UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-4465
eLEC COMMUNICATIONS CORP.
(Exact name of Registrant as specified in its charter)
New York 13-2511270
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
75 South Broadway, Suite 302, White Plains, New York 10601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 682-0214.
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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-B 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-KSB or any amendment to
this Form 10-KSB. ____
State Issuer's revenue for its most recent fiscal year: $5,568,004
As of February 13, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $2,003,386.
As of February 13, 2004, there were 16,254,282 shares outstanding of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Item 14. Principal Accountant Fees and Services
The statements contained in this Report that are not historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company, which can be identified by the use of
forward-looking terminology, such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader of the forward-looking
statements, that such statements, which are contained in this Report, reflect
our current beliefs with respect to future events and involve known and unknown
risks, uncertainties and other factors, including, but not limited to, economic,
competitive, regulatory, technological, key employee, and general business
factors affecting our operations, markets, growth, services, products, licenses
and other factors discussed in our other filings with the Securities and
Exchange Commission, and that these statements are only estimates or
predictions. No assurances can be given regarding the achievement of future
results, as actual results may differ materially as a result of risks facing us,
and actual events may differ from the assumptions underlying the statements that
have been made regarding anticipated events. Factors that may cause our actual
results, performance or achievements, or industry results, to differ materially
from those contemplated by such forward-looking statements include, without
limitation: (1) the availability of additional funds to successfully pursue our
business plan; (2) the impact of changes the Federal Communications Commission
or State Public Service Commissions may make to existing telecommunication laws
and regulations; (3) the cooperation of incumbent carriers in implementing the
unbundled network elements platform required by the Federal Communications
Commission; (4) our ability to maintain, attract and integrate internal
management, technical information and management information systems; (5) our
ability to market our services to current and new customers and generate
customer demand for our product and services in the geographical areas in which
we operate; (6) our success in gaining regulatory approval to access new
markets; (7) our ability to negotiate and maintain suitable interconnection
agreements with the incumbent carriers; (8) the availability and maintenance of
suitable vendor relationships, in a timely manner, at reasonable cost; (9) the
intensity of competition; and (10) general economic conditions. All written and
oral forward looking statements made in connection with this Report that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements. Given the uncertainties that
surround such statements, prospective investors are cautioned not to place undue
reliance on such forward-looking statements.
PART I
In this Annual Report on Form 10-KSB, we will refer to eLEC Communications
Corp., a New York corporation, as "eLEC," the "Company," "we," "us," and "our."
Item 1. - Description of Business
Overview
eLEC Communications Corp. is a full-service telecommunications company
that focuses on developing integrated telephone service in the emerging
competitive local exchange carrier ("CLEC") industry. We offer small businesses
and residential consumers an integrated set of telecommunications products and
services, including local exchange, local access, domestic and international
long distance telephone, and a full suite of local features and calling plans.
In the states in which we operate, we compete with the incumbent local carrier
and a variety of other competitive carriers, including companies that were
originally long distance service providers or data service providers. We find
that approximately 90% of the local telephone lines in the states in which we
are operating are served by
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Verizon Communications Inc ("Verizon"), AT&T Corp. ("AT&T"), or WorldCom Inc.,
which operates under the brand name of MCI ("MCI"). Our strategy is to offer the
same telephone products and services offered by Verizon, AT&T and MCI at
discounts of 10% to 25% off their rates. We also strive to provide friendly and
helpful customer service that exceeds the service provided by these large
competitors.
We believe that the Telecommunications Act of 1996 (the
"Telecommunications Act"), which opened the local exchange market to
competition, has created an attractive opportunity for CLECs. Like most CLECs,
our entry in this industry was dependent upon the provisions of the
Telecommunications Act that allow CLECs to lease various elements of the
networks of the incumbent local exchange carrier ("ILEC") that are necessary to
provide local telephone service in a cost-effective manner. This aspect of the
Telecommunications Act is referred to as "unbundling" the ILEC networks, and
allows us to lease unbundled network elements on an as-needed basis and provide
such elements to our customers at a lower cost than that which the ILEC is
charging.
Although we believe the opportunity for CLECs is attractive, it is also
challenging. We must contend with federal and state government regulators,
rapidly changing technologies, incumbent carriers that are better staffed and
capitalized than us and real-time business partners that also carry our
customer's telephone call, whether it is local, long distance or international.
At the same time that we are managing these challenges, we also must provide
connectivity, superior customer service and a culture of continuous improvement.
Because of the complexity of the business, we have focused our energies on
simplifying our working environment and improving performance through
automation.
Other CLECs have invested a substantial amount of capital to buy
circuit-switched equipment and rollout fiber, only to find that their equipment
is severely underutilized and that there is a significant shortfall in their
revenue stream when compared to their capital investment. We refer to this
strategy as a "facilities-first" strategy, because the CLEC has invested in its
equipment and placed the equipment in service before the CLEC has developed a
customer base. Our strategy is a "customer-first," or a "deferred-build"
strategy. We invested our capital in creating web based "back-office" support
systems so that we can mine data, easily analyze our customer base, and provide
comprehensive customer service to handle repairs, moves, adds and changes to
lines. After we have obtained a substantial geographical concentration of
customers, we will make decisions regarding the purchase and installation of our
own network equipment. This strategy allows us to be very flexible with our
customer base as we grow our business. We can move our customer base to
alternative access, if appropriate, and we do not become a captive of our own
underutilized equipment, as can happen with a "facilities-first" CLEC. The
technological advances in equipment and the lowering of equipment prices have
substantiated our deferred-build strategy and have enabled us to better utilize
our limited capital.
When we lease lines from an ILEC, we use the unbundled network elements
platform ("UNE-P") service offering. UNE-P allows us to lease the network
elements we need, such as the local line and the port on a local switch, so that
we can provide local dial tone service to our customers. We are capable of
providing virtually all of the same additional voice services provided by any
ILEC, such as three-way calling, call waiting, call forwarding and caller ID. We
sell our services at a fee that is at least 10% and as much as 25% less than the
rate charged by the ILEC. We also offer a bundled package of local and regional
calling minutes with popular voice service features.
We believe UNE-P is the preferable platform under which any CLEC should
operate while it is growing and building a customer base. In March 2002, UNE-P
became more valuable to us when the costs charged to us for providing local
voice services on the UNE-P service offering in New York State were lowered. We
believe current rates are also very attractive in New Jersey, Michigan and
3
Pennsylvania. Our primary operating CLEC, New Rochelle Telephone Corp. ("NRTC"),
is selling services in New York State and Pennsylvania, and is currently
achieving gross margins of approximately 50%.
Development of Business
We were incorporated in the State of New York under the name Sirco
Products Co. Inc. in 1964 and developed a line of high quality handbags, totes,
luggage and sport bags. In 1995, we divested our handbag operations, which had
experienced several years of operating losses. Although we were profitable in
fiscal 1996, declining revenues in our next two fiscal years, combined with
operating losses, forced us to analyze other business opportunities.
In October 1997, we began incubating small high-growth-potential
companies, and we made our first investment in a CLEC, Access One
Communications, Inc. ("Access One"), when we purchased approximately 28% of
Access One's outstanding capital stock. Access One was a newly-formed CLEC with
approximately 2,000 installed local access lines that looked to us for growth
capital to meet its business plan. Our Board of Directors believed that Access
One's "customer-first" growth strategy of obtaining a customer base first and
later building an equipment network around a geographically concentrated
customer base was a compelling strategy that would utilize capital wisely and
yield high valuations in the future. Access One was purchased by Talk America
Holdings Inc. ("Talk"), a publicly-traded telecommunications company, in August
2000.
We commenced operations in the telecommunications industry in fiscal 1998
by acquiring Essex Communications, Inc. ("Essex"), a newly-formed CLEC formed to
attract and retain a geographically concentrated customer base in the
metropolitan New York region, primarily through the resale of products and
services of incumbent and alternative facilities-based local providers.
Due to our increased focus on developing a full suite of
telecommunications services, and the significant decrease in luggage division
sales, our Board of Directors decided in July 1999 to divest the Company's
luggage division, and we sold the assets of our U.S. luggage operations in
August 1999.
In January 2000, we acquired Telecarrier Services, Inc. ("Telecarrier"), a
New Jersey-based CLEC that operated as a CLEC in the states of Massachusetts,
New Jersey, New York and Rhode Island and provided long distance service in 13
states. Although most of Telecarrier's operations were merged into Essex after
the acquisition was completed, we maintained several licenses in Telecarrier,
and we are now operating Telecarrier to sell local telephone services in New
York and New Jersey. For the year ended November 30, 2003, Telecarrier had
revenues of approximately $1,571,000, and an operating loss of approximately
$584,000. At November 30, 2003, Telecarrier had a customer base with
approximately 4,000 telephone lines.
On July 29, 2002, Telecarrier commenced a case under chapter 11 of the
Bankruptcy Code. Telecarrier continues to operate its business and manage its
affairs as a debtor and debtor in possession. In February 2004, Telecarrier
filed a plan of reorganization pursuant to which the capital stock of a
reorganized Telecarrier would be sold by competitive bid either to eLEC or to an
unrelated third party, and the proceeds from the sale of such stock would be
used to make distributions to creditors of Telecarrier. While we are not
currently able to determine whether the plan of reorganization will be
consummated, we expect to retain control of Telecarrier following its emergence
from bankruptcy in fiscal 2004.
4
In October 2000, we acquired Line One, Inc. ("Line One"), a telemarketing
firm with approximately 70 seats. Line One became our internal marketing engine
for our telemarketing channel, which contacts small businesses and offers our
telecommunications services. We believe telemarketing is a particularly
effective marketing strategy to utilize because of the ubiquitous reach that the
UNE-P service offering gives us. Due to our limited financial resources, we
decreased the operations of Line One at the beginning of 2003 to 15 seats. At
this level of operations, our line acquisition cost became higher than the cost
we would pay if we outsourced our telemarketing operation. We consequently
discontinued internal telemarketing in June 2003. Line One is now an inactive
subsidiary and we outsource all of our telemarketing activities on a successful
efforts basis.
On September 3, 2002, we entered into a definitive purchase agreement to
sell certain of the assets of Essex to Essex Acquisition Corp. ("EAC"), a
wholly-owned subsidiary of BiznessOnline.com, Inc. ("Biz"). The sale to EAC was
completed on December 31, 2002. EAC purchased selected assets and assumed
certain liabilities in conjunction with this transaction. The remaining shell of
Essex was sold to Glad Holdings, LLC on September 11, 2003. As a result thereof,
the Company recorded a gain of approximately $7,314,000 in the fourth quarter of
the current fiscal year.
Even though we sold a CLEC operation to EAC, we were not prevented in the
asset purchase agreement with EAC from continuing to operate as a CLEC.
Consequently, in November 2002 we began the operations of New Rochelle
Telephone, a start-up CLEC. As the intellectual know-how and internal systems we
had developed in creating Essex were still owned by us, we were able to rebuild
our customer base to a total of approximately 12,100 lines in New Rochelle
Telephone and Telecarrier combined, as of January 31, 2004. With the sale of our
corporate headquarters building in October 2003, we now have a limited amount of
cash available for line acquisition costs, and we plan to grow our sales at a
faster rate in 2004. We have outsourced an additional third-party telemarketing
firm in February 2004 to help us achieve a higher growth rate.
eLEC's Telecommunications Services
We tailor our service offerings to meet the specific needs of small
business and residential customers in our target markets. We primarily market
our services through two different distribution channels. We use third-party
telemarketers to attract small business and residential accounts (typically less
than five telephone lines for each account), and we use agents and direct
marketing to attract small business and residential accounts (typically one to
20 lines in size for each account). Based upon feedback received from our
customers and analysis of the types of services the entities in each of these
groups typically utilize, we tailor a basic telecommunications service package,
which can be promptly adjusted to the specific needs of individual customers. To
further help our customers manage their accounts, our customers can view their
invoices from us, including unbilled telephone calls in the current month, and
make payments of their invoices to us, on a secure customer web site. They can
also input requests for repair orders, moves, adds and changes via the web site,
and check their voice mail. We creatively package our services to provide
"one-stop shopping" solutions for our customers, so that they can purchase
directly from us all of their communications requirements. Listed below are the
basic categories of services that we offer:
o Local Exchange Services. We offer local exchange services, starting with
local dial tone, plus numerous features, the most common of which are call
waiting, call forwarding, caller ID and dial back features. By offering local
dial tone, when we utilize the UNE-P service offering,
5
we also receive originating and terminating access charges for interexchange
calls placed or received by our subscribers.
o Long Distance. In addition to our local telephone service, we offer long
distance services as part of a bundled product to customers through agreements
we have with a national long distance carrier. The long distance services
include domestic service, such as interLATA, which are calls that pass from one
"Local Access and Transport Area" or "LATA" to another LATA, and intraLATA,
which are calls that stay within the LATA in which they originated, but are
beyond the distance limits of the local calling plan. Our services also include
toll-free services (800, 888, 877, 866), calling card and other enhanced
services.
o International Calling. While we offer international calling, our typical
customer does not place a significant number of international calls. Most
telephone companies experience a higher bad debt percentage on international
calling than on local services. We believe there are marketing opportunities in
those cases in which we can offer low international calling rates to particular
countries and simultaneously attract more local telephone customers. To reduce
the risk of bad debt exposure, however, we do offer a prepaid international
product for customers that want to dial overseas and receive a discounted rate.
No pin or account numbers are required as the system recognizes the telephone
number from which the call is initiated, including any cell phone number that
the customer programs into the system. Calls must originate in the United States
and can be made to any destination in the world.
Business Strategy
Our goal is to use our internally developed systems and processes to
operate as a premiere UNE-P focused integrated communications provider. We
intend to take advantage of the UNE-P service offering in states in which the
rates allow a CLEC to obtain an appropriate gross margin, such as New York, New
Jersey, Pennsylvania and Michigan.
We are taking the following actions to achieve our goal of being a
profitable UNE-P CLEC:
o Target Small-Business and Residential Customers. We focus our CLEC sales
efforts for local and long distance services on small business and residential
consumers having one to 20 local access lines in any one location. We have
elected to focus on this segment because of our ability to obtain under the
UNE-P platform, an ample gross margin on the services provided to these
customers. We also believe that, as compared to larger businesses, the ILECs and
facilities-first CLECs may be less likely to apply significant resources to
obtaining or retaining these customers. We expect to attract and retain these
customers through telemarketers and agents, by offering bundled local and long
distance services, as well as enhanced telecommunication services, at
competitive long distance rates, by responsive customer service and support and
by offering new and innovative products.
o Rapidly Deploy New Customers. As a CLEC, we intend to take advantage of
our ability to rapidly provision new accounts in our existing service areas, and
to rapidly enter new service areas because of our low capital requirements to
enter new states. Our choice of states on which to focus will depend on several
factors, such as the population in the state, our ability to utilize
6
the UNE-P service offering and the potential gross margin percentage we can
achieve in that particular state.
o Achieve Market Share with Competitive Pricing. We always price our CLEC
services at a discount to the same services provided by an ILEC. We can
ascertain the prices the ILECs charge because we have access to the rates they
have filed with the various state public service commissions, and we typically
review the telephone bill of a potential customer before switching it to our
network to compare the prices it was paying and any contractual obligations to
which it was subject. We anticipate that some ILECs may reduce their prices as
increased competition begins to erode their market share. We believe, however,
that we will be able to compete as prices decrease because of our low network
costs and because we will be providing a more responsive customer service than
the ILEC and will not have to rely on price alone to maintain our core customer
base.
o Market in our Own Community. We are taking an active role in the County
of Westchester, New York, where we are located, so that local businesses and
residents will begin to recognize our principal operating subsidiary, NRTC, as
"the local phone company." Our employees participate in various charitable
groups as NRTC representatives, and NRTC has been a sponsor of various events,
such as a walk-a-thon for Support Connection, Inc., a cancer support group, and
various volunteer activities for the Habitat for Humanity program run in
Westchester County.
Competition in the Telecommunications Industry
The local telecommunications market is a highly competitive environment
and is dominated by ILECs. Based upon the geographical locations in which we
currently sell services, Verizon is our largest competitor. Verizon has a
"win-back" program through which it approaches former customers lost to a CLEC
or other competitor in an attempt to have the former customers switch back to
its services. Most of our actual and potential competitors, including most of
the facilities-first CLECs, have substantially greater financial, technical,
marketing and other resources (including brand name recognition) than we do.
Furthermore, our established competitors, such as the ILECs, are able to compete
effectively because they have long-term existing relationships with their
customers, strong name recognition, abundant financial resources, and the
ability to cut prices of certain services by subsidizing such services with
revenues generated from other products. Although the Telecommunications Act
reduced barriers to entry into the local market, future regulatory decisions
could increase the rates that CLECs must pay ILECs for use of ILEC facilities,
which would result in lower margins for CLECs and lessen the ability of CLECs to
offer consumers a significant percentage savings on their phone bill.
In addition to competition from ILECs and other CLECs, several other
entities currently offer or are capable of offering local service, such as
wireless service providers, long distance carriers, cable television companies
and electric utilities. These entities, upon entering into appropriate
interconnection agreements or resale agreements with ILECs, can offer single
source local and long distance services like those we offer. For example, long
distance carriers, such as AT&T, MCI and Sprint Corporation, among other
carriers, have each successfully implemented local telecommunications services
in major U.S. markets using UNE-P or by reselling the ILECs' services.
The long distance market, in comparison to the local market, has
relatively insignificant barriers to entry and has been populated by numerous
entities that compete for the same customers by frequently
7
offering promotional incentives and lower rates. We compete with many such
companies that do not offer any service other than long distance, and we compete
with established major carriers such as AT&T and MCI. We believe our bundled
package of local services and our attentive customer service department will
help us compete in this market. We will also have to maintain high quality and
low cost services to compete effectively. In many instances, we must be in a
position to reduce our rates to remain competitive. Such reduction could be
harmful to us if we do not also provide other services to our long distance
customers.
We also compete with wholesale DSL Carriers, including companies such as
Covad Communications Group, Inc., that offer DSL services and other data related
products. Many DSL carriers have significant strategic equity investors,
marketing alliances and product development partners and have obtained licenses
to operate as a CLEC. Additionally, many of these competitors are offering, or
may soon offer, DSL technologies and services that include voice services over
the Internet or voice services over a DSL circuit that will directly compete
with our local voice product.
Government Regulation
Local and long distance telecommunications services are subject to
regulation by the Federal Communications Commission ("FCC") and by state
regulatory authorities. Among other things, these regulatory authorities impose
regulations governing the rates, terms and conditions for interstate and
intrastate telecommunications services and require us to file tariffs for
interstate and international service with the FCC and obtain approval for
intrastate service provided in the states in which we currently market our
services. We must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in the states in which we operate. We are
also required to file and obtain prior regulatory approval for tariffs and
intrastate services. In addition, we must update or amend the tariffs and, in
some cases, the certificates of public convenience and necessity, when rates are
adjusted or new products are added to the local and long distance services we
offer. Changes in existing laws and regulations, particularly regulations
resulting in increased price competition, may have a significant impact on our
business activities and on our future operating results. We are also subject to
Federal Trade Commission regulation and other federal and state laws relating to
the promotion, advertising and direct marketing of our products and services.
Certain marketing practices, including the means to convert a customer's
local or long distance telephone service from one carrier to another, have
recently been subject to increased regulatory review of both federal and state
authorities. Even though we have implemented procedures to comply with
applicable regulations, increased regulatory scrutiny could adversely affect the
transitioning of customers and the acquisition of new customer bases. Amendments
to existing statutes and regulations, adoption of new statutes and regulations
and expansion of our operations into new geographic areas and new services could
require us to alter our methods of operation or obtain additional approvals, at
costs which could be substantial. There can be no assurance that we will be able
to comply with applicable laws, regulations and licensing requirements. Failure
to comply with applicable laws, regulations and licensing requirements could
result in civil penalties, including substantial fines, as well as possible
criminal sanctions.
Employees
At February 15, 2004, we employed 35 employees, of whom 26 were employed
on a full-time basis and nine were employed on a part-time basis. We are not
subject to any collective bargaining agreement and we believe that our
relationship with our employees is good.
8
Item 2. - Description of Property
The following table sets forth pertinent facts concerning our office lease
at February 15, 2004.
Approximate Annual
Location Use Square Feet Rent
-------- --- ----------- ----
75 South Broadway Office 4,000 $72,000
White Plains, NY 10601
The lease for our office space in White Plains is a five year lease that
began on December 1, 2003. We believe this space is adequate for our current
operating needs. We have no other leased or owned properties.
Item 3. - Legal Proceedings
Other than the license and regulatory proceedings that routinely occur for
telecommunication entities as described under "Government Regulation," we are
not currently a party to any legal proceeding that we believe will have a
material adverse effect on our financial condition or results of operations.
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 currently trades on The OTC Bulletin Board(R) ("OTCBB")
under the symbol ELEC. Prior to our listing on the OTCBB in February 2002, our
common stock traded on The Nasdaq Small Cap Stock Market(R). The high and low
sales price for each quarterly period of our last two fiscal years are listed
below:
High Low
Fiscal 2002
1st Quarter $0.61 $0.18
2nd Quarter 0.18 0.02
3rd Quarter 0.05 0.03
4th Quarter 0.09 0.02
Fiscal 2003
1st Quarter $0.08 $0.04
2nd Quarter 0.16 0.05
3rd Quarter 0.14 0.08
4th Quarter 0.21 0.08
The quotations set forth in the table above reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. As of February 13, 2004, there were 235 holders
of record of our common stock and approximately 2,800 beneficial holders.
We have never paid dividends on our common stock and do not expected to do
so in the foreseeable future. Payment of dividends is within the discretion of
our Board of Directors and would depend on, among other factors, our earnings,
capital requirements and operating and financial condition.
10
The following table provides information as of November 30, 2003 with
respect to shares of our common stock that are issuable under equity
compensation plans.
Number of securities
remaining available to
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected
warrants and rights warrants and rights in column (a))
Plan Category (a) (b) (c)
------------------------------------ -------------------- -------------------- ----------------------
Equity compensation plans
approved by security holders
Employee Stock Option Plan (1) 1,723,334 $0.84 302,381
1996 Restricted Stock Plan (2) -- 400,000
---------- ----------
Subtotal 1,723,334 702,381
---------- ----------
Equity compensation plans
not approved by security holders
RFC Warrants (3) 200,000 1.54 --
Kaufman Bros. Warrants (4) 350,000 1.88 --
----------
Subtotal 550,000
----------
Total 2,273,334 702,381
========== ==========
----------
(1) Our Employee Stock Option Plan allows for the granting of share options to
Board members, officers, non-officer employees and consultants.
(2) Our Restricted Stock Plan provides for the issuance of restricted share
grants to officers and non-officer employees
(3) The RFC Warrants were issued in conjunction with a revolving credit
facility. The facility has been retired; however, the warrants will remain
outstanding until exercised or until the expiration date of October 23,
2010.
(4) The Kaufman Bros. Warrants represent two warrant grants for investment
banking services.
11
Item 6. - Management's Discussion and Analysis or Plan of Operation
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Please refer to page 2 of this Report for
additional factors relating to such statements.
Plan of Operation
Our financial condition was significantly improved during fiscal 2003 by
the sale on December 31, 2002 to EAC of certain assets and liabilities of Essex,
the sale of the capital stock of Essex on September 11, 2203 and the sale of our
corporate headquarters building for cash of $2,200,000 on October 8, 2003. These
transactions resulted in an aggregate gain of approximately $11,372,000 and have
dramatically improved our working capital position and our net worth.
Additionally, the sale of our corporate headquarters building has been a source
of cash for customer acquisition efforts without diluting shareholders via the
sale of stock. Although we still have negative working capital, we have no
indebtedness for money borrowed, except for small equipment purchases, and
approximately $1,903,000 of our current liabilities, of which $872,000 are for
liabilities of Telecarrier, consist of payables and accruals that are more than
one year old and that we believe we may not have to pay in full, or that we may
be able to pay over an extended period of time if the creditors seek payment. We
plan to use our existing cash balances primarily to pay for new customer
acquisition costs. We believe the cash flow from our existing customer accounts
is sufficient to cover our current operating costs. In January 2004, we invoiced
our customers approximately $646,000, for accounts representing approximately
12,100 lines. This growth came over only 14 months of operations, as the
operations of NRTC and Telecarrier first had billings in November 2002 of
approximately $23,000, for accounts representing approximately 400 lines.
Our primary methods of obtaining new customer accounts will continue to be
through telemarketing and outside sales agents. We believe these are effective
low-cost methods of building new accounts, and our past history with these
customer acquisition methods is helpful in planning and budgeting our operations
on a going forward basis. While we believe our cash balances are adequate for
continued limited growth, our cash balances are not sufficient to generate the
growth we desire or the growth that our internal operating systems are capable
of handling. We are therefore beginning to explore opportunities for raising
cash through asset-based borrowings or through a modest equity placement.
We do not expect to purchase any significant assets or make any
significant capital expenditures in the next 12 months. We believe our
back-office systems are adequately developed and functioning well, and we
anticipate only minor expenditures to further automate such systems during the
next 12 months. We are continuing to pursue the utilization of a packet-based
network, such as Voice over Internet Protocol ("VoIP"), to carry our local voice
traffic. This technology is used to transmit voice conversations over a data
network using the Internet Protocol. Such data network may be the Internet or
may be a managed network.
Many carriers are providing VoIP for international calls and long distance
calls, but very few carriers have implemented VoIP for local telephone service.
We believe the most important trend in the industry will be packet-based
networks replacing today's traditional circuit-switched voice technology. Packet
switching has tremendous advantages over circuit switching. Packets can be
transmitted over copper wire or over wireless facilities, packet-switched
equipment is substantially less expensive than circuit-switched equipment and
the price of packet-switched equipment is continually dropping even as it
becomes technologically more sophisticated. We plan to move toward this
technology over the next six
12
to 12 months, as this technology also allows us to bypass the ILECs when we
provide local telephone service to our customers. Additionally, VoIP allows for
added and integrated new service offerings, such as integrated messaging,
bandwidth on demand and voice emails. While we will continue to seek and
evaluate new technologies, our focus will continue to be on building our
customer base, and not in developing new technology. We plan to continue our
efforts on improving customer service and in maintaining efficient systems that
allow us to sell, provision, bill and collect, as our first priority is to
develop and maintain a stable core UNE-P business that generates positive cash
flow from operations. As we move towards a VoIP product, we anticipate that we
will partner with a carrier's carrier or with another CLEC in order to provide
VoIP local service to our customers. We do not plan to have substantial
equipment purchases, although we may consider sharing a switch with another
entity.
Fiscal Year 2003 Compared to Fiscal Year 2002
Revenues for fiscal 2003 decreased by approximately $8,674,000, or
approximately 61%, to approximately $5,568,000 as compared to approximately
$14,242,000 reported in fiscal 2002. The decrease in revenue was directly
attributable to the sale of the entire customer base of Essex on December 31,
2002, which was our primary operating CLEC in fiscal 2002. With the sale of
substantially all of the assets and liabilities of Essex on December 31, 2002,
we had to start building a new customer base in our other two CLECs, NRTC and
Telecarrier. Our goal is to add a minimum of 2,000 net lines per month in fiscal
2004. However, we have not yet been able to outsource enough telemarketing seats
in the first quarter of fiscal 2004 to reach that monthly goal. In February
2004, we added an additional telemarketing agent and a new direct marketing
program that we believe will help us reach the 2,000 net lines a month level.
