-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O+/dP+0N0uN7TTM/WFzwyVB0bFj40NFhcatDKJWLxmcnu647P6E6uxvFkwiymam2 VHFVQufPet8avtkYFCedjQ== 0000950117-02-001598.txt : 20020702 0000950117-02-001598.hdr.sgml : 20020702 20020701172501 ACCESSION NUMBER: 0000950117-02-001598 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 DATE AS OF CHANGE: 20020701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMTEC INC/NJ CENTRAL INDEX KEY: 0000005117 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870273300 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32789 FILM NUMBER: 02694325 BUSINESS ADDRESS: STREET 1: 817 EAST LAKE GATE DRIVE CITY: MT LAUREL STATE: UT ZIP: 08054 BUSINESS PHONE: 8013633283 MAIL ADDRESS: STREET 1: 817 EAST GATYE DRIVE CITY: MT LAUREL STATE: NJ ZIP: 08054 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR PROCESSING CORP DATE OF NAME CHANGE: 19820318 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GEOTHERMAL ENERGY INC DATE OF NAME CHANGE: 19681212 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GEOLOGICAL ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-K 1 a32966.txt EMTEC, INC. 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 Commission file number: 0-32789 EMTEC, INC. (Exact name of registrant as specified in its charter) Delaware 87-0273300 (State of incorporation or organization) (I.R.S. Employer Identification No.) 817 East Gate Drive Mount Laurel, New Jersey 08054 (Address of principal executive offices, including zip code) (856) 235-2121 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, $0.01 par value 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 28, 2002, the aggregate market value of the common stock of the Registrant held by non-affiliates of the Registrant was approximately $1,658,382. As of June 28, 2002, there were outstanding 7,080,498 shares of the registrant's common stock. EMTEC, INC. 2001 FORM 10-K ANNUAL REPORT Table of Contents PART I Item 1. Business...............................................................................................1 Item 2. Properties.............................................................................................8 Item 3. Legal Proceedings......................................................................................9 Item 4. Submission of Matters to a Vote of Security Holders....................................................9 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters................................10 Item 6. Selected Financial Data...............................................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................11 Item 7A. Quantitative and Qualitative Information About Market Risk............................................22 Item 8. Financial Statements and Supplementary Data...........................................................22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................22 PART III Item 10. Directors and Executive Officers......................................................................23 Item 11. Executive Compensation................................................................................25 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........27 Item 13. Certain Relationships and Related Transactions........................................................28 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................29
-i- References in this Annual Report to "we," "us," or "our" are to Emtec, Inc. and its subsidiaries, unless the context specifies or requires otherwise. Cautionary Statement Regarding Forward-Looking Statements You should carefully review the information contained in this Annual Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the "SEC"). In this Annual Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called "forward-looking statements" by words such as "may," "will," "should," expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks discussed in this Annual Report for the year ended March 31, 2002 and other reports or documents that we file from time to time with the SEC. Those factors may cause our actual results to differ materially from any of our forward-looking statements. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure, or other budgets, which may in turn affect our business, financial position, results of operations, and cash flows. -ii- PART I Item 1. Business Introduction Emtec (OTC: ETEC) is a systems integrator focused on providing technology solutions that enable our customers to effectively use and manage their data to grow their businesses. Our areas of specialization in IT services include remote network monitoring, help desk, network design, enterprise backup and storage server consolidation, and network security. Emtec's solutions are crafted to enable our customers to become more efficient and effective, thereby giving them a competitive advantage. Named to the VARBusiness 500 list of top network integrators, value added resellers, and consultants in the U.S. every year since 1995, Emtec combines extensive experience in systems integration with premier technology elements to provide its customers with sophisticated, streamlined, truly comprehensive solutions. Over the past two decades, Emtec has built strong relationships with leading manufacturers, such as Cisco, IBM, Microsoft, Sun Microsystems, and Veritas, thereby enabling us to provide cutting-edge, scalable, reliable and secure solutions. This, along with our background in information technology, positions us as a premier, single-source provider of information systems, and network solutions. Our customers are primarily Fortune 2000 companies, local and regional government, and other large and mid-sized companies located principally in the New York/New Jersey Metropolitan area and the Southeastern United States, with annual revenues ranging from $50 million to $500 million. We service our customer base from leased facilities in New Jersey, Connecticut, New York, Georgia, and Florida. Historically, the most significant portion of our revenues has been derived from our activities as a reseller of IT products, such as workstations, servers, microcomputers, application software and networking and communications equipment. In the fiscal years ended March 31, 2002, 2001 and 2000, respectively, such reseller activities accounted, respectively, for 73.01%, 83.73%, and 86.58% of our total revenues. However, we are actively endeavoring to increase the portion of our revenues that are derived from managed services (remote network monitoring and our help desk) and IT consulting and professional services. We anticipate that an increasing percentage of our future revenues will be derived from such business. Prior to January 17, 2001, we were engaged in the oil and gas exploration and development business under the name American Geological Enterprises, Inc. At that time our principal asset, other than cash, was a 5.49% working interest in a geothermal power unit. On January 17, 2001, we completed a merger with Emtec, Inc., a privately held New Jersey corporation ("Emtec-NJ"), which since 1980 had been engaged in the business of providing IT products and services to the computer industry. Upon the merger we retained all of our assets, subject to liabilities, and assumed all of the assets and liabilities of Emtec-NJ. Although we have retained the lease in the geothermal power unit, we have not yet decided whether to seek other opportunities in the gas and oil field. During the current fiscal year, we discontinued our e-business services, which had included web self-service application programs and business relationship management. We discontinued these services because we were unsuccessful in selling these services to existing and potential customers. Our executive offices are located at 817 East Gate Drive, Mount Laurel, New Jersey; telephone: (856) 235-2121. Our website is located at www.emtecinc.com. The information on our website is not part of this Annual Report. Industry Background The broad market in which we compete is the provision of IT services. This marketplace consists of traditional IT services such as hardware and software procurement, life-cycle services, and network consulting, as well as new and innovative Internet services such as web enablement, remote network monitoring, help desk services, and information security. As the market for IT products has matured over the past several years, price competition has intensified. That factor, combined with abbreviated product lifecycles, has forced IT product manufacturers to pursue lower cost manufacturing and distribution strategies. Resellers who were able to serve the needs of corporate end users requiring diverse brands of products and related IT services were initial beneficiaries of this heightened competition. More recently, however, continuing competition and manufacturers' renewed efforts to improve their cost structure have led to both consolidations and business failures among resellers. Manufacturers have shifted from exclusive distribution partners to "open sourcing" and some have begun direct selling efforts with a view to capturing market share from resellers. At the same time that the market for IT products is consolidating, the market for IT services and, in particular, managed services, is expanding. Many companies have become increasingly dependent on the use of IT as a competitive tool in today's business environment. The need to distribute and access data on a real-time basis throughout an organization and between organizations has led to the rapid growth in network computing infrastructures that connect numerous and geographically dispersed end users through local and wide area networks. This growth has been driven by the emergence of industry standard hardware, software, and communications tools, as well as the significant improvement in the performance, capacity, and utility of such network-based equipment and applications. The decision-making process that confronts companies when planning, selecting, and implementing IT infrastructure and services continue to grow more complex. Organizations are continually faced with technology obsolescence and must design new networks, upgrade, and migrate to new systems. As a result of the rapid changes in IT products and the risks associated with the commitment of large capital expenditures for products and services whose features and perceived benefits are not within the day-to-day expertise of operating management, many businesses increasingly are outsourcing some or all of their network management and support functions and are seeking the expertise of independent providers of IT products and services. Our Strategy Our primary business objective is to become a leading single-source provider of high quality and innovative IT products, services, and support. We believe that by working with a single-source provider, business organizations will be able to adapt more quickly to -2- technological changes and reduce their overall IT costs. To this end, we are pursuing the following strategies: Expand Solution Offerings In order to make our services more valuable to customers and potential customers, we acquired an established remote network operations center (NOC) and help desk in January 2002. Together with our existing project management offerings, these comprise a set of managed services that enable customers to more effectively manage their IT infrastructure. Pursuing Strategic Acquisitions We will seek to expand our service offerings, to add to or enhance our base of technical or sales personnel, and to nurture and expand client relationships by means of acquisitions of companies whose businesses complement our businesses and, in particular, our IT consulting services. We intend to focus on companies with management teams that are willing to commit to their continued long-term participation in our growth. On January 9, 2002, we acquired substantially all of the assets of Devise Associates, Inc., an information technology consulting and managed services organization located in New York City, Devise Associates, Inc., a subsidiary of McLeodUSA, Inc. (Nasdaq: MCLD). Capitalizing on Existing Relationships We have invested in training and committed resources to obtain company certifications from key industry manufacturers, and have entered into written agreements with most of these manufacturers, such as Sun, IBM, CISCO, Microsoft, Novell and Citrix. These agreements grant us a nonexclusive right to purchase the manufacturer's hardware and license its software for our internal business use and for commercial integration and resale. Typically, our agreements with such manufacturers, such as those with Sun, IBM, CISCO, Microsoft, Novell and Citrix, provide for a one-year term, renewable by the parties for additional one-year terms and are terminable by either party on prior written notice ranging from 30 to 45 days. They generally do not contain financial terms for resale of the manufacturer's products, which terms are separately governed by purchase orders. Moreover, we believe that our history of satisfying our larger customers' IT product requirements will facilitate our efforts to successfully market our broad range of managed services to this particular segment of our client base. Our Business IT Services Enterprise Infrastructure Solutions: We offer a full spectrum of IT product acquisition and support services needed to support client/server environments including product sourcing, network design & implementation, technical support, server consolidation, and clustering and load balancing for high availability. Managed Services: We manage customers' networks through the utilization of outsourced help desk and network monitoring services, which allows organizations to focus the majority of their efforts on their businesses - not on managing their IT infrastructures. -3- Data Management Solutions: We manage customers' business-critical data through the implementation of storage and backup solutions that enhance the reliability and performance of their networks. Network Security Solutions: We assures customers' infrastructure and data are protected through the implementation of firewall, VPN, remote access authentication, and virus detection technologies. Innovation Centers: Among our most important customer resources are the Innovation Centers established at our Norcross, Georgia and Cranford, New Jersey locations. These centers give our customers the ability to test the scalability and suitability of a hardware and software configuration before investing in the technology. Staffed by high-level certified engineers, the Innovation Centers can simulate up to a 2,000-user load. The centers are equipped with high-end Sun Microsystems'TM' servers, Sun Ray'TM' thin clients, Sun'TM' storage arrays, and NT servers, as well as a wide array of software applications including Lotus Notes/Domino, IBM's DB2 product family, Oracle, Veritas backup and storage products. Lifecycle Management Services: Our lifecycle management services are designed to provide customers with continuous availability of service and support throughout the lifecycle of their IT investments, including the full spectrum of IT product acquisition and support services needed to support server environments. Our services include: Evaluation and prioritization of business objectives to determine the best course of action for our customers; Consultation with customers to identify the right IT products and services for their needs; Leveraging our vendor relationships to quickly source the right combination of products; Providing logistical support needed to deploy a major technology roll out; Offering assistance to reduce the overall operating cost of maintaining current technology through a private label lease program; and Providing continuous support to enable a client to improve end-user satisfaction, minimize downtime, and lower the total cost of ownership. Manufacturers Support Services Contracts: We offer manufacturer support service contracts that provide our clients with extended technical support, onsite hardware service and access to new software releases at a fixed price. Most of revenue from this portion of our business comes from selling three manufacturer's contracts: Sun Microsystems, Cisco, and Veritas Our IT services activities accounted for approximately 26.72%, 16.24% and 13.42% of our total revenues for fiscal years 2002, 2001 and 2000, respectively. -4- IT Reseller IT Reseller: We are an authorized reseller of the products of many leading IT manufacturers, such as 3Com, CISCO, Compaq, HP, IBM, Intel, Microsoft, NEC, Veritas, Novell, and Sun. Such products include workstations, servers, networking and communications equipment, enterprise computing products, and application software. Our business depends in large part upon our ongoing access to well established aggregators, in particular GE Access, Ingram Micro, Inc. and Tech Data Corp. to enable us to acquire IT products at competitive prices and on reasonable terms for resale to our customers. Through our alliances with GE Access, Ingram and Tech Data, we provide our customers with competitive pricing and value-added services such as electronic product ordering, product configuration, testing, warehousing, and delivery. Our relationships with our aggregators allow us to minimize inventory risk by ordering products primarily on an as-needed basis. We believe that in most cases our ability to acquire products on a cost-plus basis affords us the opportunity to avail ourselves of prices lower than those that could be obtained independently from manufacturers or other vendors. We utilize electronic ordering and pricing systems that provide real-time status checks on the aggregators' inventories and maintain electronic data interchange links to other suppliers, thereby enabling our sales team to schedule shipments more accurately and to provide electronically-generated client price lists. In particular, we rely upon products manufactured and support services provided by Sun, which accounted for 35%, 42% and 31% of our total revenues for fiscal years 2002, 2001 and 2000, respectively. We have not entered into any long-term supply contracts with any of our suppliers, as we purchase computers, computer systems, components, and parts on a purchase order basis. Our agreements with GE Access, Ingram and Tech Data, who collectively supplied approximately 79%, 80% and 43% of our resale products in the fiscal years 2002, 2001 and 2000, respectively, may be terminated by such companies at any time upon 30 days' prior written notice. We may receive manufacturer rebates resulting from equipment sales. In addition, we receive volume discounts and other incentives from various suppliers. Except for products in transit or products awaiting configuration at our facility, we generally do not maintain large inventory balances. Our primary vendors limit price protection to that provided by the manufacturer (generally less than 30 days) and they restrict product returns, other than defective returns, to a percentage (the percentage varies depending on the vendor and when the return is made) of products purchased. Those returns must occur during a defined period, at the lower of the invoiced price or the current price, subject to the specific manufacturer's requirements and restrictions. Our IT reseller activities accounted for approximately 73.01%, 83.73% and 86.58% of our total revenues for the fiscal years ended March 31, 2002, 2001 and 2000, respectively. Other Services K-12 Specialized Services for Student and Faculty Needs: We integrate top-quality curriculum software and computer products into the classroom. We have significant experience in building local area networks that link many campuses together. We also provide district-wide -5- support and sustain Internet access to educational resources worldwide. We tailor our array of services to make the best use of limited funds. Marketing Our marketing efforts are focused on: Broadening our public image as a Managed Services and IT service provider; Promoting our new Managed Services offerings to current customers, prospects, partners, and investors; Maintaining a constant flow of marketing communications to increase and maintain our market presence; Driving prospects to our web site; and Increasing overall inquiries and sales from all sources. Our business development center is charged with sales lead generation. We have developed a computer-based process by which a series of letters or e-mails are sent to a prospective customer to provide initial information about us before a sales call is made. The system executes strategies automatically and prompts the sales representative when action is required. Because its fundamental concept is to create multiple and frequent "touches" of the prospect through letters, faxes, e-mails, and phone calls, multiple and frequent contacts of prospective customers will be the basis of our marketing efforts. This process will be supplemented with seminars and consulting- and services-oriented direct mail. We have developed two proprietary software programs that tracks the success of a number of our sales and marketing programs. One software package manages the business development center process, while the other tracks the progress of sales engagements ensuring that the correct process is followed. We have discontinued using sales engagement software package. The business development center software packaged is still utilized as a part of our marketing strategy, and is also marketed to our customers as well. Customers Our targeted customer base is companies with sales revenues of between $50 and $500 million. Although we have approximately 150 customers, our two largest customers, Gwinnett County School System (Georgia) and Tiffany & Company, accounted, respectively, for approximately 13.85% and 9.32% of our revenues for the year ended March 31, 2002. These same two customers accounted for, respectively, approximately 10.23% and 6.64% of our revenues in fiscal year 2001 and for approximately 16.88% and 5.13% of our revenues in fiscal year 2000. An additional eight customers, ING Financial Services Co., BellSouth Corporation, Educational Testing Services, Mirant, Bally's Park Place Casinos, Novo Nordisk, Cox Communications, and MBNA American Bank, collectively accounted for 31.47%, 30.75% and 32.61% of our revenues for the years ended March 31, 2002, 2001 and 2000, respectively. -6- Intellectual Property We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. Our business also includes the development of custom software applications in connection with specific client engagements. Ownership of such software is generally assigned to our client. Competition The IT services industry is highly competitive. Our competitors include: established computer product manufacturers (some of which supply products to us); distributors; computer resellers; systems integrators; and other IT service providers. Many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intention to enhance such direct sales efforts. Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be able to adapt more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services. Such competitors could also attempt to increase their presence in our markets by forming strategic alliances with our other competitors or with our customers, offering new or improved products and services to our customers or increasing their efforts to gain and retain market share through competitive pricing. We have no ongoing written commitments by customers to purchase products, and all product sales are made on a purchase-order basis. We are also in direct competition with local, regional, and national distributors of microcomputer products and related services as well as with various IT consulting companies. These run the gamut from new dot com consulting companies to the established consulting arms of nationwide accounting and auditing firms. Several of these competitors offer most of the same basic products as we do. We also encounter competition from microcomputer suppliers that sell their products through direct sales forces, rather than through resellers such as ourselves, and from manufacturers and distributors that emphasize mail order and telemarketing sales techniques. The tri-state metropolitan Connecticut, New Jersey, and New York area and parts of New England, which, on a revenue basis, accounted for 58.3%, 67.7%, and 53.2% of our revenues -7- during the fiscal years 2002, 2001 and 2000, respectively, are particularly characterized by highly discounted pricing on microcomputer products from various sources. Depending on the customer, the principal areas of competition may include price, pre-sale and post-sale technical support and service, availability of inventory, and breadth of product line. We have an insignificant market share of sales in the microcomputer industry and the service markets that we serve. Most of our competitors at the regional and national levels are substantially larger, have more personnel, have materially greater financial and marketing resources, and operate within a larger geographic area than we do. Employees As of June 28, 2002, we employed 166 individuals, including 39 sales, marketing and related support personnel, 94 service and support employees, 21 operations and administration personnel, and 12 employees in accounting, finance, and human resources. We believe that our ability to recruit and retain highly skilled technical and other management personnel will be critical to our ability to execute our business model and growth strategy. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. We believe that our relations with our employees are good. Item 2. Properties We lease office space in seven locations. Our corporate headquarters and principal operational facilities are currently located in Mount Laurel, New Jersey. The following table contains certain information about each of our leased facilities:
Size Address (in square feet) Monthly Rent Expiration Date - ------- --------------- ------------ --------------- 817 East Gate Drive 15,596 $14,166.37 March 31, 2004 Mount Laurel, NJ 08054 70 Jackson Drive 13,360 $9,575.00 June 30, 2004 Cranford, NJ 07016 2990 Gateway Drive, Suite 500 17,102 $11,532.95 August 14, 2004 Norcross, GA 06855 7843 Bayberry Road 3,340 $1,753.50 February 28, 2005 Jacksonville, FL 32256 4995 LaCross Road, Suite 1300 2,337 $3,462.37 June 30, 2004(1) Charleston, SC 29406 880 Third Avenue, 12th 7,635 $22,173.00 June 30, 2008(2) New York, NY 10022 14 Strawberry Hill 2,000 $2,151.00 July 31, 2002(3) Norwalk, CT 06855
-8- - ------------------ (1) These premises were sublet at cost to the new owners of our South Carolina operation. (2) The Company assumed this lease on January 9, 2002 in connection with our acquisition of Devise Associates, Inc. (3) The Company is in negotiation with its landlord to renew this lease for an additional one-year term. We believe these facilities will satisfy our anticipated needs for the foreseeable future. Item 3. Legal Proceedings In 1999 we instituted an action against Dan. F. Williamson & Co. Inc., one of our customers, in the Court of Common Pleas, Greenville County, South Carolina, for breach of contract in an amount approximating $50,000. The defendant counterclaimed for damages in excess of $8.0 million, alleging that our negligence corrupted its computer system. In October 2001, we settled this litigation by agreeing to restore defendant's computer discs, which restoration was completed in March 2002. In March 2002, Logical Business Solutions, Inc., one of our competitors, instituted an action in the Circuit Court, Fourth Judicial Circuit, in Duval County, Florida, against us and Cheryl Pullen, one of our employees, alleging that we wrongfully interfered with its contractual relationship with one of its customers. The amount of damages was not specified. The litigation is currently in the discovery stage. We intend to vigorously defend against the claim. Item 4. Submission of Matters to a Vote of Security Holders None -9- PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters Our common stock is quoted on the OTC Bulletin Board under the symbol "ETEC." The following table sets forth the high and low closing prices of our common stock for the periods indicated:
Three Months Ended High Low - ------------------ ---- --- March 31, 2002 $1.03 $0.60 December 31, 2001 0.70 0.40 September 30, 2001 0.54 0.35 June 30, 2001 0.47 0.28 March 31, 2001 1.81 0.44 December 31, 2000 $0.56 $0.44 September 30, 2000 0.56 0.44 June 30, 2000 0.44 0.44
The above quotations represent prices between dealers and do not include retail mark-ups, markdowns or commissions. They do not necessarily represent actual transactions. As of June 28, 2002, there were 688 record holders of our common stock, although we believe that beneficial holders approximate 800. We have never declared any dividends on our common stock and we have no intention to do so in the foreseeable future. Item 6. Selected Financial Data The following selected consolidated financial data below should be read in conjunction with our consolidated financial statements including the accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, both elsewhere in this Report. The data as of March 31, 2002 and 2001 and for each of the three years in the period ended March 31, 2002 have been derived from, and should be read in conjunction with, our audited consolidated financial statements and accompanying notes, which are contained elsewhere in this Report. The data as of March 31, 2000, 1999, and 1998 and for each of the two years in the period ended March 31, 1999 have been derived from our audited financial statements, which are not contained in this Report. -10-
YEAR ENDED MARCH 31, -------------------- 2002 2001 2000 1999 1998 ------------------ ------------------ ---------------- ----------------- --------------- Net revenues $ 69,601,406 $ 92,602,735 $100,752,490 $ 91,683,046 $ 77,273,483 Income (loss) from continuing operations $ 216,972 $ (1,257,825) $ 316,004 $ 971,468 $ 454,232 Income (loss) per common share from continuing operations (basic and diluted) $ 0.03 $ (0.22) $ 0.06 $ 0.18 $ 0.08 Total assets $ 11,388,473 $ 18,699,032 $ 21,401,172 $ 26,910,725 $ 15,488,303
The Company had no long-term debt obligations or outstanding preferred stock during the 5 years ended March 31, 2002. In addition, no dividends were paid to common stockholders during the same period. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the "Risk Factors" below for a discussion of important factors that could cause actual results to differ from expectations and any of our forward-looking statements contained herein. In addition, the following discussion should be read in conjunction with our audited consolidated financial statements as of and for the fiscal years ended March 31, 2002,and 2001. Critical Accounting Policies Revenue Recognition The Company recognizes revenues based upon Staff Accounting Bulletin #101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the earnings process is complete(evidenced), by an agreement between the company and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. We had followed these principles of revenue recognition prior to the implementation of SAB 101. Therefore, SAB 101 has had no impact on revenue reporting. Procurement services represent sales of computer hardware and prepackaged software. Revenue from consulting and support service contracts are recognized ratably over the contract or service period. Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the customer are recognized immediately at their contract date. Trade Receivables The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management's evaluation of periodic aging of the accounts. -11- Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is based on standard costs generated principally by the most recent purchase prices. The Company provides an inventory reserve for obsolescence and deterioration based on management's review of products and sales. Valuation of Long Lived Assets The Company evaluates its long-lived assets as prescribed by Statement of Financial Accounting Standards No. 121 (SFAS No. 121) by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Income Taxes Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than the enactment of changes in tax laws or rates. A valuation allowance is recognized if, on weight of available evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. Results of Operations Comparison of Years Ended March 31, 2002 and 2001 Total Revenues Total revenues for the IT business decreased by 25.01% or $23.15 million, to $69.41 million for the year ended March 31, 2002, compared to $92.57 million for the year ended March 31, 2001. This decrease is mainly due to the slow-down in the economy. Services and consulting revenue increased by 23.72%, or $3.56 million, to $18.60 million for the year ended March 31, 2002 compared to $15.03 million for the year ended March 31, 2001. This increase is mainly attributable to an increase in our manufacturers support services contracts revenues. Manufacturers support services contracts revenue increased by 62.25%, or $3.16 million, to $8.24 million for the year ended March 31, 2002 compared to $5.08 million for the year ended March 31, 2001. Product procurement revenues decreased by 34.46%, or $26.72 million, to $50.81 million for the year ended March 31, 2002. This decline in product procurement revenue is also mainly due to the slow-down in the economy. In addition, some of our customers choosing to procure their IT products directly from manufacturers and our continued focus on growing our IT consulting and professional services have had a negative impact on product revenues. Geothermal Revenues of $187,978 for the year ended March 31, 2002 are consistent with the previous year's revenues. -12- Gross Profit Our aggregate gross profit for IT business declined by 9.18%, or $1.00 million, to $9.94 million for the year ended March 31, 2002. This decrease is mainly attributable to 25.01% decrease in our IT revenue due to the slow-down in the economy. Measured as a percentage of net sales, our overall gross profit margin increased to 14.32% of net sales for the year ended March 31, 2002 from 11.83% for the year ended March 31, 2001. This increase is mainly due to a 23.72%, or $3.56 million increase in our services and consulting revenues. Gross profit for product sales declined by 26.79%, or $2.19 million, to $5.98 million for the year ended March 31, 2002 as compared with $8.17 million for the year ended March 31, 2001. This decrease is mainly attributable to a 34.46% decrease in product revenue. Measured as a percentage of net product sales, our gross profit margin attributable to product sales increased to 11.77% for the year ended March 31, 2002 from 10.54% for the year ended March 31, 2001. Gross profit for service and consulting increased by 42.57%, or $1.18 million, to $3.96 million for the year ended March 31, 2002 as compared with $2.78 million for the year ended March 31, 2001. This increase is mainly attributable to higher utilization rates for our engineers as well as an increase in the gross margin manufacturers support services contracts. Manufacturers support services contracts gross margin increased by 77.76%, or $748,000, to $1.71 million for the year ended March 31, 2002 as compared with $962,000 for the year ended March 31, 2001. Also, measured as a percentage of our gross margin attributable to services and consulting revenue increased to 21.30% of services and consulting revenue for the year ended March 31, 2002 from 18.48% for the year ended March 31, 2001. The geothermal gross profit of $124,895 for the year ended March 31, 2002 is consistent with the gross profit for comparable previous periods. Sales, General, and Administrative Expenses Sales, general, and administrative expenses decreased by 12.16%, or $1.24 million, to $8.99 million for the year ended March 31, 2002. This decrease is primarily a result of lower sales commission expenses due to decline in the aggregate gross margin from IT business, termination of the management bonus plan beginning January 2001, and lower bad-debt expense due to improved accounts receivable collection performance. e-Business Costs e-Business costs for the year ended March 31, 2002 was $617,220, or 6.27% of total operating expenses, as compared with $1.30 million, or 10.58% of total operating expenses for the year ended March 31, 2001. As of January 2002 we have discontinued our e-Business division that we started in January 2000. This cost mainly included the building of a sales and consulting team of approximately 8 employees, including training, certifying, marketing, and advertising expenses. Other Income (Expense) Total other income (expense) for the year ended March 31, 2002 equaled to $0, as compared to $24,108 for the year ended March 31, 2001. This relates primarily to legal settlement income, net of costs, as well as a loss from the disposition of marketable securities. -13- Legal settlement income net of cost is $170,993. This includes approximately $355,000 in cash and marketable securities worth $176,000, less legal and other operating expenses equal to approximately $355,000. Loss from the disposition of marketable securities received in legal settlement equaled $146,885. Income Taxes Income tax expense of $ 5,632 was recorded for the year ended March 31, 2002. This amount included a deferred tax expense of $ 13,693 netted against a current income tax benefit of $ 8,061. An income tax benefit of $ 75,029 was recorded for the year ended March 31, 2001. This amount included a deferred tax benefit of $ 86,765 netted against a current income tax expense of $ 11,736. The $ 75,029 income tax benefit amount was allocated as a $ 73,059 benefit from continuing operations and a $ 1,970 benefit from discontinued operations. A valuation allowance of 90% of the amount of deferred tax assets was recorded at March 31, 2002 and 2001. Loss from Discontinued Operations Loss from discontinued South Carolina operations, net of income taxes, for the year ended March 31, 2001 equaled $63,649. The loss from discontinued operations for the year ended March 31, 2001 was primarily due to lease payments, contracted advertising expenses, and additional reserve for bad debt. Comparison of Years Ended March 31, 2001 and 2000 Total Revenues Total revenues for the IT business decreased by 8.12%, or $8.18 million, to $92.55 million for the year ended March 31, 2001. Product procurement revenues decreased by 11.12%, or $9.70 million, to $77.53 million for the year ended March 31, 2001. This decline in product procurement revenue is mainly due to our continued focus on our services and consulting organization. Services and consulting revenue increased by 11.23%, or $1.52 million, to $15.03 million for the year ended March 31, 2001 compared to $13.51 million for the year ended March 31, 2000. This increase is mainly attributable to increase in our manufacturers services support contract revenues. Manufacturers services support contract revenues increased by 112.33%, or $2.68 million, to $5.08 million for the year ended March 31, 2001 compared to $2.39 million for the year ended March 31, 2000. Geothermal Revenues of $34,366 from the date of the merger are consistent with the previous period's revenues for a comparable period. Gross Profit Our aggregate gross profit for IT procurement declined by 13.41%, or $1.69 million, to $10.95 million for the year ended March 31, 2001. Measured as a percentage of net sales, our overall gross profit margin also decreased to 11.83% of net sales for the year ended March 31, 2001 from 12.55% for the year ended March 31, 2000. Due to continued downward pricing pressure on product sales, gross profit margin attributable to product sales decreased to 10.54% for the year ended March 31, 2001 from 10.68% for the year ended March 31, 2000. We expect -14- that downward pricing pressure on products will persist due to the continued commoditization of computer products. Gross margin attributable to services and consulting revenue decreased to 18.48% of services and consulting revenue for the year ended March 31, 2001 from 24.62% for the year ended March 31, 2000. We believe this decline was due primarily to lower utilization rates and the lack of Y2K revenue during the year ended March 31, 2001. The geothermal gross profit of $24,102 from the date of the merger is consistent with the revenues for comparable previous periods. Sales, General, and Administrative Expenses Sales, general, and administrative expenses decreased by 5.9%, or $650,245, to $10.24 million for the year ended March 31, 2001. This decrease is primarily a result of lower sales commission expenses as well as our efforts to streamline many of our operational functions. e-Business Costs e-Business costs for the year ended March 31, 2001 was $1.30 million, or 10.58% of total operating expenses. We started our e-Business division in January 2000. This cost mainly includes the building of a sales and consulting team of approximately 13 employees, including training, certifying, marketing, and advertising expenses. Other Income (Expense) Total other income (expense) for the year ended March 31, 2001 of $24,108 relates primarily to legal settlement income, net of costs, as well as a loss from the disposition of marketable securities. Legal settlement income net of cost is $170,993. This includes approximately $355,000 in cash and marketable securities worth $176,000, less legal and other operating expenses equal to approximately $355,000. Loss from the disposition of marketable securities received in legal settlement equals $146,885. Income Taxes All income tax benefit of $75,029 was recorded for the year ended March 31, 2001. This amount included a deferred tax benefit of $86,765 netted against a current income tax expense of $11,736. The $75,029 income tax benefit amount was allocated as a $73,059 benefit from continuing operations and a $1,970 benefit from discontinued operations. A net current income tax benefit of $64,311 was recorded for the year ended March 31, 2000. This amount was allocated as a $326,318 expense charged to income from continuing operations and a $390,629 benefit reducing the loss from discontinued operations. Valuation allowances of 90% and 100% of the book value of deferred tax assets were recorded at March 31, 2001 and 2000, respectively. Loss from Discontinued Operations Loss from discontinued operations, net of income taxes, for the year ended March 31, 2001 equaled $63,649, as compared to $618,030 for the year ended March 31, 2000. The loss from discontinued operations for the year ended March 31, 2001 was primarily due to lease payments, contracted advertising expenses, and additional reserve for bad debt. -15- Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." This SAB summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Adoption of SAB No. 101 did not have a material effect on the Company's results of operations. In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations," which supersedes Accounting Principles Board (APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated after June 30, 2001 be accounted for under the purchase method. In addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. The Company does not expect the adoption of SFAS No. 141 will have a material effect on the Company's results of operations, financial position or cash flow. Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17. Under SFAS No. 142 goodwill and indefinite lived intangible assets will no longer be amortized, but rather will be tested for impairment at least annually. In addition, the amortization period of intangible assets with finite lives will no longer be limited to 40 years. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, which for the Company means the standard will be adopted on April 1, 2002. The Company is currently assessing the impact of SFAS No. 142 on its results of operations. The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. The Company has adopted SFAS No. 144 effective at April 1, 2002 and is currently evaluating the impact the adoption of the new accounting standards will have on its financial condition and results of operations. Liquidity and Capital Resources Cash and cash equivalents at March 31, 2002 of $1,552,666 decreased by $545,532, from $2,098,198 at March 31, 2001. We are a net borrower; consequently, we believe our cash and cash equivalents balance must be viewed along with available balance on our line of credit. Since our inception, we have funded our operations primarily from borrowings under our credit facility. On November 21, 2001, we entered into a $10.0 million revolving credit facility with Fleet Capital Corporation, formerly Summit Business Capital Corporation ("Fleet"). We simultaneously terminated our prior financing agreement with IBM Credit Corporation ("IBM") by paying IBM an aggregate of $2,270,636. Interest on outstanding loans under our revolving credit facility with Fleet is charged monthly at a fluctuating rate per annum equal to 0.25% above the Prime Rate and, at our option, interest on up to 50% of the outstanding loans may be charged at LIBOR plus 2.75%. Our Fleet revolving credit facility is collateralized by a lien upon and security interest in substantially all of our assets. As our current credit facilities with two of our primary trade vendors, GE Access, and Ingram Micro, were also collateralized by substantially all of our assets, we, Fleet, GE Access and Ingram Micro, have entered into intercreditor agreements, which provide that as regards to these vendors, our obligations to Fleet are accorded priority. On November 21, 2001, we also entered into a Wholesale Financing Security -16- Agreement with IBM. This credit facility, which is collateralized by a $750,000 letter of credit from Fleet in favor of IBM, affords us up to a like amount of credit to purchase IBM products. On January 9, 2002, Fleet has also issued $250,000 letter of credit in favor of Vandergrand Properties Co., L.P., our landlord for New York City office as a security deposit for the building lease. At March 31, 2001, we had no outstanding balance under the credit facility and the unused line of credit available is $9.0 million with Fleet. Our lending agreement with Fleet contains financial covenants that require us to maintain a minimum leverage ratio, minimum debt service coverage ratio, minimum tangible net worth, and prohibits quarterly losses of more than $150,000. As of March 31, 2002, the Company was not in compliance with tangible net worth ratio, and the net profit(loss) requirement. Fleet has verbally waived such non-compliance for fiscal year ended March 31, 2002 and is finalizing covenants for the fiscal year ending March 31, 2003. At March 31, our credit facilities with our primary trade vendors, GE Access, Ingram Micro, and Tech Data were as follows: 1) Credit Line with GE Access was $4.5 million, no interest charged, and an outstanding balance of $3.26 million. 2) Credit line with Ingram Micro was $800,000, at an 18% APR interest rate and an outstanding balance of $679,002. 3) Credit line with Tech Data was $1.5 million, no interest charged and an outstanding balance of $842,399. Under these credit lines we are obligated to pay each invoice within 30 days from the date of such invoice. Capital expenditures of $294,843 and $372,834 during the years ended March 31, 2002 and March 31, 2001, respectively, were primarily for the purchase of computer equipment for internal use, as well as $162,000 of property and equipment, which were acquired in our acquisition of Devise Associates, Inc. on January 9, 2002. We anticipate our capital expenditures for fiscal year ending March 31, 2003 will be approximately $400,000. The Company has no arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. We believe that our available funds, together with existing and anticipated credit facilities, will be adequate to satisfy our current and planned operations for at least the next 12 months. Risk Factors We cannot assure you that we can successfully increase the portion of our revenues derived from IT services. If we are unsuccessful our future results may be adversely affected. Our transition from an emphasis on reselling IT products to an emphasis on providing IT services has placed significant demands on our managerial, administrative, and operational resources. Our ability to manage this transition effectively is dependent upon our ability to develop and improve operational, financial, and other internal systems, as well as our business development capabilities, and to attract, train, retain, motivate, and manage our employees. If we are unable to do so, our ability to effectively deliver and support our services may be adversely affected. Further, our transitional efforts to access higher-margin services and consulting revenues have resulted in reduced IT product sales. If we successfully expand our IT -17- services offerings, periods of variability in utilization may continue to occur. In addition, we are likely to incur greater technical training costs during such periods. Historically, our IT reseller activities accounted for 73.01%, or $50.81 million, of our total revenue of $69.60 million for the fiscal year ended March 31, 2002, 83.73%, or $77.53 million, of our total revenue of $92.6 million for the fiscal year ended March 31, 2001, and 86.58%, or $87.23 million, of our total revenue of $100.75 million for the fiscal year ended March 31, 2000. In contrast, our IT services activities accounted for approximately 26.72%, or $18.60 million, 16.24%, or $15.03 million, and 13.42%, or $13.52 million, of our total revenue for the fiscal years ended March 31, 2002, 2001 and 2000, respectively Our new services have not achieved widespread client acceptance. If they do not achieve market acceptance, our profit potential may be adversely affected. While we have offered IT services to our customers since 1983, our major emphasis on IT consulting and services began in 1995 and we started focusing on our new managed services and network security during the fiscal year 2002. We have limited experience in developing, marketing, or providing these services. We cannot assure you that we will be able to successfully market such services to either new or existing customers, that our services will achieve market acceptance, or that we will be able to effectively hire, integrate, and manage additional technical personnel to enable us to perform these services to our customers' expectations. Currently our recurring managed services revenues equal approximately $18,000 a month. Our inability to maintain high personnel utilization rates may adversely impact our profit potentiality. The most significant cost relating to the services component of our business is personnel expense, which consists of salaries, benefits, and payroll related expenses. Thus, the financial performance of our service business is based primarily upon billing margins (billable hourly rates less the costs to us of service personnel on an hourly basis) and utilization rates (billable hours divided by paid hours). The future success of the services component of our business will depend in large part upon our ability to maintain high utilization rates at profitable billing margins. The competition for quality technical personnel has continued to intensify, resulting in increased personnel costs. This intense competition has caused our billing margins to be lower than they might otherwise have been. Our utilization rates for service personnel likely will also be adversely affected during periods of rapid and concentrated hiring. Our revenues and expenses are unpredictable. A decrease in revenues or increase in expenses could materially adversely affect our operating results. Our operating results have been, and will continue to be, impacted by changes in technical personnel billing and utilization rates. Moreover, we expect that downward pricing pressure on certain of our products will persist due to the continued commoditization of computer products. These products include computer equipment such as desktops, laptops, printers and monitors which currently comprise approximately 40% of our total product sales. -18- Our operating results have been, and will continue to be, impacted by changes in technical personnel billing and utilization rates. Further, there are numerous other factors, which are not within our control that can contribute to fluctuations in our operating results, including the following: patterns of capital spending by customers; the timing, size, and mix of product and service orders and deliveries; the timing and size of new projects, including projects for new customers; and changes in trends affecting outsourcing of IT services; We also believe that, to a limited degree, our business is seasonal with a greater proportion of our product sales occurring in the second and third quarter of our fiscal year due to the capital budgeting and spending patterns of some of our larger customers. Operating results have been, and may in the future also be, affected by the cost, timing, and other effects of acquisitions, including the mix of product and service revenues of acquired companies. Since our inception, we have funded our operations primarily from borrowings under our credit facility. We are currently in default under our credit facility, which could result in a demand for immediate repayment. Revised terms of our indebtedness could materially limit our financial and operating flexibility. Our lending agreement with Fleet contains financial covenants that require us to maintain a minimum leverage ratio, minimum debt service coverage ratio, minimum tangible net worth, and prohibits quarterly losses of more than $150,000. As of March 31, 2002, the Company was not in compliance with tangible net worth ratio, and the net profit(loss) requirement. Fleet has verbally waived such non-compliance. We cannot state with any certainty the terms upon which Fleet will waive such non-compliance. We do not have long-term commitments from any of our customers and our product sales are on a purchase order basis. Our revenues are concentrated and a loss of either one of our two top customers could materially affect our operations and business. In general, there are no ongoing written commitments by customers to purchase products from us. All product sales we make are on a purchase order basis. Moreover, our client base is highly concentrated, with our two largest customers, Gwinnett County School System (Georgia) and Tiffany & Company, accounted, respectively, for approximately 13.85% and 9.32% of our revenues for the year ended March 31, 2002. These same two customers accounted for, respectively, approximately 10.23% and 6.64% of our revenues in fiscal year 2001 and for approximately 16.88% and 5.13% of our revenues in fiscal year 2000. An additional eight customers, ING Financial Services Co., BellSouth Corporation, Educational Testing Services, Mirant, Bally's Park Place Casinos, Novo Nordisk, Cox Communications, and MBNA American Bank, collectively accounted for 31.47%, 30.75% and 32.61% of our revenues for the years ended March 31, 2002, 2001 and 2000, respectively. We anticipate that a substantial portion of our net revenues and gross profits will continue to be derived from sales to a concentrated group of customers. A loss of any of these customers, or a material decrease in the value of the purchase orders from any other them could materially affect our profitability. -19- Further, most of our customers are located in area comprising the tri-state metropolitan area of Connecticut, New Jersey, and New York and parts of New England. Total revenue derived from in this area amounted to 58.3%, 67.7%, and 53.2% of our revenues during the fiscal years 2002, 2001 and 2000, respectively. Adverse economic conditions affecting this region could have an adverse effect on the financial condition of our customers located there, which, in turn, could adversely impact our business and future growth. We may not be able to compete effectively in the highly competitive IT services industry. The IT services business is highly competitive. Our competitors include: established computer product manufacturers, some of which supply products to us; distributors; computer resellers; systems integrators; and other IT service providers. Many computer product manufacturers also sell to customers through their direct sales organizations and certain of them have announced their intentions to enhance such direct sales efforts. Many of our current and potential competitors have longer operating histories and financial, sales, marketing, technical, and other resources substantially greater than we do. As a result, our competitors may be able to adapt more quickly to changes in client needs or to devote greater resources than we can to the sales of IT products and the provision of IT services and we may not have the resources to compete effectively. We must maintain our status as an authorized reseller/service of IT products. The loss on any one of such authorizations could have a material adverse effect on our business and operations. We are materially dependent on our continued status as an approved reseller of IT products and our continued authorization as an IT service provider. Without such authorizations, we would be unable to provide the range of products and services we currently offer, including warranty services, and manufacturers support services contracts. Our resale agreements with manufacturers generally are terminable by manufacturers upon 30 days' prior written notice. The loss of one or more of such authorizations could have a material adverse effect on our business and results of operations. In particular, we rely upon products manufactured and support services provided by Sun, which accounted for 35%, 42% and 31% of our of our total revenues for the fiscal years 2002, 2001 and 2000, respectively. We have no long-term sales commitments from any of our suppliers. A loss of any of our three principal suppliers would material adversely affect our IT reseller business. Our IT reseller business depends on large part upon our access to aggregators, in particular GE Access, Ingram and Tech Data, to supply us with products at competitive prices and on reasonable terms for resale by us to our customers. Our agreements with Ingram and -20- Tech Data may be terminated by such companies upon 30 days prior written notice. Our agreement with GE Access is effective until February 28, 2003. After February 28, 2003, our agreement with GE Access can be renewed or terminated by either party. We cannot assure you that we will be able to continue to obtain products from GE Access, Ingram and Tech Data or our other vendors at prices or on terms acceptable to us, if at all. Our client engagements entail significant risks; a failure to meet a client's expectations could materially adversely affect our reputation and business. Many of our engagements involve projects that are critical to the operations of our customers' businesses and provide benefits that may be difficult to quantify. Our failure or inability to meet a client's expectations in the performance of our services could result in a material adverse change to the client's operations and therefore could give rise to claims against us or damage our reputation, adversely affecting our business, results of operations, and financial condition. Our ability to protect our intellectual property rights is questionable. If we are unable to protect such rights, our financial condition could be materially adversely affected. We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with our employees and limit distribution of proprietary information. However, we cannot assure you that the steps taken by us in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement. Our inability or failure to establish rights or to protect our rights may have a material adverse effect on our business, results of operations, and financial condition. We intend to expand our business through acquisitions of complementary businesses. There is no certainty, however, that we will be successful in acquiring any new businesses or that any such acquisitions will help us achieve our strategic objectives. As a part of our business development strategy, we intend to pursue acquisitions of IT product and service businesses in order to expand our service offerings, to add to or enhance our base of technical or sales personnel, or to provide desirable client relationships. The success of this strategy depends not only upon our ability to acquire complementary businesses on a cost-effective basis, but also upon our ability to integrate acquired operations into our organization effectively, to retain and motivate key personnel, and to retain customers of acquired firms. We cannot assure you that we will be able to acquire or integrate such businesses successfully. Furthermore, we cannot assure you that financing for any such acquisitions will be available on satisfactory terms, or that we will be able to accomplish our strategic objectives as a result of any such transaction or transactions. In addition, we expect to compete for attractive acquisition candidates with other companies or investors in the IT industry, which could have the effect of increasing the cost of pursuing our acquisition strategy, or it could reduce the number of -21- attractive candidates to be acquired. Acquisitions also may involve a number of specific risks, including: possible adverse short-term effects on our operating results; dependence on retaining key customers and personnel; diversion of management's attention; amortization of acquired intangible assets; and risks associated with unanticipated problems, liabilities, or contingencies. Item 7A. Quantitative and Qualitative Information About Market Risk We do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. We have issued no debt instruments, entered into no forward or future contracts, purchased no options and entered into no swaps. Our primary market risk exposures are those of interest rate fluctuations. A change in interest rates would affect the rate at which we could borrow funds under our revolving credit facility. Our average balance on the line of credit for the past two years has been approximately $4.10 million. Assuming no material increase or decrease in such balance, a one percent change in the interest rate would change our interest expense by approximately $41,000 annually. Item 8. Financial Statements and Supplementary Data Reference is made to Item 14(a)(i) herein. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None -22- PART III Item 10. Directors and Executive Officers The following table sets forth certain information as to each of our executive officers and directors:
Positions and Name Age Offices Presently Held ---- --- ---------------------- John P. Howlett 58 Chairman of the Board and President Ronald A. Seitz 55 Executive Vice President and Director R. Frank Jerd 60 Director George F. Raymond 65 Director Sam Bhatt 34 Vice President Finance & Operations and Treasurer Guy Fessenden 45 Executive Vice President
John P. Howlett has been our President and Chairman since January 17, 2001 and President of Emtec-NJ since August, 1997 and Chairman of Emtec-NJ since August, 1998. He has been a director of Emtec-NJ since October, 1996. Mr. Howlett was the founder (in 1983) of Cranford, New Jersey-based Comprehensive Business Systems, Inc. (CBSI). CBSI primarily provided microcomputer systems, network integration, training, and data communications to mid-size and Fortune 1000 corporations. In October 1996, CBSI merged into Emtec-NJ. Prior to founding CBSI, Mr. Howlett was with the AT&T Long Lines Division for twelve years. He earned a Bachelor of Science degree in Electrical Engineering from Rose Hulman Institute of Technology in Terre Haute, Indiana, and a Master of Business Administration degree from Fairleigh Dickinson University in New Jersey. A Vietnam veteran, Mr. Howlett served in the U.S. Army for four years. Ronald A. Seitz has been our Executive Vice-President and a director since January 17, 2001 and Executive Vice President of Emtec-NJ since March, 1996. Prior to that he was the Chief Operating Officer of Emtec-NJ. He has been a director of Emtec-NJ since April, 1995. Mr. Seitz was the founder (in 1980) of Charleston, South Carolina-based Computer Source, Inc. (CSI). CSI primarily provided microcomputer systems, network integration, and data communications to mid-size and Fortune 1000 corporations. In April 1995, CSI merged with Landress Information Systems of Mt. Laurel, New Jersey to become Emtec-NJ. Prior to founding CSI, Mr. Seitz was employed for six years as an engineer with the U.S. government in Washington, DC. He graduated from North Carolina State University with a Bachelor of Science degree and from George Washington University with an MBA in computer science. Mr. Seitz also holds a DMD degree from the Dental School at the Medical University of South Carolina. R. Frank Jerd was appointed as a director upon the consummation of our merger with Emtec-NJ. Mr. Jerd is, and has been, a securities analyst for Montauk Capital in New York -23- since 1994. From 1992 to 1993, he was chief executive officer of Benesys, Inc., a medical software company. He was also CEO of Gandalf Systems Corporation from 1993 to 1994. Mr. Jerd earned a Bachelor of Science Degree in Mathematics at Marshall University. George F. Raymond was elected as a director in August 2001. Mr. Raymond has been retired from active employment since 1989. Since his retirement, he has worked as a consultant to the information technology industry. In 1972, Mr. Raymond founded Automatic Business Centers, Inc., a payroll process service company and served as its president until its sale to Automatic Data Processing in 1989. In 1965 he co-founded Computer Services Inc, a general purpose data processing service company, which was purchased by Management Data Corp. in 1969. Mr. Raymond served as the president of Computer Services Inc. until 1972. Prior thereto, Mr. Raymond was a management consultant with Touche Ross & Co. from 1961 to 1965. Currently Mr. Raymond serves on the Board of directors of eight companies, four of which are publicly traded. Sam Bhatt has been Vice President - Finance & Operations and Treasurer of Emtec since January 17, 2001 and of Emtec-NJ since July 2000. Prior to that and from July, 1997, he was Director of Accounting for Emtec-NJ. He also held the positions at Emtec-NJ of Accounting Manager (from 1994 to July, 1997) and of Senior Accountant (from 1992 to 1994). Mr. Bhatt holds a Bachelor of Science Degree in business administration from Drexel University in Pennsylvania and a Diploma in Hotel Management from the Institute of Hotel Management and Catering Technology in Bombay, India. Guy Fessenden has been Executive Vice President of Emtec since January 2002. Mr. Fessenden joined Emtec from DIS Research, Ltd., which he founded in 1984 and where he was a Chief Executive Officer. Prior to founding DIS, Mr. Fessenden was assistant to the CEO of WR Grace & Co., an international conglomerate with holdings in number of industries, including shipping, food, publishing and others. Mr. Fessenden earned a Bachelor of Science Degree in Accounting and Master of Business Administration Degree at St. John's University. During 2002, the Board of Directors met ten times. Each director attended all of the meetings of the Board of Directors. The Board of Directors has no audit committee or compensation committee. The Board of Directors as a whole makes all such determinations and any director who as is an "interested" party in a specific matter abstains from voting on such matter. Compliance With Section 16(a) of The Securities Exchange Act Of 1934 Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own beneficially more than 10% of our common stock to file reports of ownership and changes in ownership of such common stock with the Securities and Exchange Commission, and to file copies of such reports with us. Based solely upon a review of the copies of such reports filed with the Company, the Company believes that during the fiscal year ended March 31, 2002, such reporting persons complied with the filing requirements of said Section 16(a), except that Mr. Guy Fessenden was not timely in the filing of his Initial Statement of Beneficial Ownership of Securities and Mr. James Fishkin was not timely in the filing on one monthly report indicating that he was no longer subject to Section 16 -24- Item 11. Executive Compensation The following table sets forth the aggregate compensation that we paid for services rendered to us in all capacities during our fiscal years ended March 31, 2002, 2001 and 2000 by our chief executive officer and by our only other executive officers whose cash compensation exceeded $100,000 per year in any such year. Summary Compensation Table
Long Term Compensation ------------------------------------------------- Annual Compensation Awards Payouts ------------------------- ----------------------- -------- Long Restricted Term Name and Fiscal Other Annual Stock Number of Incentive All Other Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation - ------------------ ---- ------ ----- ------------ ------ ------- ------- ------------ John P. Howlett -- -- -- President and 2002 $ 204,000 -- -- -- -- -- $16,750(1) Chief Executive 2001 $ 200,000 $54,000 -- -- -- -- $13,724(1) Officer 2000 $ 169,245 $50,000 -- -- -- -- Ronald A. Seitz 2002 $ 204,000 -- -- -- -- -- Executive Vice- 2001 $ 200,000 $54,000 -- -- -- -- $6,704(2) President 2000 $ 169,076 $50,000 -- -- -- -- $6,944(2) Sam Bhatt - -Vice President -- - -Finance & 2002 $114,545 -- -- Operations 2001 $95,983 $ 9,826 -- -- $ -
- ------------------ (1) Reflects employer contributions for life insurance premiums and for disability insurance premiums. (2) Reflects employer contribution for life insurance premiums. Stock Option Grants During Fiscal Year 2002 None of the named executive officers listed in the Summary Compensation Table were granted stock options during the fiscal year ended March 31, 2002. Set forth below is information with respect to unexercised options held by our named executive officers to purchase our common stock Aggregated Option Exercises in Fiscal Year 2002 and Fiscal Year End Option Values
Number of Unexercised Number of Securities Underlying Options Value of Unexercised Shares at March 31, 2002 In-the-Money Options Acquired on Value ----------------------------- ---------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- -------- -------- ----------- ------------- ----------- ------------- John P. Howlett......... -- $ 0 0 0 $ 0 $ 0 Ronald A. Seitz........ -- $ 0 0 0 $ 0 $ 0 Sam Bhatt............... -- $ 0 10,825 10,175 $ 0 $ 0
Compensation of Directors Non-employee directors receive annual compensation of $10,000. Directors also receive stock options at the discretion of the Board. Non-employee directors receive reimbursement of out-of-pocket expenses incurred for each board meeting or committee meeting attended. -25- Compensation Committee Interlocks and Insider Participation Currently, there is no compensation committee. The members of the entire board deliberate and decide compensation. Neither Mr. Jerd nor Mr. Raymond is or has been an employee or an officer of our company. Mr. Howlett is our Chairman, President and Chief Executive Officer, and Mr. Seitz is our Executive Vice President. -26- Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of June, 2002, based on information obtained from the persons named below, with respect to the beneficial ownership of our common stock held by: each person known by us to be the owner of more than 5% of our outstanding shares; each director; each executive officer named in the Summary Compensation Table; and all executive officers and directors as a group.
Name and Address of Amount and Percentage of Beneficial Beneficial Owner(1) Ownership(2) - ---------------------------------- ----------------------------------- John P. Howlett 1,400,910 19.78% Ronald A. Seitz 829,519(3) 11.72% Sam Bhatt 33,579 .47% R. Frank Jerd 45,000 .63% George F. Raymond 15,000 .21% Tom Dresser 1,029,774 14.54% 3505 S. Ocean Boulevard Hollywood, FL 33019 Richard Landon 1,029,774 14.54% 142 York Road Delran, NJ 08075 Carla Seitz 782,707(4) 11.05% P.O. Box 2243 Mt. Pleasant, SC 29465 All executive officers and directors as a group (5 3,106,715 43.44% persons)
- ------------------ (1) Each stockholder's address is c/o Emtec, 817 East Gate Drive, Mount Laurel, New Jersey, unless otherwise indicated. (2) As used herein, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, all persons named herein have (i) sole voting power and investment power with respect to their shares, except to the extent that authority is shared by spouses under applicable law and (ii) record and beneficial ownership with respect to their shares; also includes any shares issuable upon exercise of options or warrants that are currently exercisable or will become exercisable within 60 days of after the date of this proxy statement. (3) Excludes 782,707 shares owned by Carla Seitz, Mr. Seitz's spouse. Mr. Seitz disclaims any beneficial interest in these shares. -27- (4) Excludes 829,519 shares owned by Ronald A. Seitz, Mrs. Seitz's spouse. Mrs. Seitz disclaims any beneficial ownership in these shares. Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------- Plan category Number of securities to Weighted-average Number of securites remaining be issued upon exercise exercise price of available for future issuance of outstanding options, outstanding options, underequity compensation plans warrants and rights warrants and rights (excluding securities reflected in column (a)) (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders - ------------------------------------------------------------------------------------------------------------------- Equity compensation plans 381,328 $0.96 618,672 not approved by security holders - ------------------------------------------------------------------------------------------------------------------- Total 381,328 $0.96 618,672 - -------------------------------------------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions At March 31, 2002 and 2001, we owed an aggregate of $19,000 to relatives of our President. We made aggregate annual interest payments on the loan of $2,280 during each of the fiscal years 2002 and 2001. There are no other relationships or related party transactions of a nature required to be disclosed hereunder. -28- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports and Reports of Form 8-K (a) Documents filed as part of this report: (i) Financial Statements Report of Independent Public Accountants.................................................................. Consolidated Balance Sheets as of March 31, 2002 and 2001................................................. Consolidated Statements of Operations for the Fiscal Years Ended March 2002, 2001 and 2000................ Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended March 31, 2002, 2001 and 2000............................................................................................. Consolidated Statements of Cash Flows for the Years Ended March 2002, 2001 and 2000....................... Notes to Consolidated Financial Statements................................................................
(ii) Financial Statement Schedules None (iii) Exhibits:
Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger and Reorganization dated as of December 14, 2000 between Registrant, then known as American Geological Enterprises, Inc., and Emtec, Inc.(1) 3.1 Certificate of Incorporation, as amended(2) 3.2 Amended and Restated Bylaws(2) 4.1 Certificate evidencing shares of common stock(2) 4.2 1996 Stock Option Plan, as amended(2) 10.1 Resale Agreement dated September 29, 1997 between Registrant and Ingram Micro, Inc.(2) 10.2 Volume Purchase Agreement dated January 28, 1998 between Registrant and Tech Data Corporation(2) 10.3 Agreement of Lease dated April 1, 1992 between Registrant and Bell Atlantic Properties, Inc., as amended, for Mt. Laurel, New Jersey facility(2) 10.4 Lease Agreement dated May 5, 1993 between registrant and Central Cranford Associates, for Cranford, New Jersey facility(2) 10.5 Lease Agreement dated July 7, 1994 between Registrant and Connecticut General Life Insurance Company, as amended, for Norcross, Georgia facility(2) 10.6 Lease Agreement dated August 8, 1995 between Registrant and Charleston Rivergate Associates I, as amended, for Charleston, South Carolina facility(2)
-29-
Exhibit No. Description - ----------- ----------- 10.7 Lease Agreement dated July 21, 2000 between Registrant and Strawberry Hill Associates, for Norwalk, Connecticut facility(2) 10.8 Microsoft Certified Partner Agreement, dated December 20,2000, between Microsoft and Registrant(3) 10.9 IBM Business Partner Agreement, dated May 31, 2000, between International Business Machines Corporation and Registrant(3) 10.10 Letter Agreement, dated April 24, 2001, between Novell Inc. and Registrant(3) 10.11 Citrix Solutions Network Gold Renewal Membership Agreement, dated April 30, 2001, between Citrix Systems, Inc. and Registrant(3) 10.12 U.S. Systems Integrator Agreement, dated December 22, 1999, between Cisco System, Inc. and Registrant.(3) 10.13 Sun Microsystem, Inc. Channel Agreement, dated February 1, 2000, between Sun Microsystems, Inc. and Emtec, Inc. .(6) 10.14 Loan and Security Agreement, dated November 21, 2001, by and between Fleet Capital Corporation and Registrant.(4) 10.15 Agreement for Wholesale Financing, dated November 21, 2001, by and between IBM Credit Corporation and Registrant.(4) 10.16 Subordination Agreement, dated as of the 21st day of November, 2001, among Registrant, MRA Systems, Inc. dba GE Access and Fleet Capital Corporation.(4) 10.17 Intercreditor Agreement, dated as of November 21, 2001, between Fleet Capital Corporation and Ingram Micro Inc. and accepted by Registrant.(4) 10.18 Asset Acquisition Agreement dated December 5, 2001 by and between Devise Associates, Inc. and Registrant.(5) 10.19 Lease Agreement dated January 9, 2002 between Registrant and Vandergrand Properties Co., L.P., for New York, New York facility. 10.20 Lease Agreement dated March 1, 2002 between Registrant and G. F. Florida Operating Alpha, Inc.,, for Jacksonville, Florida facility. 21 Subsidiaries(2)