Our gross profit in fiscal 2003 decreased by approximately $2,464,000, or
approximately 47%, to approximately $2,802,000 from approximately $5,266,000
reported in fiscal 2002 while our gross profit percentage was 50.3% in fiscal
2003 and 37% in fiscal 2002. The reduction in gross profit dollars was
attributable to the sale of the Essex customer base. The increase in gross
profit percentage was attributable to lower buying prices from ILECs in the
states in which we operated during fiscal 2003, compared to the states in which
we were operating during fiscal 2002. NRTC and Telecarrier are operating in
states in which we can purchase unbundled network elements at prices that are
significantly lower than the prices charged in some of the states in which Essex
was operating. Our selling strategy in fiscal 2004 is to continue to penetrate
states that offer the opportunity to achieve higher margins.
As a result of the sale of Essex, our selling, general and administrative
("SG&A") expenses decreased by approximately $3,754,000, or approximately 39.6%,
to approximately $5,732,000 as compared to approximately $9,486,000 reported in
fiscal 2002. The decrease was also attributable to various cost cutting
measures, which included, among other things, a reduction in staffing in all
areas of our operations and reduced spending on our marketing efforts.
Additionally, we reduced and eventually discontinued internal telemarketing. In
the fourth quarter of fiscal 2003, we cut our occupancy cost from approximately
$22,000 a month to approximately $6,000 a month, when we sold our building in
New Rochelle, New York. We currently spend slightly less than $100,000 a month
on personnel costs, and we are budgeting approximately $100,000 a month for new
line acquisition costs. We anticipate total monthly selling, general and
administrative expenses to be approximately $350,000 a month beginning in the
first quarter of fiscal 2004.
Depreciation and amortization expense decreased by approximately $173,000
to approximately $88,000 from approximately $261,000 reported in fiscal 2002.
The decrease was attributable to the
13
lower amount of depreciable assets in 2003, following the sale of the assets of
Essex to EAC in December 2002 and the sale of our corporate headquarters
building in October 2003.
Interest expense decreased by approximately $262,000 to approximately
$175,000 from approximately $437,000 reported in fiscal 2002, primarily due to
lower average borrowing caused by the payback of and eventual termination of our
credit facility in August 2002, and the payoff of our building mortgage in
October 2003. In fiscal 2004, we anticipate we will pay interest on
miscellaneous capital leases and notes until a lending facility, if any, is
obtained.
Gain on the sale of investment securities and other investments in fiscal
years 2003 and 2002 of approximately $122,000 and $1,454,000, respectively,
resulted primarily from the sale of capital stock derived from our investment in
Talk. We no longer own any Talk stock and do not anticipate any gains on the
sale of Talk stock in fiscal 2004, unless we exercise warrants to buy additional
shares of Talk. We currently own warrants to purchase approximately 95,000
shares of Talk at a price of $6.30 per share. Talk common stock closed at a
price of $10.79 on February 13, 2004.
As noted above, in fiscal 2003 we sold Essex assets, Essex stock and our
headquarters building. The sales netted a gain of approximately $11,372,000. No
such asset sales occurred in fiscal 2002.
Liquidity and Capital Resources
At November 30, 2003, we had cash and cash equivalents of approximately
$669,000 and negative working capital of approximately $1,938,000 as compared to
cash and cash equivalents of approximately $939,000 and negative working capital
of approximately $11,214,000 at November 30, 2002. The decrease in negative
working capital was primarily due to the sales of Essex assets, Essex stock and
our corporate headquarters building. Our cash balances at November 30, 2003
included approximately $152,000 that was in the Telecarrier bankruptcy estate.
This cash is only available for the operations of Telecarrier.
Net cash (used in) provided by operating activities aggregated
approximately ($1,636,000) and $2,750,000 in fiscal 2003 and 2002, respectively.
The principal use of cash from operating activities in fiscal 2003 was net
income of approximately $8,323,000, which was offset by non-cash gains on the
sale of the Essex assets and subsidiary of approximately $10,825,000. The
principal source of cash from operating activities in fiscal 2002 was the
increase in accounts payable of approximately $5,188,000, which was offset in
part by the operating loss for the period of approximately $3,319,000.
Net cash provided by investing activities aggregated approximately
$2,529,000 and $1,631,000 in fiscal 2003 and 2002, respectively. The principal
source of cash from investing activities was the proceeds of $2,100,000 received
from the sale of our corporate headquarters building. The principal source of
cash from investing activities in fiscal 2002 was the proceeds from the sale of
marketable securities of approximately $1,381,000.
Net cash used in financing activities aggregated approximately
($1,163,000) and ($4,240,000) in fiscal 2003 and 2002, respectively. In fiscal
2003, net cash used in financing activities resulted from the repayment of the
mortgage note payable in respect of our former headquarters building of
$1,100,000. In fiscal 2002, the principal use of cash in financing activities
consisted of approximately $3,999,000 in repayments of a revolving credit line.
We had no capital expenditures in fiscal 2003 or in fiscal 2002. We do not
anticipate making any significant capital expenditures in fiscal 2004.
14
In August 2002, we paid off our loan and security agreement with Textron
Financial, formerly known as RFC Capital Corporation. We have no working capital
facility available to us at this time. Our Telecarrier subsidiary, which is
operating in bankruptcy, had a $150,000 line of credit with a bank. The line is
a pre-petition obligation and has been sold by the bank to an unrelated
financial institution. Telecarrier does not have any debtor-in-possession
financing. The bankruptcy court has classified the pre-petition bank loan as an
unsecured obligation.
We have stock purchase warrants that entitle us to purchase approximately
95,000 additional shares of Talk. The warrant exercise price is $6.30 per share
and, at February 13, 2004, our warrants were in-the-money, as Talk common stock
was trading at approximately $10.79 per share at such date. We have been
discussing with Talk management our intention to exercise the warrants during
fiscal 2004, as we plan to use the proceeds of the warrants to generate
additional cash for line acquisition costs.
The report of the independent auditors on our 2003 financial statements
indicates there is substantial doubt about our ability to continue as a going
concern. We have worked during the course of the year to improve our financial
condition and, as discussed previously, the sale of most of the assets and
liabilities of our former wholly-owned subsidiary, Essex, in December 2002, the
sale of the stock of Essex in September 2003 and the sale of our corporate
headquarters building in October 2003 has helped us to continue our business
operations. Additionally, we are approaching a breakeven level and we believe we
currently have the cash resources to further grow our business to profitable
levels. However, we have not recently reported a fiscal quarter with income from
operations and we continue to operate with negative working capital, which at
November 30, 2003 was approximately $1,938,000. In addition, there remains some
doubt as to whether we will have the financial ability to meet payment demands,
if they are made, from creditors. We believe we will be able to settle
approximately $872,000 of current liabilities to Telecarrier's creditors via a
reorganization plan to bring our Telecarrier subsidiary out of bankruptcy. We
believe it is important to our current operations to maintain the new customer
accounts that we have established in Telecarrier. If we are successful in
maintaining ownership of a reorganized Telecarrier, we anticipate that we will
have profitable operations and will be able to further pursue implementation of
VoIP technology as an additional network to carry the voice traffic of our
customers. The failure to retain our Telecarrier subsidiary and to settle past
due amounts within our financial means will have an adverse effect on our
ability to carry out our business plan. The inability to carry out this plan may
result in the continuance of unprofitable operations, and the eventual shut down
of vendor credit facilities, which would adversely affect our ability to
continue operating as a going concern.
New Accounting Standards
The new accounting pronouncements in footnote one of our Consolidated Financial
Statements are incorporated by reference.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. The most significant estimates include:
15
* revenue recognition and estimating allowance for doubtful accounts;
* valuation of long-lived assets
* income tax valuation allowance;
We continually evaluate our accounting policies and the estimates we use
to prepare the consolidated financial statements. In general, the estimates are
based on historical experience, on information from third party professionals
and on various other sources and assumptions that are believed to be reasonable
under the facts and circumstances at the time such estimates are made.
Management considers an accounting estimate to be critical if:
* it requires assumptions to be made that were uncertain at the time
the estimate was made; and
* changes in the estimate, or the use of different estimating methods,
could have a material impact on the Company's consolidated results
of operations or financial condition.
Actual results could differ from those estimates. Significant accounting
policies are described in Note 1 to the consolidated financial statements, which
are included in this Form 10-KSB filing. In many cases, the accounting treatment
of a particular transaction is specifically dictated by GAAP. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result.
Certain of our accounting policies are deemed "critical", as they require
management's highest degree of judgment, estimates and assumptions. The
following critical accounting policies are not intended to be a comprehensive
list of all of our accounting policies or estimates:
Revenue Recognition
We apply the provisions of Staff Accounting Bulletin 101 "Revenue
Recognition". We recognize revenue from telecommunication services in the period
that the service is provided. We estimate amounts earned for carrier
interconnection and access fees based on usage.
Accounts Receivable
In an effort to increase the number of customer lines, we have relaxed our
initial credit policies and we do not perform significant initial credit
evaluations of our customers. Once a customer is billed for services, we
actively manage the accounts receivable to minimize credit risk.
We maintain an allowance for doubtful accounts, which is estimated based
upon historical experience as well as specific customer collection issues that
have been identified. We cannot guarantee that it will continue to experience
the same credit loss rates that it has in the past.
Impairment of Long-Lived Assets
We follow the provisions of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement requires that certain assets
be reviewed for impairment and, if
16
impaired, remeasured at fair value whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Impairment loss estimates are primarily based upon management's analysis and
review of the carrying value of long-lived assets at each balance sheet date,
utilizing an undiscounted future cash flow calculation. During fiscal years 2003
and 2002, there were no impairment losses
Income Taxes
We estimate the degree to which tax assets and loss carryforwards will
result in a benefit based on expected profitability by tax jurisdiction. A
valuation allowance for such tax assets and loss carryforwards is provided when
it is determined that such assets will more likely than not go unused. If it
becomes more likely than not that a tax asset or loss carryforward will be used,
the related valuation allowance on such assets is reversed. If actual future
taxable income by tax jurisdiction varies from estimates, additional allowances
or reversals of reserves may be necessary.
Item 7. - Financial Statements
The following consolidated financial statements, notes thereto, and the
related independent auditors' report contained on page F-2 to our consolidated
financial statements are herein incorporated:
Consolidated balance sheets - November 30, 2003 and 2002
Consolidated statements of operations - Years ended November 30, 2003 and
2002
Consolidated statements of stockholders' equity deficiency - Years ended
November 30, 2003 and 2002
Consolidated statements of cash flows - Years ended November 30, 2003 and
2002
Notes to consolidated financial statements - Years ended November 30, 2003
and 2002
Item 8. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 8A. Controls and Procedures.
Disclosure Controls and Procedures. Our management, with the participation of
our chief executive officer/chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, our chief executive officer/chief financial
officer has concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.
17
Internal Control Over Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth
quarter of 2003 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
Item 9. - Directors, Executive Officers, Promoters and Control Persons of the
Company; Compliance with Section 16(a) of the Exchange Act.
Information relating to our directors is set forth under the caption
entitled "Election of Directors" in our 2004 Proxy Statement and is incorporated
herein by reference. Information relating to our executive officers is set forth
in our 2004 Proxy Statement under the caption "Executive Officers, Directors and
Key Employees" and is incorporated herein by reference.
Item 10. - Executive compensation
The information regarding compensation of our officers and directors is
set forth under the caption entitled "Executive Compensation" in our 2004 Proxy
Statement and is incorporated herein by reference.
Item 11. - Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Information regarding ownership of certain of our securities is set forth
under the captions entitled "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management" in our 2004 Proxy Statement and is
incorporated herein by reference.
Item 12. - Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions with
our company is set forth under the caption entitled "Certain Relationships and
Related Transactions" in our 2004 Proxy Statement and is incorporated herein by
reference.
Item 13. - Exhibits and Reports on Form 8-K
(3) Articles of Incorporation and By-laws
(a) Certificate of Incorporation, as amended, incorporated by
reference to our Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on August 27, 1969
under Registration Number 2-34436.
(b) Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to our definitive proxy statement
filed with the Securities and Exchange
18
Commission in connection with our Annual Meeting of
Shareholders held in May 1984.
(c) Certificate of Amendment to the Certificate of Incorporation,
incorporated by reference to Exhibit 3(b) to our Annual Report
on Form 10-K for the year ended November 30, 1988.
(d) Certificate of Amendment to the Certificate of Incorporation,
incorporated by reference to Exhibit 3(e) to our Annual Report
on Form 10-K for the year ended November 30, 1994, as amended.
(e) Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3 to our Quarterly Report
on Form 10-Q for the quarter ended August 30, 1995.
(f) Certificate of Amendment of Certificate of Incorporation filed
February 17, 1999.
(g) Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3.2 to our Quarterly
Report on Form 10-Q for the quarter ended August 31, 1998.
(h) Certificate of Amendment of the Certificate of Incorporation,
incorporated by reference to Exhibit 3(1) to our Current
Report on Form 8-K dated November 16, 1999.
(i) By-laws, amended and restated as of December 1996,
incorporated by reference to Exhibit 3(e) to our Annual Report
on Form 10-K for the year ended November 30, 1996.
(10) Material Contracts
(a) 1995 Stock Option Plan, incorporated by reference to Exhibit
10(I) to our Annual Report on Form 10-K for the year ended
November 30, 1995, as amended.
(b) 1996 Restricted Stock Award Plan, incorporated by reference to
Exhibit A to our Proxy Statement dated October 24, 1996.
(c) Non-Employee Director Stock Option Plan, dated March 30, 2001.
(d) Lease Agreement By and Between South Broadway WP, LLC,
Landlord and New Rochelle Telephone Corp., Tenant dated August
2003.
(22) Subsidiaries - The significant wholly-owned subsidiaries are
as follows:
Name Jurisdiction of Organization
---- ----------------------------
.
New Rochelle Telephone Corp. New York
Telecarrier Services, Inc. Delaware
(23) Consent of Nussbaum Yates & Wolpow, P.C.
(31.1) Certification of our Chief Executive Officer and Chief
Financial Officer, Paul H. Riss, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(32.1) Certification of our Chief Executive Officer and Chief
Financial Officer, Paul H. Riss, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On October 8, 2003, we filed a Current Report on Form 8-K reporting (i)
the sale of our corporate headquarters building in New Rochelle, New York, (ii)
the sale of a wholly-owned subsidiary, Essex Communications, Inc. and (iii) the
press releases relating to the above mentioned sales and our operating results
for the third quarter.
19
Item 14. Principal Accountant Fees and Services.
Audit Fees. The aggregate fees billed by Nussbaum Yates & Wolpow, P.C., our
principal accountants, for professional services rendered for the audit of our
annual financial statements for the last two fiscal years and for the reviews of
the financial statements included in our Quarterly Reports on Form 10-QSB during
the last two fiscal years was $99,651 and $93,078, respectively.
Audit-Related Fees. We did not engage our principal accountants to provide
assurance or related services during the last two fiscal years.
Tax Fees. The aggregate fees billed by our principal accountants for tax
compliance, tax advice and tax planning services rendered to us during the last
two fiscal years was $15,000 and $15,000, respectively.
All Other Fees. We did not engage our principal accountants to render services
to us during the last two fiscal years, other than as reported above.
Pre-Approval Policies and Procedures. Our Board of Directors has the sole
authority to appoint or replace our independent auditor. Our Board is directly
responsible for the compensation and oversight of the work of our independent
auditor (including resolution of disagreements between management and the
independent auditor regarding financial reporting) for the purpose of preparing
or issuing an audit report or related work. Our independent auditor is engaged
by, and reports directly to, our Board.
Our Board pre-approves all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed for us by our
independent auditor, subject to the de minimis exceptions for non-audit services
described in Section 10A(i)(1)(B) of the Exchange Act, all of which are approved
by our Board prior to the completion of the audit. In the event pre-approval for
such auditing services and permitted non-audit services cannot be obtained as a
result of inherent time constraints in the matter for which such services are
required, the Chairman of our Board may pre-approve such services, and will
report for ratification such pre-approval to our Board at its next scheduled
meeting. Our Board has complied with the procedures set forth above and all
services reported above were approved in accordance with such procedures. .
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report to be signed on our behalf
by the undersigned, thereunto duly authorized on the 27th day of February 2004 .
eLEC COMMUNICATIONS CORP.
(Company)
By: /s/ Paul H. Riss
-----------------------------
Paul H. Riss
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 Company
and in the capacities and on the dates indicated.
Signature Title Date
---------------------- ---------------------------------- -----------------
/s/ Paul H. Riss Chief Executive Officer February 27, 2004
---------------------- Chief Financial Officer
Paul H. Riss (Principal Accounting Officer)
Director
/s/ Joel Dupre Chairman of the Board of Directors February 27, 2004
----------------------
Joel Dupre
21
FORM 10-KSB
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
YEARS ENDED NOVEMBER 30, 2003 AND 2002
The following consolidated financial statements of eLEC Communications Corp. and
Subsidiaries are included in Item 7:
Report of Independent Certified Public Accountants F-2
Consolidated balance sheets - November 30, 2003 and 2002 F-3 - F-4
Consolidated statements of operations - Years ended November 30,
2003 and 2002 F-5
Consolidated statements of stockholders' equity deficiency -
Years ended November 30, 2003 and 2002 F-6 - F-7
Consolidated statements of cash flows - Years ended November 30,
2003 and 2002 F-8 - F-9
Notes to consolidated financial statements - Years ended November
30, 2003 and 2002 F-10 - F- 32
F-1
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
eLEC Communications Corp.
White Plains, New York
We have audited the accompanying consolidated balance sheets of eLEC
Communications Corp. and Subsidiaries as of November 30, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity deficiency,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of eLEC
Communications Corp. and its subsidiaries as of November 30, 2003 and 2002, and
the consolidated results of their operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 2, the
Company is experiencing difficulty in generating sufficient cash flow to meet
its obligations and sustain its operations and has incurred significant
recurring losses from its operations, has negative working capital and a
stockholders' equity deficiency. A wholly owned subsidiary, Telecarrier Services
Inc., has filed a petition for relief under Chapter 11 of the Federal Bankruptcy
Laws. These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 2, 2004
F-2
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2003 AND 2002
ASSETS
2003 2002
---------- ----------
Current assets:
Cash and cash equivalents $ 669,022 $ 938,528
Accounts receivable, net of allowance of
$170,143 and $14,166 in 2003 and 2002 704,649 226,324
Investment securities -- 80,231
Other investments -- 137,558
Prepaid expenses and other current assets 182,430 144,829
Due from related party 7,723 57,909
Assets held for sale -- 1,102,103
---------- ----------
Total current assets 1,563,824 2,687,482
Property, plant and equipment, net 25,391 1,826,835
Other assets 48,000 371,036
---------- ----------
Total assets $1,637,215 $4,885,353
========== ==========
(Continued)
See accompanying notes to consolidated financial statements.
F-3
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 2003 AND 2002
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY
2003 2002
------------ ------------
Current liabilities:
Short-term borrowings $ 150,000 $ 150,000
Current portion of long-term debt and capital
lease obligations 39,360 57,379
Accounts payable and accrued expenses 2,474,270 3,323,593
Taxes payable 406,097 --
Due to related parties 310,791 289,614
Liabilities assumed in sale -- 10,081,382
Deferred revenues 121,138 --
------------ ------------
Total current liabilities 3,501,656 13,901,968
------------ ------------
Long-term debt and capital lease obligations, less
current portion -- 1,145,005
------------ ------------
Stockholders' equity deficiency:
Preferred stock, $.10 par value; 1,000,000 shares
authorized, Series B 1,300 authorized, 16 shares in 2002,
liquidation preference $1,000 per share -- 2
Common stock, $.10 par value; 50,000,000 shares
authorized; 16,265,282 and 15,619,282 shares
issued in 2003 and 2002 1,626,528 1,561,928
Capital in excess of par value 25,650,634 25,671,342
Deficit (29,114,103) (37,437,314)
Treasury stock at cost, 11,000 shares (27,500) (27,500)
Accumulated other comprehensive income, unrealized
gain on securities -- 69,922
------------ ------------
Total stockholders' equity deficiency (1,864,441) (10,161,620)
------------ ------------
Total liabilities and stockholders' equity deficiency $ 1,637,215 $ 4,885,353
============ ============
See accompanying notes to consolidated financial statements.
F-4
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
Revenues $ 5,568,004 $ 14,242,079
------------ ------------
Costs and expenses:
Costs of services 2,765,811 8,976,201
Selling, general and administrative 5,731,843 9,485,592
Depreciation 88,460 261,436
------------ ------------
Total costs and expenses 8,586,114 18,723,229
------------ ------------
Loss from operations (3,018,110) (4,481,150)
------------ ------------
Other income (expense):
Interest expense (174,800) (437,119)
Interest income and other 163,528 83,588
Gain on extinguishment of debt -- 61,025
Gain on sale of investment securities
and other investments 121,687 1,454,269
Gain on disposition of subsidiary 10,825,332 --
Gain on sale and disposal of property, plant and equipment 480,574 --
------------ ------------
Total other income (expense) 11,416,321 1,161,763
------------ ------------
Income (loss) before income taxes 8,398,211 (3,319,387)
Income taxes 75,000 --
------------ ------------
Net income (loss) $ 8,323,211 ($3,319,387)
============ ===========
Basic income (loss) per share $ .53 ($.21)
------------ ------------
Diluted income (loss) per share $ .53 ($.21)
------------ ------------
Weighted-average number of common shares outstanding:
Basic 15,771,219 15,607,183
============ ===========
Diluted 15,841,941 15,607,183
============ ===========
See accompanying notes to consolidated financial statements.
F-5
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DEFICIENCY
YEARS ENDED NOVEMBER 30, 2003 AND 2002
Preferred Stock Common Stock Capital
--------------------- ----------------------------- in Excess of
Shares Amount Shares Amount Par Value Deficit
--------- --------- ------------- ------------- ------------- -------------
Balance, November 30, 2001 16 $ 2 15,418,782 $ 1,541,878 $ 25,546,342 ($34,117,927)
Net loss (3,319,387)
Unrealized gain on investment
securities arising during the period
Less reclassification adjustment for
gains realized in net loss
Comprehensive loss
Exercise of stock options -- -- 200,500 20,050 25,000 --
Expiration of warrants granted for
services -- -- -- -- 100,000 --
--------- --------- ------------- ------------- ------------- -------------
Balance, November 30, 2002 16 $ 2 15,619,282 $ 1,561,928 $ 25,671,342 ($37,437,314)
========= ========= ============= ============= ============= =============
Accumulated Total
Other Stockholders'
Treasury Comprehensive Equity
Stock Income (Loss) Deficiency
--------- ------------- -------------
Balance, November 30, 2001 ($27,500) $ 431,537 ($6,625,668)
-------------
Net loss (3,319,387)
Unrealized gain on investment
securities arising during the period 1,019,296 1,019,296
Less reclassification adjustment for
gains realized in net loss (1,380,911) (1,380,911)
-------------
Comprehensive loss (3,681,002)
Exercise of stock options -- -- 45,050
Expiration of warrants granted for
services -- -- 100,000
--------- ------------- -------------
Balance, November 30, 2002 ($27,500) $ 69,922 ($10,161,620)
========= ============= =============
(Continued)
See accompanying notes to consolidated financial statements.
F-6
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
Preferred Stock Common Stock Capital
----------------------- --------------------------- in Excess of
Shares Amount Shares Amount Par Value Deficit
---------- ---------- ------------ ------------ ------------ ------------
Balance, November 30, 2002 16 $ 2 15,619,282 $ 1,561,928 $ 25,671,342 ($37,437,314)
Net income 8,323,211
Less reclassification adjustment for
gains realized in net income
Comprehensive income
Stock issued for interest expense 630,000 63,000 (19,110)
Conversion of Series B preferred stock
to common stock (16) (2) 16,000 1,600 (1,598)
---------- ---------- ------------ ------------ ------------ ------------
Balance, November 30, 2003 -- -- 16,265,282 $ 1,626,528 $ 25,650,634 ($29,114,103)
========== ========== ============ ============ ============ ============
Accumulated Total
Other Stockholders'
Treasury Comprehensive Equity
Stock Income (Loss) Deficiency
------------ ------------- ------------
Balance, November 30, 2002 ($27,500) $ 69,922 ($10,161,620)
------------
Net income 8,323,211
Less reclassification adjustment for
gains realized in net income (69,922) (69,922)
------------
Comprehensive income 8,253,289
Stock issued for interest expense 43,890
Conversion of Series B preferred stock
to common stock --
------------ ------------ ------------
Balance, November 30, 2003 ($27,500) $ -- ($1,864,441)
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2003 AND 2002
2003 2002
------------ ------------
Operating activities:
Net income (loss) $ 8,323,211 ($ 3,319,387)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 88,460 261,436
Gain on sale of investment securities (87,965) (1,380,911)
Gain on sale of other investments (33,722) (73,358)
Loss on write-down of other investments 71,430 --
(Gain) loss on sale and disposal of property,
plant and equipment (480,574) 24,842
Gain on extinguishment of debt -- (61,025)
Stock issued for interest expense 43,890 --
Gain on disposition of subsidiary (10,825,332) --
Provision for losses on accounts receivable
and other assets 981,920 649,085
Changes in operating assets and liabilities:
Accounts receivable (1,517,838) 1,023,648
Prepaid expenses and other current assets 97,399 77,622
Other assets 189,855 96,828
Accounts payable, accrued expenses,
deferred revenues and taxes 1,442,300 5,188,287
Related party, net 71,363 262,477
------------ ------------
Net cash provided by (used in) operating activities (1,635,603) 2,749,544
------------ ------------
Investing activities, net of effects of acquisitions:
Proceeds from sale of investment securities 98,274 1,380,911
Proceeds from sale of other investments 100,000 177,770
Proceeds from sale of property, plant and equipment 2,121,746 14,500
Proceeds from collection of other assets 209,102 58,216
------------ ------------
Net cash provided by investing activities 2,529,122 1,631,397
------------ ------------
(Continued)
See accompanying notes to consolidated financial statements.
F-8
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
2003 2002
----------- -----------
Financing activities:
Repayment of revolving credit line, net $ -- ($3,998,700)
Proceeds from short-term borrowings 380,000 --
Repayment of short-term borrowings (380,000) (101,145)
Repayment of long-term debt (1,163,025) (185,234)
Proceeds from exercise of stock options -- 45,050
----------- -----------
Net cash used in financing activities (1,163,025) (4,240,029)
----------- -----------
Increase (decrease) in cash and cash equivalents (269,506) 140,912
Cash and cash equivalents at beginning of year 938,528 797,616
----------- -----------
Cash and cash equivalents at end of year $ 669,022 $ 938,528
=========== ===========
Cash paid during the year for:
Interest $ 121,532 $ 469,513
=========== ===========
Income taxes $ -- $ --
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
See Notes 4, 5, 7 and 11.
See accompanying notes to consolidated financial statements.
F-9
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles
Description of Business and Concentrations
eLEC Communications Corp. ("eLEC" or the "Company") is a full-service
telecommunications company that focuses on developing integrated telephone
service in the emerging competitive local exchange carrier ("CLEC")
industry. The Company offers small and medium-sized businesses and
residential customers an integrated set of telecommunications products and
services, including local exchange, local access, and domestic and
international long distance telephone.
The Company presently operates in one business segment. The principal
focus of the Company, as a CLEC, is to resell and provide low cost
alternative telecommunication services and other bundled services,
focusing on small and medium-sized business users.
During the fiscal year ended November 30, 2002, the Company entered into
an agreement to sell substantially all the assets of Essex Communications,
Inc. ("Essex"), a wholly-owned subsidiary that accounted for substantially
all of the revenue of the Company for the year ended November 30, 2002
(see Note 13).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of significant
intercompany balances and transactions. Investments in less than 20% owned
companies that do not have readily determinable fair values were carried
at cost prior to their disposition. The Company has consolidated its
wholly- owned subsidiary, Telecarrier Services Inc. ("TSI"), which has
filed a petition for relief under Chapter 11 of the Federal Bankruptcy
Laws. The Company has a negative investment in TSI and expects to retain
control of TSI following its expected emergence from bankruptcy in fiscal
2004.
F-10
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Investment Securities
In accordance with generally accepted accounting principles, the Company
follows Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which requires
that investment securities be classified as trading, held-to-maturity or
available-for-sale. Investment securities at November 30, 2002 consisted
of equity securities classified as available-for-sale and are carried at
fair value with unrealized gains or losses to be reported in a separate
component of shareholders' equity.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are recorded at cost. Depreciation is
computed primarily by use of accelerated and straight-line methods over
the estimated useful lives of the assets. The estimated useful lives are
three to five years for computer equipment and software, thirty-nine years
for buildings, twenty years for building improvements, five to ten years
for machinery and equipment, and the lesser of the estimated useful life
or the life of the lease for leasehold improvements.
Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Under the liability method specified by SFAS 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse and the effect of net operating loss carryforwards.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. A valuation allowance has been established to eliminate the
deferred tax assets as it is more likely than not that such deferred tax
assets will not be realized.
Revenue Recognition
Revenues from voice, data and other telecommunication-related services are
recognized in the period in which subscribers use the related services.
Revenues for carrier interconnection and access are recognized in the
period in which the service is provided.
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, in
December 1999. The SAB summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. The Company has performed a comprehensive review
of its revenue recognition policies and determined that it is in
compliance with SAB 101.
F-11
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Collectibility of Accounts Receivable
Trade receivables potentially subject the Company to credit risk. The
Company extends credit to its customers and generally does not require
collateral. The Company presently accepts new customers and extends
initial credit without an evaluation of the credit history or financial
condition of the customer. Once a customer is billed for services, the
Company actively manages the accounts receivable to minimize credit risk.
Approximately $167,000 and $406,000 (including assets held for sale) as of
November 30, 2003 and 2002 represented net amounts due (after allowance
for doubtful collection) from entities in the telecommunications industry
related to intercarrier compensation.
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and the
current creditworthiness of the Company's customers. The Company has
recorded allowances for receivables which it considered uncollectible,
including amounts for the resolution of potential credit and other
collection issues such as disputed invoices, customer satisfaction claims
and pricing discrepancies. However, depending on how such potential issues
are resolved, or if the financial condition of any of the Company's
customers was to deteriorate and their ability to make required payments
became impaired, increases in these allowances may be required. The
Company actively manages its accounts receivable to minimize credit risk
and, as of November 30, 2003, the Company had no individual customer that
constituted more than 10% of its accounts receivable.
During the years ended November 30, 2003 and 2002, the Company recorded
bad debt expense of approximately $982,000 and $649,000.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per share
in 2003 included the dilutive effect of stock options, warrants and
convertible preferred stock. Approximately 1,500,000 of the Company's
stock options and warrants were excluded from the 2003 calculation of
diluted earnings per share because the exercise price of the stock options
and warrants were greater than the average price of the common shares, and
therefore their inclusion would have been antidilutive. All options,
warrants and convertible preferred stock have not been included in the
2002 computations as they were antidilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
F-12
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future forecasted net undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the discounted cash flows
or appraised values, depending upon the nature of the assets.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the 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. Significant estimates relate to the allowance
for doubtful accounts receivable, income tax valuation allowance, and
conclusions regarding the impairment of long-lived assets and gain
recognition on the sale of the subsidiaries. Actual results could differ
from those estimates, and any difference between the amounts recorded and
amounts ultimately realized or paid will be adjusted prospectively as new
facts become known.
Advertising
Advertising costs are expensed as incurred. Advertising expense amounted
to approximately $27,000 in 2003 and $207,000 in 2002.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of significant financial instruments:
o Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
F-13
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Fair Value of Financial Instruments (Continued)
o Investment Securities
The fair value of the Company's investment in marketable equity
securities is based upon the quoted market price.
o Long-Term Debt
The fair value of the Company's long-term debt is estimated based on
current rates offered to the Company for debt of the same remaining
maturities and approximates the carrying amount.
The Company has no instruments with significant off-balance-sheet risk.
Stock Compensation Plan
The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation No. 44,
"Accounting for Certain Transactions Including Stock Compensation," an
interpretation of APB Opinion No. 25. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount
an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earning per share as if the fair value based
method of accounting had been applied as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
The Company's Stock Option Plan (the "Plan") provides for the grant of up
to 3,400,000 incentive stock options, non-qualified stock options, tandem
stock appreciation rights, and stock appreciation rights of shares of
common stock. Under the plan, incentive stock options may be granted at no
less than the fair market value of the Company's stock on the date of
grant, and in the case of an optionee who owns directly or indirectly more
than 10% of the outstanding voting stock ("an Affiliate"), 110% of the
market price on the date of grant. As of November 30, 2003, approximately
300,000 option shares remain available for future issuance.
The Company's non-employee Director Stock Option Plan provides for the
grant of options to purchase 10,000 shares of the Company's common stock
to each non-employee director on the first business day following each
annual meeting of the shareholders of the Company. Under the plan, options
may be granted at no less than the fair market value of the Company's
common stock on the date of grant.
F-14
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Stock Compensation Plan (Continued)
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in 2003 and 2002, respectively: annual dividends of $-0-
for both years, expected volatility of 159% and 143%, risk-free interest
rate of 1.15% and 1.72%, and expected life of five years for all grants.
The weighted-average fair value of stock options granted in 2003 and 2002
was $.09 and $.04, respectively.
Under the above model, the total value of stock options granted in 2003
and 2002 was $68,574 and $895, respectively, which would be amortized
ratably on a pro forma basis over the related vesting periods, which range
from immediate vesting to five years. Had compensation cost been
determined based upon the fair value of the stock options at grant date
for all awards, the Company's net income (loss) and earnings (loss) per
share would have been changed to the pro forma amounts indicated below:
2003 2002
------------- -----------
Net income (loss):
As reported $ 8,323,211 ($3,319,387)
Stock-based compensation cost, net of related tax effects,
that would have been included in the determination of net
income if the fair value based method had been
applied to all awards 294,338 406,085
------------- -----------
Proforma $ 8,028,873 ($3,725,472)
Basic earnings (loss) per share:
As reported $ .53 ($.21)
Proforma $ .51 ($.24)
Diluted earnings per share:
As reported $ .53 ($.21)
Proforma $ .51 ($.24)
Stock-based employee compensation
cost, net of related tax effects, included
in the determination of net income as
reported $ -0- $ -0-
F-15
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
effective December 1, 2001, which did not have a material impact on the
Company's consolidated results of operations and financial position. SFAS
144 establishes a single accounting model for the impairment or disposal
of long-lived assets, including discontinued operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which is effective for fiscal years beginning
after May 15, 2002. This statement rescinds the indicated statements and
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 encourages early adoption of the
provision of this standard that rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishments of Debt." Accordingly, the Company elected to
early adopt this provision during fiscal 2002, and has classified the
early retirement of debt as other income (expense) in its 2002
Consolidated Statements of Operations. The adoption of the remaining
provisions of this new standard did not have a material impact on the
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 requires that the initial measurement of a
liability be at fair value. The Company elected to early adopt SFAS 146
during fiscal 2002, and the adoption did not have a material impact on its
consolidated results of operations and financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which is effective
for fiscal years ending after December 15, 2002. The provisions of this
statement provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation, and requires disclosure about the
effects on reported net income of an entity's accounting policy decisions
with respect to stock-based compensation. The Company does not intend to
change its accounting method for stock-based employee compensation and,
accordingly, the Company does not expect the provisions of this new
standard to have a material impact on its consolidated results of
operations and financial position.
F-16
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
1. Description of Business and Summary of Accounting Principles (Continued)
Recent Accounting Pronouncements (Continued)
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits", which
revision is effective for fiscal years ending after December 15, 2003. The
adoption of this revision is not expected to have any impact on the
Company's future results of operations or financial position, but will
require additional disclosures related to the Company's defined benefit
plan. All other recent accounting pronouncements are not applicable to the
Company.
2. Going Concern Matters and Realization of Assets
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. However,
the Company has sustained substantial losses from its continuing
operations in recent years, has negative working capital and a
stockholders' equity deficiency. In addition, the Company is experiencing
difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations, and its wholly owned subsidiary, TSI, has filed a
petition for relief under Chapter 11 of the Federal Bankruptcy Laws.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company which, in turn, is dependent upon the Company's ability to
meet its financing requirements on a continuing basis, and to succeed in
its future operations, and is also dependent upon the ability of the
Company to achieve a satisfactory plan of reorganization for TSI (see Note
9). The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management has taken the steps described below to revise its operating and
financial requirements, which it believes are sufficient to provide the
Company with the ability to continue in existence; however, there can be
no assurance that management's plans can be accomplished.
1) The Company has undertaken steps to reduce selling, general and
administrative expenses.
2) The Company sold its corporate headquarters in New Rochelle, New
York and downsized to a smaller leased space in White Plains, New
York (see Note 5).
3) The Company is seeking a working capital facility to finance its
accounts receivable.
4) The Company plans to exercise a warrant it holds to purchase 95,238
shares of Talk America Holdings, Inc. ("Talk") and then sell the
related shares. The exercise price is $6.30 per share, and the
market price as of February 2, 2004 was $ 10.10 per share. The
Company is in the process of requesting that the underlying shares
be registered.
5) The Company is exploring raising capital through an equity
placement.
F-17
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
3. Investment Securities
At November 30, 2002:
Fair Unrealized
Cost Value Holding Gain
-------- --------- ------------
Equity securities $10,309 $ 80,231 $ 69,922
The Company's investment securities consisted of 10,143 common shares of
Talk, valued at $7.91 per share at November 30, 2002. In addition, the
Company holds a non-marketable warrant to purchase 95,238 Talk shares at
$6.30 per share, expiring in 2005. The Talk shares have been subject to
significant market fluctuations. During the years ended November 30, 2003
and 2002, the Company sold 10,143 shares and 410,662 shares, resulting in
gains of $87,965 and $1,380,911.
4. Other Investments
The Company held shares in Cordia Corporation (Cordia), a publicly-held
company whose shares were quoted in the over-the-counter market. Cordia is
controlled by entities owned by a shareholder and former employee of the
Company and members of his family. Due to the thinly-traded nature of the
Cordia shares, such shares had not been accounted for as a marketable
equity security in accordance with Statement of Financial Accounting
Standards No. 115, but instead were carried at cost.
During the year ended November 30, 2003 and 2002, the Company sold 70,000
and 127,000 shares of Cordia stock, resulting in gains of $33,722 and
$73,358. The shares were sold at a significant discount to published
market prices. At November 30, 2003, the Company wrote off its remaining
investment in Cordia amounting to $71,430, because the value of the Cordia
investment was deemed to be worthless.
F-18
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
5. Property, Plant and Equipment
2003 2002
---------- ----------
Land $ -- $ 225,000
Building -- 1,302,498
Building improvements -- 221,175
Machinery and equipment 80,532 679,307
Computer equipment and software 269,351 1,508,157
Furniture and fixtures 90,452 253,880
---------- ----------
440,335 4,190,017
Less accumulated depreciation and amortization 414,944 2,363,182
---------- ----------
$ 25,391 $1,826,835
========== ==========
On October 8, 2003, the Company sold its New Rochelle, New York corporate
headquarters. The Company received proceeds of $2,200,000 and used
$1,100,000 of such proceeds to retire in full the mortgage note on this
property (Note 7). As a result of the sale, the Company recorded a gain of
approximately $546,000 in the fourth quarter of the current fiscal year.
The Company placed $100,000 in escrow to be used to remedy potential
environmental costs. As of November 30, 2003, approximately $91,000
remains in escrow, and is included in prepaid expenses and other current
assets. The Company expects to receive the remainder of the escrow within
the next twelve months, as the Company believes that there are no
additional costs to be incurred.
6. Short-Term Borrowings
Short-term borrowings consists of an unsecured line of credit agreement
with a finance company, up to $150,000, due on demand with interest
payable monthly at the prime lending rate plus 2% (6.0% at November 30,
2003) (see Note 9).
During the year ended November 30, 2003, the Company borrowed $380,000
from certain individuals that was repaid upon the sale of the corporate
headquarters described in Note 5. Interest expense related to such
borrowings amounted to approximately $45,000, including the issuance by
the Company of 630,000 shares of common stock valued at approximately
$44,000.
F-19
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
7. Long-Term Debt and Capital Lease Obligations
The Company's former Essex subsidiary (see Note 13) had revolving credit
borrowings from RFC Capital Corporation ("RFC"). In connection with the
borrowing, the Company granted RFC warrants to purchase 200,000 shares of
its common stock at $1.54 per share. The warrants expire on October 23,
2010. The fair market value of the warrants granted to RFC of $313,440 was
determined by the use of the Black-Scholes method, and was written off as
interest expense during 2001. On February 14, 2002 in connection with an
amendment to the loan agreement, the Company was charged a $200,000 fee,
which was expensed during 2002. The loan was repaid in full during August
2002.
On December 7, 2000, the Company acquired a building in New Rochelle, New
York, which served as the Company's headquarters. The purchase price of
the building was $1,500,000, of which $1,100,000 was paid with the
proceeds of a mortgage loan from the seller, and the remainder of the
purchase price was paid in cash at closing. The mortgage loan required
interest payments only on a monthly basis through December 2005, when the
entire loan principal balance became due. The interest rate was 10%
through December 2001, and 11% for the remaining period. See Note 5
regarding sale of the building and repayment of the mortgage loan.
Long-term debt consists of the following:
2003 2002
---------- ----------
Mortgage note payable $ -- $1,100,000
Equipment loans payable in aggregate monthly
installments of $1,497 including
interest ranging from 4.90% to 5.90%
maturing at various dates through 2004 -- 32,187
Capital lease obligations (Note 11) 39,360 70,197
---------- ----------
39,360 1,202,384
Less current maturities 39,360 57,379
---------- ----------
$ -- $1,145,005
========== ==========
F-20
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
8. Income Taxes
At November 30, 2003, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately nineteen million dollars
expiring in the years 2004 through 2022. There is an annual limitation of
approximately $187,000 on the utilization of approximately $1,300,000 of
such net operating loss carryforwards under the provisions of Internal
Revenue Code Section 382.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities as of November 30, 2003 and 2002 are as follows:
2003 2002
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 6,640,000 $ 8,160,000
Allowance for doubtful accounts and accruals 60,000 930,000
Depreciation and impairment charge -- 280,000
----------- -----------
6,700,000 9,370,000
Valuation allowance (6,700,000) (9,370,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The following is a reconciliation of the tax provisions for the two years
ended November 30, 2003 with the statutory Federal income tax rates:
Percentage of Pre-Tax Income
----------------------------
2003 2002
------------ -----------
Statutory Federal income tax rate 35.0% (34.0%)
Utilization of net operating loss carryovers (34.1) --
Operating losses generating no current
tax benefit -- 34.0
------ ------
.9% --
====== ======
F-21
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
9. Subsidiary's Petition for Relief Under Chapter 11
On July 29, 2002, TSI, which had licenses to resell local and long
distance service in four states, filed a voluntary petition for relief
under Chapter 11 of the Federal Bankruptcy Laws in the United States
Bankruptcy Court for the Southern District of New York. Under Chapter 11,
certain claims (liabilities subject to compromise) against TSI in
existence prior to the filing of the petition for relief under the Federal
Bankruptcy Laws, are stayed while TSI continues business operations as a
debtor-in-possession. TSI has filed a plan of reorganization pursuant to
which the capital stock of a reorganized TSI would be sold either to the
Company or to an unrelated third party, and the proceeds from the sale of
the stock of the reorganized entity would be used to make distributions to
creditors of TSI. While the Company currently is unable to predict whether
the plan of reorganization will be consummated, it expects to retain
control of TSI following its expected emergence from bankruptcy in fiscal
2004. Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date, resulting from rejection of executory
contracts, including leases, and from the determination of the Court (or
agreed to by parties-in-interest) of allowed claims for contingencies and
other disputed amounts.
As of November 30, 2003 and 2002, TSI had total assets of approximately
$504,000 and $374,000 and total liabilities of approximately $1,427,000
and $947,000, of which approximately $872,000 and $899,000 represented
pre-petition liabilities and approximately $555,000 and $48,000
represented post-petition liabilities. Pre-petition liabilities subject to
compromise are reflected below:
2003 2002
-------- --------
Line of credit $150,000 $150,000
Trade payables and due
to related parties (Note 12) 619,000 646,000
Other accrued expenses 103,000 103,000
10. Pension Plans
The Company has a defined benefit plan covering two active and a number of
former employees. The benefits provided are primarily based upon years of
service and compensation, as defined. The Company's funding policy is to
contribute annually the minimum amount required to cover the normal cost
and to fund supplemental costs, if any, from the date each supplemental
cost was incurred. Contributions were intended to provide not only for
benefits attributed to service to date, but also for those expected to be
earned in the future. Plan assets consist primarily of investments in
conservative equity securities.
Effective June 30, 1995, the plan was frozen, ceasing all benefit accruals
and resulting in a plan curtailment.
F-22
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
10. Pension Plans (Continued)
Net periodic pension cost (gain) included the following components:
2003 2002
-------- --------
Interest cost on projected benefit obligation $ 54,086 $ 48,591
Return on assets (35,411) (38,287)
Net amortization of (gain) or loss 34,057 20,743
-------- --------
$ 52,732 $ 31,047
======== ========
Following is a summary of significant actuarial assumptions used:
2003 2002
-------- --------
Weighted-average discount rates 7.0% 7.0%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0%
The following table sets forth the Plan's funded status and amounts
recognized in the Company's statement of financial position at:
November 30,
2003 2002
--------- ---------
Accumulated benefit obligation, including vested
benefits of $820,709 and $736,717 at
November 30, 2003 and 2002, respectively ($820,709) ($736,717)
========= =========
Projected benefit obligation for service
rendered to date ($820,709) ($736,717)
Plan assets at fair value 498,149 417,601
--------- ---------
Plan assets in excess of (deficiency in) unfunded
projected benefit obligation (322,560) (319,116)
--------- ---------
Accrued pension cost ($322,560) ($319,116)
========= =========
The Company has a 401(k) profit sharing plan for the benefit of all
eligible employees, as defined. The plan provides for voluntary
contributions not to exceed the statutory limitation provided by the
Internal Revenue Code. The Company may make discretionary contributions.
There were no contributions made for the years ended November 30, 2003 and
2002.
F-23
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
11. Commitments
Operating Leases
Rent expense was $67,000 and $355,000 in 2003 and 2002, respectively. In
addition to the annual rent, the Company pays real estate taxes, insurance
and other occupancy costs on its leased facilities.
The minimum annual commitments under all operating leases that have
remaining non-cancelable terms in excess of one year are approximately as
follows:
Year ended November 30,
-----------------------
2004 $ 84,000
2005 86,000
2006 84,000
2007 78,000
2008 80,000
--------
$412,000
========
Capital Lease Obligations
The Company leases certain machinery and equipment with lease terms
through 2005. Obligations under capital leases have been recorded in the
accompanying financial statements at the present value of future minimum
lease payments, discounted at interest rates ranging from 12.4% to 20.2%.
The capitalized cost and accumulated depreciation included in property and
equipment is as follows:
2003 2002
------- --------
Cost $26,567 $253,276
Accumulated depreciation 23,113 226,436
------- --------
$ 3,454 $ 26,840
======= ========
F-24
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
11. Commitments
Capital Lease Obligations (Continued)
The future minimum lease payments under the capital lease and net present
value of future minimum lease payments for the ensuing years are
summarized as follows:
Year ended November 30,
-----------------------
2004 $ 48,132
Less amount representing interest 8,772
--------
Present value of future minimum
lease payments (Note 7) $ 39,360
========
12. Related Party Transactions
TSI has an agreement, effective January 2, 2002, with Telco Services, Inc.
("Telco"), a corporation owned by a former shareholder, under which Telco
provides TSI with collection, sales and other services. Expenses incurred
in connection with this agreement, which are included in selling, general
and administrative expenses in the consolidated statement of operations,
amounted to $21,127 and $383,944 for the years ended November 30, 2003 and
2002, of which $94,330 had been paid in 2002, and $310,791 and $289,614
was owed to Telco as of November 30, 2003 and 2002, respectively (Note 9).
The President of Telco is also the President of Glad Holdings LLC ("Glad
Holdings") (see Note 13).
During the years ended November 30, 2003 and 2002, the Company billed
Cordia, a related party (see Note 4), $197,224 and $93,335 for rent,
telemarketing services, commissions, and other costs. Cordia billed the
Company $ 395,232 and $52,544 for the years ended November 30, 2003 and
2002 for telecommunications services and other costs. As of November 30,
2003 and 2002, Cordia owed the Company $7,723 and $57,909.
F-25
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
13. Asset Sale
On September 3, 2002, the Company entered into an agreement with Essex
Acquisition Corp. ("EAC"), a wholly-owned subsidiary of BiznessOnline.com,
Inc. ("Biz"), to sell substantially all the assets of Essex (amounting to
$1,102,103 at November 30, 2002), for five dollars plus the assumption of
certain liabilities of Essex, amounting to $10,081,382 at November 30,
2002, including all obligations due and payable to Essex's largest vendor,
Verizon Services Corp. ("Verizon"). EAC entered into an agreement with
Verizon that provided a payment schedule for the liabilities assumed from
Essex and Verizon granted EAC a discount on the assumed liabilities
provided EAC adheres to the payout schedule. EAC also paid the Company
$270,000 to reimburse the Company for amounts paid by the Company to
Essex's lender, RFC. The sale closed on December 31, 2002. As the
creditors of Essex did not consent to the assignment of their claims,
Essex had remained liable for substantially all the obligations assumed in
the sale until such time as they were paid. The June 30, 2002 unaudited
financial statements of Biz indicated that Biz had a stockholders' equity
deficiency of approximately $20,500,000 and had negative working capital
of approximately $3,500,000. The most recent independent auditor's report
of Biz expressed significant doubt about Biz's ability to continue as a
going concern. These factors indicated that there was significant
uncertainty as to Biz and its subsidiaries' ability to repay the
obligations described above. Accordingly, the Company did not record any
gain until Essex was released from the assumed obligations. During the
period December 1, 2002 through September 11, 2003, EAC had settled
liabilities of approximately $3,511,000 and accordingly, gain was recorded
for such amount.
On September 11, 2003, the Company sold all the outstanding capital stock
of Essex to Glad Holdings (see Note 12), a New Jersey limited liability
company, for an aggregate purchase price of $100 and a general release
from Glad Holdings with respect to any and all matters arising prior to
September 11, 2003. The Company, based on all available information and
consultation with counsel has concluded that it is unlikely that any
creditor of Essex would be able to hold the Company responsible for any
debts or liabilities of Essex. As a result thereof, the Company believes
it has been released of all the liabilities related to Essex, which
amounted to approximately $7,314,000 on such date, and accordingly,
recorded such amount as gain in the fourth quarter of the current fiscal
year.
F-26
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
13. Asset Sale (Continued)
Assets and liabilities transferred to EAC consisted of the following at
November 30, 2002:
Assets:
Cash $ 109,134
Accounts receivable, net 872,092
Property and equipment, net 36,820
Security deposits 84,057
-----------
$ 1,102,103
===========
Liabilities:
Accounts payable and accrued expenses $ 9,194,427
Taxes payable 778,725
Capital lease obligations 108,230
-----------
$10,081,382
===========
The following unaudited pro forma summary presents information as if the
sale of Essex's assets had occurred at the beginning of the earliest
period presented. The pro forma amounts include certain adjustments that
eliminate all the operations of Essex for the periods presented. The pro
forma information does not necessarily reflect the actual results that
would have occurred had the sale taken place for the periods presented,
nor is it necessarily indicative of the future results of operations of
the remaining company:
F-27
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
13. Asset Sale (Continued)
Unaudited
-----------------------
2003 2002
----------- ---------
Revenues $ 4,674,808 $ 284,197
----------- ---------
Loss from continuing operations (2,106,605) (878,598)
----------- ---------
Net loss ($2,106,605) ($878,598)
----------- ---------
Basic and diluted loss per share ($.13) ($.06)
=========== =========
14. Stockholders' Equity
The Company is authorized to issue up to 1,300 shares of Series B
Preferred stock $.10 par value, and such stock is entitled to receive
dividends when as, and if dividends are declared by the Company on its
common stock. Each holder of Series B preferred stock has the right, at
the option of the holder, to convert each share of such stock into 1,000
shares of common stock. The Company has the right to convert each share of
Series B preferred stock into common stock at the same conversion ratio.
The conversion price of shares of Series B preferred stock is subject to
adjustment in the event of any reclassification, subdivision or
combination of the Company's outstanding common stock into a greater or
smaller number of shares by a stock split, stock dividend or other similar
event. In the event of a dissolution, liquidation or winding up of the
Company, the holders of Series B preferred stock are entitled to receive,
if available, prior and in preference to the holders of common stock, an
amount equal to $1,000 per share. Thereafter, any remaining assets, if
any, would be distributed ratably to the holders of common stock. The
holders of shares of Series B preferred stock are entitled to that number
of votes on all matters presented to shareholders equal to the number of
shares of common stock then issuable upon conversion of such shares of
preferred stock. Without the approval of the holders of at least a
majority of the Series B preferred stock then outstanding voting
separately as a class, the Company may not amend its Certificate of
Incorporation in any way that adversely affects the rights and preferences
of the holders of the Series B preferred stock as a class. During 2001,
certain of the Series B shareholders elected to convert their shares to
common shares, resulting in the issuance of 100,000 shares of common
stock. During 2003, the remaining Series B shareholder converted its
shares to common shares, resulting in the issuance of 16,000 shares of
common stock.
F-28
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
14. Stockholders' Equity (Continued)
The following is a summary of outstanding options:
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- -------------- ---------
Outstanding November 30, 2001 2,930,329 $.25 - $4.88 $1.52
Granted during year ended
November 30, 2002 20,000 $.05 $ .05
Exercised during year ended
November 30, 2002 (200,000) $.25 $ .25
Canceled during year ended
November 30, 2002 (1,131,876) $.72 - $4.19 $1.59
----------
Outstanding November 30, 2002 1,618,453 $.05 - $4.88 $1.60
Granted during year ended
November 30, 2003 740,000 $.10 $ .10
Canceled during year ended
November 30, 2003 (635,119) $.58 - $4.88 $1.91
----------
Outstanding November 30, 2003 1,723,334 $.05 - $2.50 $ .84
----------
Options exercisable,
November 30, 2003 621,334 $.72 - $2.50 $1.43
----------
Options exercisable,
November 30, 2002 1,037,452 $.58 - $4.88 $1.69
----------
F-29
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
14. Stockholders' Equity (Continued)
The following table summarizes information about the options
outstanding at November 30, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
------------------- ----------- ------------ --------- ------------ ------------
$ .05 - $ .97 828,000 4.18 $ .17 76,000 $ .91
$1.35 - $1.44 843,334 1.46 $1.41 493,334 $1.41
$2.25 - $2.50 52,000 1.18 $2.38 52,000 $2.38
On October 24, 1996, the shareholders of the Company adopted the eLEC
Communications Corp. 1996 Restricted Stock Award Plan (the "Restricted
Stock Award Plan"). An aggregate of 400,000 shares of common stock of the
Company has been reserved for issuance in connection with awards granted
under the Restricted Stock Award Plan. Such shares may be awarded from
either authorized and unissued shares or treasury shares. The maximum
number of shares that may be awarded under the Restricted Stock Award Plan
to any individual officer or key employee is 100,000. No shares were
awarded during 2003 and 2002.