- ------------------ (1) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated January 17, 2001, filed on January 31, 2001, and incorporated herein by reference. (2) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 filed on May 21, 2001, and incorporated herein by reference. (3) Previously filed as an exhibit to Amendment No. 1 to Registration Statement on Form 10, filed on July 12, and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated November 21, 2001, filed on November 26, 2001, and incorporated herein by reference. (5) Previously filed as an exhibit to Registrant's Current Report on Form 8K dated December 5, 2001, filed on December 20, 2001, and incorporated herein by reference. -30- (6) Previously filed as an exhibit to Registrant's Form 10-K dated March 31, 2001, filed on July 12, 2001, and incorporated herein by reference. (b) Reports on Form 8-K filed during the quarter ended March 31, 2002: Form 8-K/A filed on March 15, 2002, required by Item 7(b) of the Form 8-K, Financial Statements of Business Acquired and Pro Forma Financial Information. -31- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 1, 2002 EMTEC, INC. By: /s/ John P. Howlett ----------------------------------- John P. Howlett Chairman President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ John P. Howlett Chairman, President and July 1, 2002 - ------------------------------------ Chief Executive Officer John P. Howlett /s/ Sam Bhatt Vice President-Finance July 1, 2002 - ------------------------------------ and Operations Sam Bhatt (Principal Financial Officer) /s/ Ronald A. Seitz Executive Vice President, July 1, 2002 - ------------------------------------ Director Ronald A. Seitz /s/ Frank Jerd Director July 1, 2002 - ------------------------------------ Frank Jerd /s/ George F. Raymond Director July 1, 2002 - ------------------------------------ George F. Raymond
EMTEC, INC. YEARS ENDED MARCH 31, 2002, 2001 AND 2000 CONTENTS
Page(s) ------- INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets F-2 & F-3 Statements of Operations F-4 Statements of Shareholders' Equity F-5 Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 - F-20
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Emtec, Inc. 817 Eastgate Drive Mount Laurel, NJ 08054 We have audited the accompanying consolidated balance sheets of Emtec, Inc. as of March 31, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emtec, Inc. at March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ BARATZ & ASSOCIATES, P.A. Marlton, New Jersey May 27, 2002 F-1 EMTEC, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND 2001
2002 2001 ---- ---- Assets Current Assets Cash and cash equivalents $ 1,552,666 $ 2,098,198 Marketable securities - 292,346 Receivables: Trade, net 6,288,425 12,828,456 Others 296,529 433,580 Inventories 1,089,950 1,019,715 Prepaid expenses 388,307 296,939 Deferred tax assets 26,491 44,290 ----------- ----------- Total Current Assets 9,642,368 17,013,524 Property and equipment, net 703,940 919,110 Investment in geothermal power unit, less accumulated amortization of $302,407 and $277,571 581,612 549,626 Deferred tax assets 42,936 41,061 Other assets 417,617 175,711 ----------- ----------- Total Assets $11,388,473 $18,699,032 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-2 EMTEC, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND 2001
2002 2001 ---- ---- Liabilities and Shareholders' Equity Current Liabilities Line of credit $ - $ 6,535,405 Due to related party 19,000 19,000 Accounts payable 6,609,837 7,284,625 Customer deposits 245,387 203,202 Accrued liabilities 764,282 1,025,643 Deferred revenues 840,413 899,352 ------------ ------------ Total Current Liabilities 8,478,919 15,967,227 Deferred revenue 799,472 841,922 Deferred tax liability 60,124 62,355 ------------ ------------ Total Liabilities 9,338,515 16,871,504 ------------ ------------ Shareholders' Equity Common stock, $.01 par value; 25,000,000 shares authorized; 7,080,498 shares issued and outstanding at March 31, 2002 and 2001 70,805 70,805 Additional paid-in capital 2,210,805 2,210,805 Accumulated deficit (231,652) (448,624) Accumulated other comprehensive (loss) income - (5,458) ------------ ------------ Total Shareholders' Equity 2,049,958 1,827,528 ------------ ------------ Total Liabilities and Shareholders' Equity $11,388,473 $18,699,032 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 EMTEC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000 ---- ---- ---- Revenues: Procurement services $50,813,243 $77,533,872 $87,235,968 Service and consulting 18,600,185 15,034,497 13,516,522 Geothermal 187,978 34,366 - ----------- ----------- ----------- Total Revenues 69,601,406 92,602,735 100,752,490 ----------- ----------- ----------- Cost of Revenues: Procurement services 44,832,526 69,365,115 77,921,447 Service and consulting 14,638,667 12,255,785 10,188,181 Geothermal 63,083 10,264 - ----------- ----------- ----------- Total Cost of Revenues 59,534,276 81,631,164 88,109,628 ----------- ----------- ----------- Gross Profit: Procurement services 5,980,717 8,168,757 9,314,521 Service and consulting 3,961,518 2,778,712 3,328,341 Geothermal 124,895 24,102 - ----------- ----------- ----------- Total Gross Profit 10,067,130 10,971,571 12,642,862 ----------- ----------- ----------- Operating Expenses: Selling, general and administrative 8,995,255 10,240,596 10,890,841 Termination costs 21,746 90,000 74,480 Interest 210,305 692,227 679,286 E-Business costs 617,220 1,303,740 355,933 ----------- ----------- ----------- Total Operating Expenses 9,844,526 12,326,563 12,000,540 ----------- ----------- ----------- Income (Loss) From Continuing Operations Before Other Income And Income Tax (Expense) Benefit 222,604 (1,354,992) 642,322 Other income-litigation settlement - 24,108 - Income tax (expense) benefit (5,632) 73,059 (326,318) ----------- ----------- ----------- Income (Loss) From Continuing Operations, net of income taxes 216,972 (1,257,825) 316,004 Loss from discontinued operations, net of income taxes - (63,649) (618,030) Loss from sale of discontinued operations, net of income taxes - - (971) ----------- ----------- ----------- Net Income (Loss) $ 216,972 $(1,321,474) $ (302,997) =========== =========== =========== Income (Loss) Per Share From Continuing Operations {Basic And Diluted} $0.03 $(0.22) $0.06 Net Income (Loss) Per Share {Basic And Diluted} $0.03 $(0.23) $(0.06) Weighted Average Number Of Shares Outstanding: Basic 7,080,498 5,679,700 5,503,284 Diluted 7,081,398 5,679,700 5,503,284
The accompanying notes are an integral part of these consolidated financial statements. F-4 EMTEC, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(Accumulated Additional Deficit) Accumulated Total Common Stock Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings (Loss) Income Equity ------ ------ --------- ------------ ------------- -------------- Balance, April 1, 1999 5,563,563 $55,636 $1,375,535 $1,175,847 $ - $2,607,018 ---------- Net loss for the year (302,997) (302,997) Unrealized gain on marketable securities 1,776 1,776 ----------- Total Comprehensive Loss (301,221) ----------- Acquisition of treasury stock (234,062) (2,341) (60,659) (63,000) --------- ------- ---------- ----------- -------- ----------- Balance, March 31, 2000 5,329,501 53,295 1,314,876 872,850 1,776 2,242,797 ----------- Stock issued in reverse acquisition 1,750,997 17,510 895,929 913,439 ----------- Net loss for the year (1,321,474) (1,321,474) Unrealized loss on marketable securities (7,234) (7,234) --------- ------- ---------- ----------- -------- ----------- Total Comprehensive Loss (1,328,708) ----------- Balance, March 31, 2001 7,080,498 70,805 2,210,805 (448,624) (5,458) 1,827,528 ----------- Net income for the year 216,972 216,972 Unrealized gain on marketable securities 5,458 5,458 --------- ------- ---------- ----------- -------- ----------- Total Comprehensive Income 222,430 ----------- Balance, March 31, 2002 7,080,498 $70,805 $2,210,805 $ (231,652) $ $ 2,049,958 ========= ======= ========== =========== ======= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 EMTEC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000 ---- ---- ---- Cash Flows From Operating Activities Net income (loss) for the year $ 216,972 $(1,321,474) $ (302,997) Adjustments to Reconcile Net Income (Loss) To Net Cash Provided By (Used In) Operating Activities - --------------------------- Depreciation and amortization 548,007 422,256 387,061 Loss on sale of discontinued operations - 971 Changes In Operating Assets and Liabilities Decrease (increase) in marketable securities 292,346 7,189 (7,086) Decrease in receivables 6,677,082 4,775,110 6,223,281 (Increase) decrease in inventories (70,235) 71,748 (137,146) (Increase) decrease in prepaid expenses (88,537) 162,819 (327,207) Decrease (increase) in other assets 5,289 (2,313) 5,832 Decrease (increase) in deferred tax assets 13,693 (86,765) - (Decrease) in accounts payable (674,788) (958,818) (7,154,251) Decrease in income taxes payable - - (10,555) Increase (decrease) in customer deposits 42,185 (154,798) (276,000) Decrease in accrued liabilities (261,361) (123,469) (759,151) (Decrease) increase in deferred revenues (101,389) (251,871) 498,698 ----------- ----------- ----------- Net Cash Provided By (Used In) Operating Activities 6,599,264 2,539,614 (1,858,550) ----------- ----------- ----------- Cash Flows From Investing Activities Purchases of equipment (142,624) (338,045) (824,280) Proceeds from sale of equipment - - 43,710 Additional investment in geothermal unit (56,822) Acquisition of a business segment (409,945) - - ----------- ----------- ----------- Net Cash Used In Investing Activities (609,391) (338,045) (780,570) ----------- ----------- ----------- Cash Flows From Financing Activities Net (decrease) increase in line of credit (6,535,405) (1,775,336) 2,555,927 Purchase of treasury stock - - (63,000) Cash acquired in reverse acquisition - 985,552 - ----------- ----------- ----------- Net Cash (Used In) Provided By Financing Activities (6,535,405) (789,784) 2,492,927 ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents (545,532) 1,411,785 (146,193) ----------- Beginning Cash and Cash Equivalents 2,098,198 686,413 832,606 ----------- ----------- ----------- Ending Cash and Cash Equivalents $ 1,552,666 $ 2,098,198 $ 686,413 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 EMTEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2002 AND 2001 1. Organization and Summary of Significant Accounting Policies Organization Emtec (OTC: ETEC) is a systems integrator focused on providing technology solutions that enable our customers to effectively use and manage their data to grow their businesses. Our areas of specialization in IT services include remote network monitoring, help desk, network design, enterprise backup and storage server consolidation, and network security. Emtec's solutions are crafted to enable our customers to become more efficient and effective, thereby giving them a competitive advantage. Our customers are primarily fortune 2000 and other large and mid-sized companies located principally in the New York/New Jersey Metropolitan area and the Southeastern United States, with annual revenues ranging from $50 million to $500 million. We service our customer base from leased facilities in New Jersey, Connecticut, New York, Georgia, and Florida. The Company, was formed on April 1, 1995, as a result of the 1995 and 1996 mergers of three information technology companies that were originally founded between 1980 and 1983. Principles of Consolidation The consolidated financial statements include the accounts of the issuer and its wholly owned subsidiary as described in Note 2 (Acquisitions). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Revenue Recognition The Company recognizes revenues based upon Staff Accounting Bulletin #101 (SAB 101). SAB 101 states that revenue recognition cannot occur until the earnings process is complete, evidenced by an agreement between the Company and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. The Company had followed these principles of revenue recognition prior to the implementation of SAB 101. Therefore, SAB 101 has had no impact on revenue reporting. Procurement services represent sales of computer hardware and prepackaged software. Revenue from consulting and support service contracts are recognized ratably over the contract or service period. Revenues from manufacturer support service contracts where the manufacturer is responsible for fulfilling the service requirements of the customer are recognized immediately at their contract date. F-7 Cash Equivalents Cash equivalents include items almost as liquid as cash with maturity periods of three months or less when purchased. The carrying amount of cash and cash equivalents approximates fair value. Trade Receivables The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management's evaluation of periodic aging of the accounts. Other Receivables Other receivables represent rebates, price protection receivables and amounts due from vendors for purchase returns made in the ordinary course of business. Concentration of Credit Risk The Company provides its services to a wide variety of commercial, governmental and institutional customers. Financial instruments which potentially subject the Company to concentrations of credit risk are cash (and cash equivalents) and trade receivables. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, does not require collateral from its customers. The Company has not experienced significant credit losses. The Company maintains deposit accounts with reputable financial institutions; at times, such deposits may exceed Federal Depository Insurance Limits. Marketable Securities Marketable securities consist of investments in equity securities. The Company classifies all of its investments in securities as "available-for-sale". Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from income and reported as accumulated other comprehensive income in stockholders' equity until realized. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is based on standard costs generated principally by the most recent purchase prices. The Company provides an inventory reserve for obsolescence and deterioration based on management's review of products and sales. Property and Equipment Property and equipment are stated at original cost. Depreciation and amortization for financial accounting purposes are computed using the straight line method over the estimated lives of the respective assets. Accelerated methods of depreciation are used for tax purposes. Property and equipment along with their components are as follows: F-8
Original Cost Estimated Life ------------- -------------- March 2002 March 2001 (Years) ---------- ---------- ------- Computer equipment $ 2,510,613 $ 2,303,162 3 Office equipment 143,432 143,432 5 Furniture and fixtures 292,355 244,294 5 Leasehold improvements 147,248 107,917 5 Vehicles 66,745 66,745 2 ----------- ----------- Total Property and Equipment $ 3,160,393 $ 2,865,550 Less: accumulated depreciation and amortization (2,456,453) (1,946,440) ----------- ----------- Net book value $ 703,940 $ 919,110 =========== ===========
Maintenance and repair costs are charged to expense as incurred. The cost and accumulated depreciation relating to property and equipment retired or otherwise disposed of are eliminated from the accounts and any resulting gains or losses are credited or charged to income. Valuation of Long Lived Assets The Company evaluates its long lived assets as prescribed by Statement of Financial Accounting Standards No. 121 (SFAS No. 121) by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of certain long lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Income Taxes Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than the enactment of changes in tax laws or rates. A valuation allowance is recognized if, on weight of available evidence, it is more likely than not that some portion or all the deferred tax assets will not be realized. Advertising Costs Advertising and marketing costs are charged to expense as incurred. Advertising and marketing expenses for the years ended March 31, 2002, 2001 and 2000 were $306,271, $617,265 and $426,605 respectively. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for employer stock-based compensation utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". F-9 Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company stock at the date of grant over the amount an employee must pay to acquire the stock. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. (See Note 10) Earnings (Loss) Per Share Basic earnings (loss) per share are computed by dividing net earnings (loss) by the weighted average shares outstanding during the reporting period. Diluted earnings (loss) per share are computed similar to basic earnings (loss) per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. Reclassifications Certain reclassifications have been made to prior years balances in order to conform to current presentations. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations", and Statement of Financial Accounting Standard NO. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. However, certain provisions of SFAS 142 apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements are as follows: 1) All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. 2) Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented, or exchanged, either individually or as part of a related contract, asset, or liability. 3) Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective with the adoption of SFAS 142, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. 4) Effective with the adoption of SFAS 142, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. 5) All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. F-10 Goodwill, net of accumulated amortization, amounted to $371,777 at March 31, 2002 and is classified as other assets on the balance sheet. Goodwill acquired before June 30, 2001 has previously been amortized at approximately $19,000 annually. The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. The Company has adopted SFAS No. 142 and SFAS No. 144 effective at April 1, 2002 and is currently evaluating the impact the adoption of the new accounting standards will have on its financial condition and results of operations. 2. Acquisitions At January 9, 2002, the Company acquired substantially all of the assets of Devise Associates, Inc., an information technology consulting and managed services organization located in New York City. The Company paid an aggregate price of $355,051 in cash to be allocated under the purchase method as follows: Goodwill $200,000 Equipment 152,220 Prepaid Expenses 2,831 -------- Aggregate Purchase Price $355,051 ========
At January 17, 2001, Emtec, Inc., a New Jersey corporation (the Company) was acquired by American Geological Enterprises, Inc. (AGE) through an exchange of stock at a ratio of .9753 shares of AGE stock for 1 share of Company stock whereas AGE issued stock to the shareholders of the Company in exchange for stock representing 100% of the outstanding shares of the Company. Pursuant to the acquisition agreement, AGE changed its name to Emtec, Inc. and a majority of the directors and officers of the former AGE resigned in favor of the directors and officers of the Company. In addition, Emtec, Inc. (formerly AGE) increased its authorized capitalizaton from 2,500,000 to 25,000,000 shares of common stock. Immediately after the transaction, the stock ownership of Emtec, Inc. {formerly AGE} was as follows:
Shares Percent ------ ------- Former shareholders of the Company 5,329,501 75.3 Original shareholders of AGE 1,380,997 19.5 (including public owners) Transaction brokers 370,000 5.2 --------- ----- Total 7,080,498 100.0 ========= =====
Because the former shareholders of the Company acquired control of Emtec, Inc.{formerly AGE}, the transaction is considered a "reverse acquisition" by the Company for accounting purposes. The Company is treated as the accounting acquirer of Emtec, Inc. {formerly AGE}, the legal acquirer. For accounting purposes, the acquisition has been treated as an acquisition of Emtec, Inc. (formerly AGE) by Emtec. Inc., a New Jersey Corporation (the Company) and as a recapitalization of the Company. The historical financial statements of the Company are those of Emtec, Inc., a New Jersey corporation. F-11 The historical shareholders' equity of the Company prior to the reverse acquisition has been retroactively restated for the equivalent number of shares received in the transaction after giving effect to the difference in par value between the issuer's and acquirer's stock. Net income (loss) per share has also been restated to reflect the number of equivalent shares received by the former shareholders of Emtec, Inc. a New Jersey corporation. 3. Inventories The components of inventories at March 31, are as follows:
2002 2001 ---- ---- Hardware, software and accessories $1,390,790 $1,265,569 Service parts 150,875 145,330 ---------- ---------- 1,541,665 1,410,899 Less inventory reserve 451,715 391,184 ---------- ---------- $1,089,950 $1,019,715 ========== ==========
Appropriate consideration has been given to deterioration, obsolescence and other factors in evaluating net realizable value. 4. Financing Arrangements On November 21, 2001, the Company terminated its prior credit facility and entered into a three year, $10 million revolving credit facility with Fleet Capital Corporation, formerly Summit Business Capital Corporation ("Fleet") whereas the Company may borrow on 85% of its eligible trade receivables at a floating annual rate of .25% above prime. The interest rate at March 31, 2002 and 2001 was 5.00% and 8.50%, respectively. The Fleet revolving credit facility is collateralized by a lien upon and security interest in substantially all of the Company assets. Since current credit facilities with two of the Company's primary trade vendors, (GE Access, and Ingram Micro.), were also collateralized by substantially all Company assets, Fleet, GE Access and Ingram Micro, have entered into inter-creditor agreements, which provide that as regards to these vendors, debt obligations to Fleet are accorded priority. The lending agreement contains financial covenants that require the Company to maintain a maximum leverage ratio, a minimum debt ratio, a minimum tangible net worth ratio and minimum results of operations. The Company was in default of the financial covenants at March 31, 2002. The Company has two letters of credit totaling $1 million assigned as security deposits issued against their line of credit. At March 31, 2002, the Company had $9 million available under the terms of the agreement. Weighted average interest rates on the borrowings were 8.43%, 9.72% and 9.08% for the years ended March 31, 2002, 2001 and 2000, respectively. 5. Income Tax (Expense) Benefit Deferred income taxes reflect the net tax effects of (a) temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) net operating loss carryforwards (when available). Income tax (expense) benefit consisted of the following for the years ended March 31: F-12
2002 2001 2000 ---- ---- ---- Continuing Operations Current taxes Federal $21,143 $(9,627) $(298,722) State and local (13,082) (1,289) (27,596) --------- --------- --------- 8,061 (10,916) (326,318) Deferred taxes Federal (10,827) 68,035 - State and local (2,866) 15,940 - --------- --------- --------- (5,632) 73,059 (326,318) --------- --------- --------- Discontinued Operations Current taxes Federal - 347,053 State and local (820) 43,576 --------- --------- --------- (820) 390,629 Deferred taxes Federal 2,259 - State and local 531 - ------- ------- ------- 1,970 390,629 Net Income Tax (Expense) Benefit $(5,632) $75,029 $64,311 ======= ======= =======
Reconciliation Of the U.S. statutory income tax rate to our effective tax rate is as follows:
2002 2001 2000 ---- ---- ---- Expected (tax) benefit at statutory rates $(73,225) $ 474,811 $124,884 Effect of state taxes, net (15,883) 14,362 15,980 Valuation allowances 92,158 (397,878) (53,075) Permanent differences (8,682) (16,266) (23,478) --------- --------- -------- Actual Income Tax Expense/(Benefit) $ (5,632) $ 75,029 $ 64,311 ========= ========= ========
Significant items comprising the Company's deferred tax assets and liability at March 31, are as follows:
2002 2001 ---- ---- Deferred Tax Assets Differences between book and tax basis: Trade receivables $ 60,950 $ 181,815 Inventories 190,305 196,744 Property and equipment 17,140 (3,959) Accrued liabilities 13,655 28,718 Others - 35,263 Net Operating loss carryforwards 412,222 414,933 --------- --------- 694,272 853,514 Less Valuation Allowance (624,845) (768,163) --------- --------- Net Deferred Tax Assets 69,427 85,351 Deferred Tax Liability Differences between book and tax basis: Investment in geothermal power unit (60,124) (62,355)
F-13 At March 31, 2002 and 2001 the Company recorded a valuation allowance against its deferred tax assets, reducing those assets to amounts which are more likely than not to be realized. Federal and state net operating loss carryforwards approximated $927,000 and $1,077,000 respectively at March 31, 2002. Federal net operating loss carryforwrds expire in 2021; state net operating loss carryforwards expire at various years through 2008. 6. Related Party Transactions At March 31, 2002 and 2001 the Company owed $19,000 to a Company officer's relative. Except for quarterly interest payments there was no other loan activity during the two year period. Interest paid on the loan was $2,280 for each of the three years ended March 31, 2002. 7. Major Customers Two major customers approximated 23%, 17% and 34% of the Company's net sales in the years 2002, 2001 and 2000 respectively. Major customer sales by locations are as follows:
% Of Total Revenues Locations ------------------- --------- 14% Education - Atlanta, GA 9% Cranford, NJ --- 2002 23% ---- === 10% Education - Atlanta, GA 7% Atlanta, GA --- 2001 17% ---- === 17% Education - Atlanta, GA 17% Atlanta, GA --- 2000 34% ---- ===
While the Company believes its relationship with these customers will continue, there can be no assurance that sales to these customers will continue at all or at the same level. 8. Fair Value of Financial Instruments The following methods and assumptions were used to estimate fair value of financial instruments at balance sheet date: Short-term financial instruments (cash equivalents, receivables, payables, customer deposit and accrued liabilities) - cost approximates fair value because of the short maturity period. Line of credit - cost approximates fair value because of the short interest-reset period. 9. 401(k) Plan The Company sponsors a 401(k) plan for all employees with at least 6 months of service and who are at least 20 years of age. Eligible employees may contribute 2% to 15% of their annual compensation to the plan. The Company matches 25% of the first 6% of employee plan contributions and may contribute additional amounts at the Company's discretion. Participants are vested 20% for each year of service and are fully vested after 6 years. Company contributions to the plan were $84,707, $95,374, and $103,087 for the years ended March 31, 2002, 2001 and 2000, respectively. F-14 10. Stock Option Plan The Company's 1996 Stock Option Plan (the Plan) (amended in 1999) authorizes the granting of stock options to directors and eligible employees. The Company has reserved 1,000,000 shares of its common stock for issuance under the Plan at prices not less than 100% of the fair value of the Company's common stock on the date of grant (110% in the case of shareholders owning more than 10% of the Company's common stock). Options vest at the rate of 25% per year commencing on the first anniversary of, and expire at the earliest of 5 years after the date of grant, three months from date of retirement, or upon date of other termination of employment. The Company used the minimum value option pricing model as prescribed by SFAS No. 123 to determine the impact of applying the fair value method required by SFAS No. 123 prior to going public at January 17, 2001. The Black-Scholes option pricing model has been used to determine the fair value of options granted during the year ended March 31, 2002. Except for 30,000 options granted in November 2001, all other stock options granted during the three years ended March 31, 2002 were determined to have a fair value of zero. The exercise price of these options were set at $ 1 per share, an amount substantially in excess of the fair value of the underlying stock at dates of grant. The 30,000 options granted at November 2001 with an exercise price of $.55 resulted in pro forma compensation cost, net of income taxes of $8,934 computed under Black-Scholes. Earnings per share amounts (rounded to the nearest cent) on a SFAS 123 proforma basis equal the per share amounts reported in the statement of operations for the year ended March 31, 2002. No options granted during the three year period have been exercised as of March 31, 2002. Option activity is summarized as follows: Options outstanding - April 1, 1999 570,874 For the year ended March 31, 2000: Options granted 29,250 Options exercised - Options forfeited or expired (176,042) -------- Options outstanding - March 31, 2000 424,082 For the year ended March 31, 2001: Options granted 226,907 Options exercised - Options forfeited or expired (185,730) ------- Options outstanding - March 31, 2001 465,259 For the year ended March 31, 2002: Options granted 82,746 Options exercised - Options forfeited or expired (166,677) ------- Options outstanding - March 31, 2002 381,328 =======
F-15 11. Termination Costs Termination costs of $21,746 (2002), $90,000 (2001) and $74,480 (2000) were paid to former Company executives. 12. Commitments and Contingencies Leases: The Company leases warehouse and office facilities, vehicles and certain office equipment under noncancellable operating leases. Future minimum lease payments under such leases are as follows:
Fiscal Years ------------ 2003 $ 805,208 2004 818,466 2005 382,956 2006 283,258 Thereafter 650,216 --------- Total $2,940,104 ==========
Aggregate rent expense for the three years ended March 31, 2002, approximated $822,000, $855,000 and $792,000. Litigation: In a previous year Emtec Inc. instituted litigation against two companies (defendants) that were in discussions with Emtec about a possible merger. The complaint in the action charged the two companies for breach of contract, interference with business relationships and misappropriation of trade secrets. The parties settled the litigation in June 2000. Under terms of the settlement, the Company received a $350,000 cash payment and 333,116 shares of the defendant's common stock. Costs related to the litigation and realized losses on disposition of the common stock reduced net income from the litigation settlement to $24,108. In 1999 Emtec, Inc. instituted litigation against a company (defendant) for breach of contract action in an amount approximating $50,000. The defendant stated a counter claim in excess of $8 million for damages resulting from Emtec's alleged negligence, causing the defendant's computer system to become corrupted and unavailable. The parties reached a settlement by agreeing that the Company would restore the defendant's computer system. Restored disks were delivered to the defendant at March 26, 2002. Under the settlement, the defendant was required to file a complaint within 45 days if dissatisfied with the restoration. No such complaint was filed. In March 2002, a lawsuit was filed against the Company by a competitor seeking damages of an unspecified amount. The competitor is alleging that the Company illegally interfered with customer relationships of the competitor. At this time, the outcome of this litigation cannot be determined. The lawsuit is currently in the discovery phase. 13. Supplemental Cash Flow Information Cash paid for interest and income taxes were as follows:
2002 2001 2000 ---- ---- ---- Interest $ 246,287 $ 705,473 $ 731,723 Income Taxes $ 13,082 $ 11,231 $ 168,030
F-16 Noncash investing and financing activities were restricted to the issuance of common stock in the reverse acquisition as described in Note 1. 14. Discontinued Operations During fiscal 2000, the Company completed the sale of assets of it's two South Carolina locations (Greenville and Charleston) to a company formed by some of it's prior employees. The Company incurred a loss of $971, net of an income tax benefit of $613 on the disposition of the assets. Financial information with respect to the discontinued operations is summarized as follows:
2002 2001 2000 ---- ---- ---- Net revenues $ - $ 7,017 $ 7,606,953 Cost of revenues - 10,014 6,551,899 -------- -------- ----------- Gross (loss) profit - ( 2,997) 1,055,054 Operating expenses - 62,622 2,063,100 -------- -------- ----------- Loss before income taxes - (65,619) (1,008,046) Income tax benefit - 1,970 390,016 -------- -------- ----------- Net Loss from Discontinued Operations $ - $(63,649) $ (618,030) ======== ======== ===========
15. Segment Information The Company has organized business segments based upon branch office locations in the Mid-Atlantic and Southeastern United States. These branch office locations offer similar business information systems services. The e-business solutions segment that was started in fiscal 2000 at the Atlanta, GA and Mt. Laurel, NJ locations was discontinued during the fourth quarter 2002. The e-business unit had been focused on marketing internet business solutions. The Company has adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information"(SFAS No. 131). Operating segments are defined by SFAS No. 131 as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Emtec's chief operating decision maker is the Chief Executive Officer of the Company. Reportable operating segments include the individual branch offices as outlined below and the educational, e-business, and geothermal units. The educational unit services schools (kindergarten through 12th grade). The branch offices in Greenville and Charleston, South Carolina which discontinued operations in fiscal 2000 as described in Note 14 have been combined as one reportable segment. The accounting policies of the segments are the same as those described in Note 1. The Company had no intersegment revenues for the three year period ended March 31, 2002. Corporate overhead is allocated to segments based upon a combination of revenues earned and the number of employees attributable to each segment. The Company maintains segment level accounting for accounts receivable, inventory, and property and equipment. All other assets are accounted for at the corporate level. The following is financial information relating to the operating segments: F-17
Years Ended March 31: ---------------------------------------------- 2002 2001 2000 ---- ---- ---- External Sales Mt. Laurel, NJ $ 9,603,667 $ 17,791,016 $ 19,480,769 Cranford, NJ 27,631,177 41,960,532 29,003,759 Atlanta, GA 16,753,524 19,691,550 29,521,736 Norwalk, CT 2,633,750 2,326,671 5,125,806 Education-Atlanta 11,850,177 10,798,600 17,620,420 e-Business - - - New York City 941,133 - - Geothermal 187,978 34,366 - ------------- ------------- ------------- Total External Sales $ 69,601,406 $ 92,602,735 $ 100,752,490 ============= ============= ============= Interest Expense Mt. Laurel, NJ $ 27,907 $ 129,073 $ 109,029 Cranford, NJ 90,976 288,094 188,810 Atlanta, GA 52,036 147,969 156,318 Norwalk, CT 11,318 29,126 35,273 Education-Atlanta 27,783 70,463 177,104 e-Business - - - New York City 327 - - Geothermal - - - ------------- ------------- ------------- Allocated Interest Expense 210,347 664,725 666,534 Over/Under Allocated Interest Expense (42) 27,502 12,752 ------------- ------------- ------------- Total Interest Expense $ 210,305 $ 692,227 $ 679,286 ============= ============= ============= Depreciation and Amortization Mt. Laurel, NJ $ 22,183 $ 46,868 $ 92,585 Cranford, NJ 59,869 78,234 95,028 Atlanta, GA 103,463 135,790 77,927 Norwalk, CT 11,056 8,150 1,397 Education-Atlanta 3,411 2,748 1,223 e-Business 8,671 - - New York City 18,580 - - Geothermal 24,833 4,936 - ------------- ------------- ------------- Allocated Depreciation and Amortization 252,066 276,726 268,160 Unallocated Depreciation and Amortization 295,941 145,530 85,598 ------------- ------------- ------------- Total Depreciation and Amortization $ 548,007 $ 422,256 $ 353,758 ============= ============= ============= Operating Income/(Loss) Mt. Laurel, NJ $ (497,658) $ (669,097) $ 70,729 Cranford, NJ 634,506 795,794 (61,993) Atlanta, GA (314,437) (326,249) (374,670) Norwalk, CT (401,676) (503,807) (140,350) Education-Atlanta 1,460,783 699,749 1,211,918 e-Business (617,220) (1,303,740) (355,933) New York City (124,624) - - Geothermal 83,802 6,808 - ------------- ------------- ------------- Net Segment Operating Income/(Loss) 223,476 (1,300,542) 349,701 (Under) Over Allocated Corporate Expenses (872) (30,342) 292,621 ------------- ------------- ------------- Income/(Loss) From Continuing Operations Before Income Tax (Expense) Benefit $ 222,604 $ (1,330,884) $ 642,322 ------------- Income Tax (Expense) Benefit- Continuing Operations (5,632) 73,059 (326,318) ------------- ------------- ------------- Income (Loss) From Continuing Operations, net of income taxes $ 216,972 $ (1,257,825) $ 316,004 ============= ============= =============
F-18 CAPTION> Identifiable Assets: As of March 31: 2002 2001 ---- ---- Mt. Laurel, NJ $ 1,049,822 $ 2,691,963 Cranford, NJ 3,295,755 7,690,440 Atlanta, GA 1,596,677 2,239,838 Norwalk, CT 41,448 433,860 Education-Atlanta 650,857 1,401,107 New York City 785,169 - Geothermal 581,612 549,626 ----------- ----------- Identifiable Assets From Continuing Operations 8,001,340 15,006,834 Discontinued Operations - - ----------- ----------- Total Identifiable Assets 8,001,340 15,006,834 Corporate And Other Assets 3,387,133 3,692,198 ----------- ----------- Total Assets $11,388,473 $18,699,032 =========== ===========
16. Investment in Geothermal Power Unit The investment in Geothermal Power Unit (Unit), acquired in the reverse acquisition described in Note 2, represents a 5.49% working interest in the Roosevelt Hot Springs geothermal power unit. An agreement is in place to sell all of the steam from the Unit through 2023 to PacifiCorp, which has constructed the Blundell power plant to utilize the steam. This agreement, entered into in 1993, included an advance payment. The remaining unamortized deferred revenue attributable to the 1993 advance payment in the amount of $799,472 is reported as a non-current liability at March 31, 2002 and will be recognized into income ratably through 2023. PacifiCorp pays the Company for operating and maintenance services and a reimbursement of royalties for one lease that is included in the Unit. The Company pays its proportionate share of operating and maintenance expenses to the operator of the Unit. 17. Quarterly Financial Information - (Unaudited)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- 2002 Revenues $ 19,548,127 $ 17,430,872 $ 20,530,201 $ 12,092,206 $ 69,601,406 Gross Profit 2,754,588 2,422,672 2,775,043 2,114,827 10,067,130 Net Income (Loss) $ 271,318 $ 157,023 $ 29,380 $ (240,749) $ 216,972 Per share: {Basic and Diluted} $ .04 $ .02 $ .00 $ (.03) $ .03 2001 Revenues $ 27,430,305 $ 22,454,658 $ 21,203,768 $ 21,514,004 $ 92,602,735 Gross Profit 3,080,493 2,825,177 2,619,209 2,446,692 10,971,571 Net Income (Loss) $ 271,058 $ (186,434) $ (760,100) $ (645,998) $ (1,321,474) Per share: {Basic and Diluted} $ .05 $ (.03) $ (.14) $ (.10) $ (.23)
F-19 18. Accounts Receivable and Inventory Allowances The following table provides information regarding accounts receivable and inventory valuation allowance activity for the three years ended March 31, 2002.