As of November 30, 2003 and 2002, warrants were outstanding to purchase up
to 550,000 shares of the Company's common stock at prices ranging from
$1.54 to $2.50. The warrants expire through October 23, 2010.
On February 13, 2002, the Company received notification from NASDAQ that
its stock was delisted from the NASDAQ Small Cap Market effective February
14, 2002. The Company's stock now trades on the OTC Bulletin Board.
F-30
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
15. Net Income (Loss) Per Common Share
Net income (loss) per common share data was computed as follows:
2003 2002
------------ ------------
Net income (loss) $ 8,323,211 ($3,319,387)
============ ===========
Weighted average common shares outstanding 15,771,219 15,607,183
Effect of dilutive securities, stock options and preferred stock 70,722 --
------------ ------------
Weighted average dilutive common shares outstanding 15,841,941 15,607,183
============ ===========
Net income (loss) per common share - basic $ .53 ($.21)
============ ===========
Net income (loss) per common share - diluted $ .53 ($.21)
============ ===========
16. Risks and Uncertainties
The Company buys substantially all of the telecommunication services that
it resells from Regional Bell Operating Companies ("RBOC's"), and long
distance carriers and is, therefore, highly dependent upon them. The
Company believes that its relationship with them is satisfactory. The
Company believes that there are less desirable suppliers of
telecommunication services in the geographical location in which the
Company conducts business. In addition, the Company is at risk to
regulatory agreements that govern the rates to be charged to the Company.
In light of the foregoing, it is reasonably possible that the loss of the
Company's relationship with such vendors or a significant unfavorable
change in the regulatory agreements structure would have a severe
near-term impact on the Company's ability to conduct its
telecommunications business.
Future results of operations involve a number of risks and uncertainties.
Factors that could affect future operating results and cash flows and
cause actual results to vary materially from historical results include,
but are not limited to:
- The Company's business strategy with respect to bundled local and
long distance services may not succeed.
- Failure to manage, or difficulties in managing, the Company's growth
operations or restructurings including attracting and retaining
qualified personnel and opening up new territories for its service
with favorable gross margins.
- Dependence on the availability or functionality of incumbent local
telephone companies' networks, as they relate to the unbundled
network element platform or the resale of such services.
F-31
eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 2003 AND 2002
16. Risks and Uncertainties (Continued)
- Increased price competition in local and long distance service.
- Failure or interruption in the Company's network and information
systems.
- Changes in government policy, regulation and enforcement.
- Failure of the Company's collection management system and credit
controls efforts for customers.
- Inability to adapt to technological change.
- Competition in the telecommunications industry.
- Inability to manage customer attrition and bad debt expense.
- Adverse change in Company's relationship with third party carriers.
- Failure or bankruptcy of other telecommunications companies whom the
Company relies upon for services and revenues.
- Lack of capital, borrowing capacity, and inability to generate cash
flow.
F-32
eLEC COMMUNICATIONS CORP.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
This is a plan pursuant to which non-qualified stock options to purchase
the common stock, par value $.10 per share (the "Common Stock"), of eLEC
Communications Corp., a New York corporation (the "Company"), are granted to
non-employee directors of the Company. This plan is known as the Non-Employee
Director Stock Option Plan (the "Plan"). The purpose of the Plan is to obtain
and retain the services of qualified persons who are not full-time employees of
the Company to serve as directors of the Company, and to demonstrate the
Company's appreciation for their service on its Board of Directors.
Section 1. Administration. The Plan shall be administered by the Board of
Directors of the Company (the "Board of Directors"). The Board of Directors, in
its discretion, may delegate any or all of its authority, powers and discretion
under the Plan to a committee (the "Committee") of the Board of Directors; and
the Board of Directors in its discretion may re-vest any or all such authority,
powers and discretion in itself at any time. The Board of Directors, subject to
the provisions of the Plan and Sections 2 and 4 in particular, shall have the
power to construe the Plan, to determine all questions thereunder, and to adopt
and amend such rules and regulations for the administration of the Plan as it
may deem desirable.
Section 2. Number of Shares; Eligibility and Grants of Options. There is
no maximum number of shares of Common Stock for which options may be granted
under the Plan. The number of shares for which options may be granted shall be
as determined by resolution of the Board of Directors from time to time. In the
event that an option granted under the Plan expires or is terminated unexercised
as to any shares covered thereby, such shares shall thereafter again be
available for the purposes of the Plan. Each member of the Board of Directors
serving on the Effective Date of the Plan (as defined below), who is not a
full-time employee of the Company ("non-employee director"), shall be granted
without further action by the Board of Directors or the Committee an option to
purchase 10,000 shares of the Company's Common Stock on the Effective Date of
the Plan. Thereafter, on the first business day following each subsequent annual
meeting of stockholders of the Company (i.e. commencing with the 2002 annual
meeting), each non-employee director shall be granted without further action by
the Board of Directors or the Committee a non-qualified stock option to purchase
10,000 shares of the Company's Common Stock. As soon as practicable after the
grant of an option under the Plan, the Company and the non-employee director
shall enter into a Stock Option Agreement evidencing the option so granted. Such
agreement shall be in such form, consistent with the Plan, as the Board of
Directors shall deem appropriate.
Section 3. Adjustment of Number of Shares. In the event that a dividend or
stock split hereinafter shall be declared upon the Common Stock of the Company
payable in shares of Common Stock of the Company, the number of shares of Common
Stock then subject to any outstanding option under the Plan and the number of
shares as to which an option is to be granted to any non-employee director under
Section 2 of the Plan shall be adjusted by adding to each such share the number
of shares which would be distributable thereon if such share had been
outstanding on the date fixed for determining the stockholders entitled to
receive such stock
dividend or stock split. In the event that the outstanding shares of the Common
Stock of the Company shall be changed into or exchanged for a different number
or kind of shares of stock or other securities of the Company whether through
reorganization, recapitalization or reclassification, then there shall be
substituted for each share of Common Stock subject to or to be subject to any
such option under Section 2, the number and kind of shares of stock or other
securities into which each outstanding share of Common Stock shall be so changed
or for which each such share shall be exchanged.
In the event there shall be any change, other than as specified above in
this Section 3, in the number or kind of outstanding shares of Common Stock of
the Company or of any stock or other securities into which such Common Stock
shall have been changed or for which it shall have been exchanged, then the
Board of Directors shall make such adjustment, if any, as it deems equitable in
the number and/or kind of shares or other securities subject to outstanding
options or subject to options to be granted under Section 2 hereof. In the case
of any such substitution or adjustment as provided for in this Section, the
option price for each share covered thereby prior to such substitution or
adjustment shall be the option price for all shares of stock or other securities
which shall have been substituted for such share or to which such share shall
have been adjusted pursuant to this Section. No adjustment or substitution
provided for in this Section 3 shall require the Company to sell a fractional
share, and the total substitution or adjustment with respect to each option
shall be limited accordingly.
Section 4. Exercise and Termination of Options.
(a) Subject to the provisions of Section 6 hereof, each option granted
under the Plan (i) shall vest and become fully exercisable on the one year
anniversary of the grant date, provided that the non-employee director has
continued to serve as a non-employee director during such one-year period; and
(ii) subject to the preceding clause (i), shall be exercisable for a period of
five (5) years from the grant date. If the non-employee director should cease to
serve as a director prior to the vesting of an option by reason of death or
disability (of which the Board of Directors shall be the judge), each such
option granted under the Plan shall be exercisable in full on or after the date
that the non-employee director ceases to serve as a director.
(b) The option price per share of the shares of Common Stock subject to an
option granted under the Plan shall be 100% of the fair market value of a share
of the Common Stock on the day the option is granted. The option price per share
will be subject to adjustment in accordance with the provisions of Section 3 of
the Plan. Any adjustment or determination made by the Board of Directors shall
be conclusive. For purposes of the Plan, as long as the Common Stock is listed
on a Nasdaq Small Market, the fair market value of a share of the Common Stock
on any date shall be the closing sale price of such a share based on actual
transactions on the Nasdaq Small Market on such date, or, if there is no such
closing sale price on such date, the closing sale price of such a share on the
last preceding date on which there was such a closing sale price.
(c) Each option shall automatically terminate upon the occurrence of the
following events: (i) twelve months after the non-employee director ceases to be
a director of the Company
2
by reason of the non-employee director's death or permanent disability (of which
the Board of Directors shall be the sole judge); or (ii) six months after the
non-employee director ceases to be a director of the Company for any reason,
other than as set forth in (i) above.
(d) Options granted under the Plan shall not be transferable by the
non-employee director other than to Permitted Transferees (as defined below), or
other than by will or, if he or she dies intestate, by the laws of descent and
distribution of the state of domicile at the time of his or her death, and such
options shall be exercisable during his or her lifetime only by such
non-employee director, a Permitted Transferee, or by his or her guardian or
legal representative. "Permitted Transferee" means a member of the non-employee
director's immediate family, trusts for the benefit of such immediate family
members, and partnerships in which such immediate family members are the only
partners, provided that no consideration is provided for the transfer. Immediate
family members shall include a non-employee director's descendants (children,
grandchildren and more remote descendants), and shall include step-children and
relationships arising from legal adoption.
Section 5. Manner of Exercise of Option. Options granted hereunder shall
be exercised by delivering to the Secretary of the Company, from time to time
within the time limits specified in Section 4 hereof, a written notice
specifying the number of shares the option holder then desires to purchase
together with (a) a check payable in United States currency to the order of the
Company for an amount equal to the option price for such number of shares, or
(b) shares of Common Stock owned by the option holder duly endorsed to the order
of the Company, with a fair market value equal to the option price for such
number of shares, as of the close of business on the immediately preceding
business day (determined in accordance with Section 4 hereof), or (c) any
combination of the foregoing, and such other instruments or agreements duly
signed by the option holder as in the opinion of counsel for the Company may be
necessary or advisable in order that the issuance of such number of shares
comply with the applicable rules and regulations under the Securities Act of
1933, as amended (the "Securities Act"), any appropriate state securities laws
or any requirement of any national securities exchange or quotation system on
which such stock may be traded. As soon as practical after any such exercise of
an option in whole or in part, the Company will deliver to the option holder at
the principal executive offices of the Company, a certificate for the number of
shares with respect to which the option shall have been so exercised, issued in
the option holder's name. Such stock certificate shall carry such appropriate
legends, and such written instructions shall be given to the Company's transfer
agent, as may be deemed necessary or advisable by counsel to the Company in
order to comply with the requirements of the Securities Act or any state
securities laws. In addition, unless restricted by the Board of Directors,
option holders may elect to pay the purchase price of shares of Common Stock
purchased upon the exercise of options in cash or through the constructive
delivery at the time of such exercise of shares of Common Stock (valued at fair
market value as of the date of exercise) already owned by the option holders, or
any combination thereof, equivalent to the purchase price of such options, and,
as soon as practicable thereafter, a certificate representing the net number of
shares so purchased shall be delivered to the person entitled thereto. Option
holders also may elect to pay, unless restricted by the Board of Directors, the
purchase price, in whole or in part, of shares of Common Stock purchased upon
the exercise of options through the Company's withholding of shares of Common
Stock (valued
3
at fair market value as of the date of exercise) that would otherwise be
issuable upon exercise of such options equivalent to the purchase price of such
options and, as soon as practicable thereafter, a certificate representing the
net number of shares so purchased shall be delivered to the person entitled
thereto.
Section 6. Change in Control. Notwithstanding any other provision of the
Plan, in the event of a change in control, all outstanding stock options will
automatically become fully exercisable. For purposes of this paragraph 6, the
term "change in control" means a change in the beneficial ownership of the
Company's voting stock or a change in the composition of the Board of Directors
which occurs as follows:
(a) any "person" or "group" of persons, as such terms are used in Sections
13 and 14 of the Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Company, any of its subsidiaries, or any employee benefit plan
sponsored by the Company or any of its subsidiaries, becomes the beneficial
owner of thirty percent (30%) or more of the Common Stock issued and outstanding
immediately prior to such acquisition;
(b) a tender offer (for which a filing has been made with the Securities
Exchange Commission ("SEC") which purports to comply with the requirements of
Section 14(d) of the Exchange Act and the corresponding SEC rules) is made for
the stock of the Company, which has not been negotiated and approved by the
Board, provided that in case of a tender offer described in this paragraph (b),
the change in control will be deemed to have occurred upon the first to occur
of: (i) any time during the offer when the person (using the definition in (a)
above) making the offer owns or has accepted for payment stock of the Company
with thirty percent (30%) of the total voting power of the Company's stock or
(ii) three business days before the offer is to terminate unless the offer is
withdrawn first, if the person making the offer could own, by the terms of the
offer plus any shares owned by this person, stock with thirty percent (30%) or
more of the total voting power of the Company's stock when the offer terminates;
or
(c) individuals who were the Board's nominees for election as directors of
the Company immediately prior to a meeting of the stockholders of the Company
involving a contest for the election of directors shall not constitute a
majority of the Board of Directors following the election.
(d) the dissolution or liquidation of the Company or the consummation of
any merger or consolidation of the Company or any sale or other disposition of
all or substantially all of its assets, if the shareholders of the Company
immediately before such transaction own, immediately after consummation of such
transaction, equity securities (other than options and other rights to acquire
equity securities) possessing less than thirty percent (30%) of the voting power
of the surviving or acquiring corporation.
For purposes hereof, a person will be deemed to be the beneficial owner of any
voting securities of the Company which it would be considered to beneficially
own under Rule 13d-3 of the Exchange Act (or any similar or superseding statute
or rule) from time to time in effect.
4
Section 7. Effective Date of Plan. The Effective Date of the Plan shall be
the date on which the Plan is approved by the affirmative vote of holders of a
majority of the shares of Common Stock present or represented by proxy at a
meeting of stockholders (which date shall be printed on the first page of the
Plan at such time). It is the intent of the Company that the Plan comply with
Rule 16b-3 of the Exchange Act.
Section 8. Amendment of the Plan. The Board of Directors shall have the
right to amend, suspend or terminate the Plan at any time, and make
modifications or amendments to such Plan; provided, however, that the approval
by the affirmative vote of holders of a majority of the shares of Common Stock
present or represented by proxy at a meeting of stockholders of the Company
shall be required for any amendment. Termination or any modification or
amendment of the Plan shall not, without the consent of a non-employee director,
affect his or her rights under an option previously granted to him.
Section 9. Limitation of Rights.
(a) Neither the Plan, nor the granting of an option nor any other action
taken pursuant to the Plan shall constitute or be evidence of any agreement or
understanding, expressed or implied, that the Company will retain a director for
any period of time.
(b) An option holder shall have no rights as a stockholder with respect to
the shares covered by his or her option until the date of the issuance to him of
a stock certificate therefor, and no adjustment will be made for dividends or
other rights for which the record date is prior to the date such certificate is
issued.
Section 10. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New York, without reference to the
principles of conflicts of law thereof.
5
INDENTURE OF LEASE made as of this day of August, 2003, between
"Landlord" and "Tenant" (as such terms are hereinafter defined).
WITNESSETH:
ARTICLE 1- Definitions and Certain and Certain Provisions
The following terms shall have the meanings set forth opposite each of them.
1.01 Terms pertaining to the identity of the parties:
"Base Rent" - For the first Rent Year, $61,000.00, payable in monthly
installments of $5,083.33.
For the second Rent Year, $63,000.00, payable in monthly
installments of $5,250.00.
For the third Rent Year, at the rate of $65,000.00,
payable in monthly installments of $5,416.67.
For the fourth Rent Year, at the rate of $67,000.00,
payable in monthly installments of $5,583.33.
For the fifth Rent Year, at the rate of $69,000.00,
payable in monthly installments of $5,750.00.
"Base Operating Year" - Calendar year 2003.
"Base Tax Year" - Calendar year 2003.
"Broker" - Katter Property Company, Inc. and Newmark of Connecticut LLC.
"Building" - That building known as 75 South Broadway, White Plains, New
York.
"Building Standard" - The quality and quantity of work utilized by
Landlord in the Building.
"Commencement Date" - The date on which the Demised Premises are ready for
occupancy as provided in Article 5.
"Demised Premises" - That space on the third floor of the Building
outlined on the floor plan attached hereto as Exhibit A.
"Electric Energy Charge" - $2.75 per annum per square foot of Leased Floor
Space, which charge is in addition to the Base Rent (and as otherwise provided
in Section 12.01).
"Events of Force Majeure" - Acts of God, governmental restrictions or
guidelines, strikes, labor disturbances, shortages of materials and supplies,
power outages and any other causes or events whatsoever beyond Landlord's
reasonable control.
"Expiration Date" - The last day of the calendar month in which occurs the
end of a five year period from the Commencement Date or such earlier date on
which this Lease may expire or be terminated pursuant to the terms hereof. If
the Commencement Date occurs on a day other than the first day of a calendar
month, such period shall be measured from the first day of the calendar month
following the Commencement Date.
"Guarantor" - That party signing the Guaranty attached hereto as Exhibit
C, whose name and address are: [None].
1
"Interest Rate" - The annual rate of interest equal to two percentage
points above the corporate base lending rate most recently announced by any of
Citibank., N.A., The Chase Manhattan Bank and Bankers Trust Company (to be
chosen by Landlord), as same may change from time to time.
"Landlord" - South Broadway WP, LLC, a limited liability company having an
office c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New York, New
York 10017.
"Landlord and Others in Interest" - Landlord, Landlord's managing agent,
the lessor of any superior lease and/or the holder of any superior mortgage.
"Landlord's Contribution" - $None per square foot of Leased Floor Space.
"Leased Floor Space" - The total number of rentable square feet of space
in the Demised Premises, which the parties stipulate and agree is 4,000 square
feet for purposes of this Lease.
"Managing Agent" - Newmark & Company Real Estate, Inc., having an address
at 125 Park Avenue, New York, New York 10017 (sometimes referred to as "Building
Management").
"Parking Spaces" - 2 parking spaces (X) designated by Landlord in the
Building's parking garage and 6 parking spaces (X) in the area and on the level
leased by Landlord in the garage connected to the hotel known as the Esplanade,
adjoining the Building, available for use by Tenant on first come, first served
basis, for which Tenant shall pay Landlord, as additional rent, the Parking
Spaces Rent.
"Parking Spaces Rent" - $None per month for each Building parking space
and $None per month for each Esplanade parking space, plus applicable taxes,
subject to adjustment as provided in Section 11.02(e) hereof.
"Permitted Use" - Only as executive, administrative and general offices
and related incidental uses to the extent permitted by all applicable laws.
"Prepayment" - $6,000.00 to be paid upon execution of this Lease and
applied toward the first full monthly installment of Base Rent and Electric
Energy Charges, if any.
"Real Property" - The land upon which the Building stands and any
adjoining land (and improvements thereon) used in connection with the Building.
"Rent" - Shall mean Base Rent and additional rent.
"Rent Year" - The twelve-month period beginning on the first day of the
Term and ending with the day preceding the first anniversary of such date, and
each twelve-month period thereafter.
"Security Deposit" - $18,000.00 deposited pursuant to Article 23.
"Standard Business Hours" - 8:00 a.m. to 6:00 p.m. Mondays through
Fridays, excluding, however, the days observed as legal holidays by the Federal
or State government in which the Building is located.
"Tenant" - New Rochelle Telephone Corp., a corporation organized under the
laws of the State of New York, having its office at 543 Main Street, New
Rochelle, New York 10801.
"Tenant's Plans" - Tenant's final working plans, specifications and
drawings including engineering plans and drawings covering all Tenant's Work.
"Tenant's Property" - All Tenant's trade fixtures, furnishings and
equipment including, without limitation, computer and communications equipment
and facilities (excluding any electric meter and related wiring) whether or
2
not attached to or built into the Demised Premises, which are installed by or
for the account of Tenant (excluding any work performed by Landlord at
Landlord's cost and expense), and which can be removed without damage to the
Building.
"Tenant's Proportionate Share" - 4.42%.
"Tenant's Work" - All work to be performed in the Demised Premises to make
them ready for occupancy by Tenant.
"Term" - The period beginning on the Commencement Date and ending at noon
on the Expiration Date.
"Work Charge" - The charge described in Section 4.02G in connection with
the performance of certain work by Landlord and/or Tenant.
1.02 Alternatives applicable to this Lease:
Tenant's Plans shall be prepared by:
|_| Landlord or (X) Tenant, at
|X| Landlord's cost or ( ) Tenant's cost, or
|_| by Landlord to the extent of $_______ per square foot of
Leased Floor Space and the balance by Tenant.
Landlord shall deliver the Demised Premises to Tenant:
|_| "as is" (as provided in Section 4.01); or
|_| Landlord shall perform Tenant's Work
|_| at Landlord's cost and expense, to the extent shown on
Tenant's preliminary plans attached hereto as Exhibit A, or
|X| at Landlord's cost and expense to the extent Tenant's Work is
Building Standard, or
|_| at Tenant's cost and expense, toward which Landlord shall
grant to Tenant a credit to the extent of the cost of Tenant's
Work, not to exceed Landlord's Contribution.
Electricity consumed in the Demised Premises shall be at:
|X| the Electric Energy Charge, or
|_| the Electric Submeter Charge, as measured by a submeter,
furnished and installed by Landlord, at Tenant's expense (and
as otherwise provided in Section 12.01).
ARTICLE 2 - Demise and Demised Premises
2.01. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord the Demised Premises for the Term, for the rents hereinafter reserved
and upon and subject to the conditions and covenants hereinafter provided,
together with the right to utilize in common with others, for ingress and
egress, the lobbies, elevators, parking areas and other public portions of the
Real Property and Building. Nothing herein contained shall be construed as a
grant or demise to Tenant of the roof or exterior walls of the Building, of the
space between the drop ceiling and floor or roof above, and below the floor of,
the Demised Premises, and/or of any parking or other areas adjacent to the
Building.
ARTICLE 3- Rent
3.01. During each Rent Year, Tenant shall pay to Landlord the Base Rent
reserved under this Lease (plus any rent tax which hereafter may be imposed
thereon) when due, in lawful money of the United States, without notice or
demand and without abatement, deduction or set-off, in equal monthly
installments in advance on the first
3
day of each month, at the office of Managing Agent or such other place as
Landlord may designate, except that the Prepayment shall be paid on Tenant's
execution of this Lease; and "additional rent" consisting of all other sums of
money as and when the same become due and payable by Tenant to Landlord
hereunder (for default in payment of which Landlord shall have the same remedies
as for a default in payment of Base Rent). Notwithstanding anything hereinabove
to the contrary, all payments under this Lease shall be made payable to Managing
Agent, unless and until Landlord shall give notice to Tenant to the contrary.
Except as expressly provided herein, all additional rent shall be due and
payable ten (10) days following demand therefor. In the event the Commencement
Date shall be a date other than the first day of a calendar month, the first
monthly installment of Base Rent due after the Commencement Date shall be pro
rated accordingly.
3.02. If Tenant fails to pay any installment of Base Rent or additional
rent when due, Tenant shall pay a late charge of $.05 for each $1.00 which
remains unpaid, in compensation for the additional expenses incurred by Landlord
in processing such late payments (which charge will be imposed only once per
month insofar as each specific monthly or other installment or payment is
concerned) plus interest on the unpaid rent computed at the Interest Rate.
3.03. If any check tendered by Tenant, for any payments due, are
dishonored by the payor bank, Tenant shall pay Landlord, without prejudice to
any of Landlord's rights and remedies, in compensation for the additional
administrative expenses incurred by reason of the dishonored check (other than
due to Landlord's fault), the sum of $250.
3.04. If any time during the Term the Rent or any part thereof, shall not
be fully collectible by reason of any law or requirement of public authority,
Tenant shall enter into such agreement or agreements and take such other action
or actions (without additional expense to Tenant) as Landlord may request and as
may be legally permissible, to permit Landlord to collect the maximum rents
which may from time to time during the continuance of such legal rent
restriction be legally permissible (but not in excess of the amounts reserved
therefor under this Lease). Upon the termination of such legal rent restriction
prior to the expiration of the Term (a) the Rent shall become and thereafter be
payable hereunder in accordance with the amounts reserved in this Lease for the
period of the term following such termination and (b) Tenant shall pay Landlord,
if legally permissible, an amount equal to (i) the Rent which would have been
paid pursuant to this Lease but for such legal rent restriction less (ii) the
Rent actually paid by Tenant to Landlord during the period such rent restriction
was in effect.
3.05. In the event of a default by Tenant in its obligations under this
Lease, beyond applicable grace periods, if any, in addition to Landlord's other
rights and remedies and to the damages set forth in Article 30 hereof, there
shall be immediately payable by Tenant to Landlord, as additional rent, the
amount of all of the following which are incurred, granted or assumed by
Landlord in connection with the Lease: all rent abatements and concessions; free
rent; rent credits, contributions or payments by Landlord with respect to work
or improvements performed in the Demised Premises; and/or obligations, expenses
and liabilities of Tenant assumed or paid for by Landlord in consideration of
Tenant's entering into this Lease.
ARTICLE 4 - Preparing the Demised Premises
4.01. Intentionally omitted.
4.02. In the event that pursuant to Section 1.02 Landlord is to perform
Tenant's Work in the Demised Premises, the following provisions shall be
applicable:
A. Unless Tenant's Plans have been prepared, approved and initialed
by the parties, if Tenant is to prepare Tenant's Plans, Tenant shall furnish to
Landlord Tenant's Plans for all Tenant's Work not later than ten (10) days from
the date of this Lease. Any revisions of Tenant's Plans clearly shall be marked
to show all changes from the immediately preceding version thereof submitted to
Landlord. Landlord shall not be required to commence any work until Tenant's
Plans have been received, receipted and approved as provided herein.
B. Tenant's Plans are subject to Tenant's and Landlord's approval,
which shall not be unreasonably withheld. Landlord's approval of Tenant's Plans
shall not be deemed a statement or representation by
4
Landlord as to the completeness of such plans, or that the work included therein
is in compliance with any legal requirements, or that performance of Tenant's
Work will cause the Demised Premises to be fit for Tenant's intended purpose.
Tenant's Plans shall be prepared by Philip Fruchter, AIA, shall be in compliance
with all laws, codes and regulations and shall be sufficient to obtain a
building permit for all work shown thereon and a permanent certificate of
occupancy.
C. Intentionally omitted.
D. Notwithstanding anything to the contrary, Tenant shall, at
Tenant's cost and expense, perform all work pertaining to its telephone, data
systems, telecommunications, computer power, public address and security
requirements, conduit, wire, outlets and systems, all low-voltage wiring of
whatever nature, furnishings, work stations and equipment, whether or not shown
on Exhibit A or Tenant's Plans and shall coordinate such work with Landlord's
work schedule so as not to delay any Tenant's Work or other work being performed
by Landlord.
E. In the event that pursuant to Section 1.02 Landlord is to
perform, at Landlord's cost and expense, Building Standard Tenant's Work, then
to the extent of any other work performed by Landlord for Tenant (whether shown
on Tenant's Plans, resulting from changes in Tenant's Plans, or otherwise),
Landlord shall perform such other work at the Work Charge. Any items of Building
Standard work not shown on Tenant's Plans shall be deemed abandoned by Tenant,
except where Tenant's Plans reflect work and materials in substitution of like
Building Standard work and materials, in which event Tenant shall receive a
credit for omission of such like Building Standard work and materials.