Allowances ---------- Accounts Receivable Inventory ---------- --------- Balance, April 1, 1999 $ 209,397 $ 147,590 Charged to costs and expenses 430,947 260,387 Write-offs (272,287) (232,490) --------- --------- Balance, March 31, 2000 368,057 175,487 Charged to costs and expenses 276,198 344,918 Write-offs (211,365) (129,222) --------- --------- Balance, March 31, 2001 $ 432,890 $ 391,183 Charged to costs and expenses 55,917 76,062 Write-offs (336,205) (15,530) --------- --------- Balance, March 31, 2002 $ 152,602 $ 451,715 ========= =========
F-20 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as...............................'TM' EX-10 3 ex10-19.txt EXHIBIT 10.19 Exhibit 10.19 Assignment and Assumption of Lease For valuable consideration hereunder, the receipt and sufficiency of which is hereby acknowledged, Devise Associates, Inc. (the "Assignor") hereby assigns and delegates to Emtec, Inc. (the "Assignee"), and Assignee hereby agrees to assume and accept the assignment and delegation, of all of Assignor's right, title and interest in and to the lease identified on Exhibit A attached hereto (collectively, together with all amendments, modifications, supplements, restatements and guarantees thereof', the "Lease"). From and after the date hereof, Assignee hereby expressly assumes all of the covenants, agreements, obligations, terms, conditions and provisions to be kept, observed and performed by the lessee under or according to the provisions of the Lease. The transfer provided for herein is made without recourse and without any express or implied representation or warranty by the Assignor whatsoever. The Parties hereby agree that, from time to time upon written request, each Party will give, execute, deliver, file and/or record any notice, instrument, document, or other papers and do such acts and things that may be necessary and desirable in the reasonable opinion of the other Party to create, preserve, perfect or validate this Assignment, to enable the Parties to exercise and enforce their rights hereunder with respect to this Assignment, or to otherwise carry out the purposes and intent of this Assignment. Assignee hereby agrees to provide a security deposit in the amount of $250,000 in the form of a Letter of Credit from Fleet Bank acceptable to the Landlord as provided in the Lease to secure its obligations under the Lease. Assignee hereby agrees to indemnify Assignor against and hold Assignor harmless from any and all cost, liability, loss, damage or expense, including, without limitation, reasonable attorneys' fees, originating or relating to the period on or after the date hereof and arising out of Assignees' obligations under the lease, as well as the return of security deposit paid by Assignor. Assignor hereby agrees to indemnify Assignee against and hold Assignee harmless from any and all cost, liability, loss, damage or expense, including, without limitation, reasonable attorneys' fees, originating or relating to the period before the date hereof and arising out of Assignors' obligations under the lease. The Agreement may be executed and delivered in any number of counterparts, each of which so executed and delivered shall be deemed to be an original and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement effective as of this 9th day of January ,2002. ASSIGNOR: ASSIGNEE: Devise Associates, Inc. Emtec, Inc. By: /s/ Randall Rings By: /s/ John P. Howlett -------------------- -------------------- Name: Randall Rings Name: John P. Howlett Title: Vp & Secretary Title: CEO Exhibit 10.19 STANDARD FORM OF OFFICE LEASE The Real Estate Board of New York, Inc. Agreement of Lease, made as of this 27th day of Apri1 1998, between VANDERGRAND PROPERTIES CO., L.P., a New York limited partnership, having an address c/o Jack Resnick & Sons, Inc., 110 East 59th Street, New York, New York 10022 ("Owner" or "Landlord") and DEVISE ASSOCIATES, INC., a New York corporation, having an address at 909 Third Avenue, New York, New York 10022 ("Tenant") WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner the entire rentable area of the twelfth (12th) floor (the "premises" or "demised premises"), which Landlord and Tenant mutually agree (but without representation of any kind) contains 7,635 rentable square feet, in the building known as 880 Third Avenue (the "Building"), in the Borough of Manhattan, City of New York, for the term (the "Term") of ten (10) years, to commence on the Commencement Date (as defined in Article 51) and to expire on June 30, 2008 (the "Expiration Date")(or until such Term shall cease and expire as hereinafter provided), at the fixed annual rental rate (the "Fixed Rent") of $235,539.75 per annum, subject to adjustment as hereinafter provided, which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other place as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: Rent: 1. Tenant shall pay the rent as above and as hereinafter provided. Occupancy: 2. Tenant shall use and occupy the demised premises for general, administrative and executive offices, for ancillary uses not in violation of applicable law or the certificate of occupancy, and for no other purpose Tenant Alterations: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant, at Tenant's expense, may make alterations, installations, additions or improvements which are non-structural and which does not affect utility services or plumbing, and electrical lines. in or to the interior of the demised premises by using contractors or mechanics first approved in each instance by Owner. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and subcontractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms apart, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing the bond required by law. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner, by notice to Tenant no later than twenty days prior to the date fixed as the termination of this lease, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the use shall be removed from the premises by Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in this Article shall be construed to give Owner title so or to prevent Tenant's removal of fixtures. moveable office furniture and equipment, but upon removal, such from the premises or upon removal of other installations as may required by Owner, Tenant shall immediately andl at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal, All property permitted or required to be removed, by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the premises by Owner, at Tenant's expense. Maintenance and Repairs. Tenant shall, throughout the term of this lease, take good care of the demised premises and the fixtures and appurtenances therein. Tenant shall be responsible for all damage or injury to the demised premises or any other part of the building and the systems and equipment thereof. whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents. employees, invitees or licensees, or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant a fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the demised premises for which Tenant is responsible, using only the contractor for the trade or wades in question, selected from a list of at least two contractors per trade submitted by Owner. Any other repairs in or to the building or the facilities and systems thereof for which Tenant is responsible shall be performed by Owner at the Tenant's expense. Owner shall maintain in good working order and repair the exterior and the structural portions of the building, including the structural portions of its demised premises. and the public portions of the building interior and the building plumbing, electrical, heating and ventilating systems (to the extent such systems presently exist) serving the demised premises. Tenant agrees to give prompt notice of any defective condition in the premises for which Owner may be responsible hereunder. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from owner or others making repairs, alterations, additions or improvements in or to any portion of the building; or the demised premises or in and to the fixtures, appenurtanaces or equipment thereof. It is specifically agreed that Tenant sball not be entitled to any set off or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of an action for damages for breach of contract. The provisions of this Article 4 shall not apply in the case of fire or other casualty which are dealt with in Article 9 hereof. Window Cleaning: 5. Tenant will not clean or require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. Requirements Of Law, Fire Insurance, Floor Loads: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter, Tenant, at Tenant's sole cost and expense. shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, (including Tenant's permitted use)or, with respect to the building if arising out of Tenant's use or manner of use of the premises or the building (including the use permitted under the lease). Nothing herein shall require the Tenant to make structural repairs or alterations unless Tenant has by its manner of use of the demised premises or method of operation Therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after accusing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but limited to, reasonable attorney's fees, by cash deposit or by purety bond in an amount and in a company satisfactory to Owner, contest and appeal any such laws, ordinances, orders, rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal sense or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the demised premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the Exhibit 10.19 demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the demised premises or the building of which the demised premises form apart, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, or use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or make-up of rate for the building or demised premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein slated and of the several items and charges in the fire insurance rates then applicable to and premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in setting sufficient, in Owner's Judgement, to absorb and prevent vibration, noise and annoyance. Subordination: 7. This lease is subject and subordinate to all ground saw or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause be self-operative and no further instrument of subordination shall be any ground or underlying lessor or by any mortagee, affecting any lease or the real property of which the demised premises are apart. In conformation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner requests. Property Loss, Damage Reimbursement Indemnity: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by the theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence of Owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said building or caused by operations in construction of any private, public or quasi public work. If at any time any windows of thc demised premises are temporarily closed, darkened or bricked up(or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever including, but not limited to Owner's own acts,Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses, including reasonable attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. Exhibit 10.19 Destrucion Fire and Other casualty: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty. then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacant the premises without prejudice however, to Landlord's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c)hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and moveable equipment, furniture, and other property. Tenant's liability for rent shall resume five(5)days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner's obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery with respect to subparagraphs (b), (d), and (e) above, against the other or any one claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to Include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and/merchandise located therein. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause provoking that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, the party benefiting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section227 of the Real Property Law and agrees that the provisions of this article shall govern amid control in lieu thereof. Eminent Domain: If the whole or any part of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenants interest in any such award. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures, and equipment provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixtures and equipment at the end of the term and provided further such claims does not reduce Owner's award. Assignment, Mortgage, Etc.: 11. Tenant, for itself, its heirs, distributees, executors, administrators, legal representative, successor and assigns, expressly covenants that it shall not assign, mortgage or encumber this agreement, nor underlet, or suffer or permit the demised premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Transfer of the majority of the stock of a corporate Tenant or the majority partnership interest of a partnership Tenant shall be deemed an assignment. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further Performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. Electric Current: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. Access to Premises: 13. Owner or Owner's agents shall have the right(but shall not be obligated) to enter the demised premises in any emergency at any time, and at other reasonable times, to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to the demised premises or to any other portion of the building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided they are concealed within the walls, floor, or ceiling. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the Exhibit 10.19 same to prospective tenants. If Tenant is not present to open and permit an entry into the demised premises. Owner or Owner's agents may enter whenever such entry may be necessary or permissible by master forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom Owner may enter, altcr, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation act shall have no effect on this lease or Tenant's obligations hereunder. Vault, Vault Space, Area: 14. No Vaults, vault space or area, whether or not, enclosed or covered, not within the property line of the building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the building. All vaults and vault space and all such areas not within the property line of the building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant bc entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. Occupancy: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner s work, if any. In any event Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. Bankruptcy: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by the sending of a written notice to Tenant within a resonable time after the happening of any one or more of the following events (1) the commencement of a case in bankruptcy or under the laws of naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) it is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the compilation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be re-let by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall be deemed to be the fair and reasonable rental value for the part or the whole of thc premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. Default: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the demised premises become vacant or deserted; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant or if this lease be rejected under 235 of Title 11 of the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or take possession of the premises within thirty days after the commencement of thc term of this lease, then, in anyone of such events, upon Owner serving a written days notice upon Tenant specifying the nature of said default and upon the expiration of said days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said day period, and if Tenant shall not have diligently commenced curing such default within such day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five(5)day period were the day herein definitely fixed for the end and expiration of this lease and the term there of and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required then anti in any of such events Owner may without notice re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. Remedies of Owner and Waiver of Redemption: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or wise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Owners as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages in computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses reasonable attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified In this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgement, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder, In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at Law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption gained by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. Fees and Expenses: 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorneys' fees, in instituting, prosecuting or defending any action or proceeding, and prevails in any such action or proceeding then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner, as damages. Building Alterations and Management: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number of designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the building or any such alterations, additions anti improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. No Representations by Owner: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly, set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as so latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement Exhibit 10.19 hereafter made shall be ineffective to change, modify, discharge or effect abandonment of it in whole or in part, unless such executory agreement writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. End of Term: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. Quiet Enjoyment: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof and to the ground leases, underlying leases and mortgages herein before mentioned. Failure To Give Possession: 24. Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant or occupants or if the demised premises are located in a building being constructed, because such building has not been sufficiently completed to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession or complete construction) until after Owner shall have given Tenant written notice that the Owner is able to deliver possession in condition required by this lease. If permission is given to Tenant to enter into the possession of the demises premises or to occupy premises other than the demised premises or to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such possession and/or occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease except the obligation to pay the fixed annual rent set forth in the preamble to this lease, The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. No Waiver: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent and/or additional rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless In writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. Waiver of Trial by Jury: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession including a summary proceeding for possession of the premises. Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for statutory mandatory counterclaims. Inability to Perform: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment, fixtures, or other materials if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever including, but not limited to, government preemption or restrictions or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency. Bills and Notices: 28. Except as otherwise in this lease provided, a bill, statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, delivered to Tenant personally or sent by registered or certified mail addressed to Tenant at the building of which the demised premises form a part or at the last known residence address or business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant mailed or left at the premises as herein provided. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. Services Provided by Owners: 29. As long as Tenant is not in default under any of the covenants of this lease beyond the applicable grace period provided in this lease for the curing of such defaults, Owner shall provide: (a) necessary elevator facilities on business days from 8 a.m. to 6 p.m. and have one elevator subject to call at all other times; (b) heat to the demised premises when and as required by law, on business days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory purposes, but if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Owner shall be the sole judge), Owner may install a water meter at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense in good working order and repair to register such water consumption and Tenant shall pay for water consumed as shown on said meter as additional rent as and when bills are rendered;(d)cleaning service for the demised premises on business days at Owner's expense provided that the same are kept in order by Tenant. Tenant shall pay Owner the cost of removal of any of Tenant's refuse and rubbish from the building (e) If the demised premises are serviced by Owner's air conditioning/cooling and ventilating system, air conditioning/ cooling will be furnished to tenant from May 15th through September 30th on business days (Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00p.m., and ventilation will be furnished on business days during the aforesaid hours except when air conditioning/cooling is being furnished as aforesaid. If Tenant requires air conditioning/cooling or ventilation for more extended hours or on Saturdays, Sundays or on holidays, as defined under Owner's contract with Operating Engineers Local 94-94A, Owner will furnish the same at Tenant's expense. RIDER to be added in respect to rates and conditions for such additional service; (f) Owner reserves the right to stop services of the heating, elevators, plumbing, air-conditioning, electric, power systems or cleaning or other services, if any, when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in the judgment of Owner for as long as may be reasonably required by reason thereof. If the building of which the demised premises are a part supplies manually operated elevator service, Owner at any time may substitute automatic control elevator service and proceed diligently with alterations necessary therefor without in any wise affecting this lease or the obligation of Tenant hereunder. Captions: 30. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. Definitions: 31. The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a landlord or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays, Sundays and all days as observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld, such consent shall not be unreasonably delayed. Adjacent Excavation-Shoring: 32. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. Rules and Regulations: 33. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within fifteen (15) days after the giving of notice thereof. Nothing Exhibit 10.19 in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Security: 34. Tenant has deposited with Owner the sum of $ * as security for the faithful performance and observance by Tenant of the provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, Including but not limited to, any damages or deficiency in the re-letting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lessee and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions here of shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited here in as security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumberance Estoppel Certificate: 35. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default. Successors and Assigns: 36. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. Tenant shall look only to Owner's estate and interest in the land and building, for the satisfaction of Tenant's remedies for the collection of a judgment(or other judicial process) against Owner in the event of any default by Owner hereunder, and no other property or assets of such Owner (or any partner, member, officer or director thereof, disclosed or undisclosed), shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this lease, the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of the demised premises. * $250,000 (the "Security Deposit") Witness for Owner: In Witness Whereof, Owner and Tenant have respectively signed and scaled this lease as of the day and year first above written. [ILLEGIBLE] ............................................ - ------------------------------------------ CORPORATE OWNER Witness for Tenant: - ------------------------------------------ ACKNOWLEDGEMENTS INDIVDUAL OWNER STATE OF NEW YORK County of On this day of , 19 , Before me personally came To be known and known to me to be the individual Described in and who, as OWNER, executed the foregoing instrument and acknowledged to me that executed the same ------------------------------------ STATE OF NEW YORK County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he is of the corporation described in and which executed the foregoing instrument, as OWNER, that he knows the seal of said corporation; the seal of affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order ------------------------------------ VANDERGRAND PROPERTIES CO., L.P. By: Vanres Holding Corp. , general partner By:________________ Name: Title: -and- By: Cond Third Corp., general partner By: /s/Lawrence Ruben --------------------- Name: Lawrence Ruben Title: Preisident DEVISE ASSOCIATES, INC. By: /s/William D. Ward ---------------------- Name: William D. Ward Title: President ORPORATE TENANT STATE OF NEW YORK County of On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in ; that he is the of the corporation described in and which executed the foregoing instrument, as TENANT; that he knows the seal of said corporation; the seal affixed to mid instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ----------------------------------------- INDIVDUAL TENANT STATE OF NEW YORK, County of On this day of , 19 , before me personally came to be known and known to me to be the individual described in and who, as TENANT, executed the foregoing instrument and acknowledged to me that executed the same. ------------------------------------------ GUARANTY FOR VALUE RECEIVED, and in consideration for, and as an inducement to Owner making the within lease with Tenant, the undersigned guarantees to Owner, Owner's successors and assigns, the full performance and of all the covenants, conditions and agreements, therein provided to performed and observed by Tenant, Including the "Rules and Regulations" as herein provided, without requiring any notice of non-payment, non-performance, or non-observance, or proof, or notice, or demand, whereby to charge the undersigned therefor, all of which the undersigned hereby expressly waives and expressly agrees that the validity of this agreement and the obligations of the guarantor hereunder shall in no wise be terminated, affected or impaired by reason of the assertion by Owner against Tenant of any of the rights or remedies reserved to Owner pursuant to the provisions of the within lease. The undersigned further covenants and agrees that this guaranty shall remain and continue in full force and effect as to any renewal, modification or extension of this lease and during any period when Tenant is occupying the premises as a "statutory tenant." As a further inducement to Owner to make this lease and in consideration thereof, Owner and the undersigned covenant and agree that in any action or proceeding brought by either Owner or the undersigned against the other or any matters whatsoever arising out of, under, or by virtue of the terms of this lease or of this guarantee that Owner and the undersigned shall and do hereby waive trial by jury. Guarantor's Residence Business Address Firm Name STATE OF NEW YORK COUNTY OF Dated: 19____ Guarantor: Witness: IMPORTANT - PLEASE READ RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33. 1. The sidewalks, entrances, driveways, passageways, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or recipient of merchandise, any hand trucks, except those used equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant expense, keep the sidewalk and the curb in front of said premises, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no rubbish, rags, acids or other substances shall be deposited therein, and this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises to be occupied or to be used in a manner offensive or objectable to Owner or other occupants of the building by reason of noise, odors, and or visible vibrations, or interfere in any way with other Tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of the Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or the inside of the demised premise if the same is visible from the outside of the premises without the prior written consent of the Owner, except that the name of the Tenant may appear in the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted, or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. No Tenant shall mark, paint, drill, into, or in any way deface any part of the demised premises or the building of which they for a part. No boring, cutting, or stringing of wires shall be permitted, except with the prior written consent of the Owner, and as Owner may direct. No Tenant shall lay linoleum, or any similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or any similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, Furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only of the freight and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the building all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. Tenant shall not have a claim against Owner by reason of Owner excluding from the building any person who does not present such pass. 11. Owner shall have to right to prohibit any advertising by any Tenant which in Owners opinion, tends to impair the reputation of the building or its desirability as a building for offices, and upon written notice from Owner, Tenant shall refrain from and discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, explosive, or hazardous fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes or any unusual or other objectable odors to permeate in or emanate from the demised premises. 13. If the building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by Owner with respect of such services. If Tenant requires air conditioning or ventilation after the usual hours, Tenant shall give notice in writing to the building superintendent prior to 3:00 p.m. in the case of services required on week days, and prior to 3:00 p.m. on the day prior in case of after hour services required on weekends or on holidays. Tenant shall cooperate with Owner in obtaining maximum effectiveness of the cooling system by lowering and closing venetian blinds and/or drapes and curtains when the sun's rays fall directly on the windows of the demised premises. 14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter or fixtures into or out of the building without Owner's prior written consent. If such safe, heavy machinery, heavy equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Owner may designate. 15. Refuse and Trash (1) Compliance by Tenant. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders, and regulations of all state, federal, municipal, and local governments, departments, commissions and boards regarding the collection, sorting, separation and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse, and trash into such categories as provided by law. Each separately sorted category of waste products, refuse and trash shall be placed in separate receptacles reasonably approved by Owner. Such separate receptacles, at Owners option, be removed from the demised premises in accordance with the collection schedule prescribed by law. Tenant shall remove or caused to be removed by a contractor or acceptable Owner, at Owner's sole discretion, such items as Owner may expressly designate. (2) Owner's Rights in Event of Noncompliance. Owner has the option to refuse to collect or accept from Tenant waste products, garbage, refuse or trash(a) that is not separated and sorted as required by law or (b) which consists of such items as Owner may expressly designate for Tenant's removal, and to require Tenant to arrange to such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Owner. Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Owner by Tenant by reason of Tenant's sole cost and expense, shall indemnity, defend and hold Owner harmless (including reasonable legal fees and expenses) from and against any actions, claims and suits arising from each noncompliance, utilizing counsel reasonably satisfactory to Owner. FOOTNOTES TO LEASE DATED AS OF April 28, 1998 BETWEEN VANDERGRAND PROPERTIES CO., L.P., AS LANDLORD, AND DEVISE ASSOCIATES, INC., AS TENANT 1. Except to the extent directly and exc1us+/-ive1y caused by Landlord's negligence or willful misconduct, 2. Particular 3. reasonable 4. Notwithstanding the foregoing, Landlord shall, upon Tenant's request, use good faith efforts to obtain for Tenant's benefit a so-called subordination, non-disturbance and attornment agreement from each mortgagee of the Building, in such mortgagee's standard form. Tenant agrees to reimburse Landlord for the reasonable fees, expenses and other charges payable by Landlord to the mortgagee in connection with the issuance of such an agreement. 5. after reasonable notice 5a. upon written notice 6. Landlord represents that a true and complete copy of the certificate of occupancy for the Building is annexed hereto as Exhibit A. 7. thirty (30) 8. and such default in payment is not cured within ten (10) days after Landlord gives notice thereof to Tenant 9. (provided that Landlord does not arbitrarily refuse to relet) Landlord shall not be deemed to have arbitrarily refused to relet the demised premises or any part or parts thereof if: (1) Landlord first rents any other vacant space in the Building; (2) Landlord refuses to rent all or any part of the demised premises to any party which Landlord, in its discretion, exercised in good faith, considers an unsuitable tenant for the Building or a party with whose financial condition Landlord is dissatisfied; or (3) Landlord refuses to rent all or any part of the demised premises because a proposed leasing transaction is, in Landlord's discretion, exercised in good faith, financially or otherwise unsatisfactory to Landlord. 10. (provided that Landlord will not arbitrarily refuse to relet as aforesaid) 11. Provided that such actions do not materially interfere with the operation of Tenant's business, 11a. Subject to Article 51(B) hereof, if 12. or Tenant 13. in excess of ordinary office refuse (which cost will be at competitive rates) 14. Continued on Rider annexed hereto and made a part hereof. RIDER TO LEASE DATED AS OF April 27 , 1998 BETWEEN VANDERGRAND PROPERTIES CO., L.P., AS LANDLORD, AND DEVISE ASSOCIATES, INC., AS TENANT If and to the extent that any of the provisions of this rider conflict or are otherwise inconsistent with any of the printed provisions of this lease, whether or not such inconsistency is expressly noted in this rider, the provisions of this rider shall prevail. 37. Definitions The following terms contained in this Article 37 shall have the meanings hereinafter set forth as such terms are used throughout this lease, including the exhibits, schedules and riders hereto (if any) (A) "Base Tax Year" shall mean the tax fiscal year July 1, 1998 to June 30, 1999. (B) "Base Year Taxes" shall mean the Real Estate Taxes as finally determined for the Base Tax Year. (C) "Subsequent Tax Year" shall mean any tax fiscal year commencing on or after July 1, 1999. (D) "Tenant's Proportionate Share" shall mean 5.41%. (B) "Base Operating Expenses" shall mean the Operating Expenses incurred for 1998. (F) "Operational Year" shall mean each calendar year during the Term commencing with 1999. (G) "Electric Factor" initially shall mean $21,759.75 per annum, subject to adjustment in accordance with the terms of Article 42. (H) "Net Rent" initially shall mean $213,780.00 per annum, subject to adjustment as provided in Article 41. (I) "Base Electric Date" shall mean July 1, 1998. (J) "Broker" shall mean, collectively, Williamson, Picket, Gross, Inc. and Jack Resnick & Sons, Inc. (K) "Rent Commencement Date" shall mean the later to occur of March 1, 1999 or the date that is eight (8) months after the Commencement Date. (L) "Law" shall mean any law, rule, order, ordinance, regulation or requirement of any governmental authority having or asserting jurisdiction or any order, rule, requirement or regulation of any utility company, insurer of Landlord or the Board of Fire Underwriters (or successor organization), whether now or hereafter in effect, and all amendments thereto. 38. Rental Payments (A) All payments other than Fixed Rent to be made by Tenant pursuant to this lease shall be deemed additional rent and, in the event of any non-payment thereof, Landlord shall have all rights and remedies provided for herein or by law for non-payment of rent. (B) All payments of Fixed Rent and additional rent (collectively, "rent." or "rental") to be made by Tenant pursuant to this lease shall he made by checks drawn upon a New York City bank that is a member of the New York Clearing House Association or any successor thereto. (C) If Landlord receives from Tenant any payment less than the sum of the Fixed Rent and additional rent then due and owing pursuant to this lease, Tenant hereby waives its right, if any, to designate the items to which such payment shall be applied and agrees that Landlord in its sole discretion may apply such payment in whole or in part to any Fixed Rent, any additional rent or to any combination thereof then due and payable hereunder. (D) Unless Landlord shall otherwise expressly agree in writing, acceptance of Fixed Rent or additional rent from anyone other than Tenant shall not relieve Tenant of any of its obligations under this lease, including the obligation to pay Fixed Rent and additional rent, and Landlord shall have the right at any time, upon notice to Tenant, to require Tenant to pay the Fixed Rent and additional rent payable hereunder directly to Landlord. Furthermore, such acceptance of Fixed Rent or additional rent shall not be deemed to constitute Landlord's consent to an assignment of this lease or a subletting or other occupancy of the demised premises by anyone other than Tenant, nor a waiver of any of Landlord's rights or Tenant's obligations under this lease. (E) Landlord's failure to timely bill all or any portion of any amount payable pursuant to this lease for any period during the Term shall neither constitute a waiver of Landlord's right to ultimately collect such amount or to bill Tenant at any subsequent time retroactively for the entire amount so unbilled, which previously unbilled amount shall be payable within thirty (30) days after being so billed. 39. Tax Escalation (A) For purposes of this lease, "Real Estate Taxes" shall mean all the real estate taxes and assessments imposed by any governmental authority having jurisdiction over the Building and the land upon which it is located ("Land") (including specifically, but without limitation, so-called "BID" taxes) or any tax or assessment hereafter imposed in whole or in part in substitution for such real estate taxes and/or assessments. Landlord represents that there are presently no abatements or exemptions affecting the Building or Land. (B) If the Real Estate Taxes for any Subsequent Tax Year during the Term exceed the Base Year Taxes (as initially imposed, if not finally determined when a payment is due pursuant to this Section (B)), Tenant shall pay Landlord Tenant's Proportionate Share of such excess within fifteen (15) days after Landlord shall furnish to Tenant a statement (the "Tax Statement") setting forth the amount thereby due and payable by Tenant. If Real Estate Taxes are payable by Landlord to the applicable taxing authority in installments, then Landlord shall bill Tenant for Tenant's Proportionate Share of increased Real Estate Taxes in corresponding installments, such that Tenant's payment is due not more than fifteen (15) days prior to the date when Landlord is obligated to pay the Real Estate Taxes to the applicable taxing authority. If the actual amount of Real Estate Taxes is not known to Landlord as of the date of Landlord's Tax Statement, then Landlord may nevertheless bill Tenant for such installment on the basis of a good faith estimate, in which event Tenant shall pay the amount so estimated within fifteen (15) days after receipt of such bill, subject to prompt refund by Landlord, or payment by Tenant, upon a supplemental billing by Landlord once the amount actually owed by Tenant is determined. Landlord shall provide Tenant with a copy of the current tax bill used in the preparation of the Tax Statement when it delivers such Tax Statement to Tenant. (C) If the Base Year Taxes ultimately are reduced to less than the Real Estate Taxes initially imposed upon the Land and the Building for the Base Tax Year, Tenant shall pay Landlord, promptly upon demand, any additiona1 amount thereby payable pursuant to Section (B) for all applicable Subsequent Tax Years. -2- (D) If Landlord receives any refund of Real Estate Taxes for any Subsequent Tax Year for which Tenant has made a payment pursuant hereto, Landlord shall (after deducting from such refund all reasonable expenses incurred in connection therewith, to the extent that the same were not theretofore included in Real Estate Taxes or were not otherwise reimbursed by Tenant) pay Tenant, if not in default hereunder beyond any applicable notice and/or cure periods, Tenant's Proportionate Share of the net refund. Tenant shall pay Landlord Tenant's Proportionate Share of the costs and expenses of any nature (including, without limitation, consulting, appraisal, legal and accounting fees) incurred by Landlord in connection with any tax protest or other proceeding or arrangement leading or intending to lead to a reduction in Real Estate Taxes, whether before or after the initial assessment thereof. (E) If any Subsequent Tax Year is only partially within the Term, all payments pursuant hereto shall be appropriately prorated, based on the portion of the Subsequent Tax Year which is within the Term. Except as limited by Articles 9 and 10: (1) Tenant's obligation to make the payments required by Sections (B), (C) and (D) shall survive the Expiration Date or any sooner termination of this lease; and (2) Landlord's obligation to make the payments required by Section (D) shall survive the Expiration Date or any sooner termination of this lease pursuant to Articles 9 and 10. (F) Each Tax Statement given by Landlord pursuant to Section (B) shall be binding upon Tenant unless, within sixty (60) days after its receipt of such Tax Statement, Tenant notifies Landlord of its disagreement therewith, specifying the portion thereof with which Tenant disagrees. Pending resolution of such dispute, Tenant shall, without prejudice to its rights, pay all amounts determined by Landlord to be due, subject to prompt refund by Landlord (without interest) upon any contrary determination. 40. Operating Expense Escalation (A) For all purposes of this lease: (1) "Operating Expenses" shall mean all costs and expenses incurred by Landlord, on an accrual basis, for the operation, cleaning and maintenance of the Building and its plazas, garage, sidewalks and curbs (collectively, "Landlord' s Property") including all costs and expenses incurred as a result of Landlord's compliance with any of its obligations hereunder, and shall include the following items (without limitation) (a) salaries, wages, medical, surgical and general welfare benefits (including group life and medical insurance) and pension payments, payroll taxes, worker's compensation, union benefits paid by employer, unemployment insurance, social security and other similar taxes of or with respect to employees of Landlord and/or independent contractors engaged in operation and maintenance; (b) payments made to independent contractors for maintenance, cleaning and/or operation; (c) the cost of uniforms, including dry cleaning thereof, for employees; (d) the cost of all gas, steam, heat, ventilation, air conditioning and water (including sewer rental) , together with any taxes thereon; (e) the cost of all rent, casualty, war risk (if obtainable) , liability, excess liability, property damage, indemnification, plate glass, multi-risk and other insurance covering Landlord and/or all or any portion of Landlord's Property; (f) the cost of all supplies (including cleaning supplies) , tools, materials and equipment; -3- (g) the cost of all charges to Landlord for electricity consumed for the public areas of the Building and Building systems and equipment, together with any taxes thereon; (h) repairs or replacements made by Landlord, at its expense; (i) straight line amortization (including interest at the rate of two (2%) percent per annum in excess of the "prime rate" or "base rate" of Citibank, N.A. (the "Prime Rate") at the time such expenditure is made) over a ten (10) year period of any expenditure for a capital improvement which is intended to result in a reduction of Operating Expenses; (j) management fees not in excess of customary rates; (k) vault, sales, use and frontage taxes; (1) dues and fees for trade and industry associations and costs of their related activities, all relating to Landlord' s Property; (m) Building and home-office administrative costs and expenses for bookkeeping and telephone; (n) reasonable attorney's fees and fees paid to other professionals for services rendered in connection with the maintenance and/or operation of Landlord's Property; (o) costs and expenses incurred by Landlord in connection with compliance with Law; provided, however, that to the extent that any such cost or expense is capital in nature, it shall be amortized as set forth in clause (i) above; and provided further that Operating Expenses shall not include capital costs incurred in connection with compliance with any such Law (i) that is in effect on the date of execution of this lease; (ii) with which it is Landlord's obligation to comply; and (iii) which, under present judicial or administrative interpretation, is not being complied with on the date of this lease; and (p) all other costs and expenses incurred by Landlord for operation and maintenance of Landlord's Property which are customary for similar buildings in New York City. (2) Notwithstanding anything in this lease to the contrary, there shall be no duplication among items included in Operating Expenses, and the following items shall be excluded from Operating Expenses: (a) interest on and amortization of debts; (b) the cost of tenant improvements made for new or existing tenant(s) of the Building; (c) brokerage commissions; (d) Real Estate Taxes; (e) the cost of any repairs made by Landlord to remedy damage to the extent caused by or resulting from the negligence or wilful misconduct of Landlord, its agents, servants or employees; (f) legal or brokerage or finder's fees or other fees, leasing commissions, advertising expenses and other costs incurred in leasing or attempting to lease any portion of the Building or in connection with placing or refinancing any mortgages on the Building or Land; -4- (g) any funds or money given to any tenants in cash, by offset or otherwise, or the cost of any work done for any tenants, all in connection with the leasing of space in the Building; (h) the cost of any items to the extent Landlord is reimbursed by insurance, or otherwise compensated, including direct reimbursement by any tenant for specific services performed for such tenant (other than under operating expense, porters' wage and/or utility cost or like escalation provisions of its lease) (i) that portion of any cost paid to a corporation or other entity affiliated with Landlord (i.e., controlling, controlled by or under common control with Landlord) that is in excess of the amount that would be paid in the absence of such relationship; (j) financing and refinancing costs in respect of any indebtedness of Landlord, whether secured or unsecured, including legal and accounting fees and expenses, prepayment penalties and interest and amortization payments in connection therewith; (k) rent and additional rent under any ground or underlying lease (except to the extent that any additional rent would otherwise qualify as an Operating Expense hereunder) (1) franchise, gross receipts, unincorporated business, inheritance, foreign ownership or control or income taxes imposed upon Landlord or any taxes similar to the foregoing excluded items (other than sales taxes on items or services otherwise includible in Operating Expenses) (m) costs incurred in connection with the transfer or disposition of direct or indirect ownership interests in the Building or Landlord; (n) the costs of repairs or restoration necessitated by condemnation to the extent of any condemnation award applicable thereto; (o) fines, judgments or awards against Landlord based on Landlord's negligence, wilful misconduct or criminal act (except to the extent all or any portion of such fines, judgments or awards represent the cost of maintenance, repairs or other items otherwise includible in Operating Expenses); (p) general overhead of Landlord's or the managing agent's office, except to the extent included in clause (1) (m) (q) depreciation and amortization (except to the extent provided in clauses (1) (i) and (1) (o) ) (r) costs resulting from Landlord's default under any lease, except to the extent such costs represent the costs of maintenance, repairs or other items otherwise includible in Operating Expenses; (s) compensation of clerks, attendants or other persons in concessions serving the public and operated by Landlord or the managing agent (such as shoeshine, newsstand, etc.); (t) costs for purchasing work of fine art, as opposed to decorative art work of no special value; (u) items to the extent actually reimbursed to Landlord pursuant to any warranties or guarantees; (v) the cost of repairs or other work occasioned by fire, windstorm or other casualty to the extent covered by insurance; -5- (w) Landlord's cost of electricity provided to leased or leasable areas of the Building; (x) wages, salaries and other compensation paid to employees of the Building above the grade of Building manager; (y) costs arising from Landlord's charitable or political contributions; (z) reserves, including, without limitation, replacement reserves for bad debts or any similar charge; (aa) cost of any parties or ceremonies for tenants or third parties whether conducted in the Building or in any other location; (ab) costs incurred by Landlord in connection with rooftop communications equipment, whether belonging to Landlord or to any other person; (ac) so-called "takeover" expenses, including, but not limited to, the expenses incurred by Landlord with respect to space located at another building of any kind or nature in connection with the leasing of space in the Building; (ad) the entertainment expenses and travel expenses of Landlord, its employees, agents, partners and affiliates; (ae) legal fees, accounting fees and other expenses incurred in connection with disputes with tenants or occupants of the Building (except to the extent such dispute involves any interference by such tenant with the quiet enjoyment of another occupant of the Building) , or the defense of Landlord's title to, or interest in, the Building; and (af) except to the extent provided in clauses (1)(i) and (1)(o), any cost or expense considered capital in nature under generally accepted accounting principles applicable to real estate, consistently applied. (B) In determining the amount of the Base Operating Expenses or the Operating Expenses for any Operational Year, if less than ninety-five percent (95%) of the office portion of the Building shall have been occupied by tenants at any time during any such year, the Base Operating Expenses or the Operating Expenses for any such Operational Year shall be adjusted to an amount equal to the like expenses which would normally be expected to have been incurred had the occupancy of the office portion of the Building been ninety-five percent (95%) throughout the applicable year. (C) If Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute an Operating Expense) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, the Operating Expenses for each Operational Year during which such situation exists shall be increased by an amount equal to the additional Operating Expense which reasonably would have been incurred during such period by Landlord if it had at its own expense furnished such service or services to such tenant. (D) In any Operational Year in which Operating Expenses exceed Base Operating Expenses, Tenant shall pay to Landlord Tenant's Proportionate Share of such excess. Notwithstanding anything to the contrary contained herein, Tenant's payment obligation for calendar year 1999 shall be reduced by one-half. (E) During or after the first Operational Year, Landlord shall forward Tenant an itemized statement prepared by Landlord's accountants ("Operating Statement") of the Base Operating Expenses. Thereafter, during each succeeding Operational Year during the Term, Landlord shall forward to Tenant an Operating Statement of -6- the Operating Expenses for the prior Operational Year and a computation of the amount payable by Tenant pursuant to this Article for such Operational Year. (F) With each installment of Fixed Rent payable during the first Operational Year, Tenant shall pay Landlord the monthly sum of $200.00 on account c- the amount due pursuant to this Article for such Operational Year. (G) With each installment of Fixed Rent payable during the Term during and after the second Operational Year, Tenant shall pay to Landlord, on account of the amount payable pursuant to this Article for the then current Operational Year: (1) until Landlord forwards the applicable Operating Statement for the preceding Operational Year, the amount of the monthly payment due during December of such preceding Operational Year; and (2) after Landlord forwards the applicable Operating Statement for the preceding Operational Year, one-twelfth (1/12th) of the amount that would be payable pursuant to this Article for the then current Operational Year if Operating Expenses for the then current Operational Year were 110% of those for the preceding Operational Year. In addition, with the first Fixed Rent payment due after Landlord forwards the Operating Statement for the preceding Operational Year as aforesaid, Tenant shall pay to Landlord, on account of Tenant's obligation under this Article for the then current Operational Year, the amount by which (a) one-twelfth (1/12th) of Tenant's Proportionate Share of the amount by which 110% of the Operating Expenses for the preceding Operational Year (as shown on the Operating Statement for such preceding Operational Year) exceed Base Operating Expenses, multiplied by the number of months that have elapsed in the then current Operational Year prior to the due date of such payment, exceeds (b) the amount theretofore paid on account of Operating Expenses for the then current Operational Year. (H) Once Landlord forwards the applicable Operating Statement for the preceding Operational Year, Landlord and/or Tenant, as the case may be, promptly shall make appropriate payment to the other (without interest) of any amount overpaid by Tenant or owing to Landlord for such Operational Year based on the amount due pursuant to such Operating Statement and amounts theretofore paid by Tenant for such preceding Operational Year. (I) The parties' obligation to make any payment pursuant to this Article shall survive the Expiration Date or any sooner termination of this lease and shall be appropriately prorated for any Operational Year which is only partially within the Term. (J) Each Operating Statement given by Landlord pursuant to Section (E) shall be binding upon Tenant unless, within sixty (60) days after its receipt of such Operating Statement, Tenant notifies Landlord of its disagreement therewith, specifying the portion thereof with which Tenant disagrees. Tenant shall have the right, upon reasonable notice, to audit Landlord's records regarding Operating Expenses, but not more frequently than once a year and only during the period in which Tenant is entitled to send a notice of disagreement, plus sixty (60) days. Tenant covenants that (i) it will hold the results of any investigation into Landlord's records in the strictest confidence (provided, however, that Tenant may discuss the results of the audit with its attorneys, accountants and other consultants and use the information obtained in the audit to the extent required in any legal or arbitration proceedings related thereto or as may be required by Law); (ii) it will cause any consultants retained by it to make a similar covenant for the benefit of Landlord. Landlord will reasonably cooperate with Tenant's auditors in the conduct of the audit; and (iii) no consultant or other person engaged by Tenant in connection with such audit shall be compensated on a contingency basis (i.e., based -7- upon the results of such audit) . Pending resolution of such dispute, Tenant shall, without prejudice to its rights, pay all amounts determined by Landlord to be due, subject to prompt refund by Landlord (without interest) upon any contrary determination. 41. Abatement and Adjustments of Fixed Rent (A) Provided this lease remains in full force and effect and Tenant is not in default hereunder beyond any applicable notice and grace period, the Fixed Rent shall abate, to the extent of the Net Rent only, from the Commencement Date through the date that is one day prior to the Rent Commencement Date. (B) Effective on the third (3rd) anniversary of the Commencement Date, the Fixed Rent and the Net Rent in effect on the preceding day each shall be increased by $30,540.00 per annum, subject to adjustment thereafter as herein provided. (C) Effective on the seventh (7th) anniversary of the Commencement Date, the Fixed Rent and the Net Rent in effect on the preceding day each shall be further increased by $22,905.00 per annum, subject (in the case of Fixed Rent) to adjustment thereafter as herein provided. 42. Electricity (A) As an incident to this lease and as part of the Fixed Rent payable hereunder, Landlord shall furnish to Tenant, through transmission facilities installed by it in the Building, alternating electric current of up to six (6) watts per rentable square foot, connected load (exclusive of the electricity used by the base Building HVAC), to be used by Tenant in, or in connection with, the lighting fixtures and electrical receptacles presently installed in the demised premises. Landlord shall not be liable in any way to Tenant for any failure or defect in supply or character of electric current furnished to the demised premises except to the extent resulting from the negligence or wilful misconduct of Landlord or its agents, contractors or employees. Landlord shall furnish and install all lighting tubes, ballasts, lamps and bulbs used in the demised premises and Tenant shall pay, promptly upon demand, Landlord's reasonable charges therefor. Tenant shall use said electric current for lighting and, insofar as Landlord's facilities are not burdened thereby and applicable Laws permit, for operation of such equipment as is normally used in connection with the operation of a business office. (B) Tenant's use of electric current in the demised premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the demised premises. Tenant shall not make or perform, or permit the making or performing of, any alterations to wiring installations or other electrical facilities in or serving the demised premises or any additions to the business machines, office equipment or other appliances in the demised premises which utilize electrical energy without the prior written consent of Landlord in each instance, which consent will not be unreasonably withheld or delayed. Should Landlord grant any such consent, all additional risers or other equipment required therefor shall be installed by Landlord and the cost thereof shall be paid by Tenant promptly upon demand. As a condition to granting any such consent, Landlord may require that Tenant agree to an increase in the Electric Factor (and the Fixed Rent) payable hereunder pursuant to Section (C) (C) Landlord may, at any time, retain a reputable independent electrical engineer or consultant, selected by Landlord and paid equally by both parties (unless Tenant elects to dispute under Section (G), in which event Landlord's Electrical Consultant shall be paid by Landlord), to make a survey of the electrical wiring and power load to determine what the value would be to Tenant if it were purchasing electricity directly from the entity providing electricity to the Building ("Electric Company") at Landlord's rate -8- schedule. If the Electric Factor (and the Fixed Rent) then payable hereunder does not fairly reflect such value as determined by the consultant or engineer, the Electric Factor (and the Fixed Rent) shall be increased by a sufficient amount such that the same shall fairly reflect such value. The findings of the consultant or engineer in all such instances shall be conclusive upon the parties (subject to Section (G)). When the amount of such value is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect any appropriate increase in the amount of the Electric Factor (and the Fixed Rent) payable hereunder, effective from the earlier of (1) the date of such survey or (2) the date determined by such consultant or engineer to be the date when such increased usage commenced (and Tenant shall cooperate with such consultant or engineer and shall promptly provide copies of records, purchase orders and the like as such consultant or engineer shall request to aid in such determination) in his sole and absolute discretion, but such increase shall be effective from such date even if such supplementary agreement is not executed. (D) If any tax is imposed upon Landlord in connection with the furnishing of electric current to Tenant by any federal, state or local government, subdivision or authority, Tenant shall pay Landlord an amount equal to such tax, where permitted by Law. (E) If, subsequent to the Base Electric Date, the Electric Company rate schedule or any portion of the charge for the supply of electric current to the Building is increased or decreased or such rate schedule is superseded by another rate schedule, the Electric Factor (and the Fixed Rent) shall be increased or decreased by the percentage of increase or decrease in Landlord's cost for purchasing electricity for the Building. However, in no event shall the Electric Factor be reduced to less than the amount set forth in Article 37(G), as such amount may be increased-from time to time as a result of the addition of space to the premises initially demised by this lease. If Landlord and Tenant cannot agree thereon, the amount of such adjustment shall be determined by a reputable independent electrical engineer or consultant, to be selected by Landlord and paid equally by both parties (unless Tenant elects to dispute under Section (G), in which event Landlord's Electrical Consultant shall be paid by Landlord) .The findings of the consultant or engineer, in all such instances, shall be conclusive upon the parties (subject to Section (G)) Whenever the amount of any such adjustment is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect such adjustment in the amount of the Electric Factor (and the Fixed Rent) payable hereunder, effective from the effective date of such increase, decrease or change in such rate schedule or charge, but such adjustment shall be effective from such date whether or not a supplementary agreement is executed. (F) Landlord reserves the right to discontinue furnishing electric current to Tenant in the demised premises at any time upon not less than thirty (30) days' written notice to Tenant. If Landlord exercises such right of termination, this lease shall continue in full force and effect and shall not be affected thereby, except that, from and after the effective date of such termination, Landlord shall not be obligated to furnish electric current to Tenant and the Fixed Rent payable hereunder shall be reduced to and become the Net Rent then in effect. If Landlord so discontinues furnishing electric current to Tenant, Tenant shall arrange to obtain electric current directly from the Electric Company. Such electric current may be furnished to Tenant by means of the then existing Building system feeders, risers and wiring to the extent that the same are available, suitable and safe for such purposes. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment which may be required to obtain electric current directly from the Electric Company shall be installed and maintained by-Landlord, at Tenant's expense. Provided that Tenant proceeds promptly and diligently after receipt of Landlord's notice to arrange to obtain electric current directly -9- from the Electric Company, Landlord may not discontinue electric service until Tenant is able to obtain service directly from the Electric Company (unless Landlord is compelled to do so by Law or the Electric Company). (G) Anything in this Article to the contrary notwithstanding, if Tenant disputes any determination made by Landlord's electrical consultant or engineer ("Landlord's Electrical Consultant") pursuant to Section (C) or (E), Tenant may challenge such determination (but not any prior determination of Landlord's Electrical Consultant) , within ninety (90) days after receipt thereof (time being of the essence) , by submitting a different estimate made by Tenant's reputable independent electrical engineer or qualified consultant ("Tenant' s Electrical Consultant") , which shall be paid by Tenant. If Landlord's Electrical Consultant and Tenant's Electrical Consultant agree on a determination, such agreement shall be conclusive upon the parties. If Landlord's Electrical Consultant and Tenant's Electrical Consultant cannot agree, they shall select a third reputable independent electrical engineer or qualified consultant, to be paid equally by both parties, to make a binding determination with respect to such dispute. If Landlord's Electrical Consultant and Tenant's Electrical Consultant cannot select a third electrical engineer or consultant, the same shall be selected by the Presiding Judge of the Appellate Division of the Supreme Court of the State of New York, First Department. No delay in the resolution of any such dispute shall affect the effective date of any such determination. 43. Restrictions on Use (A) Anything in Article 2 to the contrary notwithstanding, Tenant shall not use or permit all or any part of the demised premises to be used for the: (1) storage for purpose of sale of any alcoholic beverage in the demised premises; (2) storage for retail sale of any product or material in the demised premises; (3) conduct of a manufacturing, printing, clerical support or electronic data processing business, except that Tenant may operate business office reproducing equipment, electronic data processing equipment and other business machines and may provide clerical support for Tenant's own requirements; (4) rendition of any health, rehabilitation, treatment or related services, conduct of a school or conduct of any business which results in the presence of the general public in the demised premises; (5) conduct of the business of an employment agency or executive search firm; (6) conduct of any public auction, gathering, meeting or exhibition; (7) conduct of a stock brokerage office or business; (8) use as a radio or television station; or (9) occupancy of a foreign, United States, state, municipal or other governmental or quasi-governmental body, agency or department or any authority or other entity which is affiliated therewith or controlled thereby. (B) Tenant shall not use or permit all or any part of the demised premises to be used in any manner that is inconsistent with a first class office building or so as to make operation of the Building materially more difficult or expensive. (C) Tenant shall not obtain or accept for use in the demised premises towel, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any party not theretofore approved by Landlord (which party's charges shall be competitive). Such services shall be furnished only at such hours, in such places within the demised premises and pursuant to such regulations as Landlord prescribes. (D) Subject to Tenant's compliance with the applicable provisions of this lease, Landlord will permit Tenant to install an ice-maker, coffee maker, water dispenser, dishwasher and microwave oven in the premises. -10- Supplementing Article 11: (A) Tenant shall neither: (i) publicly advertise the availability of all or any part of the premises for assignment, sublease or occupancy at a rental rate less than the rental rate at which Landlord is then offering to lease comparable space in the Building; or (ii) assign this lease to or sublet to or permit the occupancy of all or any part of the demised premises by any other party which is then a tenant, subtenant, licensee or occupant of any space in the Building or which has negotiated with Landlord for space in the Building within the twelve (12) month period preceding the date of Landlord's receipt of Tenant's Notice pursuant to Section (B) (nor shall Tenant accept an assignment of a lease or sublet space from any tenant, subtenant, licensee or occupant of any space in the Building) (B) If Tenant wishes to assign this lease (a transfer of more than a fifty percent (50%) beneficial interest in Tenant, whether such transfer occurs at one time, or in a series of related transactions, and whether of stock, partnership interest or otherwise, by any party in interest being deemed an assignment of this lease), sublet all or any part of the demised premises or permit the demised premises to be occupied by any other party, Tenant shall first notify Landlord ("Tenant's Notice"), specifying the name of the proposed assignee, subtenant or occupant, the name of and character of its business, its proposed use of the premises, the terms of the proposed assignment, sublease or occupancy (including, without limitation, the commencement and expiration dates thereof) and current information as to the financial responsibility and standing of the proposed assignee, sublessee or occupant and shall provide Landlord with such other information as it reasonably requests. If only a portion of the demised premises (not constituting an entire floor of the Building) is to be so sublet or occupied, Tenant's Notice shall be accompanied by a reasonably accurate floor plan, indicating such portion. The portion of the demised premises to which such proposed assignment, sublease or occupancy is to be applicable is hereinafter referred to as the "Space." (C) Landlord may, within forty-five (45) days after its receipt of Tenant's Notice, by notice to Tenant ("Landlord's Notice"), require that (i) Tenant sublease the Space to Landlord or its nominee, on the terms set forth in Section (D) , or (ii) this lease be terminated as to the Space for the period specified in Tenant's Notice, on the terms set forth in Section (E) . If Tenant's proposed assignment or sublease is for more than fifty percent (50%) of the demised premises or the then balance of the Term is three (3) years or less, Landlord also may, by Landlord's Notice, terminate this lease as of the proposed commencement date for such assignment, sublease or occupancy. If Landlord fails to exercise such option, it shall not unreasonably withhold or delay its consent to the proposed assignment, sublease or occupancy (provided that the proposed use of the premises by the proposed assignee, subtenant or occupant complies with the terms of this lease, including, without limitation, Articles 2 and 43 hereof) but such consent shall be deemed of no effect if such assignment, sublease or occupancy is not consummated upon the terms set forth in Tenant's Notice and within one hundred twenty (120) days after such consent is given. (D) If Landlord requires that Tenant execute a sublease ("Sublease") pursuant to clause (C)(i), the Sublease shall be upon the same terms as this lease, except for such terms thereof as are inapplicable and except that: (i) the term of the Sublease shall he the term specified in Tenant's Notice commencing, at Landlord's option, on (a) the commencement date set forth in Tenant's Notice, or (b) a date designated by Landlord which shall not be more than thirty (30) days after the date of Landlord's Notice; (ii) the Net Rent for the Sublease shall be the lesser of (a) the pro rata Net -11- Rent for the Space Tenant is then paying Landlord hereunder, or (b) the Net Rent set forth in Tenant's Notice; (iii) the Electric Factor for the Sublease shall be the lesser of (a) the pro rata portion of the Electric Factor Tenant is then paying Landlord hereunder which is allocable to the Space, or (b) the Electric Factor set forth in Tenant's Notice; (iv) Tenant's Proportionate Share for the Sublease shall be determined based on the relative sizes of the Space and the initial demised premises; (v) the subtenant under the Sublease shall have the unrestricted right to assign the Sublease or any interest therein, to further sublet all or any part of the Space and/or to make any alterations, decorations, additions or improvements in and to the Space (all or any part of which may be removed, at Landlord's option, at any time, provided Landlord repairs all damage caused by such removal) ; (vi) Tenant, as sublandlord under the Sublease, shall, at its expense: (a) erect all partitions required to separate the Space from the remainder of the demised premises and (b) to the extent necessitated by the Sublease, install all doors required for independent access from the Space to the elevators, lavatories and staircases on the floor and install all equipment and facilities (including, without limitation, men's and women's toilets) required to comply with all applicable Laws and to enable Landlord to maintain and service the Space and permit the Space to be used as an independent unit; (vii) the Sublease shall provide that the termination of all or any portion of this lease by merger is not thereby intended; and (viii) at the expiration of the Sublease, the Space shall, subject to clause (v) , be returned to Tenant as then existing. (E) If Landlord requires that this lease be terminated as to the Space pursuant to clause (C) (ii), then (i) Tenant at its expense shall (a) erect all partitions required to separate the Space from the remainder of the demised premises and (b) to the extent required by Landlord, install all doors required for independent access from the Space to the elevators, lavatories and stairwells on the floor and install all equipment and facilities (including, without limitation, men's and women's toilets) required to comply with all applicable Laws and to enable Landlord to maintain and service the Space and permit the Space to be used as an' independent unit, and (ii) Landlord and Tenant shall execute and deliver a supplementary agreement modifying this lease by eliminating the Space from the demised premises for the term specified in Tenant's Notice commencing, at Landlord's option, on (a) the commencement date set forth in Tenant's Notice, or (b) a date designated by Landlord which shall not be more than thirty (30) days after the date of Landlord's Notice, and, for such period, reducing the Fixed Rent and additional rent payable hereunder on a pro rata basis. (F) Anything herein to the contrary notwithstanding, Tenant may not assign this lease or sublet all or any part of the demised premises prior to the expiration of the first year of the Term. (G) No assignment of this lease shall be effective unless and until Tenant delivers to Landlord duplicate originals of the instrument of assignment (wherein the assignee assumes the performance of Tenant's obligations under this lease) and any accompanying documents. (H) In the event of any such assignment, Landlord and the assignee may modify this lease in any manner, without notice to Tenant or Tenant's prior consent, without thereby terminating Tenant's liability for the performance of its obligations under this lease, except that any such modification which, in any way, increases any of such obligations shall not, to the extent of such increase only, be binding upon Tenant. (I) No sublease of all or any part of the demised premises (except a Sublease) shall be effective unless and until Tenant delivers to Landlord duplicate originals of the instrument of sublease (containing the provision required by Section (J)) and any -12- accompanying documents. Any such sublease shall be subject and subordinate to this lease. (J) Any such sublease shall contain substantially the following provisions: (1) "In the event of a default under any underlying lease of all or any portion of the premises demised hereby which results in the termination of such lease, the subtenant hereunder shall, at the option of the lessor under any such lease ("Under-lying Lessor"), attorn to and recognize the Underlying Lessor as landlord hereunder and shall, promptly upon the Underlying Lessor's request, execute and deliver all instruments necessary or appropriate to confirm such attornment and recognition. Not-withstanding such attornment and recognition, the Underlying Lessor shall not (a) be liable for any previous act or omission of the landlord under this sublease, (b) be subject to any offset, not expressly provided for in this sublease, which shall have accrued to the subtenant hereunder against said landlord, or (c) be bound by any modification of this sublease or by any prepayment of more than one month's rent, unless such modification or prepayment shall have been previously approved in writing by the Underlying Lessor. The subtenant hereunder hereby waives all rights under any present or future law to elect, by reason of the termination of such underlying lease, to terminate this sublease or surrender possession of the premises demised hereby. (2) This sublease may not be assigned or the premises demised hereunder further sublet, in whole or in part, without the prior written consent of the Underlying Lessor." (K) No assignment or sublease, whether or not consented to by Landlord and whether or not any such consent is required, shall release Tenant from its liability for the performance of Tenant's obligations hereunder during the balance of the Term. Landlord's consent to any assignment or sublease shall not constitute its consent to any (i) further assignment of this lease or of any permitted sublease or (ii) further sublease of all or any portion of the premises demised hereunder or under any permitted sublease. If a sublease to which Landlord has consented is assigned or all or any portion of the premises demised thereunder is sublet without the consent of Landlord in each instance obtained, Tenant shall immediately terminate such sublease, or arrange for the termination thereof, and proceed expeditiously to have the occupant thereunder dispossessed. (L) Tenant shall pay to Landlord, promptly upon demand therefor, all costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by Landlord in connection with any assignment of this lease or sublease of all or any part of the demised premises. (M) If Landlord gives its consent to any assignment of this lease or to any sublease or if Tenant otherwise enters into any assignment or sublease permitted hereunder, Tenant shall, in consideration therefor, pay to Landlord, as and when received by Tenant: (1) in the case of an assignment, fifty (50%) percent of the amount, if any, by which (a) all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property less the then fair market value thereof) exceeds (b) the amount of any rental concessions and work allowance granted by Tenant or costs incurred by Tenant in preparing the demised premises for the assignee's occupancy, plus all reasonable and customary out-of-pocket expenses reasonably incurred by Tenant directly relating to such assignment, such as the New York State and City Transfer Taxes (but not income taxes), brokerage -13- commissions, engineering, advertising and promotion expenses and legal fees; and (2) in the case of a sublease, fifty (50%) percent of the amount, if any, by which (a) any rents, additional charges or other consideration payable under the sublease to Tenant by the subtenant (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of a sale thereof, the then fair market value thereof) exceeds (b) the sum of (x) the Fixed Rent and additional rent accruing during the term of the sublease in respect of the Space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms of this lease and (y) the amount of any rental concessions and work allowance granted by Tenant or costs incurred by Tenant in physically separating the Space from the rest of the demised premises or otherwise in preparing the Space for the subtenant's occupancy, plus all reasonable and customary out-of-pocket expenses reasonably incurred by Tenant directly relating to such subletting, such as the New York State and City Transfer Taxes (but not income taxes) brokerage commissions, engineering, advertising and promotion expenses and legal fees (all amortized over the initial Term) (N) Anything in Article 11 or this Article 44 notwithstanding, but subject to all applicable provisions of this lease (including, without limitation, Articles 2 and 43 and Sections (A)(i), (B), (G), (H), (I), (J), (K) and (L) of this Article 44, but not including Sections (A)(ii), (C), (D), (E), (F) or (M) of this Article 44), Landlord's consent shall not be required to (w) any sublease or assignment from Tenant to any party controlling, controlled by or under common control with Tenant ("control" and its variants meaning ownership of more than 50% of the equity interests in the party in question), (x) Tenant's assignment of this lease to any purchaser of all or substantially all of Tenant's assets, (y) an acquisition of more than a fifty (50%) percent interest in Tenant's stock or partnership interests, or (z) an assignment of this lease to any corporation that is a successor to Tenant either by merger or consolidation; provided, in the case of any of the events described in clauses (x) , (y) and (z) , that (a) such purchaser, acquiring party or successor to Tenant has a combined net worth and/or equity, computed in accordance with generally accepted accounting principles, consistently applied, at least equal to the greater of the combined net worth and/or equity, similarly computed, of Tenant on the date of execution of this lease or immediately prior to the consummation of the transaction in question, and (b) proof reasonably satisfactory to Landlord of the satisfaction of such financial conditions shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. 45. Air Conditioning, Etc. (A) Landlord shall, at its expense, through the Building's heat, ventilating and air conditioning system ("System"), provide air conditioning for the demised premises, during the air conditioning season (May 15 - September 30) from 8:00 a.m. to 6:00 p.m. on Monday through Friday (not including public holidays and holidays observed by the Building's union employees (such days of operation being called "System Business Days" and such hours of operation being called "System Business Hours"). System Business Hours for freight elevator service are 8:00 a.m. to 5:00 p.m. on System Business Days. (B) Whenever the System is in operation, Tenant shall close the venetian blinds and/or drapes in the demised premises. Tenant shall comply with all reasonable regulations of Landlord regarding operation of the System. (C) Tenant understands that the Fixed Rent does not reflect or include any charge to Tenant for the furnishing of any necessary heat, ventilating or air conditioning to the demised premises -14- during other than System Business Hours. Accordingly, unless Landlord reasonably deems it impracticable or damaging to the System to do so, Landlord, upon Tenant's request, shall furnish heat or air conditioning during other than System Business Hours (overtime ventilating is not available), and Tenant shall pay Landlord additional rent for such services at the standard rates then fixed by Landlord for the Building or, if no such rates are then fixed, at reasonable and customary rates. The overtime rate at the time this lease is executed is $275 per hour for heat and air conditioning and $75 per hour for freight elevator service with, in each case, a four (4) hour minimum at times that are not contiguous to System Business Hours. Landlord shall not be required to furnish any such service during other than System Business Hours unless Landlord has received advance notice from Tenant requesting such service prior to 3:00 P.M., in the case of services on System Business Days, and prior to 3:00 P.M. on the day prior, in the case of service required on other days. 46. Brokerage Tenant represents that it dealt only with the Broker as broker in connection with this lease. Landlord shall pay the Broker's commissions therefor pursuant to separate agreements. Landlord and Tenant hereby each indemnify the other against any claim for a brokerage commission or like compensation (other than those of the Broker) that is based on alleged actions of the indemnifying party or its agents or representatives. The liability of the parties under this Article shall survive any expiration or termination of this lease. 47. Building Directory (A) Landlord shall, upon Tenant's request, list on the Building's directory ("Directory"), the names of Tenant, any other party occupying any part of the demised premises pursuant hereto and their officers or employees, provided the number of Directory lines so provided by Landlord does not exceed Tenant's Proportionate Share of the Directory's capacity. (B) The listing of any party's name other than Tenant's shall neither grant such party any right or interest in this lease and/or the demised premises nor constitute Landlord's consent to any assignment or sublease to or occupancy by such party. Such listing may be terminated by Landlord at any time, without prior notice. The initial listing(s) on the Directory shall be provided by Landlord without charge to Tenant. Thereafter, Tenant shall pay Landlord's standard fee for any work performed in connection with any additions, deletions or changes to the Directory. 48. Exculpatory Clause (A) Anything herein to the contrary notwithstanding, the liability of Landlord and the partners of, or any other party which holds any interest in, Landlord for negligence, failure to perform lease obligations or otherwise under or in connection with this lease shall be limited to each of their respective interests in the Land and Building. Tenant shall neither seek to enforce nor enforce any judgment or other remedy against any other asset of Landlord, any partner of Landlord or any party that holds any interest in Landlord. (B) In any claim made by Tenant against Landlord alleging that Landlord has acted unreasonably where Landlord had an obligation to act reasonably, Tenant shall have no right to recover damages from Landlord and Tenant's sole and exclusive recourse against Landlord shall be an action seeking specific performance of Landlord's obligation to act reasonably or, in the alternative, Tenant may send a notice to Landlord specifying the matter with respect to which it alleges that Landlord acted unreasonably and electing to have the dispute resolved by an expedited hearing procedure conducted in accordance with the rules of the American -15- Arbitration Association as then in effect in New York City, and subject also to the following: (1) The hearing officer shall have no authority to make any determination other than to require Landlord to act in a reasonable manner as to the matter in dispute. (2) The determination by the hearing officer shall be conclusive upon the parties and shall be made within seven (7) days after the hearing is completed. (3) If Landlord is determined not to have acted unreasonably, Tenant shall pay the fees of the hearing officer. If Landlord is determined to have acted unreasonably, Landlord shall pay such fees. (C) Notwithstanding Section (B), Tenant is not waiving any claim that Landlord acted in bad faith. 49. Submission to Jurisdiction. Etc. (A) This lease shall be deemed to have been made in New York County, New York, and shall be construed in accordance with the laws of the State of New York. All actions or proceedings relating, directly or indirectly, to this lease shall be litigated only in courts located within the County of New York. Tenant, any guarantor of the performance of its obligations hereunder and their respective successors and assigns hereby subject themselves to the jurisdiction of any state or federal court located within such county. (B) Whenever any default by Tenant causes Landlord to incur attorneys' fees and/or any other costs or expenses, Tenant agrees that it shall pay and/or reimburse Landlord for such reasonable fees, costs or expenses within ten (10) days after being billed there for. (C) If any monies owing by Tenant under this lease are paid more than fifteen (15) days after the date such monies are payable pursuant to the provisions of this lease, Tenant shall pay Landlord interest thereon, at two (2%) percent per annum above the prime or base rate of Citibank, N.A. in effect from time to time, for the period from the date such monies were payable to the date such monies are paid. (D) The submission of this lease to Tenant shall not constitute an offer by Landlord to execute and exchange a lease with Tenant and is made subject to Landlord's acceptance, execution and delivery thereof. (E) Landlord and Tenant each respectively represent that (i) the person executing this lease on its behalf is duly authorized to execute, acknowledge and deliver this lease; (ii) the execution and delivery of this lease is within its corporate or partnership power, as the case may be, and does not conflict with, violate, breach or cause a default under any agreement to which it is a party; and (iii) it has obtained all consents, approvals and authorizations necessary for the execution and delivery of this lease (except for the Consent referred to in Article 66). 50. Requests by Mortgagee or Others (A) If any present or prospective mortgagee of the Land, Building or any leasehold interest therein requires, as a condition precedent to issuing or extending its loan, the modification of this lease in such manner as does not materially lessen Tenant's rights or increase its obligations hereunder, Tenant shall not delay or withhold its consent to such modification and shall execute and deliver such confirming documents therefor as such mortgagee requires. -16- (B) If Landlord, in conjunction with any proposed sa1e or mortgaging of all or any portion of the Land and Building or any leasehold interest therein, requests the delivery of financial statements or other information relating to the financial condition of Tenant, Tenant shall deliver such financial statements (certified, if avai1ab1e) or such other information (but only to the extent not confidentia1) within ten (10) days after Landlord's written request therefor. 51. Delivery of Demised Premises (A) Supplementing Article 21, the demised premises shall be leased to Tenant with all existing improvements therein demolished in a Building standard manner and otherwise in their "as is" condition on the date of delivery and Landlord shall not be required to perform any work (other than such demolition) to prepare the demised premises for Tenant's occupancy. The taking of possession of the demised premises by Tenant shall be conclusive evidence as against Tenant that, at the time such possession was so taken, the demised premises and the Building were in good and satisfactory condition. Landlord shall deliver to Tenant, no later than the date on which it delivers possession of the demised premises, a Form ACP-5 with respect to the demised premises. The date of delivery of the demised premises and the Form ACP-5 to Tenant as above provided is herein called the "Commencement Date." Landlord anticipates that the Commencement Date will occur between July 15 and August 15, 1998. (B) If (1) Landlord fails to deliver the demised premises as above provided by August 15, 1998, or (ii) Landlord fails to deliver the Form ACP-5 by August 15, 1998 and Tenant is thereby delayed in commencing its improvements in the premises, then Landlord shall pay to Tenant, as Tenant's sole remedy, the amount of $466.00 for each day of delay after August 15, 1998 in the delivery of the premises or day of delay in the commencement of Tenant's improvements caused by the late delivery of the Form ACP5, as the case may be. Moreover, if Landlord fails to deliver the premises and the Form ACP-5 as above provided by November 15, 1998, Tenant shall have the option (as Tenant's sole remedy except to the extent set forth in the preceding sentence) to cancel this lease by delivering notice to that effect to Landlord no later than November 30, 1998, as to which time is of the essence, in which event Landlord shall return any amounts theretofore paid by Tenant and neither party shall have any further rights or obligations pursuant hereto. 