F. Intentionally omitted.
G. All work to be performed by Landlord for Tenant under this Lease
to the extent it is to be performed at Tenant's (as opposed to Landlord's such
as for Building Standard Tenant's Work) cost and expense shall be performed at
the "Work Charge", which shall mean (a) the cost charged to Landlord by, or paid
by Landlord to, Landlord's architects and engineers, contractors, suppliers,
materialmen, employees and agents in connection with such work, plus 10% of such
costs for Landlord's general conditions (such as cleanup, removal of waste and
debris, protection of work in progress, utilities, supervisory personnel and use
of elevators and hoists), and (b) added to such amount under clause (a) shall be
an additional sum of 10% of such amount for Landlord's overhead. With respect to
any work in connection with the Demised Premises performed by Tenant, the Work
Charge shall mean the sum computed above, except that, for purposes of
computation thereunder, reference therein to cost shall mean to those costs of
Landlord's architects, engineers and supervisory personnel reasonably necessary
in connection with the approval of Tenant's plans for such work or in the
performance of such work. Tenant shall pay Landlord the Work Charge within 10
days of being billed therefor, from time to time.
4.03. If Tenant shall employ or use any contractor or subcontractor other
than Landlord in the performance of any work in connection with Tenant's initial
occupancy, all of Tenant's duties and obligations set forth in Article 17
(relating to Tenant's duties and obligations in making Tenant's Alterations)
shall be applicable to and binding upon Tenant with respect to any such work.
Landlord may, in its sole discretion, permit Tenant and or its agents or
contractors to enter the Demised Premises at Tenant's sole risk prior to the
Commencement Date in order to perform work therein through its own contractors.
If at any time in Landlord's reasonable judgment such entry shall cause
interference with the timely completion of the Demised Premises (if Landlord is
performing work therein) or labor disputes then said license may be withdrawn by
Landlord immediately upon written notice to Tenant. In the event Landlord incurs
any charges as a result of such Tenant's entry, such charges shall be deemed
additional rent.
4.04. Landlord's agreement to do any work in the Demised Premises as set
forth herein shall not require it to incur overtime costs and expenses and shall
be subject to Events of Force Majeure.
4.05. All materials and workmanship provided or performed by Landlord
shall be Building Standard quality unless otherwise specified.
4.06. Tenant shall be responsible for all damage caused by trades employed
by Tenant.
5
4.07. If by reason of (a) Tenant's failure to submit Tenant's Plans on
their due date, (b) any materials or work in Tenant's Plans not included in the
Tenant's preliminary plans, (c) any changes in or additions to the material or
work on Tenant's Plans or otherwise requested by Tenant, (d) the failure of
Tenant to act promptly when any consent or approval may be requested by
Landlord, or (e) the occurrence of any delays for which Tenant is responsible
under the terms of the Lease ("Delay Conditions"), Landlord is delayed in
completing Tenant's Work, then the Commencement Date and the obligation of
Tenant to pay Base Rent and additional rent shall be accelerated by one day for
each day, or part of a day, during which a Delay Condition existed and the
Demised Premises shall be deemed ready for occupancy on the date they would have
been ready for occupancy if no Delay Conditions had occurred; and the foregoing
shall be applicable whether or not Landlord has completed such work or whether
or not a certificate of occupancy or other permission to occupy shall have
issued or been approved for issuance.
4.08. Tenant's Work (whether performed by Landlord or by Tenant) shall be
performed only during Standard Business Hours in accordance with reasonable
rates and regulations which Landlord may promulgate for construction in the
Building (sometimes called "Construction Rules and Regulations"). If Tenant
requests Landlord to perform work during other hours or if the nature of such
work requires that the work be done during non-Standard Business Hours, or if
Tenant desires to perform any work through its contractors, agents, or
employees, provided Landlord so consents, Tenant shall pay as additional rent,
the cost of employing such additional help as shall be required under the
foregoing rules and regulations, as well as the cost of supervisory personnel
employed by Landlord in connection with the Building. Payment shall be made by
Tenant to Landlord within ten (10) days after being billed therefor.
4.09. Wherever in this Lease reference is made to the performance of work
(a) by Landlord, it shall mean by Landlord or a contractor or contractors chosen
by Landlord, it being understood that Landlord itself shall not be required to
perform such work or construction; and to the extent that, pursuant to this
Lease, the cost of such work or construction is payable by Tenant, such cost
shall be at the Work Charge; and (b) by Tenant, it shall mean at the Work Charge
applicable to work performed by Tenant.
ARTICLE 5- Commencement Date and Ready for Occupancy
5.01. Intentionally omitted.
5.02. Landlord shall perform Tenant's Work for Tenant, and the Demised
Premises shall be deemed ready for occupancy on the earliest date on which all
of the following conditions have been met:
A. Landlord shall have substantially completed Tenant's Work to the
extent it consists of Building Standard work (subject to Delay Conditions as
provided in Section 4.07 hereof); substantial completion shall be deemed to have
occurred even though minor details or adjustments which do not substantially
adversely interfere with Tenant's use of the Demised Premises for the conduct of
its business (and provided Tenant does not use the Demised Premises) may then
not have been completed provided Landlord agrees they will thereafter diligently
be completed; and
B. Means of access have been provided, and the use without material
interference of the facilities necessary to Tenant's occupancy of the Demised
Premises are available to Tenant substantially in accordance with Landlord's
obligations under this Lease.
In the event that Tenant performs any work prior to the Commencement
Date, substantial completion under this Section 5.02 shall be deemed to have
been achieved if incomplete work to be performed by Landlord has not been
completed because, under good construction scheduling practices such work should
be done after still incompleted work to be done by or on behalf of Tenant is
completed.
Notwithstanding the foregoing provisions of this Section 5.02, in
the event a strike or work slowdown applicable to new telephone circuit/line
installations by Verizon employees delays installation of Tenant's telephone
system after such substantial completion, the Commencement Date shall be delayed
one day for each day of such delay up to 30 days.
6
5.03. When the Commencement Date has been determined, Landlord and Tenant
shall, upon the request of either of them, execute and deliver to each other
duplicate originals of a Commencement Date statement prepared by Landlord which
shall specify the Commencement and Expiration Dates of the Term. Upon execution
and delivery of the Commencement Date statement it shall be deemed a part of
this Lease. Any failure of Tenant to execute such statement shall not affect
Landlord's determination of the Commencement Date, and such statement shall be
deemed approved and accepted if not received back by Landlord, or objected to by
notice to Landlord, within fifteen (15) days of submission by Landlord.
5.04. On the Commencement Date, it shall be conclusively presumed that the
Demised Premises were as of the Commencement Date in the condition in which
Landlord was required to deliver the Demised Premises under this Lease, unless
within thirty (30) days (or 180 days for latent defects) after such date Tenant
shall have given Landlord notice specifying in which respects the Demised
Premises were not in satisfactory condition.
ARTICLE 6- Costs of Operation
6.01. As used in this Article, the words and terms which follow mean the
following:
(a) "Base Year Operating Costs" shall mean all Costs of Operation
incurred during the Base Operating Year.
(b) "Operating Year" shall mean each calendar year after the Base
Operating Year in which occurs any part of the Term.
(c) "Costs of Operation Statement" shall mean a written statement
setting forth the amount due from Tenant for a specified Operating Year pursuant
to this Article.
(d) "Costs of Operation" shall mean costs and expenses incurred by
Landlord, directly or indirectly, with respect to the operation, maintenance,
management, security and repair of the Real Property and the Building including,
without limitation, the cost incurred for materials, supplies and equipment;
service contracts; maintenance and repair of grounds, Building systems,
underground pipes, lines, equipment and systems; heating; air-conditioning;
ventilation; cleaning; extermination; rubbish removal; refurbishing; window
washing; elevators; escalators; electric current for unleased portions of the
Building and Real Property; concierge and surveillance services; water;
telephone; insurance; wages, salaries and fringe benefits and taxes respecting
service and maintenance employees of the Building; uniforms and working clothes
for such employees and the cleaning thereof; maintenance, upkeep, repair of the
parking lots located on the Real Property or adjacent to the Building; the
sidewalks, curbs and landscaping located outside and serving the Building;
expenses imposed on Landlord pursuant to any collective bargaining agreement
with respect to employees; payroll, social security, unemployment and other
similar taxes with respect to such employees; accounting fees; legal fees; fees
of any managing agent employed by Landlord (or if no managing agent is employed,
a sum in lieu thereof which is not in excess of the prevailing rate); and sales,
use and other similar taxes applicable to the above items; and those percentages
included in the Work Charge of all the foregoing costs and expenses to cover
Landlord's administrative supervision, overhead and general conditions. The term
"Cost of Operation" shall not include:
(i) Any expense to the extent that Landlord is compensated by
insurance or manufacturer's warranty;
(ii) Taxes (as defined in Article 10), franchise taxes or taxes
imposed upon or measured by the income or profits of Landlord;
(iii) Any executive salary above the grade of building manager;
(iv) Leasehold improvements made by Landlord to the Demised Premises
or in any other space in the Building leased to tenants;
(v) Except as provided in subsection (e), the cost of any item which
should, in accordance with generally accepted accounting principles,
be capitalized on the books of Landlord;
(vi) Any real estate brokerage commissions or other costs incurred
in procuring tenants;
(vii) Any advertising and promotional expenses;
(viii) Legal fees in preparation of this Lease and other leases and
in connection with
7
disputes with any tenants of the Building;
(ix) The cost of any electricity furnished to the Demised Premises
or any other space in the Building leased to other tenants;
(x) The cost of any special work or service performed for any tenant
(including Tenant) whether or not at the cost of such tenant; and
(xi) Mortgage, debt service, financing and refinancing costs and
ground rent.
(e) If Landlord purchases any item of capital equipment or makes any
capital expenditure for the purpose of reducing the Costs of Operation or by
reason of legal or insurance requirements, for the protection of health, safety,
or otherwise to benefit the tenants of the Building, then the cost of such
capital equipment or capital expenditure shall be included as a Cost of
Operation beginning with the year in which such expense is incurred. The amount
of such capital equipment or capital expenditure to be included in each year's
Costs of Operation shall be the amortized amount of such capital equipment or
capital expenditure, on a straight line basis over the estimated useful life,
(but not more than 10 years), plus an interest factor equal to the Interest Rate
at the time of such purchase or expenditure. If Landlord shall lease any such
item of capital equipment, then the annual amount paid by Landlord on account of
such lease shall be included in Costs of Operation.
(f) Whenever in this Lease it is provided that Landlord will perform
certain obligations or services at its cost and expense, the same shall be
included as a Cost of Operation to the extent they otherwise would be pursuant
to this Section 6.01.
6.02 If the Costs of Operation for any Operating Year shall be greater
than the Base Year Operating Costs, Tenant shall pay to Landlord as additional
rent for such Operating Year, an amount equal to Tenant's Proportionate Share of
such increase. Tenant shall make such payments, as a material covenant of this
Lease, on an estimated basis, in advance, in twelve (12) equal monthly
installments, on the first day of each month based upon Landlord's reasonable
estimate of the increased Costs of Operation for such Operating Year, with
appropriate adjustments made, as provided in Section 6.03, when a Costs of
Operation Statement has been furnished to Tenant; such estimated payments shall
continue to be made until modified by Landlord, and Landlord shall have the
right to revise such estimate from time to time and at any time to reflect
changed projections of expenses.
6.03. Following the end of each Operating Year, Landlord shall furnish to
Tenant a Costs of Operation Statement for such Operating Year and Tenant shall
pay the amount shown on said statement within ten (10) days of receipt; or, if
Tenant has overpaid such additional rent, Landlord shall credit the difference
against the next installment(s) of additional rent due hereunder or pay the
difference to Tenant.
When requested by Tenant, and provided that such request is made in
writing within thirty (30) days following the receipt by it of any Costs of
Operations Statement, Landlord will furnish to Tenant such additional back-up
information as may be reasonably necessary for the verification of such Costs of
Operations Statement and will permit the pertinent records to be examined by a
financial officer of Tenant or its independent certified public accountants.
Landlord shall be under no duty to preserve any such records, or any data or
material related thereto, for more than one (1) year after the end of the Base
Operating Year and each Operating Year. Every Costs of Operation Statement shall
be conclusive and binding upon Tenant unless (i) within thirty (30) days after
the receipt of such statement Tenant shall notify Landlord that it disputes the
correctness of the statement, specifying in detail the respects in which the
statement is claimed to be incorrect and, as a material condition to its right
to dispute, Tenant shall have made payment of all amounts included on Landlord's
statement as hereinafter provided, and (ii) if such dispute shall not have been
settled by agreement within thirty (30) days after receipt by Landlord of such
notice from Tenant, the dispute shall have been submitted within that time to a
reputable independent certified public accountant chosen by Landlord, whose
decision (and where reasonably necessary such decision shall be based upon the
opinion of experts whom such accountant may retain) shall be final and binding
on the parties. The cost of such accountant shall be borne by the unsuccessful
party (and if both parties are partially unsuccessful, the accountant shall
apportion the costs between the parties). Pending the determination of such
dispute Tenant shall, as a material covenant of this Lease within ten (10) days
after receipt of such statement, pay additional rent in accordance with
Landlord's statement, but such payment shall be without prejudice. If the
dispute shall be determined in Tenant's favor, Landlord shall, within five (5)
days after notice of such determination, pay or credit Tenant the amount of
Tenant's overpayment of Costs of Operation.
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6.04. Landlord's failure to render a statement with respect to increases
in Costs of Operation for any Operating Year shall not prejudice Landlord's
right to thereafter render a statement with respect thereto or with respect to
any subsequent Operating Year. The rights and obligations of Landlord and Tenant
under the provisions of this Article shall survive the termination of this
Lease.
6.05. Landlord, may, at its option, calculate Costs of Operation on a
fiscal year basis rather than a calendar year basis and, in such event, if less
than a full fiscal year is involved, appropriate adjustments and prorations
shall be made.
ARTICLE 7 - Heat, Ventilating and Air Conditioning
7.01. Landlord shall as a Cost of Operation, maintain and operate the
Building's central heating, ventilating and air-conditioning system(s) and shall
furnish to the Demised Premises through said system(s) heated, outside and
conditioned air ("HVAC"), at reasonable temperatures, pressures and degrees of
humidity and in reasonable volumes and velocity, during Standard Business Hours.
Upon reasonable advance notice from Tenant at least forty-eight hours in
advance, Landlord shall furnish heating, cooling or ventilating service at any
time other than Standard Business Hours (hereinafter called "After Hours"). If
Tenant shall request or use such services After Hours, Tenant shall pay Landlord
therefor, as additional rent and upon rendition of a bill therefore the
prevailing rate for After Hours HVAC usage at the Building, which Landlord may
designate for Building tenants from time to time at Landlord's sole election.
7.02. Any damage caused to the heating, air conditioning, and ventilating
equipment, appliances or appurtenances as a result of the negligence of, or
careless operation of the same by, Tenant or its agents, servants, employees,
licensees, invitees, or visitors shall be repaired by Landlord, and the cost and
expense thereof shall be paid by Tenant, as additional rent, within ten (10)
days after being billed therefor.
7.03. Tenant shall be responsible for the failure of the air-conditioning
systems to adequately cool and dehumidify the Demised Premises where such
failure results from the occupancy of the Demised Premises with more than an
average of one person for each one hundred seventy five (175) square feet of the
Leased Floor Space or where Tenant installs and operates machines and
appliances, the connected electrical load of which when combined with all
lighting fixtures exceeds four (4) watts per usable square foot contained in any
one room or other area or where any part of the Demised Premises is used other
than for offices (including, without limitation, conference rooms, computer
rooms, equipment rooms and kitchens) where the heat release or personnel
occupancy is greater than in normal office space. If Tenant exceeds the
aforementioned occupancy and electrical load criteria and interference with
normal operation of the air conditioning in the Demised Premises results,
necessitating changes in the air conditioning system servicing the Demised
Premises, such changes shall be made by Landlord upon written notice to Tenant
at Tenant's sole cost and expense. Tenant agrees to keep all windows closed, and
to lower and close window coverings when necessary because of the sun's position
whenever the said air conditioning system is in operation, and Tenant agrees at
all times to cooperate fully with Landlord and to abide by all the regulations
and requirements which Landlord may prescribe for the proper functioning and
protection of the said air conditioning system.
ARTICLE 8-Use
8.01. Tenant shall use the Demised Premises only for the Permitted Use and
for no other purpose. Tenant shall not have the right to use or occupy the
Demised Premises until the Commencement Date.
8.02. Tenant shall not permit the Demised Premises to be used in any
manner which would in any way (i) violate any of the provisions of any lease or
mortgage to which this Lease is subordinate, (ii) violate the certificate of
occupancy for the Demised Premises or the Building or any laws or requirements
of public authorities, (iii) make void or voidable any fire or liability
insurance policy then in force with respect to the Building, (iv) constitute a
public or private nuisance, (v) discharge objectionable fumes, vapor or odors
into the Building's heating, ventilating and air conditioning systems, (vi)
impair or interfere with any of the Building services or the proper and economic
heating, air conditioning, cleaning or other servicing of the Building or the
Demised Premises or impair or interfere with the use of any other areas of the
Building.
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8.03. Tenant shall not place any load upon any floor of the Demised
Premises which exceeds the load for which it was designed and which is allowed
by certificate, rule regulation, permit or law.
8.04 If any government license or permit, other than a certificate of
occupancy, shall be required for the lawful conduct of Tenant's business in the
Demised Premises, or any part thereof and if failure to secure such license or
permit would in any way affect Landlord, then Tenant, at its expense, shall
procure and thereafter maintain such license or permit and submit the same for
inspection by Landlord. Tenant shall comply with the terms and conditions of
each such license or permit, but the failure to procure and maintain same shall
not affect Tenant's obligations hereunder.
ARTICLE 9 - Entry, Right to Change Public Portions of the Building, etc. of the
Building, etc.
9.01. Tenant shall permit Landlord to install, use and maintain pipes and
conduits in and through the Demised Premises and unless such installations
reduce the Leased Floor Space in excess of one-half of one (.5%) percent, there
shall be no adjustment in the Rent. Where access doors are required for
mechanical trades in or adjacent to the Demised Premises, Landlord shall furnish
and install such access doors and confine their location wherever practical to
closets, coat rooms, toilet rooms, corridors, and kitchen or pantry rooms.
Landlord and Tenant shall cooperate with each other in the location of
Landlord's and Tenant's facilities requiring such access doors.
9.02. Landlord, its agents or designees shall have the right at all
reasonable times to enter the Demised Premises for the purpose of operating,
maintaining, repairing or altering the Building, its systems and facilities or
the Demised Premises, as Landlord reasonably shall require or as shall be
required for Landlord to perform its duties or rights under this Lease; Landlord
shall also have the right at all reasonable times to enter the Demised Premises
for the purpose of inspecting them or exhibiting them to prospective purchasers,
mortgagees or ground lessees of the Real Property or the Building or to
prospective assignees of any such parties. Landlord shall be allowed to take all
material into and upon the Demised Premises that may be required for the
operation, maintenance, repair or alteration above mentioned without the same
constituting an eviction of Tenant in whole or in part, and the rent reserved
shall in no way abate, except as otherwise provided in this Lease, while said
operation, maintenance, repair or alteration are being made.
9.03. During the twelve (12) months prior to the expiration of the Term,
at all reasonable times, Landlord may enter and exhibit the Demised Premises to
prospective tenants. Landlord, its agents or employees, shall also have the
right to enter on and/or pass through the Demised Premises, or any part thereof,
at such times as such entry shall be required by circumstances of emergency
affecting the Demised Premises or the Building; included among the foregoing
emergencies shall be a situation where water has entered the Demised Premises,
in which event upon Landlord learning thereof Landlord may enter the Demised
Premises and remove such water, and unless caused by Landlord's negligence,
Tenant shall pay Landlord for the cost of such removal as additional rent.
9.04. Landlord shall have the right at any time without thereby creating
an actual or constructive eviction or incurring any liability to Tenant
therefor, to change the arrangements or location of such of the following as are
not contained within the Demised Premises or any part thereof: entrances,
passageways, doors and doorways, corridors, stairs, toilets, and other like
public or service portions of the Building or the Real Property, as well as to
make such changes in or to the entrance doors to the Demised Premises, without
any adjustment in the Rent due hereunder from Tenant.
9.05. All of Landlord's rights under this Article 9 shall be exercised in
such manner as will not unreasonably interfere with Tenant's use and occupancy
of the Demised Premises.
9.06. Landlord shall have the right at any time to name the Building after
any person(s) or tenant(s) and to change any and all such names at any time
thereafter.
9.07. Landlord may limit and restrict the means of access to the Demised
Premises outside Standard Business Hours so long as Tenant's employees and
authorized agents have reasonable access to all parts of the Demised Premises.
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ARTICLE 10 - Adjustment of Rent for Changes in Real Estate Taxes
10.01. As used in this Article 10:
(a) "Real Property" shall mean the Building, the land upon which the
Building stands and any adjoining land used in connection with the Building.
(b) "Taxes" shall mean all real estate taxes, school taxes, sewer
rates and charges and/or transit taxes assessed, levied or imposed upon the Real
Property or Building, or both, or other governmental charges, general, specific,
ordinary or extraordinary, foreseen or unforeseen. If at any time during the
Term the methods or standards of taxation prevailing at the date hereof shall be
altered so that in lieu of or as an addition to or as a substitute for the whole
or any part of the Taxes now levied, assessed or imposed, there shall be imposed
with respect to the Building or the Real Property, (i) a tax assessment, levy,
imposition or charge based on the rents received (whether or not wholly or
partially as a capital levy or otherwise), (ii) an occupancy fee measured by the
rent payable by Tenant to Landlord, or (iii) any other tax, levy, imposition,
charge or license fee, then all of the foregoing items in clauses (i), (ii) and
(iii), as applicable, also shall be deemed to be Taxes.
(c) "Tax Year" shall mean each 12 month period following the Base
Tax Year which falls within the Term.
10.02. If any of the Taxes payable during or attributable to any Tax Year
shall exceed the Taxes payable during or attributable to the Base Tax Year,
then, Tenant shall pay to Landlord as additional rent Tenant's Proportionate
Share of such excess. Such payment of additional rent shall be made within ten
(10) days after the rendition of a statement from Landlord to Tenant setting
forth the amount of additional rent due.
10.03. Notwithstanding the foregoing, in determining Taxes, any tax
abatement or partial assessment granted by any taxing authority as a tax
inducement shall be disregarded; and, in the event of any partial assessment(s)
of the Building based upon less than full completion thereof, the assessment for
the Tax Base Year (and any other partial assessment) and Taxes shall be
projected to what they would have been had the Building been fully-completed.
Upon full assessment, appropriate adjustments shall be made, if necessary, to
any projections so made and any excess paid based thereon; and any amounts
payable as a result of such adjustments from Landlord to Tenant or Tenant to
Landlord, as the case may be, shall be paid in accordance with the provisions of
this Article 10.
10.04. Tenant shall pay as additional rent all increases in Taxes which
may be attributable to additions or improvements to the Demised Premises made by
Tenant or on Tenant's behalf after the Commencement Date. Tenant shall also pay
as additional rent Tenant's Proportionate Share of any assessments for public
betterments levied upon the Real Property. If any assessment is payable in
installments, Tenant shall only be obligated to pay those installments, together
with interest thereon, which are due and payable during the Term. Payment shall
be made by Tenant to Landlord on the rent payment day next following the
issuance of a bill therefor by Landlord to Tenant.
10.05. In the event that, at any time, the Real Property is assessed for
Tax purposes with other property owned by Landlord, and the taxing authorities
are unwilling to separately assess or tax the properties, the Tax attributable
to the Real Property shall be such portion of the Tax on the entire properties
as the value of the Real Property bears to the value of the entire properties,
as such values are determined by the assessor of the municipality in which the
Real Property is located. An informal apportionment by such assessor of the
total assessment of such Real Property shall be binding upon the parties hereto.
10.06. Landlord, at its option, may prior to or at the commencement of any
Tax Year, submit to Tenant Landlord's reasonable estimate of any increase in
Taxes, in which event on the first day of each month during said Tax Year Tenant
shall pay to Landlord one-twelfth of such estimated increase. Within 60 days
following the end of the Tax Year Landlord shall submit to Tenant a statement
showing the actual amount of Taxes due for such year. If the total of estimated
payments is less than the actual amount of additional rent due for increased
Taxes, Tenant shall pay to Landlord the difference within 10 days following
rendition by Landlord of an invoice therefor; if the total of
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such estimated payments is greater than such actual additional rent, the
difference shall be credited against the next monthly installments of additional
rent until paid, or such difference shall be paid to Tenant. Landlord's failure
to render a statement with respect to increases in Taxes for any year shall not
prejudice Landlord's right to thereafter render a statement with respect thereto
or with respect to any subsequent year.
10.07. Tenant hereby waives any and all right which Tenant may have
(whether at law, equity, or otherwise) to commence or participate in any action
relating to reduction or refund of Taxes. If, during the Term, Landlord shall
receive a Tax refund for any year after the Base Tax Year, Tenant shall be
entitled to that portion of the refund applicable to an increase in said Tax,
after deducting from such refund and interest that portion of the costs and
expenses (including experts' and attorneys' fees) of obtaining such refund.
Tenant shall pay to Landlord Tenant's Proportionate Share of the costs and
expenses of (but not to exceed savings resulting from) seeking any Tax reduction
or refund, as additional rent, unless such protest, action or proceeding
pertains solely to a reduction in or refund of Base Taxes.
10.08. In the event that at any time after the Base Tax Year, the Taxes
for any Tax Year are reduced (as a result of settlement, final determination,
legal proceedings or otherwise), so that the Taxes payable for such Tax Year are
less than the Taxes payable for the Base Tax Year, or in the event that Taxes
for the Base Tax Year are so reduced, then in either such event: (i) the Taxes
for the Base Tax Year shall become such lower amount effective as of the Tax
Year to which said settlement or final determination pertains; and (ii) any
prior payments by Tenant shall be recalculated so that Tenant shall pay Landlord
Tenant's Proportionate Share of the amount by which Taxes during Tax Years for
which Tenant was responsible to make payment to Landlord are further in excess
of Taxes for the Base Tax Year as a result of such reduction.
ARTICLE 11 - Landlord's Services
11.01. Landlord shall, as a Cost of Operation:
(a) Provide public elevator service in the Building during Standard
Business Hours.
(b) Provide cleaning in public portions of the Building except
Saturdays, Sundays and holidays so long as Tenant is not in default hereunder.
(c) Furnish hot and cold water for normal lavatory, drinking and
office cleaning purposes. If Tenant requires, uses or consumes water for any
other purpose, Landlord may install, at Tenant's expense, a meter or meters or
other means to measure Tenant's water consumption and Tenant shall reimburse
Landlord for the cost of all water consumed as measured by said meter or meters
or as otherwise measured.
(d) Maintain and keep in good order and repair the public portions
of the Building (including bathrooms in such public portions but excluding
bathrooms installed by, or at the request of, Tenant or serving only the Demised
Premises).
11.02. (a) Landlord represents that throughout the Term there will be the
Parking Spaces. Tenant shall require its personnel and visitors to park their
vehicles only in the Parking Spaces on a "first come, first served" basis.
Landlord reserves the right at all times to redesignate Parking Spaces. Tenant,
its personnel and visitors shall not at any time park any trucks or delivery
vehicles in any of the parking areas.
(b) All Parking Spaces and any other parking areas, roadways and
driveways used by Tenant, its personnel and visitors will be at their own risk,
and Landlord shall not be liable for any injury to person or property, or for
loss or damage to any vehicle or its contents, resulting from theft, collision,
vandalism or any other cause whatsoever. Landlord shall have no obligation
whatsoever to provide a guard or any other personnel or device to patrol,
monitor, guard or secure any parking areas. If Landlord does so provide, it
shall be solely for Landlord's convenience, and Landlord shall in no way
whatsoever be liable for any acts or omissions of such personnel or device in
failing to prevent any such theft, vandalism, or loss or damage by other cause.
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(c) The vehicles permitted in the Parking Spaces shall include only
normal sized passenger automobiles (or passenger vans of not greater size) to
the extent such vehicles are used by Tenant's employees while they are working
at the Building. No employee shall be permitted to park more than one vehicle in
said parking areas, and no storage or overnight parking of vehicles shall be
permitted except in those areas, if any, designated by Landlord.
(d) Landlord reserves the right from time to time to: (i) change the
area, location and arrangement of Parking Spaces; (ii) restrict parking by
tenants, their officers, agents, employees, customers and invitees, to
designated areas; (iii) discontinue, restrict or temporarily suspend use of all,
or any portion of, the Parking Spaces for such period of time as may be
necessary in Landlord's sole discretion, to perform maintenance or repairs; (iv)
limit the parking of vans, limousines and other large vehicles to specified
areas; (v) exclude any and all vehicles other than as permitted in Section
11.02(c); and (vi) institute control mechanisms and systems in order to regulate
the use of the common parking area.
(e) The Parking Spaces Rent shall be subject to adjustment to the
prevailing rate charged by Landlord for the type of Parking Spaces provided to
Tenant, which rate Landlord shall designate from time to time in Landlord's sole
discretion.
11.03. Landlord reserves the right, without any liability to Tenant, to
interrupt, curtail or suspend the services required to be furnished by Landlord
under this Lease when the necessity therefor arises by reason of accident,
emergency, mechanical breakdown, or when required by any law, order or
regulation of any federal, state, county or municipal authority, or by reason of
Events of Force Majeure. Landlord shall exercise reasonable diligence to
eliminate the cause of stoppage and to effect restoration of service and shall
give Tenant reasonable notice, whenever practicable, of the commencement and
anticipated duration of such stoppage. No diminution or abatement of rent or
other compensation shall be claimed by Tenant as a result therefrom, nor shall
this Lease or any of the obligations of Tenant be affected or reduced by reason
of such interruption, curtailment or suspension.
11.04. Tenant shall not clean from the outside, or allow to be cleaned
from the outside by anyone acting for or on behalf of Tenant, any window in the
Demised Premises. Notwithstanding Section 11.01(b) hereof, Tenant shall pay to
Landlord on demand the costs incurred by Landlord for (a) cleaning work in the
Demised Premises or the Building required because of (i) misuse or neglect on
the part of Tenant or its employees, agents, contractors, licensees or visitors,
(ii) use of portions of the Demised Premises for preparation, serving or
consumption of food or beverages, reproducing operations, private lavatories or
toilets or other special purposes requiring greater or more difficult cleaning
work than office area, and/or (iii) interior glass surfaces, (iv) non-Building
Standard materials or finishes installed by Tenant or at its request, requiring
greater or more difficult care than if Building Standard, and (b) removal from
the Demised Premises and the Building of (i) any refuse and rubbish of Tenant as
shall exceed that normally accumulated daily in the routine or ordinary business
office occupancy and (ii) all of the refuse and rubbish of Tenant's machines and
the refuse and rubbish of any eating facilities requiring special handling
(known as "wet garbage"). Landlord and its cleaning contractor and their
employees shall have after hours access to the Demised Premises and the use of
Tenant's light, power and water in the Demised Premises as may be reasonably
required for the purpose of cleaning the Demised Premises.
11.05. Landlord shall furnish and install a Building directory for
tenants' listings in the ground floor lobby of the Building. Tenant shall submit
its Building directory listings with its final plans, which listings shall be
limited to one (1) per directory, unless the Building directing is electronic,
in which event Tenant may have Tenant's Proportionate Share of the directory
capacity. At Tenant's sole cost and expense, Landlord shall install per Tenant's
plans an identification sign on Tenant's entrance door in keeping with all other
Building standard door signs.
11.06. To the extent that there shall be incurred any subsidies or other
costs in connection with any amenities for all tenants of the Building,
including, without limitation, shuttle buses, a cafeteria, fitness center, day
care center, bootblack and newsstand, then Tenant shall pay Landlord Tenant's
Proportionate Share thereof as additional rent.
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ARTICLE 12 - Electric Service
12.01. If pursuant to Section 1.02 hereof, electrical energy consumed by
Tenant is at the Electric Energy Charge, the following shall be applicable:
(a) Landlord will furnish electricity to Tenant through presently
installed electrical facilities for Tenant's reasonable use for lighting,
electrical appliances and equipment. Tenant shall pay to Landlord on the first
day of each month the Electric Energy Charge, which amount is in addition to the
Base Rent. If the Commencement Date occurs prior to the commencement of the
first Rent Year, Tenant shall pay the Electric Energy Charge on the first day of
each month prior to the commencement of the first Rent Year. The Electric Energy
Charge shall in all cases be subject to increase based on surveys of the use of
electricity by Tenant, which may be made from time to time during the Term, at
Tenant's cost, by an electrical consultant selected by Landlord, which shall be
binding on the parties. Prior to installing any equipment which would not be
considered ordinary office equipment, Tenant shall submit to Landlord for
approval, a list of such equipment specifying the manufacturer's electrical
rating of same.
(b) The Electric Energy Charge shall also be subject to adjustment
in the event of any increase subsequent to the date of this Lease in the
electric rate or charge of any kind, including without limitation fuel
adjustment, demand, time of day, energy and taxes, imposed by the public utility
corporation serving the area in which the Building is located. Such adjustment
shall be in the same percentage as the increase in cost to Landlord over the
prior electric rate schedule or charge. When the amount of such an adjustment is
determined, the parties shall execute an agreement supplementary hereto prepared
by Landlord to reflect such adjustment in the Electric Energy Charge effective
from the date such increase occurred; but such adjustment shall be effective
from such date even if such supplementary agreement is not executed.
12.02. (a) If Landlord shall so decide, Landlord shall supply electricity
to service the Demised Premises on a submetered basis, in which event Tenant
shall pay to Landlord the cost of installing the submeter (if not presently
existing), and Tenant shall pay to Landlord, as additional rent, the sum of (i)
an amount determined by applying the electric rate at which Landlord purchases
electricity (including taxes and surcharges thereon), to Tenant's consumption of
and demand for electricity within the Demised Premises as recorded on the
submeter servicing the Demised Premises, and (ii) Landlord's overhead and
administrative charge of 10% of the amount referred to in clause (i) above, to
the extent permitted (such combined sum being hereinafter called "Electric
Submeter Charge"). Landlord shall cause Tenant's submeter to be read at regular
intervals. Upon receipt by Landlord of an invoice from the utility company
supplying electricity to the Building, Landlord shall bill Tenant in accordance
with the foregoing.
(b) At Landlord's option, Tenant shall pay the Electric Submeter
Charge in twelve (12) equal monthly installments based upon Landlord's
reasonable estimate of the Electric Submeter Charge. Following the end of each
calendar year, Landlord shall furnish Tenant a statement of the Electric
Submeter Charge; if Tenant has underpaid, Tenant shall pay the amount shown on
said Statement, and if Tenant has overpaid, Landlord shall credit the difference
against the next installment of additional rent due hereunder or pay the
difference to Tenant.
(c) For any period during which the submeter(s) servicing the
Demised Premises are inoperative, the Electric Submeter Charge shall be
determined by Landlord, based upon its reasonable estimate of Tenant's actual
consumption of and demand for electricity, and the Electric Rate or Cost per
Kilowatt and Cost per Kilowatt Hour then in effect.
12.03. Landlord shall not be liable to Tenant in any way for any failure
or defect in the supply or character of electric energy furnished to the Demised
Premises by reason of any requirement, act or omission of the public utility
serving the Building with electricity or for any other reason not attributable
to Landlord; and no such failure or defect shall entitle Tenant to any payment
from Landlord for any loss, damage or expense or to abatement of Rent or
otherwise relieve Tenant from any of its obligations under this Lease. Landlord
shall furnish and install all lighting tubes, lamps, bulbs and ballasts required
in the Demised Premises, and Tenant shall pay Landlord's reasonable charges
therefor on demand.
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12.04. Tenant's use of electric energy in the Demised Premises shall not
at any time exceed the capacity of any of the electrical conductors, wiring,
insulation or other equipment in or otherwise serving the Demised Premises, and
Tenant may not use any electrical equipment which, in the opinion of Landlord,
will overload such installations or interfere with the use thereof by other
tenants of the Building. If Landlord should decide that such equipment would
overload the Building's electrical service equipment or interfere with the use
thereof, Landlord shall, at Tenant's sole cost and expense provide and install
such additional risers or other electrical service equipment as Landlord shall
deem necessary or prudent.
12.05. If any tax is imposed upon Landlord with respect to electrical
energy furnished as a service to Tenant by any federal, state or municipal
authority, Tenant shall reimburse Landlord for Tenant's Proportionate Share of
such taxes, as additional rent hereunder. It is understood and agreed that the
amount set forth in Sections 1.01 and 12.01 does not include any currently
applicable sales tax.
12.06. Landlord shall have the right at any time and from time to time
during the Term to contract for electric service to the Building from the
company presently so providing or from a different company (each such company
shall hereinafter be referred to as an "Electricity Provider"). Tenant shall
cooperate with Landlord and the Electricity Provider at all times and, as
reasonably necessary, shall allow Landlord and any Electricity Provider
reasonable access to the Building's electric lines, feeders, risers, wiring, and
any other equipment or machinery within the Demised Premises.
ARTICLE 13 - Condemnation
13.01. In the event that the whole or substantially all of the Real
Property, Building or Demised Premises shall be condemned or taken in any manner
(including agreement between Landlord and any governmental authority authorized
to exercise such right) for any public or quasi-public use, this Lease and the
term and estate hereby granted shall forthwith cease and terminate as of the
date of vesting of title, and the rent shall be apportioned and paid to such
date of vesting. In the event that only a part of the Demised Premises
consisting of less than substantially all thereof shall be so condemned or
taken, then, effective as of the date of vesting of title, the Rent reserved
hereunder for such part shall be equitably abated, and this Lease shall continue
as to such part not so taken.
13.02. In the event that only a part of the Real Property or Building
shall be so condemned or taken, then (a) if substantial structural alteration or
reconstruction shall, in the reasonable opinion of Landlord, be necessary or
appropriate as a result of such condemnation or taking (whether or not the
Demised Premises are affected), Landlord may, at its option, terminate this
Lease and the term and estate hereby granted, as of the date of such vesting of
title, by notifying Tenant in writing of such termination within 30 days
following the date on which Landlord shall have received notice of vesting of
title, or (b) if that portion of the Demised Premises then occupied by Tenant is
reduced by more than 25%, either party may, at its option, terminate this Lease
by notice of election to the other party given not later than 30 days following
the date on which notice of such taking was given by the condemning authority.
If this Lease is not terminated, as aforesaid, this Lease shall be unaffected by
such condemnation or taking, except that the Rent shall be abated to the extent,
if any, hereinbefore provided. In the event that only part of the Demised
Premises shall be so condemned or taken and this Lease and the term and estate
hereby granted are not terminated as hereinbefore provided, Landlord will,
subject to the requirements of any superior mortgage or superior lease, at its
expense, restore with reasonable diligence the remaining portions of the Demised
Premises as nearly as practicable to the same condition as it was in prior to
such condemnation or taking, provided, that Landlord's liability under this
section shall be limited to the amount received by Landlord as an award arising
out of such taking.
13.03. In the event of termination in any of the instances hereinabove
provided, this Lease and the term and estate hereby granted shall expire as of
the date of such termination with the same effect as if that were the Expiration
Date of this Lease, and the rent reserved hereunder shall be apportioned as of
such date.
13.04. In the event of any condemnation or taking hereinabove mentioned of
all or a part of the Building, Landlord shall be entitled to receive the entire
award in the condemnation proceeding, including any award made for the value of
the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns
to Landlord any and all right, title and interest of Tenant now or hereafter
arising in or to any such award or any part thereof; and
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Tenant shall be entitled to receive no part of such award. Notwithstanding the
foregoing, Tenant shall be entitled to claim, prove and receive in any
condemnation proceedings, such portion of any award as represents the then value
of Tenant's Property and any moving and relocation expenses awarded to Tenant.
ARTICLE 14 - Repairs and Cleaning
14.01. (a) Tenant shall take good care of the Demised Premises and the
fixtures and appurtenances therein (including, without limitation, windows and
doors used exclusively in connection with the Demised Premises), and Tenant
shall, at its sole cost and expense, make all repairs thereto as and when needed
to preserve them in good working order and condition except as otherwise
provided in Section 14.02. It is understood that Tenant shall be solely
responsible for the maintenance, repair and/or replacement of any computer,
communications, plumbing fixtures, supplementary heating, ventilating and air
conditioning units and similar equipment installed by Tenant or at its request,
whether or not located in the Demised Premises.
(b) All damage or injury to the Real Property, Building, Demised
Premises, and/or to the fixtures, glass, appurtenances and equipment in, or
pertaining to any of the foregoing, caused by or resulting from the performance
of work by or for Tenant to prepare the Demised Premises for Tenant's occupancy
or Tenant's Alterations, or from Tenant moving property in or out of the
Building or by Tenant's installation or use of Tenant's Property or resulting
from the misuse or neglect of Tenant or any of its employees, agents or
contractors, shall be repaired, restored or replaced, at Landlord's option,
either by Tenant or Landlord at Tenant's sole cost and expense, calculated at
the Work Charge. All such repairs, restorations and replacements shall be of
good quality and class at least equal to the original installations.
14.02. Landlord shall, as a Cost of Operation, make all repairs and
replacements to the Real Property and to the Building, its fixtures, systems and
facilities (including the central heating, ventilating and air conditioning
systems and elevator and plumbing systems), necessary or desirable in order to
keep them in good order and repair, except for those repairs provided in Section
14.01 hereof for which Tenant is responsible for the cost. Tenant agrees to
notify Landlord of the necessity for any repairs of which Tenant may have
knowledge.
14.03. When used in this Lease, the term "repair" shall be deemed to
include restoration and replacement as may be necessary to achieve or maintain
good working order.
14.04. (a) Tenant, at Tenant's expense, shall keep the Demised Premises in
order, shall cause the Demised Premises to be cleaned and shall cause Tenant's
refuse and rubbish to be removed, all at regular intervals in accordance with
standards and practices adopted by Landlord for the Building. Tenant shall
cooperate with any waste and garbage recycling program of the Building and shall
comply with all reasonable rules and regulations of Owner with respect thereto.
Tenant, at Tenant's expense, shall cause all portions of the Demised Premises
used for the storage, the preparation, service or consumption of food or
beverages to be cleaned daily in a manner satisfactory to Landlord, and to be
exterminated against infestation by vermin, roaches or rodents regularly and, in
addition, whenever there shall be evidence of any infestation.
(b) Landlord, at Landlord's expense, shall clean the public portions
of the Building at regular intervals in accordance with reasonable practices and
standards adopted by Landlord for the Building.
(c) The removal of refuse and rubbish and the furnishing of office
cleaning services to Tenant by persons other than Landlord and its contractors
shall be performed in accordance with such regulations and requirements as, in
Landlord's reasonable judgment, are necessary for the proper operation of the
Building, and Tenant agrees that Tenant will not permit any person to enter the
Demised Premises or the Building for such purposes, or for the purpose of
providing extermination services required to be performed by Tenant pursuant to
Subsection (a) of this Section, other than persons first approved by Landlord,
such approval not reasonably to be withheld.
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ARTICLE 15 - Damage by Fire or Other Cause
15.01. If the Demised Premises and/or access thereto, or any part thereof,
shall be damaged by fire or other cause, Tenant shall give immediate notice
thereof to Landlord, and this Lease shall continue in full force and effect
except as hereinafter set forth. In such event, Landlord shall, subject to
compliance with the provisions of any superior mortgage or superior lease, and
to its rights under Section 15.03, repair the damage and restore and rebuild the
Demised Premises with reasonable diligence as nearly as may be practicable to
its condition immediately prior to such damage.
15.02. If the Demised Premises shall be partially or totally damaged or
rendered partially or totally untenantable by fire or other cause without the
fault or neglect of Tenant, Tenant's employees, agents, contractors, visitors or
licensees, until such repairs are made the Rent shall be apportioned according
to the part of the Demised Premises which is usable by Tenant and shall be
abated from the date of such damage to the date the damage shall be
substantially repaired to the same condition as required under Section 5.02 for
the Demised Premises to be ready for occupancy.
15.03. If the Demised Premises are totally or substantially damaged or are
rendered wholly or substantially untenantable by fire or other cause, and if
Landlord shall decide not to restore or not to rebuild the same, or if the
Building shall be so damaged that Landlord shall decide to demolish it or not to
rebuild it (whether or not the Demised Premises have been damaged), then in any
of such events Landlord may, within one hundred twenty (120) days after the
occurrence of such casualty, give Tenant notice of such decision, and thereupon
the Term of this Lease shall expire upon the date set forth in such notice as
fully and completely as if such date were the Expiration Date of this Lease.
Tenant shall then forthwith quit, surrender and vacate the Demised Premises.
Such termination and surrender shall be without prejudice to Landlord's rights
and remedies against Tenant under the Lease provisions in effect prior to such
termination, and the Rent reserved hereunder shall be apportioned as of such
date if not earlier abated pursuant to Section 15.02.
15.04. Unless Landlord shall serve a termination notice as provided for in
Section 15.03 hereof, Landlord shall make the repairs and restorations as
above-described, with all reasonable expedition subject to delays due to
adjustment of insurance claims and Events of Force Majeure. Tenant may terminate
this Lease by notice to Landlord if Landlord has not substantially completed the
making of the required repairs and restored and rebuilt the Demised Premises
and/or access thereto (other than to the extent resulting from Tenant's acts or
omissions) within 12 months from the date of such damage or destruction and such
additional time as Landlord shall be delayed due to adjustment of insurance or
Events of Force Majeure. No damages, compensation or claims shall be payable by
Landlord for delay, inconvenience, loss of business or annoyance arising from
any repair or restoration of any portion of the Demised Premises or of the
Building.
15.05. For purposes of this Article 15, casualty damage which Landlord is
responsible to repair shall not be deemed to include damage caused by vandalism,
unknown cause or other act not normally covered under fire and extended coverage
insurance policies applicable to office buildings in the area in which the
Building is located.
15.06. The provisions of this Article shall be considered an express
agreement governing any case of damage or destruction of the Demised Premises by
fire or other casualty, and any laws now or hereinafter in force providing for
such a contingency in the absence of an express agreement shall have no
application in such case.
15.07. Notwithstanding any of the foregoing provisions of this Article, if
Landlord or the lessor of any superior lease or the holder of any superior
mortgage shall be unable to collect all of the insurance proceeds applicable to
damage or destruction of the Demised Premises or the Building by reason of some
action or inaction on the part of Tenant or any of its employees, agents or
contractors, then, without prejudice to any other remedies which may be
available against Tenant, the abatement of Tenant's rent provided for in this
Article shall not be effective to the extent of the uncollected insurance
proceeds.
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ARTICLE 16 - Insurance
16.01. Tenant shall not do or permit to be done any act or thing in or
about the Demised Premises which will invalidate or conflict with any
certificate of occupancy issued with respect to the Building, or the terms of
any fire, sprinkler, water damage, or other insurance policies covering the
Building or the Real Property. Tenant shall, at its own expense, comply with all
rules, orders, regulations or requirements of any Board of Fire Underwriters or
any other similar body and shall not do or permit anything to be done or kept in
or about the Demised Premises which would increase the rate of insurance upon
the Building over the rate in effect at the Commencement Date or which would
result in insurance companies of good standing refusing to insure the Building
in amounts and at normal rates satisfactory to Landlord.
16.02. If, by reason of any failure of Tenant to comply with the
provisions of this Lease, the premium on any of Landlord's insurance policies
covering the Real Property shall be higher than it otherwise would be, Tenant
shall reimburse Landlord as additional rent for such increased premiums. In any
action or proceeding in which Landlord and Tenant are parties, a schedule or
"make up" of any insurance rate for the Real Property, Building or Demised
Premises issued by a body establishing fire insurance rates therefor shall be
conclusive evidence of the facts therein stated.
16.03. Tenant, at its expense, shall maintain throughout the Term the
following types of insurance: (a) Commercial General Liability Insurance
covering claims for bodily injury, death and property damage occurring upon, in
on about the Demised Premises; such insurance shall afford coverage of not less
than $4,000,000.00 combined, single limit for bodily injury, death and property
damage and shall indicate that the Landlord and Others in Interest are
additional insureds; there shall be added to or included within said liability
insurance all other coverages as may be usual to Tenant's use of the Demised
Premises; said insurance shall be written in a primary policy not contributing
with, or in excess of, insurance that Landlord and Others in Interest may have
and shall include coverage on an "occurrence basis" rather than a "claims made"
basis; (b) commercial auto liability insurance providing bodily injury and
property damage coverage on an occurrence basis at a combined single limit of
not less than $3,000,000; (c) "all risk" property insurance on all of Tenant's
Property, including contents and trade fixtures; (d) workers' compensation and
employer's liability as required by law; (e) disability benefits liability as
required by law; (f) owners' and contractors' protective liability coverage in
an amount not less than $2,000,000 during the performance by or on behalf of
Tenant of any work under this Lease, until completion thereof; and (g) insurance
covering in full interruption of Tenant's business for a minimum of six months.
The insurance described in clauses (a), (b) and (f) hereof shall indicate that
the Landlord and Others in Interest are additional insureds.
No more frequently than once per year, Landlord may review the
provisions of this Article and require Tenant to provide, at Tenant's cost and
expense, reasonable changes in the amounts or types of insurance, or both, as
Landlord may deem reasonably necessary in order to adequately protect Landlord's
interests.
16.04. On or before the earlier of the Commencement Date and the
performance of any work in the Demised Premises by or on behalf of Tenant (other
than work performed by Landlord), Tenant shall furnish Landlord with a paid
certificate evidencing the aforesaid insurance coverage, and renewal
certificates shall be furnished to Landlord at least thirty (30) days prior to
the expiration date of each policy for which a certificate was theretofore
furnished. In the event Tenant fails to procure any insurance required under
this Lease, after notice to Tenant, Landlord may, but shall not be obligated to
procure same, in which event, the premium paid shall be refunded by Tenant to
Landlord within 10 days of demand.
16.05. All such insurance shall be effected under valid and enforceable
policies (i) which may cover the Demised Premises and other locations provided
that at all times there is adequate insurance attributable to the Demised
Premises to comply with the insurance requirement set forth herein, (ii) shall
be issued by an insurer of recognized responsibility licensed to do business in
New York State and reasonably satisfactory to Landlord with a Best's Key Rating
Guide of "A-IX" or better, (iii) shall contain a provision whereby the insurer
agrees not to cancel, or materially amend, the insurance without thirty (30)
days' prior written notice to Landlord and Others in Interest, (iv) may contain
deductibles in such amounts as Tenant determines, but not exceeding $5,000 with
respect to property damage and $10,000 with respect to liability insurance.
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16.06. Notwithstanding any other provision of this Lease, in the event of
loss or damage to the Building or the Demised Premises, and/or any contents,
each of Landlord and Tenant agree to look first to any insurance in its favor
before pursuing any claim against the other party. Landlord and Tenant shall use
due diligence to obtain, for each policy of such property insurance, provisions
pursuant to which their insurer waives subrogation or consents to a waiver of
any claim against the other party (and insofar as Landlord is concerned against
Landlord and Others in Interest), their employees and agents, for loss or damage
within the scope of the insurance, and to the extent of such waiver or consent,
each party for itself and its insurers waives all such insured claims against
the other party. If such waiver or agreement is available only upon payment of a
premium, the insured party shall notify the other party promptly after learning
thereof and the other party shall have the right to pay the premium and obtain
the waiver or otherwise to forfeit the waiver.
16.07. Tenant acknowledges that Landlord will not carry insurance on
Tenant's Property and agrees that Landlord will not be obligated to repair any
damage thereto or replace the same.
16.08. The limits of all insurance provided under this Article 16 shall
not limit Tenant's liability to Landlord under this Lease. If Tenant fails to
maintain insurance or decides to self-insure for any loss including, without
limitation, business interruption, Tenant releases Landlord and Others in
Interest for all loss or damage which could have been covered if Tenant had so
insured.
ARTICLE 17 - Alterations
17.01. Tenant shall make no alterations, installations, additions or
improvements ("Alterations") in or to the Demised Premises without Landlord's
prior written consent, which shall not be unreasonably withheld to the extent
they are non-structural, do not adversely affect the proper functioning of the
mechanical, electrical, sanitary or other Building systems and do not affect the
outside appearance, character or use of the Building and then only by
contractors or mechanics approved by Landlord. All such Alterations shall be
done at Tenant's sole expense and in full compliance with the Rules and
Regulations attached hereto as Exhibit B, with all rules, regulations and
requirements of all governmental bodies having jurisdiction, and with Landlord's
building standard construction rules and regulations then in effect. If Landlord
determines that the services of architects, engineers or other professionals are
reasonably required in order to review Tenant's plans for any Alterations or to
supervise the performance of Alterations, the costs incurred by Landlord shall
be calculated at the Work Charge, and shall be payable within ten (10) days of
demand as additional rent. Landlord's approval of Tenant's plans shall not be
deemed to be a statement or representation by Landlord as to the completeness of
said plans or their compliance with any laws, ordinances or regulations.
17.02. Prior to commencing any Alteration, Tenant shall furnish to
Landlord:
(i) Plans and specifications for such Alterations, for Landlord's
approval, which shall not be unreasonably withheld, and the approval
of the holder of any superior mortgage, if required.
(ii) All contractors and subcontractors that Tenant proposes to
perform the Alterations, who shall be those on Landlord's approved
list, or if Landlord has no such list shall be reputable, have had
at least 7 years experience in their respective trades and be
subject to Landlord's approval, which shall not be unreasonably
withheld.
(iii) Copies of all governmental permits and authorizations which
may be required in connection with any Alteration.
(iv) A certificate evidencing that Tenant and Tenant's contractors
have procured commercial general liability and worker's compensation
insurance covering all persons employed in connection with the work
who might assert claims for death or bodily injury against Landlord
or the Building and such insurance (in addition to the insurance
required to be carried by Tenant pursuant to the provisions of
Article 16) as Landlord may reasonably require because of the nature
of the work to be done by Tenant, including without limitation,
owners' and contractors' protective liability and completed
operations liability coverages.
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(v) With respect to any Alteration estimated to cost in excess of
$25,000.00, Tenant shall furnish to Landlord a performance bond and
a labor and materials payment bond (issued by a corporate surety
licensed to do business in New York, and in a form reasonably
satisfactory to Landlord). In the event Tenant fails to cause such
bonds to be delivered, Tenant shall furnish to Landlord one of the
following (as selected by Landlord): (x) a cash deposit, or (y) an
irrevocable, sight, unconditional, negotiable, demand letter of
credit, issued by and drawn on a bank or trust company which is a
member of the New York Clearing House Association in a form
reasonably satisfactory to Landlord; each in an amount equal to one
hundred twenty five (125%) percent of the estimated cost of the
Alteration; and upon the completion of the Alterations in accordance
with the terms of this Article and the submission to Landlord of
proof evidencing the payment in full for said Alterations,
including, but not limited to, delivery of waivers of mechanic liens
(in accordance with Section 17.06 hereof), the foregoing security
deposited with Landlord (or the balance of the proceeds thereof, if
Tenant has furnished cash or a letter of credit and if Landlord has
drawn on the same) shall be returned to Tenant.