52. Insurance (A) During the Term, Tenant shall pay for and keep in force general liability policies in standard form providing coverage on an occurrence basis including bodily injury and property damage liability, personal injury liability, contractual liability (covering all indemnification and hold harmless terms of this lease as respects bodily injury, property damage or personal injury) and fire legal liability, all subject to common terms and conditions. Such insurance shall cover the operations of Tenant and contain no deductible or self-insurance except as reasonably approved by Landlord. Such insurance is to be secured with New York licensed insurers authorized to issue such policies, and reasonably approved by Landlord. The minimum limits of liability shall be a combined single limit for bodily injury and property damage of not less than $3,000,000 per occurrence and annual aggregate per location. If at any time during the Term it appears that public liability or property damage limits in the City of New York for buildings similarly situated, due regard being given to the use and occupancy thereof, are higher than the foregoing limits, then Tenant shall increase the foregoing limits accordingly. Landlord (and each member thereof in the event Landlord is a partnership, joint venture or other entity) and Landlord's managing agent (Landlord's current managing agent is Jack Resnick & Sons, Inc.) shall be named as additional insured in the aforesaid insurance policies. Tenant -17- shall also secure and keep in force "all risk" property insurance covering all of its personal property, equipment, trade fixtures, goods, merchandise, furniture, furnishings and other items removable by Tenant located in the premises for the full replacement value thereof from time to time. All such policies shall guarantee that Landlord shall be afforded not less than thirty (30) days' prior notice of cancellation, non-renewal or material change of or to said insurance. Tenant shall deliver Acord 27 certificates of insurance evidencing such policies, including the additional insureds as required above and reasonably satisfactory evidence of payment of premiums, if requested by Landlord. Tenant shall supply renewal certificates no less than ten (10) days prior to expiration. All premiums and charges for the aforesaid insurance shall be paid by Tenant. If Tenant shall fail to maintain any such required insurance, or to pay the premiums therefor when due, Landlord may obtain such insurance or make such payment and the cost thereof to Landlord shall be repaid to Landlord by Tenant on demand as additional rent. Tenant shall not violate or permit to be violated any condition of any of said policies and Tenant shall perform and satisfy the requirements of the companies writing such policies. (B) Landlord and Tenant shall each endeavor to secure an appropriate clause in, or an endorsement upon, each fire or extended coverage or rent or business interruption insurance policy obtained by it and covering the Building, the demised premises or the personal property, fixtures and equipment located therein or thereon, pursuant to which the respective insurance companies waive subrogation or permit the insured, prior to any loss, to agree with a third party co waive any claim it might have against such third party. The waiver of subrogation or permission for waiver of any claim hereinhefore referred to shall extend to the agents of each party and its employees and, in the case of Tenant, shall also extend to all other persons and entities occupying or using the demised premises in accordance with the terms of this lease and, in the case of Landlord, shall also extend to all general and limited partners of Landlord. If and to the extent that such waiver or permission can be obtained only upon payment of an additional charge, then, except as provided in the following Sections (C) and (D), the party benefitinq from the waiver or permission shall pay such charge upon demand, or shall be deemed to have agreed that the party obtaining the insurance coverage in question shall be free of any further obligations under the provisions hereof relating to such waiver or permission (including, without limitation, the provisions of Sections (C) and (D) hereinbelow). (C) If Landlord is unable at any time to obtain one of the provisions referred to in Section (B) in any of its insurance policies, at Tenant's option, Landlord shall cause Tenant to be named in such policy or policies as one of the insureds (but with no right to receive any insurance proceeds), but if any additional premium shall be imposed for the inclusion of Tenant as such an insured, Tenant shall pay such additional premium upon demand or Landlord shall be excused from its obligations under this Section (C) with respect to the insurance policy or policies for which such additional premiums would be imposed. If Tenant is named as one of the insureds in any of Landlord's policies in accordance with the foregoing, Tenant hereby irrevocably appoints Landlord as its agent to receive any proceeds of any such policy or any other payment growing out of or connected with such policy and Tenant hereby irrevocably waives any right to receive any such proceeds or payments. (D) If Tenant is unable at any time to obtain one of the provisions referred to in Section (B) in any of its insurance policies, Tenant shall cause Landlord to be named in such policy or policies as one of the insureds (but with no right to receive any insurance proceeds), but if any additional premium shall be imposed for the inclusion of Landlord as such an insured, Landlord shall pay such additional premium upon demand or Tenant shall be excused from its obligations under this Section (D) with respect to the -18- insurance policy or policies for which such additional premiums would be imposed. If Landlord is named as one of the insureds in any of Tenant's policies in accordance with the foregoing, Landlord hereby irrevocably appoints Tenant as its agent to receive any proceeds of any such policy or any other payment growing out of or connected with such policy and Landlord hereby irrevocably waives any right to receive any such proceeds or payments. (B) Each party agrees to look first to any insurance in its favor (including rent loss or business interruption insurance, as the case may be) before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty. Subject to Sections (B) (C) and (D) of this Article, but only insofar as may be permitted by the terms of the insurance policies carried by it, each party hereby releases the other with respect to any claim (including a claim for negligence) that it might otherwise have against the other party for loss, damage or destruction with respect to its property by fire or other casualty (or for rent loss or business interruption) occurring during the. Term, to the extent covered by the insurance that it maintains (or, if greater, that it was required to maintain by the terms of this lease). 53. Bankruptcy Without limiting any of the provisions of Articles 16, 17 or 18 hereof, if, pursuant to the Bankruptcy Code of 1978, as the same may be amended, Tenant is permitted to assign this lease in disregard of the obligations contained in Articles 11 and 44 hereof, Tenant agrees that adequate assurance of future performance by the assignee permitted under such Code shall mean the deposit of cash security with Landlord in an amount equal to the sum of one year's Fixed Rent then reserved hereunder plus an amount equal to all additional rent payable under this lease for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord, without interest, for the balance of the Term as security for the full and faithful performance of all of the obligations under this lease on the part of Tenant yet to be performed. If Tenant receives or is to receive any valuable consideration for such an assignment of this lease, such consideration, after deducting therefrom (A) the brokerage commissions, if any, and other expenses reasonably incurred by Tenant for such assignment and (B) any portion of such consideration reasonably designated by the assignee as paid for the purchase of Tenant's property in the demised premises, shall be and become the sole and exclusive property of Landlord and shall be paid over to Landlord directly by such assignee. In addition, adequate assurance shall mean that any such assignee of this lease shall have a net worth, exclusive of good will, equal to at least fifteen (15) times the aggregate of the Fixed Rent reserved hereunder plus all additional rent for the preceding calendar year as aforesaid. 54. Local Law 5/Required Alterations Supplementing Article 6: (A) All work performed or installations made by Tenant (or by Landlord at Tenant's request and expense) in and to the demised premises shall be done in a fashion such that the demised premises and the Building shall be in compliance with the requirements of Local Law 5 of 1973 of The City of New York, as heretofore and hereafter amended ("Local Law 5"). The foregoing shall include, without limitation, (i) compliance with the compartmentalization requirements of Local Law 5, (ii) relocation of existing fire detection devices, alarm signals and/or communication devices necessitated by the alteration of the demised premises, and (iii) installation of such additional fire control or detection devices as may be required by applicable governmental or quasi-governmental rules, regulations or requirements (including, without limitation, any requirements of the New York Board of Fire Underwriters) as a -19- result of Tenant's particular manner of use of or Alterations to the demised premises. In addition, Tenant shall cause the demised premises to be connected to the Building "Class E" system and arrange to have the demised premises and Tenant added to the "Class E" computer. Landlord represents that it has received no notice that the demised premises are in violation of Local Law 5 as of the date of this lease. (B) Except to the extent caused by Landlord's gross negligence or wilful misconduct, Landlord shall not be responsible for any damage to Tenant's fire control or detection devices nor shall Landlord have any responsibility for the maintenance or replacement thereof. Tenant shall indemnify Landlord from and against all loss, damage, cost, liability or expense (including, without limitation, reasonable attorneys' fees and disbursements) suffered or incurred by Landlord by reason of the installation and/or operation of any such devices. (C) All work and installations required to be undertaken by Tenant pursuant to this Article shall be performed at Tenant's sole cost and expense and in accordance with plans and specifications and by contractors previously approved by Landlord, which approval will not be unreasonably withheld or delayed. (D) The fact that Landlord shall have heretofore consented to any installations or alterations made by Tenant in the demised premises shall not relieve Tenant of its obligations pursuant to this Article with respect to such installations or alterations. (E) If any utility company or governmental or quasi-governmental authority requires any work, installation or improvement to be made to the Building in connection with any Alteration performed by Tenant, the installation or operation of equipment or machinery in the demised premises or for any other reason relating to Tenant's particular use or occupancy of the demised premises, Tenant shall reimburse Landlord for the cost of such work, installation or improvement on demand. 55. Tenant's Alterations (A) Tenant shall not make or perform, or permit the making or performance of, any alterations, installations, improvements, additions or other physical changes in or about the demised premises (collectively, "Alterations"), other than purely cosmetic changes such as painting, wall covering or carpeting, without Landlord's prior consent. Landlord agrees not unreasonably to withhold its consent to any Alterations which are nonstructural and which do not affect the Building's systems and facilities, provided that such Alterations are performed only by contractors or mechanics first approved by Landlord, do not affect any part of the Building other than the demised premises (including, without limitation, the exterior thereof) do not adversely affect any service required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building and do not reduce the value or utility of the Building. All Alterations shall be done at Tenant's expense and at such times and in such manner as Landlord may front time to time reasonably designate pursuant to the conditions for Alterations prescribed by Landlord for the Building ("Alteration Regulations") Prior to making any Alterations, Tenant (i) shall submit to Landlord detailed plans and specifications (including layout, architectural, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord's approval of such plans and specifications, (ii) shall, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies, and (iii) shall furnish to Landlord duplicate original policies of worker's compensation insurance (covering all persons to be employed by Tenant and Tenant's contractors and subcontractors in connection with such Alteration) and comprehensive public liability (including property damage coverage) insurance in such form, with such companies -20- for such periods and in such amounts as Landlord may reasonably require, naming Landlord and its agents as additional insureds. Upon completion of such Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alteration required by any governmental or quasi-governmental bodies and shall furnish Landlord with copies thereof and shall, within thirty (30) days of such completion, deliver a set of final "as built" drawings to Landlord reflecting the Alteration. All Alterations shall be made and performed in accordance with the Alteration Regulations. All materials and equipment to be incorporated in the demised premises as a result of all Alterations shall be new and first quality. No such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the demised premises, whether in connection with any Alteration or otherwise, if, in Landlord's sole but good faith discretion, such employment will interfere or cause any conflict with other contractors, mechanics, or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. (B) Tenant covenants that it will substantially complete and pay for its initial Alterations in a diligent manner after the Commencement Date and that at no time will it permit any lien for labor or materials supplied to or on behalf of Tenant or those claiming through Tenant to attach to the premises or the Building. (C) No approval of any plans or specifications by Landlord or consent by Landlord allowing Tenant to make any Alterations or any inspection of Alterations made by or for Landlord shall in any way be deemed to be an agreement by Landlord that the contemplated Alterations comply with any legal requirements or insurance requirements or the certificate of occupancy for the Building nor shall it be deemed to be a waiver by Landlord of the compliance by Tenant of any provision of this lease. (D) Tenant shall promptly reimburse Landlord for all reasonable fees, costs and expenses payable to third parties including, hut not limited to, those of attorneys, architects and engineers, incurred by Landlord in connection with the review of Tenant's plans and specifications and inspecting the Alterations to determine whether the same are being or have been performed in accordance with the approved plans and specifications therefor and with all legal and insurance requirements. The provisions of this Section shall not apply to Tenant's initial Alterations to the extent they represent a standard office installation. (B) It shall be the responsibility of Tenant in performing any Alterations to relocate and/or add additional speakers and strobes, subject to the Landlord's prior written approval, and in such manner so as not to reduce or alter the audible levels of the existing fire line connections system. Caution shall be exercised by Tenant to protect the wire used for both the above speaker communications and strobes and the smoke detecting device. The wire used for all of the above is red and white and is clearly stamped FIRE ALARM SYSTEM. (F) Tenant shall also comply with the following terms and conditions: (1) Landlord shall not be responsible for any disturbance or deficiency created in the air conditioning or other mechanical, electrical or structural facilities within the premises or the Building as a result of Alterations. If such disturbance or deficiency results, it shall be Tenant's responsibility to correct -21- the resulting conditions and to restore the services to the reasonable satisfaction of Landlord, its architects and engineers. (2) Tenant shall provide Landlord with three (3) complete sets of the plans referred to hereinabove. (3) If Tenant employs any contractor to do any work in the premises, such contractor and any subcontractor shall agree to employ only such labor as will not result in jurisdictional disputes, strikes, walk outs or job actions or result in causing disharmony with other workers employed at the Building. Tenant shall inform Landlord, in writing, of the names of any contractor or subcontractor Tenant proposes to use in the premises at least ten (10) days prior to the beginning of any work by such contractor or subcontractor. In the event of any such jurisdictional dispute, strike, etc., and provided the same is not resolved within forty-eight (48) hours, Tenant shall forthwith cease doing any further work until such time that such dispute, strike, etc. is settled. (4) Tenant's contractors shall comply with the rules of the Building as they may, from time to time, exist as to the hours of availability of the Building elevators and the manner of handling materials, equipment and debris to avoid conflict and interference with Building operations. (5) Demolition must be performed after 5:30 P.M. or on weekends. The delivery and handling of materials, equipment and debris must be arranged to avoid any inconvenience and. annoyance to other tenants. Cleaning must be controlled to prevent dirt and dust from infiltrating into adjacent tenant or mechanical areas. (6) Tenant shall be responsible, at Tenant's expense, for causing the demised premises (including, without limitation, the existing core lavatories, corridors, lobbies and other public portions of the floors on which the demised premises are located) with all applicable requirements of the Americans with Disabilities Act and New York City Local Law #58 of 1987 (as each of the same may be amended). 56. Estoppel Certificate Tenant, at any time, and from time to time, upon at least ten (10) days' prior notice by Landlord, shall execute, acknowledge and deliver to Landlord, and/or to any other party, firm or corporation specified by Landlord ("Recipient") a statement (1) certifying that this lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications)(2) stating the dates to which Fixed Rent and additional rent have been paid, (3) stating whether or not there exists any defaults by Landlord under this lease and, if so, specifying each such default, (4) confirming (if such is the case) that Tenant has accepted possession of and is currently occupying the demised premises for the conduct of business and that all improvements required to be made by Landlord (if any) have been completed to Tenant's satisfaction, (5) stating the commencement and expiration dates of this lease, (6) stating whether or not there are any existing defenses to or offsets against Landlord's enforcement of this lease and Tenant's obligation to pay Fixed Rent and additional rent hereunder, and (7) furnishing any other information that may be reasonably requested by the Recipient. 57. Holdover In the event Tenant shall hold over after the expiration of the Term, the parties hereby agree that Tenant's occupancy of the demised premises after the expiration of the Term shall be upon all of the terms set forth in this ]ease except that Tenant shall pay as a use and occupancy charge for the holdover period an amount equal to the hiqher of (A) an amount equal to two times the pro -22- rata Fixed Rent and additional rent payable by Tenant during the last year of the Term; or (B) an amount equal to the then market rental value for the demised premises, as established by Landlord's good faith estimate of such market rental value. 58. Conditional Limitation In the event that twice in any twelve (12) month period (A) a default of the kind set forth in Section 17(1) shall have occurred or (B) Tenant shall have defaulted in the payment of Fixed Rent or additional rent, or any part of either, and Landlord shall have commenced a summary proceeding to dispossess Tenant in each such instance, then, notwithstanding that such defaults may have been cured at any time after the commencement of such summary proceeding, any further default by Tenant within such twelve (12) month period shall be deemed to be a violation of a substantial obligation of this lease by Tenant and Landlord may serve a written three (3) days' notice of cancellation of this lease upon Tenant and, upon the expiration of said three (3) days, this lease and the Term shall end and expire as fully and completely as if the expiration of such three (3) day period were the day here in definitely fixed for the end and expiration of this lease and the Term and Tenant shall then quit and surrender the demised premises to Landlord, but Tenant shall remain liable as elsewhere provided in this Lease. 59. Limitation on Rent If on the Commencement Date, or at any time during the Term, the Fixed Rent or additional rent reserved in this lease is not fully collectible by reason of any federal, state, county or city law, proclamation, order or regulation, or any direction of any public officer or body pursuant to law and of general application (collectively, "Rent Law") Tenant agrees to take such lawful steps as Landlord may reasonably request to permit Landlord to collect the maximum rents which may be legally permissible from time to time during the continuance of such Rent Law (but no~ in excess of the amounts reserved there for under this lease) . Upon the termination of the effectiveness of such Rent Law, Tenant shall pay to Landlord, to the extent permitted by the Rent Law, an amount equal to (A) the Fixed Rent and additional rent that would have been paid pursuant to this lease but for such Rent Law, less (B) the Fixed Rent and additional rent paid by Tenant to Landlord during the period such Rent Law was in effect. 60. Acceptance of Keys If Landlord or Landlord's managing or rental agent accepts from Tenant one or more keys to the demised premises in order to assist Tenant in showing the demised premises for subletting or other disposition or for the performance of work there in for Tenant or for any other purpose, the acceptance of such key or keys shall not constitute an acceptance of a surrender of the demised premises nor a waiver of any of Landlord's rights or Tenant's obligations under this lease including, without limitation, the provisions relating to assignment and subletting and the condition of the demised premises. 61. Security Deposit (A) Supplementing Article 34, Tenant may, at the execution of this lease or at any time during the Term, deliver as the Security Deposit an irrevocable letter of credit (the "Letter of Credit") in the amount of the Security Deposit issued by a New York City commercial bank acceptable to Landlord in its sole discretion, or from Merrill Lynch, and in the form of the letter of credit annexed hereto as Exhibit B, to be held by Landlord as the Security Deposit in accordance with Article 34 and this Article 61. The Letter of Credit shall (I) be payable in New York City, (II) ~initially expire not less than one (1) year from the Commencement date or the date of issuance if delivered to Landlord thereafter, (III) provide for -23- automatic renewals for periods of not less than one (1) year, and (iv) have a final expiration date not less than four (4) months after the Expiration Date. Tenant shall pay to Landlord, on demand (but one time only) and as additional rent hereunder, all fees and charges paid by Landlord to the bank issuing the Letter of Credit_in connection with the transfer of the same to any future owner of the Building. In the event of a default by Tenant in the performance of any of the terms, provisions and conditions of this lease, Landlord shall be permitted to draw down any portion or the entire amount of the Letter of Credit and apply the proceeds or an~' part thereof in accordance with Article 34 of this lease and retain the balance for the Security Deposit. Landlord shall also have the right to draw down any portion or the entire amount of the Letter of Credit in the event that Landlord receives notice that the date of expiry of the Letter of Credit will not be extended by the issuing bank and retain the proceeds for the Security Deposit. If Landlord shall have drawn against the Letter of Credit and applied all or any portion thereof, or if Landlord shall have applied any portion of any cash Security Deposit, then Tenant shall deposit with Landlord, upon demand, a sufficient amount of cash to bring the balance of the monies held by Landlord to the amount of the Security Deposit. Tenant's failure to comply with the preceding sentence will entitle Landlord to exercise all the same remedies as are available in the event of a default in the payment of Fixed Rent. (B) Tenant will be permitted to reduce the amount of the Security Deposit by $50,000.00 on the date that is three (3) years after the Rent Commencement Date and by an additional $50,000 on the date that is five (5) years after the Rent Commencement Date; provided that on each such date Tenant has received no notice of any default that remains uncured after the expiration of any applicable notice and/or cure period and provided further that if a notice of default is outstanding with respect to a default that ~ remains uncured, Tenant must cure such default within the applicable cure period prior to any applicable reduction becoming effective. If the Security Deposit is in cash, Landlord will pay to Tenant the amount of any applicable reduction promptly after Tenant's request therefore. If the security Deposit is a Letter of Credit, Landlord will accept a Letter of Credit in the proper reduced amount in exchange for the existing Letter of Credit, or will enter into an amendment of the Letter of Credit reducing the amount thereof to the proper reduced amount. 62. Definitions of "Landlord" and "Owner" The terms "Owner" and "Landlord, " whenever used in this lease (including, without limitation, in Article 31), shall have the same meaning. 63. Hazardous Materials (A) Tenant shall not cause nor permit "Hazardous Materials" (as defined below) to be used, transported, stored, released, handled, produced or installed in, or from, the demised premises, except that inflammable or combustible (but not explosive) items may be brought into and used within the demised premises as may be needed for the operation of normal office equipment, so long as done in compliance with all Laws. The term "Hazardous Material" shall, for the purposes hereof, mean any flammable, explosive or radio-active material, hazardous waste, hazardous or toxic substance or related material, asbestos or any material containing asbestos, or any other substance or material, as defined by any present or future Law, including without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resources Conservation and Recovery Act, as amended, Superfund Amendment and Reauthorization Act of 1986 and in the regulations adopted and publications promulgated pursuant to each of the foregoing. In the event of a breach of the provision~ of this Article, Landlord, in addition to all of its rights and -24- remedies under this lease and pursuant to Law, may require Tenant to remove any such Hazardous Materials from the demised premises or the Building in the manner prescribed for such removal by all requirements of Law. The provisions of this Article 63 shall survive the expiration or sooner termination of this lease. (B) Landlord warrants and represents that, to the best of its knowledge, no Hazardous Material will exist in the premises on the Commencement Date. If any Hazardous Materials (defined as such under applicable Law as then in effect and interpreted) or friable asbestos is discovered in the premises that is not the responsibility of Tenant as above provided and is required by then-applicable Law to be removed or encapsulated, then, as Tenant's sole remedy, Landlord will at Landlord's expense and with reasonable promptness remove or encapsulate such Hazardous Material or friable asbestos in accordance with Law, and will provide Tenant with appropriate evidence thereof. 64. Deletions Any striking out or deletion of any portion of this Lease was done as a matter of convenience for the purpose of execution and the language omitted is not to be given any effect whatsoever in construing this Lease. 65. Notices by Agent Notwithstanding anything contained in this lease to the contrary (including but not limited to notices referred to in Articles 17 and 28) , wherever reference is made to Owner or Tenant serving any notice upon the other under this Lease, any notice served by the notifying party's agent or attorney shall be deemed as if such notice was served by the notifying party. 66. Mortgagee's Consent This Agreement is subject to the prior written consent ("Consent") of the holder of the existing mortgage on the Land and Building. If Landlord has not received the Consent within thirty (30) days after the execution and exchange of this lease, then Landlord shall have the right to cancel this lease by notice to Tenant given within fifteen (15) days after the expiration of such thirty (30) day period, time being of the essence. If Landlord gives such notice, then this lease shall immediately be cancelled and of no further force and effect and neither party shall have any further rights or obligations pursuant hereto, except that Landlord shall promptly return to Tenant any amounts paid hereunder. 67. Option to Expand (A) For purposes of this Article, (1) The entire rentable area of the thirteenth (13th) floor in the Building ("Floor 13") shall be deemed "Available" only if and when (I) Floor 13 becomes vacant, free of occupants and tenancies and rights of third parties, or (II) (a) the then existing tenant of Floor 13 has not exercised an option to renew or extend the term of its lease and the time by which such tenant must exercise such option has expired and (b) the then existing occupant thereof is not negotiating with Landlord for a lease or renewal thereof, or (III) Landlord reasonably expects that, within the succeeding six (6) months, the lease for Floor 13 will be terminated and Landlord will receive vacant possession thereof, free of any claims or rights of any third party. (2) "Business Terms" shall mean the material economic business terms upon which Landlord is willing in its sole discretion to enter into a lease for Floor 13 including, without limitation, the rental rate to be paid, any escalation payment obligations and the applicable base years, any other additional rent, the duration of the term thereof (including any renewal -25- options), any work to be performed or paid for by Landlord, the amount and duration of any rent Concessions, and the cost and extent of any so-called "take-over" obligations to be assumed by Landlord. (3) "Net Effective Rental" shal1 mean the constant net effective rental payable for the portion of the balance of the Term covered thereby, taking into account all applicable Business Terms and calculated on the basis of an interest factor of the then-current Prime Rate. (B) Tenant's rights under this Article shall exist only if and so long as (I) Tenant is not in default under this lease after notice and expiration of any applicable grace period, (II) at the time Tenant exercises such rights, there are at least five (5) years remaining in the Term, and (III) Tenant exercises such rights in the manner and within the applicable time period set forth in Section (C) hereinbelow. (C) If Floor 13 becomes Available prior to the fifth (5th) anniversary of the Commencement Date, Landlord shall promptly deliver a notice (the "Offer Notice") to Tenant offering to lease Floor 13 to Tenant and stating the Business Terms of such offer. Tenant shall thereupon have the right, to be exercised by a notice ("Tenant's Acceptance Notice") given to Landlord no later than the fifteenth (15th) day after Landlord delivers such Landlord's Offer Notice (as to which time shall be of the essence), to lease all but not part of Floor 13 on terms hereinafter set forth. Tenant shall riot have the right to lease less than all of Floor 13. Together with Tenant's delivery of Tenant's Acceptance Notice, and as a condition to the effectiveness thereof, Tenant shall deliver to Landlord a letter of credit as required by Article 61, or an amendment to the existing Letter of Credit complying with Article 61, in each case in an amount reasonably determined by Landlord to be appropriate in relation to the costs to Landlord of the transaction (such as the brokerage commission, free rent and work contribution, if any), but in any event not in excess of $250,000.00, to be held as an additional Security Deposit (in which event, the reduction provisions contained in Article 61(E) hereof shall apply thereto, except that in the first sentence of Article 61(B) the words "Rent Commencement Date" shall, for the purpose of this parenthetical, be deemed replaced by "the date on which full Fixed Rent commences for Floor 13" and except that the amount of the reductions shall be proportionately reduced based on the ratio of the amount of the additional security to $250,000.00 (i.e., the original amount of the Security Deposit)). (D) If Tenant timely delivers Tenant's Acceptance Notice, then, as of the date on which Landlord delivers possession of Floor 2.3 to Tenant in the condition specified in the Business Terms (the "Floor 13 Commencement Date"), Floor 13 shall become part of the demised premises upon all the terms and conditions set forth in Landlord's Offer Notice and otherwise upon all the same applicable terms and conditions set forth in this lease with respect to the initial demised premises. The lease of Floor 13 shall be co-terminous with this lease. Tenant's Proportionate ~- Are with respect to the Offered Space shall be 5.41's. Landlord agrees to use diligent efforts to cause the Floor 13 Commencement Date to occur as promptly as reasonably practicable after Landlord receives vacant possession of Floor 13. (E) If Tenant fails timely to deliver Tenant's Acceptance Notice, Tenant shall be deemed to have waived its rights with respect to Floor J~3 (except to the extent, if any, that Floor 13 becomes Available after the initial leasing thereof after Tenant fails to deliver a Tenant's Acceptance Notice) and Landlord shall be free to lease Floor 13 to any third party on such terms and conditions as Landlord may determine; provided, however, that if Landlord wishes to enter into a lease for Floor 13 at less than 90~ of the Net Effective Rental contained in the initial or immediately prior Landlord's Offer Notice, then Landlord shall give Tenant a new Landlord's Offer Notice (unless Landlord is not required to do so pursuant to Section (B) hereof) and Tenant shall have the right, to be exercised by Tenant's Acceptance Notice given to Landlord no later than the tenth (10th) day after Landlord delivers such Landlord's Offer Notice (as to which time shall be of the essence), to lease all but not part of Floor 13 as aforesaid. -26- (F) Promptly after Tenant's delivery of Tenant's Acceptance Notice, Landlord and Tenant shall execute and deliver an agreement incorporating Floor 13 into the demised premises and setting forth the terms of the leasing thereof; provided that the failure of the parties to enter into such an agreement shall not affect their respective rights and obligations hereunder. (G) Under no circumstances shall Landlord have any liability for the failure of any occupant of all or any portion of Floor 13 to vacate the same at the end of the term of such occupant's lease. Landlord agrees to take such actions (including summary proceedings) as are reasonable, in its sole judgment, to obtain vacant possession of Floor 13 at the end of such term, provided that Landlord's failure to deliver such possession to Tenant shall in no event affect the enforceability of this lease or impose any liability upon Landlord. 68. Tenant's Initial Installation and Landlord's Contribution (A) Tenant shall submit to Landlord complete and detailed architectural, mechanical and engineering plans and specifications showing the Alterations required to prepare the premises for Tenant's occupancy ("Tenant's Initial Installation"), which plans and specifications shall be prepared by Tenant at Tenant's own cost and expense. Tenant's submission shall include not fewer than three sets of sepias and four sets of black-and-white prints. The plans and specifications, as approved by Landlord, are hereinafter referred to as the "Final Plans." The approval of the Final Plans by Landlord shall not be deemed to create any liability on the part of Landlord with respect to the design or specifications set forth in the Final Plans. The work set forth in the Final Plans shall be performed in accordance with Article 55 hereof and all other applicable provisions of this lease. Following Landlord's approval of the Final Plans and prior to Tenant's commencement of Tenant's Initial Installation, Tenant shall provide Landlord with a copy of the final contract with the general contractor (or, if Tenant is performing Tenant's Initial Installation without a general contractor, then a copy of all contracts relating to Tenant's Initial Installation), which contract(s) shall be certified by Tenant and the general contractor (or contractors) as being true and complete. The cost of Tenant's Initial Installation as shown on such contract(s) shall be herein referred to as "Tenant's Cost." (B) Subject to the terms and conditions set forth below, Landlord shall reimburse Tenant (or, at Tenant's request, will reimburse Tenant's contractors directly) up to a maximum amount of $267,225.00 ("Landlord's Contribution") for costs incurred by Tenant in connection with Tenant's Initial Installation (including filing and permit fees, architectural, engineering, legal and other consulting fees, but not including interest and personal property not constituting a permanent leasehold improvement). Landlord shall disburse from time to time, but not more often than once in any thirty (30) day period, within ten (10) business days after receipt of Tenant's request there for, that portion of Landlord's Contribution equal to ninety percent (90%) of the amount set forth in Tenant's requisition, multiplied by a fraction of which the numerator is Landlord's Contribution and of which the denominator is one hundred fifteen (115%) percent of the greater of Landlord's Contribution and Tenant's Cost; provided, however, that no advance shall be made if, and for so long as, Tenant is in default under this lease beyond any applicable notice and cure period. No advance shall be made until receipt of a request there for from Tenant and the submission by Tenant of the following: (1) A certificate signed by Tenant and Tenant's architect dated not more than ten (10) days prior to such request setting forth (a) the sum then justly due to contractors, subcontractors, materialmen, engineers, architects and other persons who have rendered-services or furnished materials in connection with Tenant's Initial Installation, (b) a brief description of such services and materials and the amounts paid or -27- to be paid from such requisition to each of such persons in respect thereof, (c) that the work described in the certificate has been completed substantially in accordance with the Final Plans, (d) that there has not been filed with respect to the demised premises or the Building or any part thereof or any improvements thereon, any vendor's, mechanic's, laborer's, materialmen's or other like liens arising out of Tenant's Initial Installation which has not been discharged of record, and (e) that Tenant has complied with all of the conditions set forth in Articles 3 and 55 of this lease, including the requirement that Tenant comply with all applicable Laws; and (2) Partial lien waivers, paid receipts or such other proof of payment as Landlord shall reasonably require for all work done and material supplied prior to the work and materials covered by the current requisition (meaning that this condition need not be satisfied for the first requisition). Upon the substantial completion of Tenant's Initial Installation, Landlord shall, upon receipt of all of the foregoing, disburse to Tenant (or at Tenant's direction) an amount equal to the amount by which ninety percent (9O%) of the portion of Landlord's Contribution for which Tenant has submitted payment requests exceeds the amount of Landlord's Contribution theretofore disbursed. Landlord shall disburse the remaining ten percent (10%) balance of the portion of Landlord's Contribution for which Tenant has submitted payment requests upon receipt of all of the foregoing plus (w) final "as built" plans of the demised premises showing Tenant's Initial Installation, (x) delivery of Building Department filing documents, permits and approvals and other evidence satisfactory to Landlord that the work is in compliance with Law, (y) delivery of evidence satisfactory to Landlord that all laborers, materialmen and mechanics have been paid, including a waiver of liens by the general contractor and all major subcontractors involved with the installation, and (z) the completion of an inspection by Landlord confirming that the work set forth in the Final Plans has been completed. Notwithstanding the foregoing, Tenant's right to collect Landlord's Contribution shall exist only with respect to work performed by Tenant during the first twelve (12) months of the Term, subject to extension by reason of delays beyond Tenant's control; to the extent not utilized within such period, Landlord's Contribution shall be deemed waived by Tenant and Landlord shall be under no further obligation to make any further payments to Tenant for Landlord's Contribution or otherwise with respect to Tenant's Initial Installation. 69. 24-Hour Access Subject to Landlord's Building-wide security regulations and events beyond Landlord's reasonable control, Tenant shall have access to the premises 24 hours a day, 365 days a year. 70. Casualty Damage (A) Anything in Article 9 to the contrary notwithstanding: (1) If an independent licensed architect or engineer estimates that Landlord's portion of any restoration necessitated by damage or destruction to the demised premises by fire or other casualty (collectively "Casualty") cannot be substantially completed within six (6) months after the occurrence of the Casualty, Landlord shall so notify Tenant and Tenant, at its option, may terminate this lease by notice sent to Landlord within thirty (30) days after receipt of Landlord's notice (time being of the essence); and (2) if Landlord's portion of any restoration necessitated by Casualty has not been substantially completed within six (6) months after the occurrence of the applicable Casualty, then Tenant, at its option, may terminate this lease by notice sent to Landlord within thirty (30) days after the expiration of such six (6) month period, time being of the essence), but in any event prior to the substantial completion of Landlord's restoration obligation. On or -28- before such effective date, Tenant shall vacate and surrender possession of the demised premises in the condition required by this lease (except to the extent affected by the casualty). Fixed Rent and other amounts payable under this lease shall be prorated as of such effective date and the parties shall have no further rights or obligations hereunder. If Tenant does not elect to terminate this lease under clause (1) above, Landlord shall expeditiously commence and diligently prosecute restoration of the premises as provided in Article 9. Notwithstanding the foregoing, the six (6) month period referred to in clause (2) above shall be extended by up to an additional three (3) months to the extent such restoration is delayed due to adjustment of insurance claims or circumstances of the nature set forth in Article 27 or otherwise beyond Landlord's reasonable control. -29- EXHIBIT A THE CITY OF NEW YORK ALT 1OO7O3856 DEPARTMENT OF BUILDINGS CERTIFICATE OF OCCUPANCY BOROUGH MANHATTAN DATE MAY 12 1994 NO. 105085 This certificate supersedes C.O. NO 61 103 ZONING DISTRICT C6--6 THIS CERTIFIES that the -xxxx-a1tered-xxxx- building--premises located at 876 THIRD AVENUE--163 EAST 53RD STREET Block 1308 Lot 33 CONFORMS SUBSTANTIALLY TO THE APPROVED PLANS AND SPECIFICATIONS AND TO THE REQUIREMENTS OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS FOR THE USES AND OCCUPANCIES SPECIFIED HEREIN.
PERMISSIBLE USE AND OCCUPANCY - ------------------------------------------------------------------------------------------------------------------------- MAXIMUM ZONING BUILD4NO BUILDING LIVE LOAD NO. OF DWELLING CODE CODE LBS. PER PERSONS OR ROOMING HABITABLE ZONING OCCUPANCY STORY SO. FT PERMITTED UNITS ROOMS USE GROUP GROUP DESCRIPTION OF USE - ------------------------------------------------------------------------------------------------------------------------- CELLAR OG 40 STORAGE, EQUIPMENT AND LOCKER ROOM 1ST FLOOR 100 130 LOBBY AND STORES USE GROUP 2ND TO 11TH FLOORS 50 EA 70 EA OFFICES ON EACH FLOOR 12TH & 13TH FLOORS 50 EA 60 EA OFFICES ON EACH FLOOR 14TH TO 16TH FLOORS 50 EA 50 EA OFFICES ON EACH FLOOR 17TH & 18TH FLOORS 50 40 OFFICES ON EACH FLOOR TANK & COOLING TOWERS 75
NOTE: THIS APPLICATION IS FILED FOR AMENDED C OF O FOR CORRECTION OF MEETS AND BOUNDS. STANDARD PIPE SYSTEM APPROVED BY FIRE DEPARTMENT JANUARY 28, 1964 ZONING LOT CERTIFICATION FILED 29. DECEMBER 1993 REED 2041 PAGES 0825 TO 0832. THIS CERTIFICATE OF OCCUPANCY MUST BE POSTED WITHIN THE BUILDING IN ACCORDANCE WITH THE RULES OF THE DEPARTMENT PROMULGATED MARCH 31ST, 1967. OPEN SPACE USE - ------------------------------------------------------------------------------ (SPECIFY-PARKING SPACES, LOADING BERTHS, OTHER USES, NONE OFFICE COPY - DEPARTMENT OF BUILDINGS BOROUGH SUPERINTENDENT COMMISSIONER NO CHANGES OF USE OR OCCUPANCY SHALL BE MADE UNLESS A NEW AMENDED CERTIFICATE OF OCCUPANCY IS OBTAINED THAT THE ZONING LOT ON WHICH THE PREMISES IS LOCATED IS BOUNDED AS FOLLOWS: BEGINNING at a point on the, WEST side of THIRD AVENUE distance 0 WEST feet from the corner formed by the intersection of EAST 53RD STREET and THIRD AVENUE running thence WEST 95' 0" feet; thence NORTH 100' 0" feet thence EAST 20' 0" feet; thence SOUTH 0' 5" feet thence EAST 75" 0" feet; thence SOUTH 100' 0" feet to the point or place of beginning. 100703856 BUILDING OCCUPANCY GROUP CLASSIFICATION HEIGHT STORIES FEET 6+18 203' 6" COMMERCIAL.