17.03. All Alterations affixed to the realty or for which Tenant has
received a credit or allowance shall, unless Landlord elects otherwise by
written notice given not less than thirty (30) days prior to the expiration or
other termination of this Lease or any renewal or extension thereof, become the
property of Landlord and shall remain upon, and be surrendered with, the Demised
Premises as a part thereof, at the end of the Term or any renewal term, as the
case may be. In the event the Landlord shall elect otherwise, such Alterations
as Landlord shall select shall be removed by Tenant and the Demised Premises
restored to its original condition, reasonable wear and tear excepted, at
Tenant's cost and expense, at or prior to the Expiration Date. Tenant's
obligations pursuant to this Section 17.03 shall survive expiration or earlier
termination of this Lease.
17.04. All Alterations shall be performed in accordance with the approved
plans and specifications, in a first-class and good and workmanlike manner,
during regular business hours as specified in the Construction Rules and
Regulations, using materials and equipment at least equal in quality and class
to the original installations, and in such manner as not to interfere with the
occupancy of any other tenant in the Building, nor delay, nor impose any
additional expense upon Landlord, in the maintenance or operation of the
Building. Landlord shall not be liable for any failure of any Building
facilities or services caused by Alterations, and Tenant shall pay Landlord, as
additional rent, the cost of correcting, or at Landlord's option Tenant shall
correct, any such faulty Alteration as additional rent.
17.05. Upon Tenant's failure to properly perform, complete and fully pay
for any Alterations, as reasonably determined by Landlord, Landlord shall be
entitled to draw on the security deposited under this Article 17 and Article 23
to the extent it deems necessary to complete any incomplete or otherwise
hazardous Alteration, to effect any necessary restoration and/or protection of
the Demised Premises or the Real Property and to apply such funds to the payment
or satisfaction of any costs, damages or expenses in connection with the
foregoing and/or Tenant's obligations under this Article 17 and the Lease
relating to Alterations and repairs, including the satisfaction of any
mechanic's lien.
17.06. If in connection with any Alterations Tenant shall hire the
services of any contractor or construction manager, Tenant shall enter into an
agreement with such party which shall provide that such contractor or
construction manager, as well as all subcontractors, materialmen and suppliers
hired in connection therewith (all of the foregoing known collectively as the
"Contractors"), shall upon receiving any payment respecting such Alterations
deliver to Tenant a duly executed waiver, or final waiver as the case may be, of
mechanic's lien evidencing payment in full for the cost of work, labor and/or
services theretofore furnished. Said waivers of mechanic's liens shall name the
Landlord and Tenant as the beneficiaries of such waivers and shall be in a form
reasonably acceptable to Landlord. Prior to the commencement of any Alterations,
a form of the waiver of mechanic's lien to be given by each such Contractor must
be approved by Landlord.
17.07. Tenant, at its expense, and with diligence and dispatch, shall
procure the cancellation or discharge of all notices of violation arising from
or otherwise connected with Alterations which may be issued by any public
authority having or asserting jurisdiction over the Demised Premises. If any
mechanics' lien is filed against the Demised Premises or the Building for work
claimed to have been done for, or materials claimed to have been
20
furnished to, Tenant, at its sole cost and expense Tenant shall cause the same
to be discharged within ten (10) days thereafter by filing the bond required by
law, by payment or otherwise. Tenant shall defend, indemnity and save harmless
Landlord against and from any and all mechanics and other liens in connection
with Alterations and all costs, attorney's fees, fines, expenses and liabilities
reasonably incurred in connection with any such lien or any action or proceeding
brought thereon. If Tenant fails to discharge any such lien within said ten (10)
day period, Landlord may do so without inquiring as to the validity of such
lien. Any amount so paid by Landlord and all costs and expenses incurred by
Landlord in connection therewith, together with interest thereon at the Interest
Rate from the respective dates of Landlord's making of the payment or incurring
of the cost and expense, shall constitute additional rent payable by Tenant
under this Lease within 10 days of demand. Within 5 days of completion of
Alterations, as well as at any time within 5 days of Landlord's request, Tenant
shall submit to Landlord a valid and enforceable release of liens and
certificate of occupancy, if by law required for the Alterations, for all work
included in the Alterations.
17.08. Anything to the contrary in this Article 17 or anywhere else in
this Lease notwithstanding, Landlord shall have the option of performing
Alterations at the Work Charge.
ARTICLE 18 - Tenant's Property
18.01. All of Tenant's Property shall be removed by Tenant, at its sole
cost and expense, upon the expiration or sooner termination of this Lease. In
case of damage by reason of such removal, Tenant shall restore the Demised
Premises to good order and condition. Any items of Tenant's Property which
remain in the Demised Premises after the expiration of this Lease may, at the
option of Landlord, be deemed abandoned and either be retained by Landlord as
its property or disposed of without accountability at Tenant's expense. Tenant
shall reimburse Landlord for the costs of removal and repairing any damage
arising out of Tenant's failure to remove Tenant's Property.
ARTICLE 19 - Surrender
19.01. Upon the expiration or earlier termination of this Lease, Tenant
shall quit and surrender the Demised Premises in good order and condition,
ordinary wear and tear and damage by fire or other casualty, the elements and
any cause beyond Tenant's control excepted. At Landlord's request, as provided
in Section 17.03, Tenant shall remove all Alterations and restore the Demised
Premises.
19.02. Tenant acknowledges that possession of the Demised Premises must be
surrendered upon the expiration or sooner termination of this Lease, time being
of the essence. Tenant shall indemnify and hold Landlord harmless from any loss,
cost or expense, including, without limitation, claims made by any succeeding
tenant or prospective tenant, resulting from Tenant's failure or refusal to
vacate the Demised Premises in a timely fashion including, without limitation,
reasonable attorneys' fees, court costs and any claims made by any succeeding
tenant or prospective tenant based upon such delay. In addition, Tenant agrees
to pay for use and occupancy of the Demised Premises after the expiration or
sooner termination of this Lease at a rate equal to 300% of the Rent payable
immediately prior to such termination, subject to all the other terms of this
Lease. No such payment shall, however, serve to renew or extend the Term.
ARTICLE 20 - Estoppel Certificate
20.01. Tenant agrees, at any time, and from time to time, upon not less
than ten days' prior notice by Landlord, to execute, acknowledge and deliver
without cost or expense to Landlord, a statement in writing addressed to the
party requesting same 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), certifying the dates to
which the Base Rent, additional rent and other charges have been paid, the
amount of the Security Deposit, and stating whether or not to the best knowledge
of Tenant, there exists any default in the performance of any covenant,
agreement, term, provision or condition contained in this Lease, and if so,
specifying each such default of which Tenant may have knowledge, it being
intended that any such statement delivered pursuant hereto may be relied upon by
the party requesting same and by any other person with whom Landlord may be
dealing. If Tenant fails to execute any such instrument within said 10-day
period, (a) such failure shall constitute a material default by
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Tenant under this Lease and, in such event, Tenant agrees to pay as liquidated
damages, in addition to all other remedies available to Landlord, an amount
equal to $100 per day for each day that Tenant fails to deliver such certificate
to Landlord after the expiration of such 10-day period and (b) Tenant
irrevocably appoints Landlord as its attorney-in-fact, in Tenant's name, to
execute such instrument.
ARTICLE 21 - Defaults and Termination
21.01. (a) If at or before the Commencement Date or at any time during the
Term there shall be filed against Tenant in any court pursuant to any statute
either of the United States or of any state a petition in bankruptcy or
insolvency or for reorganization or for the appointment of a receiver or trustee
of all or a portion of Tenant's assets, and within thirty (30) days thereafter
Tenant fails to secure a discharge thereof, or if Tenant shall make an
assignment for the benefit of creditors or petition for or enter into an
arrangement or composition with creditors, or takes advantage of any statute
relating to bankruptcy, this Lease, at the option of Landlord, may be canceled
and terminated upon five days written notice from Landlord to Tenant, if
permitted by such statutes, in which event neither Tenant nor any person
claiming through or under Tenant by virtue of any statute or of an order of any
court shall be entitled to possession or to remain in possession of the Demised
Premises but shall forthwith quit and surrender the premises. In the event
Landlord delivers such termination notice, then upon the expiration of said five
day period, this Lease shall terminate (whether or not the Term shall
theretofore have commenced) with the same force and effect as if that day were
the Expiration Date, but Tenant shall remain liable for damages as provided in
Article 30. In addition to the other rights and remedies available to Landlord
by virtue of any other provision of this Lease or by virtue of any statute or
rule of law, Landlord may retain as liquidated damages any rent, the Security
Deposit and/ or any other monies received by it from Tenant or others on behalf
of Tenant.
(b) If, pursuant to any bankruptcy statute, Tenant is permitted to
assign this Lease in disregard of the provisions of this Section 21.01, Tenant
agrees that adequate assurance of future performance by such assignee shall be
required in an amount equal to the sum of one (1) year's Base Rent and all
additional rent, payable as of the date of such assignment. Said sum shall be
deposited in cash with Landlord and shall be held, without interest, by it for
the balance of the Term of this Lease as further security for the full and
faithful performance of all of the obligations of this Lease to be performed by
such assignee. If Tenant receives or is to receive any valuable consideration
for such assignment, such consideration, after deducting therefrom (i) the
reasonable broker's commissions, if any, incurred by Tenant for such assignment,
and (ii) 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
the sole and exclusive property of Landlord and shall be paid over to Landlord
directly by such assignee.
21.02. This Lease and the Term and estate hereby granted are subject to
the limitation that, (a) whenever Tenant shall default in the payment of any
installment of Base Rent, or in the payment of any additional rent, on any day
upon which the same shall be due and payable (and such default shall not be
cured within five (5) days after written notice given to Tenant not more than
three times in any Rent Year), or (b) whenever Tenant shall do or permit
anything to be done, whether by action or inaction, contrary to any of Tenant's
obligations hereunder, other than the payment of Rent, and if such situation
shall continue and shall not be remedied by Tenant within thirty (30) days after
Landlord shall have given to Tenant a notice specifying the same, or, in the
case of a happening or default which cannot with due diligence be cured within a
period of thirty (30) days and the continuance of which during the period
required for cure will not subject Landlord to the risk of criminal liability or
termination of any superior lease or foreclosure of any superior mortgage, if
Tenant shall not duly institute within such thirty (30) day period and promptly
and diligently prosecute to completion all steps necessary to remedy the same,
or, (c) whenever any event shall occur or any contingency shall arise whereby
this Lease or any interest therein or the estate hereby granted or any portion
thereof or the unexpired balance of the Term hereof would, by operation of law
or otherwise, devolve upon or pass to any person, firm or corporation other than
Tenant, except as expressly permitted by Article 22, or (d) whenever Tenant
shall abandon the Demised Premises or advise Landlord that Tenant does not
intend to take possession of and occupy the Demised Premises (whether or not any
of Tenant's Work remains to be completed), then in any such event covered by
subsections a, b, c or d of this Section 21.02 at any time thereafter, Landlord
may give to Tenant a notice of intention to end the Term of this Lease at the
expiration of five (5) days from the date of the service of such notice of
intention, and upon the expiration of said five (5) days this Lease and the Term
and
22
estate hereby granted, whether or not the Term shall theretofore have commenced,
shall terminate with the same effect as if that day were the Expiration Date,
but Tenant shall remain liable for damages as provided hereinafter.
ARTICLE 22 - Assignment, Subletting, Mortgaging
22.01. (a) Tenant shall not, by operation of law or otherwise, assign,
mortgage or encumber this Lease, nor sublet or permit the Demised Premises or
any part thereof to be used by others, without Landlord's prior written consent
in each instance. The consent by Landlord to any assignment or subletting shall
not in any manner be construed to relieve Tenant from obtaining Landlord's
express written consent to any other or further assignment or subletting.
(b) For purposes of this Article 22: (i) the transfer of a majority
of the issued and outstanding capital stock of any corporate tenant (including,
without limitation, any capital stock issued in connection with any transfer),
or of a corporate subtenant, or the transfer of a majority of the total interest
in any partnership, limited liability company or other entity of tenant or
subtenant, however accomplished, whether in a single transaction or in a series
of related or unrelated transactions, shall be deemed an assignment of this
Lease, (ii) any corporate merger or consolidation of Tenant not permitted under
Section 22.01(c), and (iii) a takeover agreement shall be deemed a transfer of
this Lease.
(c) Upon at least 20 days prior notice to Landlord, if Tenant is a
corporation, this Lease may be assigned to, or the Demised Premises sublet to, a
corporation into which Tenant merges or consolidates, or to any other
corporation which controls, is controlled by, or under common control with
Tenant, so long as the transfer is not principally for the purpose of
transferring the leasehold estate created hereby; the net worth of the assignee
or subtenant is at least equal to or in excess of the greater of the net worth
of Tenant on the Commencement Date and that immediately prior to such merger or
consolidation; and the assignee or subtenant assumes by documents reasonably
satisfactory to Landlord all of Tenant's obligations pursuant to this Lease.
22.02. (a) Upon obtaining a proposed assignee or sublessee, upon terms
satisfactory to Tenant, Tenant shall submit to Landlord a copy of the proposed
assignment or sublease (or if not yet prepared, a description of the terms and
conditions of the proposed assignment/sublet) together with a description of the
nature and character of the business of the proposed assignee or subtenant,
current financial information and such other information reasonably requested by
Landlord. Landlord shall not be obligated to entertain or consider any request
by Tenant to any proposed assignment of this Lease or sublet of all or any part
of the Demised Premises unless each request is accompanied by a non-refundable
fee payable to Landlord in the amount of $1,000 to be applied toward Landlord's
administrative, legal and other costs and expenses incurred in processing each
of Tenant's requests, for which Tenant shall reimburse Landlord as additional
rent.
(b) Landlord's consent to any such proposed assignment or subletting
shall not be unreasonably withheld provided that the following further
conditions shall be fulfilled:
(i) there shall be no advertisement or public communication
which lists the rental rate or which adversely reflects on the dignity,
character or prestige of the Building;
(ii) no space shall be sublet, and the Lease shall not be
assigned to another tenant, or to a related entity of such tenant or to any
other occupant of the Building, if Landlord shall then have available for rent
comparable or similar space in the Building;
(iii) no subletting or assignment shall be to a person or
entity which in Landlord's judgment has a financial standing, is of a character,
is engaged in business, is of a reputation, or proposes to use any part of the
Demised Premises in a manner, not in keeping with the standards of a first-class
office Building;
(iv) the subletting or assignment shall be expressly subject
to all of the obligations of Tenant pursuant to Lease and shall specifically
provide that there shall be no further subletting or assignment of the Demised
Premises;
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(v) no such subletting or assignment shall result in there
being more than one occupant other than Tenant in the Demised Premises;
(vi) the proposed subtenant or assignee shall not be a person
then negotiating with Landlord for the rental of any space in the Building;
(vii) the business of the assignee or subtenant shall not
violate any restriction against competition contained in any lease to which
Landlord is a party;
(viii) Landlord shall be furnished with a duplicate copy of
the assignment or sublease agreement promptly after its execution;
(ix) Tenant shall pay to Landlord, as additional rent, a sum
equal to all Rent and other consideration paid to Tenant by any assignee or
subtenant which is in excess of the Rent then being paid by Tenant to Landlord
for such space pursuant to this Lease;
(x) every sublease shall contain substantially the following
language:
"In the event of a default under any superior lease, this
sublease shall, at the option of the lessor under such superior
lease, remain in full force and effect and the subtenant hereunder
shall attorn to and recognize such lessor as owner and landlord
hereunder and shall promptly upon such party's request, execute and
deliver all instruments necessary or appropriate to confirm such
attornment and recognition. The subtenant hereunder hereby waives
all rights under any present or future laws or otherwise to elect,
by reason of the termination of such superior lease, to terminate
this sublease or surrender possession of the premises demised
hereby.";
(xi) the holders of any "superior mortgage" and "superior
lease" (as defined in Section 24.02) shall grant their consent (if required
under the terms of such mortgage or lease), failure of which shall not be deemed
an unreasonable withholding of consent by Landlord;
(xii) the Base Rent and additional rent for any such
subletting shall be not less than the greater of (a) that provided for under
this Lease on a per square foot basis for the space as proposed to be sublet,
and (b) the then going fair market rental rate for comparable space and for a
comparable term in the Building (or if none is or has been currently leased or
subleased, then comparable space and term in a comparable building in the area
in which the Building is located);
(xiii) the subleased premises shall be used only for the
Permitted Use;
(xiv) Landlord shall be furnished with a copy of the agreement
of sublease to be executed, at least ten (10) days prior to its execution, and
with a duplicate original of the sublease, within ten (10) days after the date
of its execution; and
(xv) Tenant shall have fully and faithfully complied with all
of the terms, covenants and conditions of this Lease on the part of the Tenant
then to have been performed under this Lease.
(c) Notwithstanding the foregoing, Tenant's right to assign the
Lease or sublet all or part of the Demised Premises shall be subject to
Landlord's option (to be exercised within twenty (20) days of Tenant's request
to assign or sublet), (i) to require a surrender of the Demised Premises, or
part thereof, in which event Tenant shall deliver such Demised Premises to
Landlord in accordance with the provisions of the Lease relating to surrender of
the Demised Premises and termination of this Lease at the expiration of the
Term, or (ii) to backlease from Tenant such Demised Premises at the same Rent as
under this Lease (prorated if less than all of the Demised Premises are
involved) and otherwise on the same terms and conditions as provided in this
Lease, except that Landlord shall have the free right without Tenant's consent
to sublet all or a portion of the Demised Premises so sublet back to Landlord.
If only a portion of the Demises Premises is so surrendered, this Lease shall
remain in effect as to the remainder of
24
the Demised Premises, except that the Rent shall be appropriately reduced based
upon the number of square feet surrendered. Landlord shall construct, at
Tenant's expense, calculated at the Work Charge, such alterations as may be
required to separate the surrendered or backleased part from the balance of the
Demised Premises, and Tenant shall afford Landlord access to the Demised
Premises to make such alterations at least 30 days prior to the date on which
such portion of the Demised Premises is surrendered or sublet.
22.03 If this Lease shall be assigned, or if the Demised Premises or any
part thereof shall be sublet or occupied by any person or persons other than
Tenant, Landlord may, after default by Tenant, collect Rent from the assignee,
subtenant or occupant and apply the net amount collected to the Rent herein
reserved, but no such assignment, subletting, occupancy or collection of rent
shall be deemed a waiver of the covenants in this Article, nor shall it be
deemed acceptance of the assignee, subtenant or occupancy as a tenant, or a
release of Tenant from the full performance by Tenant of all the terms,
conditions and covenants of this Lease, and Tenant shall remain liable
therefore.
22.04 Each permitted assignee or transferee shall assume and be deemed to
have assumed this Lease and shall be and remain liable, jointly and severally,
with Tenant for the payment of the Base Rent and additional rent, and for the
due performance of all the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed for the Term of this Lease.
ARTICLE 23 - Security Deposit
23.01. Simultaneously with Tenant's execution of this Lease Tenant will
deposit with Landlord the Security Deposit as security for the punctual
performance by Tenant of each and every obligation of it under this Lease. In
the event of any default by Tenant, Landlord may apply or retain all or any part
of the security to cure the default or to reimburse Landlord for any sum which
Landlord may spend by reason of the default. In the event that the Base Rent
shall increase under this Lease, then, effective upon any such increase Tenant
shall deposit with Landlord, as additional security, an amount necessary to
retain the same ratio of Security Deposit to Base Rent as existed at the
commencement of this Lease. Landlord may commingle the Security Deposit with
other deposits in a non-interest bearing account and not be obligated to pay
Tenant any interest. In the case of every such application or retention Tenant
shall, on demand, pay to Landlord the sum so applied or retained which shall be
added to the Security Deposit so that the same shall be restored to its original
amount. If at the end of the Term Tenant shall not be in default under this
Lease, the Security Deposit, or any balance thereof, shall be returned to Tenant
within thirty (30) days after the Expiration Date. In the event of a sale of the
Real Property and Building or leasing of the Building, of which the Demised
Premises form a part, Landlord shall have the right to transfer the security to
the vendee or lessee and Landlord shall thereupon be released by Tenant from all
liability for the return of such security; and Tenant agrees to look to the new
landlord solely for the return of said security; and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new landlord. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither the Landlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
ARTICLE 24 - Subordination and Attornment
24.01. Landlord covenants that if, and so long as, Tenant pays all of the
Rent due under this Lease and keeps, observes and performs each and every term,
covenant, agreement, condition and provision of this Lease on Tenant's part to
be kept, observed and performed, Tenant may peaceably and quietly enjoy the
Demised Premises without hindrance or molestation by Landlord or by any other
person lawfully claiming the same, subject nevertheless to the covenants,
agreements, terms, provisions and conditions of this Lease and to any superior
lease or superior mortgage to this Lease.
24.02. This Lease, and all rights of Tenant hereunder, are and shall be
(a) subject and subordinate in all respects to all present and future ground
leases, over-riding leases and underlying leases and/or grants of term of the
Real Property and/or the Building or the portion thereof in which the Demised
Premises are located in whole or in part now or hereafter existing ("superior
leases") and, (b) subject to all mortgages and building loan agreements, which
may now or hereafter affect the Real Property and/or the Building and/or any
superior leases ("superior
25
mortgages"), whether or not the superior leases or superior mortgages shall also
cover other lands and/or buildings. The foregoing shall extend to each and every
advance made or hereafter to be made under the superior mortgages, and to all
renewals, modifications, replacements and extensions of the superior leases and
superior mortgages and spreaders, consolidations and modifications of the
superior mortgages. This Section shall be self-operative and no further
instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall promptly execute and deliver any instrument, in
recordable form, if required, that Landlord, the lessor of any superior lease or
the holder of any superior mortgage or any of their respective successors in
interest may request to evidence such subordination.
24.03. Tenant agrees without further instruments of attornment in each
case, (a) to attorn to lessor under any superior lease, or to the holder of any
superior mortgage or any successor to such holder's interest, upon such holder's
or successor's request, as the case may be, (b) to waive the provisions of any
statute, rule or law now or hereafter in effect which may give or propose to
give Tenant any right of election to terminate this Lease or to surrender
possession of the Demised Premises in the event a superior lease is terminated
or a superior mortgage is foreclosed, and (c) that unless and until said lessor,
or holder, as the case may be, shall elect to terminate this Lease, Tenant's
obligations under this Lease shall not be affected in any way whatsoever by any
such proceeding or termination (it being understood, however, that such holder
or successor in interest shall under no circumstances be bound by any payment of
rent for more than one month in advance, except for the Security Deposit, if
any, or for any defaults of Landlord). Tenant shall take no steps to terminate
this Lease without giving written notice to said lessor under the superior
lease, or holder of a superior mortgage, and a reasonable opportunity to cure
(without such lessor or holder being obligated to cure), any default on the part
of Landlord under this Lease. In confirmation of such attornment, Tenant shall
promptly execute and deliver any instrument, in recordable form, if required,
that Landlord, the lessor of any superior lease or the holder of any superior
mortgage or any of their respective successors in interest may request to
evidence such attornment.
24.04. If, in connection with obtaining, continuing or renewing financing
for which the Real Property and/or Building and/or air rights and/or any other
structure located on the Real Property, or any part thereof (or a leasehold or
any interest therein) represents collateral in whole or in part, a banking,
insurance or other lender shall request modifications of this Lease as a
condition of such financing, Tenant will not withhold, delay or defer its
consent thereto, provided that such modifications do not increase the financial
obligations of Tenant hereunder or adversely affect to a material degree the
leasehold interest hereby created.
24.05. Landlord agrees to grant to a secured party of Tenant the right to
reasonable access to the Demised Premises for a reasonable time and on
reasonable terms and conditions in order to protect such secured party's right,
so long as Tenant and Landlord's Mortgagee agree, so long as the terms of such
grant of right are in a written agreement reasonably acceptable to Landlord, and
further, so long as Tenant pays the reasonable cost of Landlord's counsel to
review such agreement.
ARTICLE 25 - Broker
25.01. Tenant represents that in the negotiation of this Lease it dealt
with no broker or brokers other than Broker and that no other broker was
involved or instrumental with Tenant in this transaction or brought this
transaction to Tenant's attention. Based upon such representation Landlord
agrees to pay to Broker a brokerage commission pursuant to a separate agreement
between Landlord and Broker. Tenant hereby agrees to defend, indemnify Landlord
and hold Landlord harmless from any and all loss, cost, damage, expense,
including, without limitation, reasonable legal fees and disbursements
liabilities and claims, successful or not, for brokerage commissions by any
other broker in connection with this transaction. Landlord shall have no
liability for brokerage commissions arising out of any sublease by Tenant, and
Tenant hereby agrees to defend, indemnify and hold Landlord harmless from and
against same. In the event any action is instituted for which Tenant is required
under this Article 25 to defend Landlord, such defense shall be conducted by
attorneys selected by Tenant, subject to the reasonable approval of Landlord.
26
ARTICLE 26 - Re-Entry and Remedies on Tenant's Default
26.01 If this Lease terminates for any reason whatsoever, then and in any
of such events Landlord may, without notice, re-enter the Demised Premises, and
dispossess Tenant and/or the legal representative of Tenant or other occupant of
the Demised Premises by summary proceedings, ejectment, or otherwise, and remove
their effects and hold the Demised Premises as if this Lease had not been made.
Tenant shall, however, remain liable hereunder and hereby waives the service of
notice of intention to re-enter or to institute legal proceedings to that end.
26.02. In case of re-entry by Landlord, whether upon expiration of the
Term or termination of this Lease, and whether by summary proceedings or
otherwise, Landlord or its agents and legal representatives shall have the
right, without being liable for any prosecution or damages therefor, to relet
the Demised Premises as the agent of Tenant, and receive the rent therefor, upon
such terms as shall be satisfactory to the Landlord, in its sole discretion, and
all rights of Tenant to repossess the Demised Premises shall be forfeited. Any
such reletting may be of the entire Demised 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 in excess of the period which would otherwise
have constituted the balance of the Term and may provide for rent concessions or
free rent. Such re-entry or reletting, or both, by Landlord shall not operate to
release Tenant from any rent to be paid or covenant to be performed hereunder by
Tenant during the Term except any rent received on such reletting shall be
applied as per Section 30.01B. For the purposes of reletting, Landlord shall be
authorized to make such repairs or alterations in or to the Demised Premises as
Landlord shall deem necessary to place the same in good order and condition, and
such alterations or decorations in or to the Demised Premises as Landlord in
Landlord's judgment considers advisable or necessary. Tenant shall be liable to
Landlord for the cost of such repairs, alterations and decorations, and all
expenses of such reletting, including, but not limited to, legal expenses,
attorney's fees and brokerage fees. Tenant shall not be entitled to any surplus
accruing as a result of any such reletting.
26.03. In the event of a breach or threatened breach by Tenant of any of
the covenants or provisions hereof, Landlord 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 Landlord from any other
remedy at law or in equity.
26.04. Tenant on behalf of itself and of any and all persons claiming
through or under Tenant (including creditors of all kinds) hereby expressly
waives any and all rights to service of any notice of intention to re-enter and
also waives all rights of redemption granted 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 Landlord obtaining possession of the Demised Premises, by reason of
the violation by Tenant of any of the covenants and conditions of this Lease, or
otherwise.