THE FOLLOWING FIRE DETECTION AND EXTINGUISHING SYSTEMS ARE REQUIRED AND WERE INSTALLED IN COMPLIANCE WITH APPLICABLE LAWS. STANDPIPE SYSTEM YES AUTOMATIC SPRINKLER SYSTEM YARD HYDRANT SYSTEM STANDPIPE FIRE TELEPHONE AND SIGNALLING SYSTEM SMOKE DETECTOR FIRE ALARM AND SIGNAL SYSTEM YES STORM DRAINAGE DISCHARGES INTO: A) STORM SEWER B) COMBINED SEWER C) PRIVATE SEWAGE DISPOSAL SYSTEM SANITARY DRAINAGE DISCHARGES INTO: A) SANITARY SEWER B) COMBINED SEWER C) PRIVATE SEWAGE DISPOSAL SYSTEM
LIMITATIONS OR RESTRICTIONS: BOARD OF STANDARDS AND APPEALS CAL. NO. CITY PLANNNG COMMISSION CAL. NO. OTHERS: EXHIBIT III REEL 2041 PAGES 825--832 EXHIBIT B (Name and Address of Landlord) Re: Irrevocable Clean Letter of Credit Gentlemen: By order of our client, ________________________________, we hereby open our clean irrevocable Letter of Credit No.________________________________, in your favor for an amount not to exceed in the aggregate $___________________________, US Dollars effective immediately. Funds under this credit are available to you against your sight draft drawn on us mentioning thereon our Credit No.__________. This Letter of Credit shall expire sixteen (16) months from the date hereof; provided, however, that it is a condition of this Letter of Credit that it shall be deemed automatically extended, from time to time, without amendment, for one year from the expiry date hereof and from each and every future expiry date, unless at least sixty (60) days prior to any expiry date we shall notify you by registered mail that we elect not to consider this Letter of Credit renewed for any such additional period. This Letter of Credit is transferable and may be transferred one or more times. However, no transfer shall be effective unless advise of such transfer is received by us in the form attached signed by you. We hereby agree with you that all drafts drawn or negotiated in compliance with the terms of this Letter of Credit will be duly an promptly honored upon presentment and delivery of your draft to our office at _________________ if negotiated on or prior to the expiry date as the same may from time to time be extended. Except as otherwise specified herein, this Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revisions), International Chamber of Commerce Publications No. 500. Very truly yours, (Name of Bank) By:____________________ EXHIBIT B-1 Re: Credit Issued by Gentlemen: For value received, the undersigned beneficiary irrevocably transfers to: (Name and Second Beneficiary) (Address) all rights of the undersigned beneficiary to draw under the above Letter of Credit in its entirety. By this transfer, all rights of the undersigned beneficiary in such letter of Credit are transferred to the second beneficiary and the second beneficiary shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised direct to the second beneficiary without necessity of any consent of or notice of the undersigned beneficiary. The advice of such Letter of Credit is returned herewith, and we ask you to endorse the assignment on the reverse thereof and forward it directly to the second beneficiary with your customary notice of transfer. Enclosed is remittance of $100.00 in payment of your transfer commission and in addition thereto we agree to pay you on demand any expenses, which may be incurred by you in connection with this transfer. Yours very truly, SIGNATURE AUTHENTICATED Signature of Beneficiary (Bank) (Authorized Signature) LIMITED GUARANTY This Guaranty made as of this 27TH day of April, 1998, by William Ward, residing at 85 Prospect St. White Plains, NY (the "Guarantor"), to and for the benefit of Vandergrand Properties Co, L.P., a New York limited partnership ("Landlord"), having an office c/o Jack Resnick & Sons, Inc., 110 East 59th Street, New York, New York 10022. W I T N E S S E T H: WHEREAS, Landlord is the owner of the land and the building thereon (the "Building") known as 880 Third Avenue, in the Borough of Manhattan, City, County and State of New York; and WHEREAS, by a certain agreement of lease (the "Lease") to be dated of even date herewith between Landlord, as landlord, and Devise Associates, Inc. ("Tenant"), as tenant, Landlord intends to demise a portion (the "Premises") of the Building as more specifically described in the Lease (defined terms used herein shall have the same meanings ascribed to them in the Lease unless otherwise defined herein); and WHEREAS, Guarantor desires to give this Guaranty to Landlord in order to induce Landlord to enter into the Lease with Tenant. NOW, THEREFORE, for good and valuable consideration and as an inducement to Landlord to enter into the Lease with Tenant: 1. (A) Guarantor hereby unconditionally and absolutely guarantees to Landlord the full and prompt payment when due of (1) all amounts payable by Tenant pursuant to the Lease including, without limitation, Fixed Rent and additional rent, as well as all amounts otherwise payable by Tenant for use and occupancy, accruing from the Commencement Date under the Lease until the date that Tenant delivers (x) vacant, unencumbered possession of the entire Premises to Landlord in the condition required under the Lease at the end of the Term together with (y) an agreement, signed by Tenant, in the form of Exhibit A annexed hereto, plus (ii) the costs incurred by Landlord in seeking a termination of the Lease and recovering vacant possession of the Premises after a default by Tenant under the Lease including, without limitation, reasonable attorneys' fees and disbursements. Successive recoveries may be had hereunder. (B) In addition, Guarantor hereby guarantees that the Premises and the Building are and shall throughout the Term remain free of all liens for labor and materials supplied to or in connection with the Premises or to Tenant or anyone claiming through or under Tenant or at any such person's request (except for those liens pre-existing the commencement of the Lease or those for work contracted for by Landlord), and Guarantor will forthwith pay to Landlord all damages that may arise in consequence of the existence, enforcement or attempted enforcement of any such liens, including, without limitation, all reasonable attorney's fees and disbursements incurred by Landlord in connection therewith. (C) In no event shall any amount payable by Guarantor pursuant to this Guaranty be reduced by the amount of the Security Deposit held or applied by Landlord under the Lease, the parties acknowledging that such Security Deposit is intended to reimburse Landlord for amounts payable under the Lease by Tenant that are not covered by this Guaranty. 2. This Guaranty is an absolute and unconditional, guaranty of payment and of performance to the extent set forth in Paragraph 1. It shall be enforceable against Guarantor without the necessity of any suit or proceedings on Landlord's part of any kind or nature whatsoever against Tenant, its successors and assigns, or any other person or entity ("Other Guarantor") guaranteeing any of the same obligations guaranteed by Guarantor hereunder and without the necessity of notice of nonpayment, nonperformance or nonobservance or any notice of acceptance of this Guaranty and without need for demand for payment under this Guaranty or of any other notice or demand to which Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives; and Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no respect be terminated, affected, diminished or impaired by reason of the assertion or the failure to assert by Landlord against Tenant, or against Tenant's successors and assigns, or against any Other Guarantor, of any of the rights or remedies reserved to Landlord pursuant to the provisions of the Lease or allowed at law or in equity, or by relief of Tenant or any Other Guarantor from any of their respective obligations under the Lease, their guaranties or otherwise by (a) the release or discharge of Tenant or any Other Guarantor in any creditors' proceedings, receivership, bankruptcy or other proceedings, (b) the impairment, limitation or modification of the liability of Tenant or any Other Guarantor or the estate of Tenant or any Other Guarantor in bankruptcy, or of any remedy for the enforcement of Tenant's said liability under the Lease, or any Other Guarantor's liability under its guaranty, resulting from the operation of any present or future provisions of the bankruptcy laws or from the decision in any court, (c) the rejection or disaffirmance of the Lease in any such proceedings, or (d) any lack of validity or enforceability of this Guaranty, the Lease, any other guaranty or any other circumstance which might otherwise constitute a defense available to Guarantor or Tenant. 3. This Guaranty shall be a continuing guaranty and the liability of Guarantor shall in no way be affected, modified or diminished by reason of any assignment, amendment, renewal, supplement, modification or extension of the Lease; any subletting of the Premises or any part thereof; any modification or waiver of or change in any of the terms, covenants, conditions or provisions of the Lease; any extension of time that may be granted by Landlord to Tenant, its successors or assigns, or any Other Guarantor; a changed or different use of the Premises, whether or not consented to by Landlord; or any dealings or transactions or matters or things occurring between Landlord and Tenant, its successors or assigns, or any Other Guarantor, whether or not notice thereof is given to Guarantor. 4. This Guaranty shall remain in full force and effect and continue to be effective should any petition be filed by or against Tenant for liquidation or reorganization, should Tenant become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of Tenant's assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment and performance guaranteed hereunder, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of such obligations or such part thereof, whether as a "voidable preference," "fraudulent transfer," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, Guarantor's obligations hereunder shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. -2- 5. Landlord's consent to any occupancy agreement covering, or subletting of, all or any portion of the Premises by any party or to any assignment or successive assignments by Tenant or Tenant's assigns of the Lease, made either with or without notice to Guarantor, shall in no manner whatsoever release Guarantor from any liability hereunder. 6. All of Landlord's rights and remedies under the Lease or under this Guaranty are intended to be distinct, separate and cumulative, and no such right and remedy therein or herein mentioned, whether exercised by Landlord or not, is intended to be an exclusion of or a waiver of any of the others. The obligation of Guarantor hereunder shall not be released by Landlord's receipt, application or release of any security given for the performance and observance of covenants and conditions required to be performed or observed by Tenant under the Lease nor shall Guarantor be released by the maintenance of or execution upon any lien which Landlord may have or assert against Tenant and/or Tenant's assets. 7. Guarantor hereby submits itself to the jurisdiction of the courts of New York in any action or proceeding against Guarantor arising out of this Guaranty. At any time that Guarantor is not resident in the state of New York, Guarantor designates Robert J. Frisoni, Esq., 200 Broadhollow Road, Suite 2.07, Melville, New York 11747, as its agent for service of process in any such action or proceeding. A copy of any such service shall be mailed to Guarantor as provided in Paragraph 11. Guarantor may change its agent for service of process by notice given to Landlord as provided in Paragraph 11 hereof. Any such substituted agent must be resident in New York City or Nassau or Suffolk County. 8. Guarantor hereby covenants and agrees to and with Landlord, its successors and assigns, that Guarantor may be joined in any action against Tenant or against any one or more Other Guarantors in connection with the Lease and that recovery may be had against Guarantor in such action or in any independent action against Guarantor without Landlord, its successors or assigns, first pursuing or exhausting any remedy or claim against Tenant, its successors or assigns or against any one or more Other Guarantors. Guarantor also agrees that, in any jurisdiction, it will be conclusively bound by the judgment in any such action by Landlord against Tenant (wherever brought) as if Guarantor were a party to such action even though Guarantor is not joined as a party in such action. 9. Guarantor hereby waives all right to trial by jury in any action or proceedings hereafter instituted by Landlord to which Guarantor may bea party. 10. If this Guaranty is held ineffective or unenforceable by any court of competent jurisdiction, Guarantor shall be deemed to be a tenant under the Lease with the same force and effect as if Guarantor were expressly named as a joint tenant therein with joint and several liability, but with no more liability thereunder than Guarantor would have had hereunder. 11. Any notice, demand or request by either party to the other shall be in writing, and shall be deemed to have been duly given or made if mailed by certified mail, return receipt requested, addressed to the other party at its address above set forth or to such other address as the receiving party shall have designated by notice given as above provided. Notices so given shall be deemed received on the third (3rd) business day after mailing. 12. This Guaranty shall be construed in accordance with and governed by the laws of the State of New York. -3- 13. This Guaranty shall inure to the benefit of Landlord and Landlord's successors and assigns, and shall be binding upon and enforceable against Guarantor and Guarantor's successors and assigns. IN WITNESS WHEREOF, Guarantor has executed this instrument the day and year first above written. WITNESS: - --------------------------- - ----------------------------- William Ward ACKNOWLEDGMENT STATE OF NEW YORK COUNTY OF New York On the 14th day of April, 1998, before me personally came William Ward, to me known to be the individual described in and who executed the foregoing instrument and acknowledged that he executed the same. ----------------------- Robert Frisoni Notary Public, State of New York No. 41-4949551 Qualified in Queens County Commission Expires April 17, 1998 -4- EXHIBIT A (Letterhead of Tenant) (Date) Vandergrand Properties Co. L.P. C/o Jack Resnick & Sons, Inc. 110 East 59th Street New York, New York 10022 Gentlemen: Reference is made to the lease between you, as landlord, and Devise Associates, Inc., as tenant, dated_______________, 1998 [and amended ______________] ([as so amended] the "Lease") covering certain space more particularly described in the Lease (the "Premises") at 880 Third Avenue, New York, New York. Defined terms used herein shall have the meanings ascribed to them in the Lease unless otherwise defined herein. Reference is also made to a certain limited guaranty (the "Guaranty") given to Landlord to induce it to enter into the Lease. The Guaranty provided for certain limitations on the liability of the guarantor thereunder upon the surrender to Landlord of all rights of Tenant to the Premises, including the right of possession of the Premises. The undersigned represents and warrants that (i) the undersigned is the sole tenant under the Lease and has the power, right and authority to execute this Agreement and carry out the intent hereof, (ii) to the best of the knowledge, information and belief of the undersigned, the execution and delivery of this Agreement shall not violate or contravene any agreement, contract, security agreement, financing, lease or indenture to which the undersigned is a party or by which it is bound and shall not require consent of any party to any of the foregoing, (iii) the undersigned has not subleased all or any part of the Premises nor has it entered into any other agreement pursuant to which any third party has any interest in the Premises or any right to occupy the same, and (iv) the interest of the undersigned in the Premises and in such of the fixtures, improvements, betterments and equipment as are affixed to the realty, is unencumbered, free of any security interests, liens, chattel mortgages, financing leases, lease purchase agreements or any other security or financing devices and all such installations have been paid for in full. Effective upon the date hereof, the undersigned hereby unconditionally and irrevocably surrenders all of its rights and privileges under the Lease and its rights in and to the Premises and agrees that it, and anyone claiming under or through it, shall no longer have the right to use or occupy, or any other right or rights of any nature with respect to, the Premises, under the Lease or otherwise. Notwithstanding the preceding sentence, however, Tenant agrees that its liability and obligations under the Lease shall continue in full force and effect, in all respects as if this Lease had continued until the Expiration Date (as the same may have heretofore been extended). Tenant acknowledges that it is executing this agreement in order to limit the liability of the guarantor under the Guaranty and that such limitation constitutes full consideration for the agreements contained herein. Very truly yours, DEVISE ASSOCIATES, INC. By: ----------------------------------- Name: Title: Landlord is executing this Agreement below to acknowledge that the Lease (but not the obligations of the Tenant thereunder, which shall continue in full force and effect as provided in the third paragraph of the preceding letter) is hereby terminated as above set forth. VANDERGRAND PROPERTIES CO. L.P. By: Vanres Holding Corp., general partner By: ----------------------------------- Name: Title: EX-10 4 ex10-20.txt EXHIBIT 10.20 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- THIS AGREEMENT OF LEASE ("Lease") made this February 19, 2002, by and between G.F. FLORIDA OPERATING ALPHA, INC., a Florida corporation, ("Landlord"), and EMTEC, Inc. , a Delaware corporation, ("Tenant"). WITNESSETH Article 1. Premises. Landlord hereby demises and lets unto Tenant and Tenant hereby leases and takes from Landlord, for the term and upon the terms and conditions set forth herein, that portion of the "Building" constructed on the real property more particularly described on Exhibit "A" attached hereto and made a part hereof(The `Property"), located at 7843 Bayberry Road, Jacksonville, Florida 32256 containing 3,340 square feet (the `Premises"), together with the right in common with the other occupants of the building to use the driveways, sidewalks, and common area being more particularly described on Exhibit "A" attached hereto (The "Common Area"). Tenant's right to use the Common Area shall be limited or restricted as depicted by Exhibit "A". Article 2. Term & Expansion. To have and to hold said Premises for a term of 3 years commencing on March 1, 2002 (hereinafter called the "Commencement Date"), and ending at 6:00 p.m. on February 28, 2005 (hereinafter called the "Term"). Should Landlord have property available for expansion and/or relocation, and Landlord & Tenant come to a mutual agreement of terms and conditions of said expansion and/or relocation, then Tenant would have the option without penalty to expand or relocate to said space. Notwithstanding the foregoing, in the event Landlord is unable to accommodate Tenant's expansion after one year of occupancy, with adequate space as determined by Tenant, the lease is cancelable upon ninety days notice to Landlord and payment of a cancellation fee equal to the then current three month's gross rent, at any time during the lease after the first year. This Lease shall not be recorded in any public records without the prior written consent of the Landlord. Article 3. Construction by Landlord. Landlord has completed at its own cost and expense the construction of the Premises in accordance with the outline specifications and drawings attached hereto as Exhibits A, B, and B- 1. By its execution hereof, Tenant acknowledges that it has had the opportunity to inspect the premises and agrees to take the space "as is". Article 4. Use of Premises. Tenant shall use the Premises for warehouse and appurtenant offices. The Premises may not be used or occupied in whole or in part for any other purpose without the written consent of Landlord. Landlord warrants that the Premises is presently zoned Industrial Business Park 2, (IBP2), pursuant to current City of Jacksonville zoning regulations and complies with Deerwood Center's Covenants and Restrictions. Tenant shall not store any hazardous materials in or about the Premises and Tenant's use of the premises shall be in accordance with all applicable federal, state, and local laws, regulations, and ordinances. AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Article 5. Acceptance of Premises. Tenant accepts the Premises for Tenant's use in the condition in which the Premises are, without reservation and without representation, express or implied, by Landlord. Nothing herein shall absolve Landlord from responsibility to repair or replace structural portions of the Premises in accordance with the terms or other provisions of this Lease. Article 6. Rent. A. Base Rent. Tenant shall pay to the Landlord, or to Landlord's designate, in care of G. F. Florida Operating Alpha, Inc., 8186 Baymeadows Way West, Jacksonville, Florida, 32256, or at such other place as Landlord may designate in writing, without notice, demand, deduction, or set-off, annual rental, (hereinafter called "Base Rent"), (in accordance with the attached Exhibit "C"), payable in equal monthly installments in advance on the first day of each calendar month during the Term, together with all sales tax thereon and any additional rents as hereinafter provided. In the event this Lease commences on a date other than the 1st day of the month, the first month's rent shall be prorated to reflect the actual period of tenancy. B. Additional Rent. 1. Building Operating Expenses. a. Tenant shall pay as Additional Rent it's pro rata share of any Building Operating Expenses (as hereinafter defined) and shown in Exhibit "C". Landlord shall deliver to Tenant each year, on or before March 31 (or within a reasonable time thereafter), a statement setting forth the amount of Operating Expenses paid or incurred by Landlord, directly or indirectly, during the immediately preceding calendar year. This statement shall delineate Tenant's actual pro rata share of the demonstrated Building Operating Expenses for the preceding calendar year. Within thirty (30) days after delivery of the statement, Tenant shall pay to Landlord as Additional Rent, Tenant's share of such Building Operating Expenses not previously paid. b. Commencing with the rental payment immediately following the receipt of the statement of Building Operating Expenses, Tenant shall remit as Additional Rent one-twelfth (1/12) of Tenant's pro rata share of the anticipated Building Operating Expenses for the following year in addition to the scheduled Base Rent. c. If the term of this Lease begins after January 1, or ends prior to December 31, Tenant's share of the Building Operating Expenses shown on the statement delivered at the end of such year shall be reduced proportionately. In the event Tenant's share of the Building Operating Expenses is less than the amount previously anticipated and collected by Landlord, Tenant's excess shall be applied to sums owed to Landlord, and if none, then shall be remitted to Tenant. In the event Tenant's share of the Building Operating Expenses is more than the amount previously anticipated and collected by Landlord, Tenant's shortage shall be billed to Tenant and remitted within thirty (30) days. AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- d. The term "Building Operating Expenses" shall be deemed to include, but not be limited to: costs incurred in the normal operation, prevention and corrective maintenance and repair of the Property and any parking lot, elevator, landscaping, exteriors of the buildings, and other common areas used in conjunction therewith, whether paid to employees of Landlord or to independent suppliers or contractors engaged by Landlord; wages and salaries, taxes imposed in respect to wages and salaries, (including social security, unemployment, medicare and disability insurance), fringe benefits, and workers compensation insurance with respect to such wages and salaries; insurance premiums carried by or on behalf of Landlord in connection with the Property and paid by Landlord; assessments paid by Landlord to Deerwood Center Owner's Association for common area maintenance and guard service; base charges for water and sewage services, irrigation and fire protection stand-by fees for the Property; charges for electricity paid by Landlord in connection with the Property; and management fees. e. The Building Operating Expenses shall not include the cost of any repairs or replacements that by sound accounting practices should be capitalized. In this connection the decision of Landlord's accountants shall be final. 2. Tenant Expenses. a. Tenant shall pay to Landlord, as Additional Rent, all increases in fire insurance premiums on the Leased Premises due to an increase in the rate of fire insurance in excess of the rate on the Leased Premises at the time of making this Lease, if such increase is caused by any action or omission of Tenant, or the nature of Tenant's business. C. Late Charges. In the event Tenant fails to pay when due any amount owed under the provisions of this Article or any amount owed under the provisions of this Article or any other Article of this Lease, Tenant shall pay to Landlord, in addition to the amount due, a late charge according to the following schedule. 1. For any amount Tenant fails to pay within ten (10) days of the date upon which such amount is due, three percent (3%) of such amount. 2. For any amount Tenant fails to pay within twenty (20) days of the date upon which such amount is due, ten percent (10%) of such amount. 3. If Tenant fails to pay any such amount within thirty (30) days of the due date, Tenant shall pay in addition to the late charge, interest thereon from the date upon which such amount was due until the date upon which such amount is paid, at the highest rate permitted by law. Article 7. Security Deposit. Not applicable. 2 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Article 8. Indemnity and Insurance. (a) To the fullest extent permitted by law, Tenant shall indemnify, hold harmless and defend Landlord and its agents and employees from and against all claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from the conduct of Tenant's business, or Tenant's use of the Premises, or from any accident in or on the Premises, and will further indemnify and save the Landlord harmless against and from any and all claims arising from any breach on the part of Tenant in the performance of any covenant or agreement to be performed by Tenant pursuant to the terms of this Lease, provided that any such claim, damage, loss or expense is caused in whole or in part by any act or omission of Tenant, any subcontractor of Tenant, anyone directly or indirectly employed by any of them, or anyone for whose acts any of them may be liable. (b) In any and all claims against the Landlord or any of its agents or employees, by any employee of Tenant, any subcontractor of Tenant, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, the indemnification obligation under this Article 8 shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable by or for Tenant or any subcontractor of Tenant under workers' compensation acts, disability benefits acts, or other employee benefits acts. (c) Tenant shall purchase and maintain such insurance as will protect it from claims set forth below which may arise out of or result from its operations under this Lease, whether such operations be by itself, by any subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable: (1) claims under workers' compensation provided under Florida statutes; (2) claims for damages because of bodily injury, sickness or disease, or death of any person other than employees; (3) claims for damages insured by usual personal injury liability coverage which are sustained (a) by any person as a result of any offense directly or indirectly related to the employment of such person by the Tenant, or (b) by any other person; (4) claims for damages because of injury to or destruction of tangible property, including loss of use thereof, (5) claims for damages because of bodily injury or property damage arising out of the ownership, maintenance, use, loading or unloading of any motor vehicle. (d) The minimum limit of liability for the policies required under preceding Section "c" above shall be: (1) Workers' Compensation and Employer Liability Coverage A - Statutory Coverage B - Bodily Injury by Accident - $100,000 - Each Accident Bodily Injury by Disease - $100,000 - Each Employee Bodily Injury by Disease - $500,000 - Policy Limit 3 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- (2) Comprehensive General Liability Per Occurrence - $500,000 General Aggregate - $1,000,000 Products Aggregate - $1,000,000 Coverage to include a "Broad Form Comprehensive General Liability" Endorsement (or equivalent). (3) Automobile Liability Bodily Injury - $500,000 per person - $500,000 per accident Property Damage - $100,000 per accident OR $500,000 combined single limits (e) The insurance required by Section "c 2-5" shall include Landlord as an Additional Insured with respect to operations performed under this Lease. (f) Certificates of insurance acceptable to Landlord shall be filed with Landlord prior to the commencement of operations under this Lease. These certificates shall contain a provision that coverages afforded under the policies will not be canceled, nor will coverage be reduced, without 30 day written notice to Landlord. (g) The insurance companies providing coverage required under Article "8" shall be acceptable to the Landlord, shall be licensed to do business in the State of Florida, and shall have a "Best's Rating" of "A" or "A+". Any exceptions must have prior written approval from Landlord. Article 9. Casualty Damage. (a) If the building or other improvements on the Leased Premises should be damaged or destroyed by fire, flood, or other casualty; Tenant shall immediately give written notice thereof to Landlord. (b) If the building on the Leased Premises should be totally destroyed by fire, flood, or other casualty, or if it should be so damaged that rebuilding or repairs cannot reasonably be completed within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the occurrence of the damage, this Lease shall terminate and rent shall be abated for the unexpired portion of this Lease, effective as of the date of said occurrence. (c) If the building on the Leased Premises should be damaged by fire, flood, or other casualty, but not to such an extent that rebuilding or repairs cannot reasonably be completed within one hundred eighty (180) days from the date of written notification by Tenant to Landlord of the occurrence of the damage, this lease shall not terminate, but Landlord shall, if the casualty has occurred prior to the final six (6) months of the Lease term, at its sole cost and risk proceed to rebuild or repair such building improvements to substantially the same condition in which it existed prior to such damage. If the casualty occurs during the final six (6) months of the Lease term, Landlord shall not be required to rebuild or 4 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- repair such damage. If the building is to be rebuilt or repaired and is untenantable in whole or in part following such damage, the rent payable during the period in which it is untenantable shall be adjusted equitably. In the event that Landlord should fail to complete such rebuilding or repairs within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the occurrence of the damage, Tenant may at its option terminate this Lease by written notification at such time to Landlord, whereon all rights and obligations hereunder shall cease. (d) The Landlord also reserves the right to enter upon the Premises whenever necessary to repair damage caused by fire or other casualty to the property of which the Premises are a part, even though the effect of such entry is to render the premises or a part hereof untenantable. In either event, the rent shall be apportioned and suspended during the time the Landlord is in possession, taking into account the proportion of the Premises rendered untenantable and the duration of the Landlord's possession. Tenant shall, however, have the right to proceed to recover the excess payment, if any. Landlord shall make such election to repair the Property and/or Premises or terminate this Lease by giving notice thereof to Tenant within forty-five (45) days from the day Landlord receives notice that the Premises have been destroyed or damaged by fire or other casualty. Landlord shall not be liable for any damage, compensation or claim by reason of inconvenience or annoyance arising from the necessity of repairing any portion of the Property, damages to Tenant's Property, the interruption in the use of the Premises or Tenant's business, or the termination of this Lease by reason of the destruction of the Premises, the work shall be commenced promptly and be completed with due diligence taking into account the time required for Landlord to effect a settlement with and procure insurance proceeds from the insurer, except for delays due to governmental regulations, scarcity of or inability to obtain labor or materials, or causes beyond Landlord's reasonable control. Article 10. Care, Improvement and Restoration of the Premises. A. Maintenance and Repair. 1. Tenant shall, throughout the term of this Lease and its sole cost and expense, take good care of the non-structural interior and exterior of the Premises and the other improvements now or hereafter located upon the Premises, including, but not limited to, air conditioners, filters and compressors, thereto; plumbing, air-conditioning and heating and all other systems serving the Premises, only for their respective normal, customary and intended uses. Tenant shall keep the Premises and improvements in good order and condition and promptly at Tenant's own cost and expense make all repairs necessary to maintain such good order and condition, whether such repairs be ordinary or extraordinary, foreseen or unforeseen. When used in this section, the term "repairs" shall include replacements and renewals when necessary to maintain such building and other improvements in good order and condition. All such repairs made by Tenant shall be at least equal in quality and usefulness to the building and other improvements as the original items or improvements so repaired. 2. Tenant shall provide at its expense, outside refuse containers and shall maintain such containers and the area around them in a clean and sanitary condition. 5 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- 3. Tenant shall be responsible for keeping all Common Areas adjacent to the premises in a clean, orderly condition. 4. Tenant shall maintain and repair at its own cost and expense, all heating and air conditioning systems and equipment within the Leased Premises. In addition, Tenant shall, at its own cost and expense, enter into a regularly preventive maintenance contract with a licensed HVAC contractor. The contract and contractor must be approved by Landlord and must become effective (and a copy delivered to Landlord) within (30) days of the date Tenant takes possession of the Leased Premises. Tenant will give copies of inspections and work orders to Landlord within 10 days after the service has been performed. If Tenant fails to enter into such service contract as required, Landlord shall have the right to do so on Tenant's behalf and Tenant agrees to pay Landlord the cost and expense of same upon demand. 5. Landlord, at Landlord's sole expense, shall keep and maintain all structural portions of the Premises, except for repairs made necessary because of Tenant's and/or the Tenant's Invitee's negligent acts or omissions or abuse of the Premises, which repairs shall be carried out by Landlord at Tenant's expense. B. Alterations. Tenant shall not, without on each occasion first obtaining Landlord's prior written consent, make or permit to be made any alterations, improvements or additions to the Premises. Except as otherwise provided herein, all alterations, improvements, additions, repairs and all other property attached to or used in connection with the building or any part thereof made or installed on the Premises by or on behalf of Tenant shall immediately upon completion or installation thereof be and become part of the Premises and the property of Landlord upon the expiration or earlier termination of this Lease, Landlord may require, at its sole election, that Tenant remove all such improvements installed by Tenant, at Tenant's sole cost and expense. Article 11. Signs. Tenant agrees it will not erect or maintain any exterior signs upon the Premises, without first obtaining Landlord's written approval as to size, projection, location, type of illumination, composition, etc. Landlord may withhold its consent in its sole discretion, including without limitation on purely aesthetic grounds. Tenant agrees to maintain any sign or signs approved by Landlord in good condition and repair at all times. Tenant shall remove all signs at the termination of this Lease, repairing any damage caused by the installation and/or removal thereof. No sign, door plaques, advertisement, or notice shall be displayed, painted or affixed by Tenant on any part of the Building, parking facilities, or Leased Premises without prior written consent from Landlord. Article 12. Mechanic's Liens . (a) No liens. Tenant shall not create or permit to be created, and will discharge and have removed from the Premises, the Property, or any portion thereof, any lien, encumbrance or charge arising out of any work of any contractor, mechanic, laborer, or materialman (levied on account of imposition of any mechanic's, laborer's or materialman's lien) which might be or become a lien, encumbrance or charge upon the premises, the property, or any part thereof or on the income therefrom having priority or preference over or ranking on a parity with the estate, rights and interest of 6 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Landlord in the Premises or any part thereof or the income therefrom, and Tenant will not suffer any other matter or thing whereby the estate, rights, and interest of Landlord in the Premises, the Property or any part thereof might be impaired. In no event shall the interest of Landlord in the property be subject to liens for improvements made by the Tenant and the Tenant shall notify any contractor making any such improvement of this provision prior to commencement of such improvement. (b) Discharge of liens. If any mechanic's, laborer's, or materialman's lien shall at any time be filed against the Premises, the Property, or any part thereof, Tenant, within thirty (30) days after notice of the filing thereof, will cause it to be discharged of record by payment deposit, bond, order of a court or competent jurisdiction or otherwise. If Tenant shall fail to cause such lien to be discharged within the 30-day period, then in addition to any other right or remedy, Landlord may, but shall be obligated to , discharge it either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit or bonding proceedings. In any event, Landlord shall be entitled, if Landlord so elects, to compel the prosecution of any action for the foreclosure of such lien by the lienor and to pay the amount of the judgement in favor of the lienor with interest, costs, and allowances. Any amount so paid by Landlord and all costs and expenses including reasonable attorney fees incurred by Landlord in connection therewith, together with interest at the highest rate permitted by law from the respective dates of Landlord's making of the payment and incurring of the cost and expense, shall constitute Additional Rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord on demand. (c) No consent of Landlord Intended. Nothing contained in this Lease shall be deemed or construed as constituting the consent or request of Landlord, express or implied to any contractor, subcontractor, laborer or materialman for the performance of labor or the furnishing of materials of any specific improvement, alteration to, or repair of the Premises, the Property or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of services or the furnishing of materials that would give rise to the filing of any lien against the Premises, the Property, or any part thereof. Article 13. Quiet Enjoyment. Tenant, upon paying the Base Rent, Additional Rent and other charges herein provided for and observing and keeping all covenants, agreements and conditions of this Lease, shall quietly have and enjoy the Premises during the term of this Lease without hindrance or molestation by anyone claiming by or through Landlord, subject, however to the exceptions, reservations and conditions of this Lease, and easements for utilities now or hereafter created by Landlord. Article 14. Landlord's Right of Entry . Tenant agrees to permit Landlord, the authorized representatives of Landlord, the holder of any mortgage, or any prospective mortgagee to enter the Premises during usual business hours for the purpose of inspecting, exhibiting the Premises to any prospective purchaser, tenant and/or mortgagee thereof, and making any necessary repairs thereto and performing any work therein that may be necessary by reason of Tenant's failure to make such repairs or perform work required of Tenant under this Lease. During the progress of any work in the Premises, Landlord may keep and store in 7 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- the Premises all necessary materials, tools, and equipment. Landlord shall not in any event be liable for the inconvenience or other damage to Tenant by reason of making such repairs or the performance of such work in the Premises and the obligations of Tenant under this Lease shall not be affected in any manner whatsoever. Landlord or Landlord's agent may enter the Premises at reasonable hours to show the Premises to mortgagees, prospective purchasers or tenants, or to inspect the Premises, or to make repairs required of Landlord under the terms hereof, or repairs to adjoining space within the Building. During the last sixty (60) days of this Lease, Landlord may display a "For Rent" sign on the Premises. Notwithstanding the above, Landlord or its agents, contractors or sub-contractors shall have the right to enter the Premises, at any time, if deemed an emergency. Article 15. Curing Tenant's Defaults. If Tenant shall be in default in the performance of any of its obligations hereunder, Landlord may (but shall not be obligated to do so), in addition to any other rights it may have in law or equity, cure such default on behalf of Tenant, and Tenant shall reimburse Landlord for any sums paid or costs incurred by Landlord in curing such default, including reasonable attorney fees and interest at the highest rate permitted by law on all sums advanced by Landlord as aforesaid, which sums and costs together with interest thereon shall be deemed Additional Rent payable hereunder within ten (10) days of Landlord's furnishing Tenant with a written statement itemizing such Additional Rent. Article 16. Governmental Regulations. Tenant shall at all times during the term of this Lease, at Tenant's sole cost and expense, promptly comply with all laws, ordinances, notices, orders, rules, regulations, and requirements of all federal, state, and municipal governments, and appropriate departments, commissions, boards, and officers thereof, and notices, orders, rules, and regulations of the National Board of Fire Underwriters or any other body now or hereafter constituted, exercising similar functions relating to the Premises, or to the use or the manner of use of the Premises or to the sidewalks, curbs, or common access ways adjoining the Premises. Tenant at all times shall keep in force all licenses and permits necessary for the lawful use of the Premises and Tenant shall pay all personal property taxes, income taxes, license fees, and other taxes which are or may hereafter be assessed, levied or imposed upon Tenant in connection with Tenant's operation of its business within the Premises. Article 17. Condemnation. (a) Condemnation of Entire Premises. If all of the Premises is taken or condemned for a public or quasi-public use (a sale in lieu of condemnation to be deemed a taking or condemnation for purposes of this Lease), this Lease shall terminate as of the date title to the condemned real estate vests in the condemnor and the rent herein reserved shall be apportioned and paid in full by Tenant to Landlord to that date and all rent prepaid for periods beyond that date shall forthwith be repaid by Landlord to Tenant and neither party shall thereafter have any liability hereunder. 8 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- (b) Partial Condemnation. If only a part of the Property of which the Premises occupies all or a part, is taken or condemned for a public or quasi-public use, Landlord shall have the option of doing such work as may be reasonably necessary to restore the Property and other improvements upon the Premises to tenantable condition for Tenant's uses, or of terminating this Lease. The Landlord reserves the right to enter upon the Premises to carry out such work affecting the Premises or Property of which the Premises are a part, even though the effect of such entry is to render the Premises or a part thereof untenantable. Landlord shall not be liable for any damage compensation or claim by reason of inconvenience or annoyance arising from the necessity of restoring any portion of the Property, damages to Tenant's property, the interruption in the use of the Premises or Tenant's business, or the termination of this Lease by reason of the taking or condemnation of the Premises. In the event that Landlord elects to restore the building and Premises, a minimum of sixty (60) days notice shall be given to the Tenant and the work shall be commenced immediately after the date when Tenant is required to vacate the Premises, or the portion to be restored, and shall be completed with due diligence, except for delays due to governmental regulation, inability to obtain labor or materials, or causes beyond Landlord's reasonable control. The prior paragraph notwithstanding, if the floor area of the Premises is reduced by more than one-fifth or if more than one-fifth of the parking area allocated to the Premises as depicted on Exhibit A attached hereto is so taken and such parking area cannot be replaced, Tenant may by notice to the Landlord, within thirty (30) days after receiving notice of the condemnation from Landlord, terminate this Lease as of the date when Tenant is required to vacate the Premises or portion thereof as the result of the condemnation. If this Lease is not terminated after any such taking or condemnation, the Base Rent (and correspondingly the monthly installments thereof) and the Additional Rent shall be equitably adjusted for the balance of the term taking into account the character and amount of such adjustments, either party may submit the issue for arbitration pursuant to the rules then in effect of the American Arbitration Association and the determination or award rendered by the arbitrator shall be final, conclusive and binding upon the parties and not subject to appeal, and judgment thereon may be entered in any court of competent jurisdiction. (c) Award. Tenant shall have the right to make a separate claim against the condemnor for removal expense, business dislocation damages and moving expenses which may be payable to tenants under the laws of Florida. Except as aforesaid, Tenant hereby waives all claims against Landlord and all claims against the condemnor, and Tenant hereby assigns to Landlord all claims against the condemnor including, without limitation, all claims for leasehold damages and diminution in the value of Tenant's leasehold interest. Article 18. Subordination and Attornment. This Lease shall be subject and subordinate at all times to the lien of any first mortgage or other encumbrance now or hereafter placed upon the Premises without the necessity of any further instrument or act on the part of Tenant to effectuate such subordination. Tenant agrees to execute and deliver upon demand such further instrument or instruments evidencing such subordination and/or attornment to any of the foregoing interest holders as shall be reasonably desired by any such interest holder or proposed interest holder. 9 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Article 19. Assignment and Subletting. Tenant shall not assign, mortgage, pledge or encumber this Lease, or sublet the whole or any part of the Premises, without on each occasion first obtaining the prior written consent of Landlord which consent may be withheld for any or no reason. If any time during the term of this Lease any part of all of its outstanding voting stock, if Tenant is a corporation, or any interest in the partnership, if Tenant is a partnership, shall be transferred by sale, assignment, bequest, inheritance, operation of law, or other disposition so as to result in a change in the present effective voting control of Tenant by the person or persons owning a majority of said outstanding voting stock or a majority interest in the partnership, as the case may be, on the date of this Lease, then such event shall constitute an assignment for the purposes of this Lease. In the event of any assignment of this Lease, Tenant shall, nevertheless, remain liable for the performance of all the terms, conditions, and covenants of this Lease and any assignee shall be required to execute and deliver to Landlord and assumption of liability agreement in form satisfactory to Landlord, including an assumption by the assignee of all of the obligations of Tenant and the assignee's ratification of and agreement to be bound by all the provisions of this Lease. Landlord shall be entitled to, and Tenant shall promptly remit to Landlord, any profit that may inure to the benefit of Tenant as a result of any permitted subletting of the Premises or assignment of this Lease. All rental payments made by or on behalf of assignee shall be remitted directly to Landlord. Article 20. Abandonment and Vacating. (a) Tenant agrees not to abandon or vacate the Premises during the term. "Abandon" means the vacating of all or a substantial portion of the premises by Tenant whether or not Tenant is in default of the rent payment due under this Lease. (b) Tenant agrees to remove from the Premises all equipment, merchandise, and personal property owned, used, or possessed by Tenant or any other person or entity (hereinafter collectively called the `Personal Property"), and make repairs to the premises, as necessary, resulting from the removal of such `Personal Property", upon vacating the Premises. If any Personal Property remains on the Premises after Tenant vacates the Premises, Landlord may provide Tenant with written notice stating that such Personal Property remains on the Premises (but Landlord shall be under no obligation to itemize such Personal Property). If Tenant has not removed such Personal Property within three (3) days after such notice, such Personal Property shall be conclusively deemed abandoned, notwithstanding that title to or a Security Interest in such Personal Property, may be held by an individual or entity other than Tenant, and Landlord may dispose of such Personal Property in any manner it deems proper, in its sole discretion. Tenant hereby waives and releases any claim against Landlord arising out of the removal and disposition of such Personal Property and waives and releases any claim to the Personal Property. Tenant shall indemnify, defend, and hold Landlord harmless for any costs, expenses, or fees incurred by Landlord in connection with the removal and disposition of such Personal Property. Article 21. Tenant's Defaults. A. Events of Default. If (1) Tenant vacates or abandons the Premises prior to the Expiration Date, or (2) Tenant fails to fulfill any of the terms or conditions of this Lease or any other Lease heretofore made by Tenant for space in the Building or (3) the appointment of a trustee or a receiver to take possession of all or substantially all of Tenant's assets occurs, or 10 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- if the attachment, execution or other judicial seizure of all or substantially all of Tenant's assets located at the Premises, or of Tenant's interest in this Lease, occurs, or (4) Tenant or any of its successors or assigns should file any voluntary petition in bankruptcy, reorganization or arrangement, or an assignment for the benefit of creditors or for similar relief under any present or future statute, law or regulation relating to relief of debtors, or (5) Tenant or any of its successors or assigns should be adjudicated bankrupt or have an involuntary petition in bankruptcy filed against it, or (6) Tenant shall permit, allow or suffer to exist any lien, judgment, writ, assessment, charge, attachment, or execution upon Landlord's or Tenant's interest in this Lease or to the Premises, and/or the fixtures, improvements and furnishings located thereon; then, Tenant shall be in default hereunder. B. Landlord's Remedies for Tenant's Default. 1 . Landlord's Options. If Tenant is in default of this Lease, Landlord may, at its option, in addition to such other remedies as may be available under Florida Law: (a) terminate this Lease and Tenant's right of possession; or (b) terminate Tenant's right to possession but not the Lease and/or proceed in accordance with any and all provisions of paragraph 2 below. 2. Landlord's Remedies. (a) Landlord may without further notice reenter the Premises either by force or otherwise and dispossess Tenant by summary proceeding or otherwise, as well as the legal representative(s) of Tenant and/or other occupant(s) of the Premises, and remove their effects and hold the Premises as if this Lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end; and/or at Landlord's option, (b) All Rent and all Additional Rent for the balance of the Term will, at the election of Landlord, be accelerated and the present worth of same for the balance of the Lease Term, net of amounts actually collected by Landlord, shall become immediately due thereupon and be paid, together with all expenses of every nature which Landlord may incur such as (by way of illustration and not limitation) those for attorneys' fees, brokerage, advertising, and refurbishing the Premises in good order or preparing them for re-rental; and/or at Landlord's option, (c) Landlord may re-let the Premises or any part thereof, either in the name of Landlord or otherwise, for a term or terms which may at Landlord's option be less than or exceed the period which would otherwise have constituted the balance of the Lease Term, and may grant concessions or free rent or charge a higher rental than that reserved in this Lease; and/or at Landlord's option, (d) Tenant or its legal representative(s) will also pay to Landlord as liquidated damages any deficiency between the Rent and all Additional Rent hereby reserved and/or agreed to be paid and the net amount, if any, of the rents collected on account of the Lease or Leases of the Premises for each month of the period which would otherwise have constituted the balance of the Lease Term. 11 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- 3. Landlord's Remedies in Bankruptcy. (a) Anything contained herein to the contrary notwithstanding, if termination of this Lease shall be stayed by order of any court having jurisdiction over any proceeding described in subparagraph 1, of this Paragraph, or by federal or state statute, then, following the expiration of any such stay, or if Tenant or Tenant as debtor-in possession or the trustee appointed in any such proceeding (being collectively referred to as "Tenant" only for the purposes of this Paragraph) shall fail to assume Tenant's obligation under this Lease within the period prescribed therefor by law or within fifteen (15) days after entry of the order for relief or as may be allowed by the Court, or if Tenant shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on fifteen (15) days notice to Tenant and upon the expiration of said fifteen (1 5) day period this Lease shall cease and expire as aforesaid and Tenant shall immediately quit and surrender the Premises as aforesaid. Upon the termination of this Lease as provided above, Landlord, without notice, may re-enter and repossess the Premises using such force for that purpose as may be necessary without being liable to indictment, prosecution, or damages therefor and may dispossess Tenant by summary proceedings or otherwise. (b) For the purposes of the preceding paragraph (1), adequate protection of Landlord's right, title and interest in and to the Premises, and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, shall include, without limitation, the following requirements: (i) that Tenant comply with all of its obligations under this Lease; (ii) that Tenant continue to use the Premises in the manner originally required by this Lease; (iii) that Tenant pay to Landlord within fifteen (15) days after entry of such order or the effective date of such stay, as partial adequate protection against future diminution in value of the Premises and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, an additional security deposit in an amount acceptable to Landlord; (iv) that Tenant has and will continue to have unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that sufficient funds will be available to fulfill the obligations of Tenant under this Lease; (v) that if Tenant assumes this Lease and proposes to assign the same (pursuant to Title 11 U.S.C. S 365, or as the same may be amended) to any person who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to such court having competent jurisdiction over Tenant's estate, then notice of such proposed assignment, setting forth (x) the name and address of such person, (y) all of the terms and conditions of such offer, and (z) the adequate assurance to be provided Landlord to assure such person's future performance under this Lease, including, without limitation, the assurance referred to in Title 11 U.S.C. S 365 (b) (3), as it may be amended, shall be given 12 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- to Landlord by Tenant no later than fifteen (15) days after receipt by Tenant of such offer, but in any event no later than thirty (30) days prior to the date that Tenant shall make application to such court for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept, or to cause Landlord's designee to accept, an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease; and (vi) that if Tenant assumes this Lease and proposes to assign the same, and Landlord does not exercise its option pursuant to Paragraph (vii) of this Paragraph, Tenant hereby agrees that: (A) such assignee shall have a net worth not less than the net worth of Tenant as of the Commencement Date, or such Tenant's obligations under this Lease shall be unconditionally guaranteed by a person having a net worth equal to Tenant's net worth as of the Commencement Date; (B) such assignee shall not use the Premises except subject to all the restrictions contained in this Lease; (C) such assignee shall assume in writing all of the terms, covenants and conditions of this Lease including, without limitation, all of such terms, covenants and conditions respecting the Permitted Use and payment of Rent; (D) such assignee shall pay to Landlord an amount equal to the unamortized portion of any construction allowance made to Tenant; and Article 22. Grace Period and Notice of Default. It is understood and agreed that neither party hereto will exercise any right or remedy provided for in this Lease or allowed by law because of default of the other except for the imposition of late charges and interest, unless such party shall have first given written notice thereof to the other, and the other within a period often (10) days thereafter, shall have failed to pay the sum or sums due if the default consists of the failure to pay money, or if the default consists of something other than the failure to pay money, shall have failed within ten (10) days thereafter to begin the correction of the default or fails to actively and diligently in good faith proceed with and continue the correction of the default until it shall be fully corrected. However, no such notice from Landlord shall be required if Tenant shall have temporarily or permanently ceased operating and using the Premises to the extent and in the manner herein required, or if Tenant shall have filed a petition in bankruptcy or for reorganization or a bill in equity or otherwise initiated proceedings for the appointment of a receiver of Tenant's assets, or if a receiver or trustee is appointed for Tenant and such appointment and such receivership or trusteeship is not terminated within sixty (60) days, or Tenant makes an assignment for the benefit of creditors, or if Tenant is levied upon and is about to be sold upon the Premises by any sheriff, marshall, or constable. Notwithstanding the foregoing, Landlord shall not be required to give any notice called for by this section more than two (2) times in any twelve-(12) month period. Tenant shall also send a copy of any notice of default directed to Landlord to any mortgagee or 13 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- mortgagees designated by Landlord, and Tenant hereby agrees that any mortgagee so designated shall be entitled to the same opportunity to cure any default, as is Landlord. Article 23. Notice. All notices required or permitted hereunder from either of the parties to the other shall be in writing and sent by Certified Mail, return receipt requested. Notices to Tenant shall be addressed to the Premises. Notices to Landlord shall be addressed to 8186 Baymeadows Way West, Jacksonville, FL 32256 with a carbon copy to any mortgagee designated by Landlord. Either party may at any time set forth in writing to the other a different address to which notices to it shall be sent. Article 24. Short Form of Lease. It is understood and agreed that the parties hereto will execute and acknowledge a Short Form of Lease for recording purposes, if such is requested by Landlord. Article 25. Parking. Tenant shall not utilize or require more than 8 parking spaces. Initially, 3 parking spaces shall be unassigned and utilized in the front of the premises and 5 parking spaces shall be unassigned and utilized in the rear of the premises. Should it become necessary, and at the sole option of the Landlord, Landlord shall assign and/or reassign parking spaces. Article 26. Rules and Regulations. Tenant and Tenant's agents, employees, and invitees shall fully comply with all requirements of the Rules and Regulations (as changed from time to time as hereinafter provided) which are attached hereto as Exhibit "D" and made a part hereof. Landlord shall at all times have the right to change such Rules and Regulations or to promulgate other Rules and Regulations in such reasonable manner as Landlord, in its sole discretion, may deem advisable; provided, however, that such changes shall not become effective and a part of this Lease until a copy thereof shall have been delivered to Tenant. Tenant shall further be responsible for compliance with such Rules and Regulations by the employees, servants, agents, visitors, and invitees of Tenants. Article 27. Definition of "Landlord". The word "Landlord" is used herein to include the Landlord named above and any subsequent owner of the Premises, as well as their respective heir, personal representative, successors and assigns, each of whom shall have the same rights, remedies, powers, authorities, and privileges as he would have had he originally signed this Lease as Landlord. Any owner of the Premises, whether or not named herein, shall have no liability hereunder after he ceases to hold title to the said real estate, except for the obligations that may have theretofore accrued. Neither Landlord nor any principal of Landlord, whether disclosed or undisclosed shall have any personal liability with respect to this Lease or the Premises, and if Landlord is in breach or default with respect to its obligations or otherwise under this Lease, Tenant shall look solely to the Premises and rents, profits, and issues to be received therefrom. Article 28. Definition of "Tenant". The word "Tenant" is used herein to include the Tenant named above as well as its permitted successors and assigns, each of which shall be under the same obligations, liabilities, and disabilities and have only such rights, privileges, and 14 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- powers shall inure to the benefit of any assignee of Tenant, immediate or remote, unless the assignment to such assignee is permitted or has been approved in writing by Landlord. Article 29. Captions. The captions in this Lease are for convenience only and are not a part of this Lease and do not define, limit, describe, or amplify the terms and provisions of this Lease or the scope or intent thereof. Article 30. Entire Agreement. This Lease and the exhibits attached set forth all the promises, agreements, conditions, and understandings between Landlord and Tenant with respect to the premises. There are no promises, agreements, conditions, or understandings between Landlord and Tenant other than herein set forth. This Lease shall not be modified except by an instrument in writing executed by both parties. Article 31. Jury Trial; Attorney's Fees. To the extent permitted by law, Tenant hereby waives: (a) jury trial in any action or proceeding regarding a monetary default by Tenant and/or Landlord's right to possession of the Premises, and (b) in any action or proceeding by Landlord for eviction where Landlord has also filed a separate action for damages, Tenant waives the right to interpose any counterclaim in such eviction action. Moreover, Tenant agrees that it shall not interpose or maintain any counterclaim in such damages action unless it pays and continues to pay all Rent, as and when due, into the registry of the court in which the damages action is filed. In the event of any dispute hereunder, or any default in the performance of any term or condition of this Lease, the prevailing party in litigation shall be entitled to recover all costs and expenses associated therewith, including reasonable attorney's fees. Article 32. N/A Article 33. Early Termination. No termination of this Lease or the prosecution of a civil action by Landlord to obtain a writ of possession to dispossess Tenant prior to the normal ending thereof by the lapse of time or otherwise shall affect Landlord's right to collect rent and other charges due, by acceleration, or otherwise as provided hereunder. Article 34. Gender. The parties "Landlord," "Tenant," and "Agent" and pronouns relating thereto, as used herein, shall include male, female, singular, and plural, corporation, partnership, or individual, as may fit the particular parties. Article 35. Remedies Cumulative. The rights given herein are in addition to any rights that may be given by any statue or otherwise. Article 36. Landlord's Liability. Landlord shall have no liability or obligation to Tenant with respect to this Lease except insofar as Landlord may have any right, title, or interest in and to the Building in which the Premises is located, it being understood and agreed that Landlord shall have no personal liability hereunder. 15 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Article 37. Joint and Several Liability. If there is more than one Tenant, the obligations imposed shall be joint and several. Article 38. Commission. Landlord and Tenant covenant, represent, and warrant that they have had no dealing or negotiations with any broker or agent other than Commercial Jacksonville in connection with the consummation of this Lease, and they covenant and agree to pay, hold harmless and indemnify each other from and against any and all costs, expenses (including reasonable attorney's fees before trial, at trial, and on appeal) or liability for any compensation, commissions, or charges claimed by any broker or agent, other than the Broker set forth in this paragraph with respect to this Lease or the negotiation thereof. During the period of the initial term, not to exceed three years, a 4% commission based on the net base rents, including expansion if applicable, will be payable every ninety days, in advance, as long as Tenant is not in default and has not vacated the premises. The first payment will be paid upon our receipt of the first month's rent. No commission will be paid on renewals. Article 39. Other Taxes; Sales Taxes. (a) Tenant shall be liable for and shall pay before delinquency any and all taxes, assessments, fees, or public charges assessed against, imposed, or levied upon the trade fixtures, furnishings, equipment, and all other personal property contained in the Premises. If any such taxes or charges are levied against Landlord or Landlord's property, and if Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by the inclusion of personal property contained in the Premises and Landlord elects to pay the taxes or charges based on such increase, Tenant shall pay Landlord upon demand that part of such taxes or charges for which Tenant is responsible hereunder. (b) Tenant shall pay as and when due all sales taxes or other impositions levied or imposed upon the rentals and other sum due hereunder. Article 40. Heirs and Assigns. The provisions of this Lease shall bind and inure to the benefit of Landlord, Tenant, Agent, and their respective successors, heirs, legal representatives, and where permitted, assigns. It is understood, however, that the term "Landlord," as used in this Lease, means only the owner from time to time of the Building so that, in the event of any sale or sales of said property or of any lease thereof, the Landlord named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing thereafter; and it shall be deemed without further agreement that the purchaser or the lessee, as the case may be, has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder during the period such party has ownership or leasehold rights of the Building. Should the land and the entire Building be severed as to ownership by sale and/or lease, then the owner of the entire Building or tenant of the entire Building who has the right to lease space in the Building to others shall be deemed the "Landlord." Tenant shall be bound to any succeeding party Landlord for all the terms, covenants, and conditions hereof, and shall execute any attornment agreement not in conflict herewith at the request of any such succeeding party Landlord. 16 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- Article 41. No Implied Waiver. The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement herein, or to exercise any option, right, power, or remedy contained in this Lease, shall not be construed as a waiver of or a relinquishment thereof for the future. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Base Rental, additional rent, or any other sum herein provided to be paid by Tenant shall be deemed to be other than on account of the earliest such payment due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Base Rental, additional rent, or any other sum herein provided to be paid by Tenant be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Base Rental, additional rent, or any other sum herein provided to be paid by Tenant, or pursue any other remedy provided for in this Lease. Article 42. Tenant Corporation, Partnership, or Individual. If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant, warrant, and represent that Tenant is a duly authorized and existing corporation, that Tenant has and is qualified to do business in Florida, that the corporation has full right and authority to enter into this Lease, and that each and all persons signing on behalf of the corporation were authorized to do so. Upon Landlord's request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties. Article 43. Estoppel Certificates. Tenant shall, at any time and from time to time, within ten (10) days after receipt of a written request from Landlord, execute, acknowledge, and deliver to Landlord or such other persons or entities and Landlord may designate, a statement in a form reasonably satisfactory to Landlord, executed by Tenant, certifying: (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified and setting forth such modifications); (b) the date or dates to which the Base Rental has been paid; (c) the Commencement Date; (d) the anticipated termination date of this Lease; (e) that no default exists under this Lease (or the existence of any known defaults); (f) the existence of any set-offs against or defenses to the enforcement of the terms and conditions of this Lease, and the particulars of any such set-offs or defenses; and (g) any other information which Landlord may reasonably request. It is intended that any such statement by Tenant may be relied upon by Landlord and by any prospective purchaser or mortgagee of the Premises or the Building or both, or any assignee, sublessee, governmental authority, or public agency. Article 44. Holding Over. Should Tenant or any of its successors in interest continue to hold the Premises after termination of this Lease, whether such termination occurs by lapse of time or otherwise, such holding over shall constitute and be construed as a tenancy from month-to-month only, at a monthly rental equal to twice the monthly rent (including Base Rental, adjusted rental, Operating Expenses, and utility charges) provided herein at the time of such termination hereof, Tenant shall be regarded as a tenant from month-to-month; subject, however, to all the terms, provisions, covenants, and agreements on the part of the Tenant hereunder. No payments of money by Tenant to Landlord after the termination of this Lease 17 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- shall reinstate, continue, or extend the Term and no extension of this Lease after the termination hereof shall be valid unless and until the same shall be reduced to writing and signed by both Landlord and Tenant. Tenant shall be liable to Landlord for damage which Landlord shall suffer by reason of Tenant's holding over and Tenant shall indemnify Landlord against all claims made by any other tenant or perspective tenant against Landlord resulting from delay by Landlord in deliver possession of the Premises to such other Tenant or prospective Tenant. Article 45. Hazardous Substances. Tenant hereby expressly represents and warrants that it will not use the Premises to generate, manufacture, refine, transport, treat, store, handle, discharge, or dispose of hazardous or toxic wastes and substances, and that Tenant has not and will not permit any of such substances to be brought onto the Premises or into the Project or onto the real property upon which the building is located. Landlord, for itself, and on behalf of its agents, employees, consultants, and contractors reserves the right to enter upon the Premises to perform such tests on the Premises as are reasonably necessary to ensure that Tenant has complied with this representation and warranty. The term "hazardous or toxic wastes and substances" shall be deemed to include all hazardous, toxic, radioactive substances, wastes or materials, all pollutants or contaminants, asbestos, pesticides, gasoline, diesel fuel, and other petroleum products, polychlorinated biphenyls (PCB's) and other similar substances and all raw materials containing such substances that are included under or regulated under the Comprehensive Environmental Response, Compensation and Liability Act (42 USC 6901 et seq., "CERCLA") and any other local, state, or federal law, either by definition, determination or identification in such laws or by judicial or administrative interpretation of such laws, together with any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or that may or could pose a hazard to the health and safety of the occupants of the Premises or the building or the owners and occupants of property adjacent to the Premises or the building. In the event that Tenant receives any notice of violation, summons, citation, directive, letter, or other communication from any federal, state or local agency or local governmental body concerning the presence, release, or threatened release of hazardous or toxic wastes or substances, Tenant shall immediately notify Landlord of the fact and content thereof In the event it is determined that any action must be taken with regard to the presence of any such hazardous or toxic wastes and substances on the Premises, Tenant covenants and agrees (a) to take all such actions necessary to bring promptly the Premises into compliance with all applicable laws or governmental regulations and (b) to secure evidence acceptable to Landlord that all governmental agencies and entities having jurisdiction over the Premises, the real property of which the Premises are a part, and the hazardous or toxic wastes and substances have certified that the Premises and the real property are in compliance with all applicable laws and governmental regulations, all at Tenant's sole cost and expense. Tenant acknowledges that Landlord is relying on the warranties, representations, and covenants 18 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- contained in this paragraph in executing this lease agreement, and Tenant agrees to defend, indemnify, and hold Landlord and its successors and assigns harmless of and from any and all actions, suits, claims, remedial orders, judgements, decrees, and damages of any nature (including but not limited to, attorneys' fees and costs, consultants' fees, cleanup, removal, and restoration costs, and environmental damages provided for under all federal, state, and local environmental laws) arising from or in relations to the presence, generation, manufacture, refining, transportation, treatment, storage, handling, disposal, discharge, release, or spill of any hazardous or toxic wastes, or substances in or on the Premises during the term of this Lease unless caused by Landlord. The foregoing indemnification and hold harmless obligations shall be in addition to any and all remedies otherwise available to Landlord hereunder. The provisions of this paragraph shall be deemed to survive, and continue in full force and effect, after the termination, sale assignment, or sublease of this Lease. In the event of a violation of the representations, covenants, and warranties contained herein, Landlord may, at its sole discretion; (i) declare a default hereunder; (ii) require Tenant to take actions and expend whatever funds are necessary to correct such violation and to correct all adverse consequences of such violation so that full compliance with all applicable federal, state, and local laws, rules and regulations are insured; or (iii) Landlord may take such action and expend such sums on Tenant's behalf to ensure that all such violations are all adverse consequences of such violations are corrected and that the Premises (and the real estate of which the Premises are a part) are brought into full compliance with all applicable federal, state, and local laws, rules, and regulations. In the event Landlord elects to expend moneys to correct any such violations, such moneys shall be deemed Additional Rent, payable within five (5) days of Tenant's receipt of an invoice thereof Any such action taken by Landlord shall not constitute a waiver of any claim that Landlord has or may have against Tenant or any other person to recover any loss incurred by Landlord as a result of such violation. 19 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement under seal the day and year first above written. Signed, sealed and delivered in the presence of: G.F. Florida Operating Alpha, Inc. A Florida Corporation /s/ Janet K. Salem - ------------------------ Janis K. Salem By: /s/ Christopher J. Gazes ----------------------------- Christopher J. Gazes Its: President "CORPORATE SEAL" EMTEC, Inc. A Delaware Corporation /s/ - ------------------------- Notary Public, Gwinnett County, GA By: /s/ Ronald A. Seitz My Commission Expires March 1, 2004 ---------------------------- Ronald A. Seitz Its: EUP "Corporate Seal" Emtec, Inc. WHEN EXECUTED, PLEASE RETURN ALL ORIGINAL COPIES OF THE LEASE TO LANDLORD FOR EXECUTION. LANDLORD WILL THEN RETURN ONE FULLY EXECUTED COPY TO TENANT. 20 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- EXHIBIT B SPECIFICATIONS FOR EMTEC, 1NC. IMPROVEMENTS FOR 7843 BAYBERRY ROAD JACKSONVILLE, FLORIDA 32256 21 AGREEMENT OF LEASE Exhibit 10.20 ----------------------------------------------------- 1. General. The building shall be generally of structural steel and concrete "tilt-up" construction of two-story height. Design and construction shall comply with all governing codes and ordinances. Gross floor area of the premises shall be as follows: Lavatory - 1,080 sq. ft. Warehouse- 2,260 sq. ft. ----- Total 3,340 sq. ft. 2. Structural. Structural Steel forming shall be a A36 structural steel, fabricated and erected in compliance with AISC specifications. Steel joist shall meet AISC and SJI specifications. Roof deck shall be 1.5 inch deep rigid steel. Clear height shall be 22'. 3 . Exterior Walls. Exterior walls shall be of reinforced concrete "tilt-up" construction, structural beams and columns as required. 4. Roof. Roof shall be of a bondable type with rigid insulation as manufactured by Johns-Manville or equal. Roof shall be sloped for drainage including gutters and downspouts. 5. Floor Slabs. Floor slabs shall be 5 inch thick concrete. 6. Interior Finishes. All partitions shall be constructed using wood or metal studs with painted gypsum board and insulated. A finished ceiling will be provided in offices and rest room. Ceiling to be 2' X 2' acoustical ceiling board laid in exposed tee suspension system and insulated. All doors to be solid-core wood, stained or painted. Floor coverings and cove base in offices and lavatory shall be a building standard with color selected by Tenant. 7. Mechanical. A. Offices and Lavatories. These areas will be heated and air-conditioned. The system was designed by an Engineer to provide an electrical heating unit and air cooled air conditioning system through a supply duct, return air register system to give automatic cooling throughout the summer season. Heating system shall be designed to maintain an indoor temperature of 72 degrees F. throughout the area with an external temperature of 0 degrees F. Air conditioning shall be designed to maintain an indoor temperature of 78 degrees F. with a relative humidity of 50% when the outside temperature is 95 degrees F. 22 AGREEMENT OF LEASE Exhibit 10.20 B.Warehouse 1 - Warehouse exhaust fan. 8. Electrical. A. Lighting in office will be recessed 2' X 4' fixtures providing approximately 80 foot candles of lighting in the office area. Ample duplex receptacles and telephone outlets are existing. B. Warehouse. 208/120 volt three-phase electrical system. Warehouse area to be lighted with strip fluorescent fixtures. One 96" two-tube fixture per 550 sq. ft. of floor area. C. Exterior. Mercury vapor floodlights or high pressure sodium fixtures will be mounted on the building. 9. Plumbing. A complete plumbing system will be provided to accommodate the following fixtures: 1-Shower 1-Commode 1-Restroom Sink 1-Water Heater 1-Warehouse Sink 1-Kitchen Sink 10. Loading. One dock high loading with a 10' X 12' overhead door. 11. Paving and Landscaping. All paving shall consist of asphaltic concrete pavement with a minimum stone base coarse of 6" plus 1 -1/2" of asphalt topping. The building is fully landscaped. 12. Party Walls. All party walls separating tenants shall be constructed of wood or metal studs with sheet rock finished and insulated. 13. Not included. Any item not specifically listed herein, including without limitation, burglar alarms and/or ADT systems, employee time clocks, curtains, drapes, intercommunications systems, and dumpsters. NOTE: 1. Tenant shall be responsible for the installation of any item or improvement not included in these specifications, as may required for Tenant's use and possession of the Premises, in accordance with the plans and specifications for the construction of the Premises and the terms of the Lease to which these specifications are attached. 23 EXHIBIT "C" Article 6.A. The Base Rent payable in advance on the first day of each month during the term hereof is:
Rental Annual Monthly Period Base Rent Base Rent - ------ --------- --------- 3/1/02-2/28/03 $21,042.00 $1,753.50 3/1/03-2/29/04 $21,876.96 $1,823.08 3/1/04-2/28/05 $22,745.40 $1,895.45
Article 6.B. Additional Rent. 1. Building Operating Expenses. The Building's square footage is 70,000 square feet, of which Tenant occupies 3,340 square feet. Therefore, Tenant's pro rata share for purposes of the foregoing Lease is 4.77 % and Tenant shall pay, as Additional Rent, it's pro rata share of the estimated Building Operating Expenses as defined in Article 6.B. 1.
Cost Per Square Expense Foot - ------- Utilities Water, Sewer, Irrigation, Fire Stand By .13 Fee, & Common Area Electric Real Estate Taxes .53 Landscaping .10 Deerwood Center Assessment For Common Area Maintenance & Guard Service .05 Building Maintenance .23 Insurance .07 Management Fee (4% of Gross Rents) .31 ----- Total Estimated Building Expenses Per Square Foot $1.42
24 EXHIBIT "D RULES AND REGULATIONS 1. Tenant shall have the exclusive right to park in areas designated by Landlord in Exhibit A. Only vehicles that reasonably fit within the lined spaces may use the parking facilities, which may not be used for the continuous parking of any vehicle or trailer, regardless of size. No parking is allowed in roadways, driveways, fire lanes, service areas, walkways, building entrances, or any other area not designated for parking. Any trucks serving the Premises shall be parked directly on the east side of the Premises, and shall not interfere with other occupants' access to other premises, parking, or other common areas. Landlord shall not be responsible for any illegally parked vehicle that Landlord shall have towed. 2. Landlord will provide at Tenant's expense identification signage for the Premises, such sign-age to be coordinated throughout the Project for uniformity and attractiveness. No sign, tag, label, picture, advertisement, or notice shall be displayed, distributed, inscribed, painted, or affixed on any part of the Premises visible from outside of the Building or the Premises without the prior-written consent of Landlord. 3. No additional locks shall be placed on any door in Building without the prior written consent of Landlord. Landlord will furnish two keys to each lock on doors in the Leased Premises and Landlord, upon request of Tenant, shall provide additional duplicate keys at Tenant's expense. Landlord will not permit entrance to Tenant's Premises by use of a pass key to any person at any time without permission of Tenant, except employees, contractors, or service personnel directly supervised by Landlord. 4. Tenant will refer all contractors, contractor representatives, and installation technicians rendering any service on or to the Premises to Landlord for approval and supervision before performing any contractual service. This provision shall apply to all work in the Building, including installation of electrical devices and attachments, and installations of any nature affecting floors, walls, woodwork, trim, doors, windows, ceilings, equipment, or other physical portion of the Premises or Building. All service work performed will be subject to applicable permitting requirements. Landlord shall not be responsible for any repairs or installations done by Tenant or Tenant's agents, nor be held responsible for any code violations resulting from it. 5. Tenant shall not place, install, or operate on the Premises or in any part of the Building any machine, equipment, or stove, or conduct mechanical operations, or place or use in or about the Premises any explosive, flammable, caustic, noxious, or hazardous material without the prior-written consent of Landlord. 6. No Tenant shall do or permit to be done within or about the Premises or Building anything which would annoy, disturb, or interfere with the rights of other occupants of the Building. 25 7. There shall be no outside storage of goods, supplies, equipment, pallets, disabled vehicles, or any other material. All storage must be within the Premises, and, along with any other non-office use area, be kept at all times from view from outside of the Premises through doors, service doors, windows, or otherwise. 8. Exterior windows shall at all times be kept clean and whole. All plate and other glass now in Leased premises or Building which is broken through cause attributed to Tenant, its officers, agents, servants, employees, patrons, licensees, customers, visitors, or invitees shall be replaced by and the expense of Tenant under the direction of Landlord. 9. No Tenant shall at any time occupy any part of the Premises or Building as sleeping or lodging quarters or for the cooking or preparation of food without the prior written consent of the Landlord. 10. No boats, vehicles of any description (except for automobiles or small trucks through rear service doors for the purpose of and during loading or unloading), animals, fish, fowl, reptile, or insect shall be brought into the Premises or Building without prior-written consent of the Landlord. 11. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from a violation of this provision shall be borne by Tenant, who shall, or whose officers, employees, agent servants, patrons, customers, licensees, visitors or invitees shall, have caused it. 12. Each Tenant agrees to keep the areas immediately in front, behind, and beside the Premises clean and free of all trash and debris. In the event Tenant must dispose of crates, boxes, etc. which will not fit into wastepaper baskets, it will be the responsibility of Tenant to dispose of it properly. 13. Tenant shall not canvass or conduct surveys with or among occupants of the Project without the prior-written consent of Landlord, and shall cooperate to prevent the same. 14. Tenant shall not paint or otherwise change the appearance of Premises' door, doorframes, windows, window frames, or hardware. 15. Tenant shall not conduct its business and/or control its officers, agents, employees, servants, patrons, customers, licensees, and visitors in such a manner as to create any nuisance or interference with, annoy, disturb any other tenant or Landlord in its operation of the Building or commit waste or suffer or permit waste to be committed in Leased Premises. 26 16. Landlord shall not be responsible to any occupant for the non-observance or violation of any of these "Rules and Regulations" by any other occupant. Landlord shall have the right from time to time to modify, add to, or delete from the "Rules and Regulations" at Landlord's sole discretion. Any additional "Rules and Regulations" shall be binding upon the parties hereto as if they had been present herein at the time of execution of this Lease. 17. The movement of furniture, equipment, machines, merchandise or materials within, into or out of the leased Premises, shall be restricted to time, method, and routing of movement as determined by Landlord upon request from Tenant and Tenant shall assume all liability and risk to Property, leased Premises, and Building in such movement. Tenant shall not move furniture, machines, equipment, merchandise or materials within, into or out of the Building, Leased Premises or warehouse facilities without having first obtained a written permit from Landlord twenty-four (24) hours in advance. Safes, large files, electronic data processing equipment, any other heavy equipment or machines shall be moved into Leased Premises, or Building, only with Landlord's written consent and placed where directed by Landlord. 18. Landlord will not be responsible for lost or stolen personal property, equipment, money or any article taken from Leased Premises, regardless of how or when loss occurs. 19. Tenant, its officers, agents, servants or employees shall do no painting or decorating in Leased Premises; or mark, paint or cut into, drive nails or screw into nor in any way deface any part of Leased Premises or Building without the prior written consent of Landlord. If Tenant desires a signal, communication, alarm or other utility or service connection installed or changed, such work shall be done at expense of Tenant, with the approval and under the direction of Landlord. 20. Tenant, its officers, agents, servants and employees shall not permit the operations of any musical or sound-producing instruments or device which may be heard outside Leased Premises, or which may emanate electrical waves which will impair radio or television broadcasting or reception from or in Building. 21. Tenant, its officers, agents, servants and employees shall, before leaving Leased Premises unattended, close and lock all doors and shut off all utilities; damage resulting from failure to do so shall be paid by Tenant. Each Tenant, before the closing of the day and leaving the said Premises shall see that all doors are locked. 22. Tenant shall give Landlord prompt notice of all accidents to or defects in air conditioning equipment, plumbing, electric facilities or any part or appurtenance of Leased Premises. 23. Neither Tenant nor any officer, agent employee, servant, patron, customer, visitor, licensee or invitee or any Tenant shall go upon the roof of the Building, without the written consent of the Landlord. 27 24. If the Leased Premises demised to any Tenant become infested with vermin, such Tenant, at its sole cost and expense, shall cause its Premises to be exterminated from time to time to satisfaction of Landlord and shall employ such exterminators therefor as shall be approved by Landlord. 25. Tenant shall not install any antenna or aerial wires, radio or television equipment or any other type of equipment inside or outside of the Building without Landlord's prior approval in writing and upon such terms and conditions as may be specified by Landlord in each and every instance. 28 TENANT'S CERTIFICATE OR CORPORATION RESOLUTION AND AUTHORIZATION OF AGENCY It is hereby certified that a meeting of a quorum of the directors of EMTEC, Inc. a Delaware corporation, which is the Tenant under the Lease to which this Certificate is attached, was held on 2/22, 2002 and that it was resolved to enter into said Lease and further that the officers of the corporation, and Ronald A. Seitz as agent of the corporation, have been authorized, empowered, and directed in the corporate name and with the corporate seal to execute and deliver any or all documents and to pay all rent, fees, and charges necessary to carry out the entry into and compliance with said Lease. EMTEC, Inc. A Delaware Corporation By: /s/ Ronald A. Seitz --------------------- Ronald A. Seitz Secretary 29 [FLOOR PLAN] 5 Unassigned Parking Rear EXHIBIT A -----END PRIVACY-ENHANCED MESSAGE-----