26.05. Each right and remedy of Landlord provided for in this Lease shall
be cumulative and shall be in addition to every other right or remedy provided
for in this Lease or now or hereafter existing at law or in equity or otherwise,
and the exercise by Landlord of any one or more of the rights or remedies
provided for in this Lease or now or hereafter existing at law or in equity or
otherwise shall not preclude the simultaneous or later exercise by Landlord of
any or all other rights or remedies.
26.06. If Tenant shall default in the performance of any covenant,
agreement, term, provision or condition herein contained, Landlord without
waiving such default, may perform the same for the account and at the expense of
Tenant without notice in case of emergency and in any other case upon three (3)
days written notice of intention to do so. Bills for any reasonable expenses
incurred by Landlord in connection with such performance by Landlord and for all
costs, expenses and disbursements, including (without being limited to)
reasonable counsel fees, incurred in collecting or endeavoring to collect the
Base Rent or additional rent or other charge or enforcing any rights against
Tenant under this Lease, whether or not any action or proceeding is instituted,
shall be payable by Tenant, within three (3) days of notice to Tenant and if not
paid when due, the amounts thereof shall immediately become due and payable as
additional rent under this Lease together with interest thereon at the Interest
Rate. Landlord reserves the right, without liability to Tenant and without
constituting any claim or constructive eviction, to suspend furnishing or
rendering to Tenant any property, material, labor, utility or other service,
wherever Landlord is obligated to furnish or render the same at the expense of
Tenant, in the event that (but only for so long as) Tenant is in arrears in
paying Landlord therefor.
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ARTICLE 27- Notices
27.01. Any notice, statement, demand, request or other communication
required or permitted pursuant to this Lease or otherwise (sometimes in this
Lease collectively called "notice") shall be in writing and shall be deemed to
have been properly given if addressed to the other party at the address
hereinabove set forth except that notices from Tenant to Landlord shall
simultaneously be sent to Managing Agent at the address hereinabove set forth
and except that after the Commencement Date, Tenant's address, unless Tenant
shall give notice to the contrary, shall be the Building, and sent by nationally
recognized overnight courier or by registered or certified United States mail,
return receipt requested, postage prepaid, or if personally delivered to such
address to an officer, partner or other authorized representative. Any notice so
given shall be deemed to have been given, rendered or made upon delivery, or if
rejected, when delivery was attempted. Either party may, by notice as aforesaid,
designate a different address or addresses for notices, statements, demands or
other communications intended for it. Any notice by the attorney for a party
shall be deemed a notice by such party.
ARTICLE 28 - Legal Requirements
28.01. Tenant shall promptly notify Landlord of any written notice it
receives of the violation of any laws, orders, ordinances, rules, regulations
and requirements of any federal, state and municipal authorities with respect to
or arising from (i) the occupancy, use or manner of use of the Demised Premises,
(ii) any cause or condition created by or at the instance of Tenant or any other
person at the Real Property, or (iii) breach of any of Tenant's obligations
hereunder.
28.02. Tenant, its servants, employees, agents, visitors and licensees
shall, at Tenant's cost, observe faithfully and comply strictly with (a) the
laws, orders, rules, regulations and requirements referred to in Section 28.01,
and (b) the Rules and Regulations set forth in Exhibit B attached hereto and
made a part hereof, the Construction Rules and Regulations referred to in
Section 4.08 hereof and such reasonable modifications in and of any of the
foregoing as Landlord shall make hereafter and provide notice of to Tenant. To
the extent that there is any conflict or inconsistency between this Lease and
such modified Rules and Regulations, the provisions of this Lease shall control.
28.03. Except as aforesaid, Landlord shall, as a Cost of Operation, comply
with or cause to be complied with, all laws, orders, ordinances and regulations
of federal, state and municipal authorities with respect to the public portions
of the Building. Landlord may contest the validity of any such law, ordinance,
rule, order or regulation.
28.04. Any failure by Landlord to enforce any rules and regulations now or
hereafter in effect, either against Tenant or any other tenant in the Building,
shall not constitute a breach hereunder or waiver of any such rules and
regulations.
ARTICLE 29 - Liability of Landlord and Tenant's Indemnity
29.01. Neither Landlord nor any agent or employee of Landlord shall be
liable to Tenant, its employees, agents, contractors and licensees for any
injury or damage to Tenant or to any other persons or for any damage to, or loss
(by theft, vandalism or otherwise) of any of Tenant's Property and/or of
property of any other person, irrespective of the cause of such injury, damage
or loss (unless the sole cause is by Landlord's gross negligence and such
injury, damage or loss is not covered by Tenant's insurance). Landlord shall not
be liable in any event for loss of, or damage to, any property entrusted to any
of Landlord's employees or agents by Tenant without Landlord's specific written
consent. Landlord shall not be liable for the security or physical safety of
Tenant, its employees, agents, contractors, licensees or visitors, including,
without limitation, during after hours use of the Demised Premises, the Building
or the Land. The foregoing shall be applicable notwithstanding any determination
by a court of competent jurisdiction that Landlord's failure to take or
institute security measures was negligent. As a material covenant of this Lease,
Tenant waives, to the fullest extent permitted by law, any and all claims for
consequential damages in connection with any of the foregoing.
29.02. Tenant shall defend, indemnity and save harmless Landlord and
Others in Interest, their agents, employees, contractors, shareholders,
partners, members and principals (disclosed or undisclosed) (collectively
28
"Indemnitees") from and against any and all liabilities, obligations, damages,
costs and expenses, including reasonable attorneys' fees, and from and against
any and all suits, claims, and demands of every kind and nature, by or on behalf
of any person, firm, association or corporation, arising out of or based upon
any of the following occurrences during the Term and any period prior to the
Commencement Date that Tenant may have been given access to the Demised
Premises: (i) any accident, injury or damage, however occurring, which shall or
may happen in, on or about the Demised Premises, other than to the extent
resulting from Landlord's gross negligence if not covered by Tenant's insurance,
(ii) any matter or thing arising out of the condition, maintenance, repair,
alteration, use, occupation or operation of the Demised Premises by, or at the
instance of any of the Indemnitees (iii) any negligence or otherwise wrongful
act or omission on the part of Tenant or any of its agents, contractors,
subcontractors, employees, licensees or invitees, (iv) any failure on the part
of Tenant to perform or comply with any term, covenant or condition of this
Lease on Tenant's part to be kept, observed, performed or complied with. In case
any action or proceeding is brought against any of the Indemnitees by reason of
any such claim, Tenant upon written notice from Landlord shall at Tenant's
expense resist or defend such action or proceeding by counsel approved by
Landlord in writing, which approval Landlord shall not unreasonably withhold.
29.03. Except as expressly otherwise provided in this Lease, Landlord
shall have no liability to Tenant by reason of any inconvenience, annoyance,
interruption or injury to business arising from Landlord or any tenant making
any repairs or alterations or performing maintenance services, whether or not
Landlord is required or permitted by this Lease or by law to make such repairs
or alterations or to perform such services in or to any portion of the Real
Property, Building or Demised Premises, or in or to the fixtures, equipment or
appurtenances of the Building or the Demised Premises.
29.04. Tenant shall look solely to the estate and interest of Landlord,
its successors and assigns, in the Real Property and Building (or the proceeds
thereof) for the collection of a judgment (or other judicial process) requiring
the payment of damages or money by Landlord in the event of any default by
Landlord hereunder, and no other property or assets of Landlord (or if Landlord
is a partnership of any partner of Landlord) shall be subject to levy, execution
or other enforcement procedure for the satisfaction of Tenant's remedies under
or with respect to either this Lease, the relationship of Landlord and Tenant
hereunder or Tenant's use and occupancy of the Demised Premises.
29.05. Notwithstanding any contrary provisions of this Lease whatsoever,
including, without limitation, those pertaining to use and Permitted Use, Tenant
shall not use, or permit the use of the Demised Premises or the Real Property so
as to create or result in, directly or indirectly, (a) any sudden or gradual
spill, leak, discharge, escape, seepage, infiltration, abandonment, dumping,
disposal or storage of any hazardous or industrial waste, substance or
contamination, effluent, sewage, pollution or other detrimental or deleterious
material or substance (including without limitation asbestos), or the disposal,
storage or abandonment on the Real Property of any material, tank or container
holding or contaminated by any of the foregoing or residues thereof, or the
installation of any material or product containing or composed of any of the
foregoing, in, on, from under or above the Real Property (the occurrences being
hereinafter collectively called "Environmental Hazard"), or (b) any violation,
or state of facts or condition which would result in a violation, of any
federal, state or local statute, law, code, rule, regulation or order applicable
to any Environmental Hazard (the foregoing being hereinafter collectively called
"Legal Violation"). In the event of the violation of the foregoing by Tenant, in
addition to all other rights and remedies of Landlord under this Lease,
regardless of when the existence of the Environmental Hazard or Legal Violation
is determined, and whether during the Term or after the Expiration Date, Tenant
shall, immediately upon notice from Landlord, at Tenant's sole cost and expense,
at Landlord's option, either (i) take all action necessary to test, identify and
monitor the Environmental Hazard and to remove the Environmental Hazard from the
Real Property and dispose of the same and restore the Real Property to the
condition existing prior to such removal, and/or to remedy any Legal Violation,
all in accordance with applicable federal, state and local statutes, laws,
codes, rules, regulations or orders; or (ii) reimburse Landlord for all costs
and expenses incurred by Landlord for engineering or environmental consultant or
laboratory services) in testing, investigating, identifying and monitoring the
Environmental Hazard and in removing and disposing of the Environmental Hazard
and in restoring the Land, and/or in remedying any Legal Violation, and Tenant
shall, with legal counsel acceptable to Landlord, defend, indemnify and save
harmless Landlord and Others in Interest against and from all liabilities,
obligations, damages, penalties, claims, costs, charges and expenses, including
without limitation architects' and attorneys' fees and disbursements which may
be imposed upon or incurred by or asserted against Landlord and Others in
Interest, whether by any governmental authority,
29
Tenant or other third party, by reason of any violation or alleged violation of
any of the foregoing provisions of this Section.
29.06. All of the provisions of this Article 29 shall survive termination
of this Lease.
ARTICLE 30 - Damages
30.01. Tenant shall pay to Landlord as damages for the failure of Tenant
to observe and perform Tenant's obligations hereunder, at the election of
Landlord, either:
A. an amount equal to the Base Rent and any additional rent
(conclusively presuming the additional rent to be same as was payable for the
year immediately preceding such termination) due for the period which would
otherwise have constituted the balance of the Term of this Lease, or
B. an amount equal to the Base Rent and additional rent (as above
presumed) for the period which would otherwise have constituted the balance of
the Term, payable quarterly, provided, however, if the Demised Premises are
relet, Landlord shall credit Tenant with the net sum realized from such
reletting for the period which would otherwise have constituted the balance of
the Term. Any suit brought to collect the amount of deficiency for any month or
months shall not prejudice in any way the rights of Landlord to collect the
deficiency for any subsequent month or months by a similar proceeding. Nothing
herein contained shall be construed to limit or preclude recovery by Landlord
against Tenant of any sums or damages to which, in addition to the damages
particularly provided above, Landlord may lawfully be entitled by reason of any
default hereunder or otherwise on the part of Tenant.
30.02. Landlord shall in no event and in no way be responsible or liable
for any failure to relet the Demised Premises or any part thereof or for failure
to collect any rent due upon any such reletting and such failure or refusal
shall not release or affect Tenant's liability for damages.
30.03. If at any time Tenant is in default hereunder (whether or not
Landlord institutes an action or summary proceeding against Tenant) or if Tenant
requests Landlord to review documents or to grant its consent to making
Alterations or otherwise if it is prudent for Landlord to contact counsel,
architects, engineers or other consultants or representatives (sometimes
collectively called "representatives"), Tenant shall reimburse Landlord for the
reasonable costs so incurred by Landlord for such representatives, as additional
rent.
ARTICLE 31 - Waivers
31.01. The failure of Landlord to seek redress for violation of, or to
insist upon the strict performance of, any covenant or condition of this Lease,
or any of the Rules and Regulations set forth or hereafter adopted by Landlord,
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 Landlord of rent with knowledge of the breach of any covenant of this
Lease shall not be deemed a waiver of such breach. No provision of this Lease
shall be deemed to have been waived by Landlord, unless such waiver be in
writing signed by Landlord. No payment by Tenant or receipt by Landlord 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 on any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or pursue any other remedy in this Lease provided. No act by Landlord or
its agent shall be deemed an acceptance of a surrender of the Demised Premises
and no agreement to accept such surrender unless in writing and signed by
Landlord. No employee of Landlord or its agent shall have any power to accept
the keys to the Demised Premises and the delivery of the keys shall not operate
as a termination of this Lease or surrender of the Demised Premises.
31.02. Tenant waives Tenant's rights, if any, to assert a counterclaim in
any summary proceeding brought by Landlord against Tenant, and Tenant agrees to
assert any such claim against Landlord only by way of a separate action or
proceeding.
30
31.03. To the extent permitted by applicable law, Landlord and Tenant
hereby waive trial by jury in any action, proceeding or counterclaim brought by
either against the other on any matter whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, or Tenant's
use or occupancy of the Demised Premises, or any emergency or other statutory
remedy with respect thereto.
ARTICLE 32 - Excavation
32.01. In the event that an excavation or any construction should be
authorized upon land adjacent to the Building, or in the vaults beneath the
Building or in subsurface space adjacent to said vaults, Tenant shall, without
liability on the part of Landlord therefor, afford to the person or persons
causing or authorized to cause such excavation or other substructure work,
license to enter upon the Demised Premises for the purpose of doing such work as
shall reasonably be necessary to protect or preserve the Building or surrounding
lands from injury or damage and to support them by proper foundations, pinning
and/or underpinning, or otherwise. Said license shall be afforded by Tenant
without any claim for diminution or abatement of rent on account thereof.
ARTICLE 33 - Successors and Assigns
33.01. The obligations of this Lease shall bind and benefit the successors
and assigns of the parties, except that no violation of the provisions of
Article 22 shall operate to vest any rights in any successor or assignee of
Tenant, and that the provisions of this Article shall not be construed as
modifying the conditions of limitation contained in Article 21. However, the
obligations of Landlord under this Lease shall not be binding upon Landlord
herein named with respect to any period subsequent to the transfer of its
interest in the Building as owner or lessee thereof and in the event of such
transfer said obligations shall thereafter be binding upon each transferee of
the interest of Landlord herein named as such owner or lessee of the Building,
but only with respect to obligations arising during the period commencing with
such transfer and ending with a subsequent transfer within the meaning of this
Article, and such transferee, by accepting such interest, shall be deemed to
have assumed such obligations except only as may be expressly otherwise provided
elsewhere in this Lease. A lease of Landlord's entire interest in the Building
as owner or lessee thereof shall be deemed a transfer within the meaning of this
Section 33.01.
ARTICLE 34 - Miscellaneous
34.01. This Lease with the exhibits and/or schedules annexed hereto
contain the entire agreement between Landlord and Tenant and any agreement
hereafter made between Landlord and Tenant shall be ineffective to change,
modify, waive, release, discharge, terminate or effect an abandonment of this
Lease, in whole or in part, unless such agreement is in writing and signed by
the party against whom enforcement of the change, modification, waiver, release,
discharge, termination or the effecting of the abandonment is sought. Tenant
expressly acknowledges and agrees that Landlord has not made and is not making,
and Tenant, in executing and delivering this Lease, is not relying upon, and has
not been induced to enter into this Lease by, any representations, except to the
extent that the same are expressly set forth in this Lease.
34.02. This Lease and the obligations of Tenant to pay rent hereunder and
perform all of the other covenants, agreements, terms, provisions and conditions
hereunder on the part of Tenant to be performed shall in no wise be effected,
impaired or excused because Landlord is unable to fulfill any of its obligations
under this Lease or is unable to supply or is delayed in supplying any service,
express or implied, to be supplied or is unable to make or is delayed in
supplying any equipment or fixtures if Landlord is prevented or delayed from so
doing by reason of any Events of Force Majeure; provided that Landlord shall in
each instance exercise reasonable diligence to effect performance when and as
soon as possible.
34.03. If any term or provision of this Lease shall, to any extent be
invalid or unenforceable, the remainder of this Lease shall not be affected
thereby and the balance of the terms and provisions of this Lease shall be valid
and enforceable to the fullest extent either hereunder or as permitted by law.
34.04. Any provision of this Lease which requires a party not to
unreasonably withhold its consent (a) shall be read as if the word "withhold"
read "withhold, delay or defer" and (b) shall never be the basis for any award
31
of damages (unless exercised in deliberate bad faith) or give rise to a right of
setoff to the other party, but shall be the basis for a declaratory judgment or
injunction with respect to the matter in question.
34.05. Tenant agrees not to record this Lease.
34.06. This Lease is offered to Tenant for signature with the express
understanding that it shall not be binding upon Landlord unless and until
Landlord shall have executed and delivered a fully executed copy to Tenant, and
until the holder of any and all superior mortgages shall have approved the same
if such approval is required under the terms of such mortgages.
34.07. Notwithstanding any contrary provision of this Lease, Tenant shall
not under any circumstances commence any action or proceeding or take any action
based upon an alleged breach or default of this Lease by or through Landlord
unless and until (a) Tenant first shall have notified Landlord thereof,
specifying in detail the facts of the alleged breach or default, and (b)
Landlord shall not have cured, or used due diligence to cure, said alleged
breach or default within 30 days after receipt of said notice.
34.08. In the event Tenant shall be in default in the performance of any
other lease between Landlord and Tenant, such default also shall be a default
under the terms of this Lease.
34.09. Notwithstanding any cancellation or termination of this Lease,
nothing herein shall be construed to release Tenant from any liability or
responsibility (whether then or thereafter occurring) with respect to any acts,
omissions or obligations of Tenant occurring prior to such cancellation or
termination, all of which shall survive such cancellation or termination.
34.10. This Lease is to be governed by and construed under the laws of the
State of New York.
34.11. The captions of Articles in this Lease are inserted only as a
matter of convenience and for reference and they in no way define, limit or
describe the scope of this Lease or the intent of any provision thereof. Any
reference in this Lease to an Article or Section shall mean the Article or
Section of this Lease unless otherwise specified.
ARTICLE 35 - Relocation
35.01 Landlord may, at its option, elect by notice to Tenant to substitute
for the Demised Premises other office space designated by Landlord in the
Building (herein called the "Substitute Premises"), provided that the Substitute
Premises contain approximately the same square foot area as the Demised Premises
and have a configuration substantially similar to that of the Demised Premises.
Landlord's notice shall be accompanied by a plan of the Substitute Premises.
Tenant shall occupy the Substitute Premises promptly (and, in any event, not
later than 30 days) after Landlord has substantially completed the work to be
performed by Landlord in the Substitute Premises to make the same substantially
comparable to the Demised Premises. Tenant shall pay the same Base Rent rate and
additional rent rate under Articles 6, 7, 10 and 12, with respect to the
Substitute Premises (on a per square foot basis) as was payable with respect to
the Demised Premises. In the event of such substitution, this Lease (i) shall no
longer apply to the Demised Premises, except with respect to- obligations which
accrued on or prior to such surrender date, and (ii) shall apply to the
Substitute Premises as if the Substitute Premises had been the space originally
demised under this Lease, with such modifications and changes as may be
necessary due to the fact that Substitute Premises, possibly in a different
building, are involved and as sense otherwise shall require. Landlord shall have
no liability to Tenant in the event of such substitution and relocation, but
Landlord shall reimburse Tenant for any reasonable expenses incurred by Tenant
for architects or engineers necessitated by reason of the substitution of the
Substitute Premises for the Premises and for Tenant's reasonable expenses
incurred in moving to the Substitute Premises.
ARTICLE 36 - Continuation of Term
36.01 Provided that the Lease is in full force and effect, that Tenant has
fully and faithfully complied with all of its obligations under this Lease
beyond any applicable cure period, and that Tenant is not subleasing more than
10% of the Demised Premises and has not assigned this Lease, then Tenant (but
not any subtenant or assignee)
32
shall have the option to continue leasing for an additional period of five years
commencing on the moment immediately following the Expiration Date
("Continuation Term") upon the following terms and conditions:
A. The space to be included in the Continuation Term shall be the
same space as was included under this Agreement at the moment immediately prior
to the commencement of the Continuation Term.
B. Tenant shall exercise its option to lease for the Continuation
Term by notifying Landlord thereof ("Continuation Notice") not later than nine
full calendar months prior to the Expiration Date.
C. Provided that Tenant complies with the conditions in Paragraph
36.01B hereof, then the following terms ("Fair Market Rent Terms") shall be
applicable to the Continuation Term:
(i) The Demised Premises shall be delivered to Tenant "as is",
in their same condition, and none of Landlord's obligations under any provision
of the Lease regarding improvement of any space shall be applicable.
(ii) No rent concession or abatement or credit against the
cost of, or Landlord's contribution to the cost of, any improvements, work or
other costs shall be applicable.
(iii) The same "escalators" or adjustments in rent as are
provided in Articles 6, 10 and elsewhere in this Lease shall be applicable,
except that the bases and base years used in connection with such adjustments
shall be changed to those applicable to the calendar year 2008.
(iv) The After Hours Charges shall be those amounts which
Landlord is then charging therefor to the most recent tenants in the Building.
(v) The annual Base Rent for each Rent Year during the
Continuation Term shall be increased to the greater of (a) the amount determined
under Paragraph 36.01D and (b) the Base Rent and additional rent during the last
Rent Year of the original Term.
(vi) All of the other terms and conditions of the Lease, as
modified by this Agreement, shall be applicable to the Continuation Term other
than rent, any further right to continue, extend or renew and other than as may
be reasonably necessary because a renewal term rather than an original term, and
a previously occupied space rather than a new space, is involved.
D. Following receipt by Landlord of the Continuation Notice timely
given as provided in Paragraph 36.01B, unless Landlord believes the annual Base
Rent for the Continuation Term is that provided in clause (b) of Section
36.01C(v), Landlord shall notify Tenant of the Base Rent which, in Landlord's
reasonable opinion, represents the "Fair Market Base Rent" (without deduction
for the cash value of free rent, leasehold improvements or any contribution in
lieu of leasehold improvements, vacancy or any reduced brokerage payable on
renewal) during the Continuation Term. "Fair Market Base Rent" shall mean the
annual fair market rental value of the Demised Premises which non-equity tenants
are then paying in connection with new leases for comparable spaces in buildings
in the White Plains area of comparable quality, size, location, services and
amenities and quality of construction as the Building on the commencement of the
Continuation Term with a term equal to the Continuation Term and otherwise
containing comparable provisions as the Lease. Within twenty (20) days of such
notice, (a) if Tenant agrees, Tenant shall notify Landlord that Tenant so agrees
that the Base Rental Rate therein provided constitutes the "Fair Market Base
Rent", as hereinafter provided or (b) if Tenant disagrees, Tenant shall specify
what Base Rental Rate, in Tenant's opinion, constitutes the Fair Market Base
Rent ("Tenant's Base Rent Notice), or (c) if Tenant does not respond, Tenant
shall be deemed to agree. In the event Tenant agrees as provided in clauses (a)
or (c) above, the Base Rental Rate set forth in Landlord's said notice shall be
deemed the Fair Market Base Rent. In the event Tenant disagrees as provided in
clause (b) above, the following procedure shall be used in determining Fair
Market Base Rent (sometimes hereinafter called "Fair Market Base Rent
Procedure"):
In the event the parties cannot agree upon the Fair Market Base Rent
within 7 business days following the foregoing 20 day period, then at the
request of either party to the other (called the "Initial Request"),
33
the parties shall jointly choose an impartial real estate appraiser (who shall
have had at least ten (10) years experience as an appraiser in commercial office
leasing in the White Plains area), whose decision shall be final and binding. If
the parties do not agree upon such a third party appraiser and notify in writing
the other thereof within 7 business days of the Initial Request, then within 6
additional business days each party shall choose such a real estate appraiser
(having the foregoing credentials) and notify in writing the other thereof, and
the joint decision of such real estate appraisers regarding Fair Market Base
Rent shall be final and binding, (or, failing such choice, or, if such choice is
made, failing notice to the other within such 6 additional business day period,
the decision of one such real estate appraiser timely chosen and noticed
regarding Fair Market Base Rent shall be final and binding). If the two real
estate appraisers timely chosen and noticed do not agree within 7 business days
of the end of the 6 business day period mentioned above during which they were
chosen, then they shall choose a third such real estate appraiser within 5
business days, or if they do not agree upon a third, then either party may make
a request of the Chairman of the Real Estate Section of the Westchester County
Bar Association of the appointment of such an appraiser, and the decision of
such third real estate appraiser regarding Fair Market Base Rent shall be final
and binding. To the extent that the determination of Fair Market Base Rent shall
extend beyond the Expiration Date, Tenant shall continue paying on an estimated
basis Base Rent and additional rent at the rate payable during the last Rent
Year of the Term, and, within 10 days of the determination of Fair Market Base
Rent, based upon such estimated payments made by Tenant with respect to the
Continuation Term, Tenant shall pay Landlord any underpayments, and Landlord
shall pay Tenant (or credit against Base Rent next becoming due under the Lease)
any overpayments of Fair Market Base Rent.
E. Within fifteen (15) days following Landlord's submission to
Tenant of a Continuation Term Agreement in accordance with the terms of this
Section 36.01, Tenant shall sign and return the same to Landlord.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this Lease as of the day and year first above written.
ATTEST: LANDLORD:
SOUTH BROADWAY WP, LLC
By:
----------------------------- -----------------------------
Witness for Landlord Name:
---------------------------
Its: Managing Member
TENANT:
(Name of Tenant)
By:
----------------------------- -----------------------------
Witness for Tenant (Signature)
Its:
----------------------------- ----------------------------
Witness for Tenant (Title)
---------------------------------
Tenant's Federal I.D. No. or
Social Security No.
34
UNIFORM FORM CERTIFICATE OF ACKNOWLEDGMENT
(within New York State)
State of New York )
)ss.:
County of )
On the ______ day of __________ in the year _______ before me, the
undersigned personally appeared ________________________________________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the individual(s) whose name(s) is (are) subscribed to the within instrument
and acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies), and that by his/her/their signature(s) on the instrument, the
individual(s), or the person upon behalf of which the individual(s) acted,
executed the instrument.
-----------------------------------------
Signature and Office of individual
taking acknowledgment
UNIFORM FORM CERTIFICATE OF ACKNOWLEDGMENT
(Outside of New York State)
State, District of Columbia, Territory, Possession, or Foreign Country.)
)ss.:
___________________ )
On the _______ day of ____________ in the year ______ before me, the
undersigned, personally appeared ______________________________________,
personally known to me or proved to me on the basis of satisfactory evidence to
be the individual(s) whose name(s) is (are) subscribed to the within instrument
and acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies), that by his/her/their signature(s) on the instrument, the
individual(s), or the person upon behalf of which the individual(s) acted,
executed the instrument, and that such individual made such appearance before
the undersigned in the __________________. (Insert the city or other political
subdivision and state or country or other place the acknowledgment was taken).
-----------------------------------------
Signature and Office of individual
taking acknowledgment
35
EXHIBIT A
FLOOR PLAN OF DEMISED PREMISES AND TENANT'S PRELIMINARY PLANS
A-1
EXHIBIT B
RULES AND REGULATIONS
(a) GENERAL
1. The sidewalks, entrances, passages, lobbies, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or encumbered by
Tenant or used for any purpose other than ingress and egress to and from
the Demised Premises, and Tenant shall not permit any of its employees,
agent or invitees to congregate in any of said areas. No doormat of any
kind whatsoever shall be placed or left in any public hall or outside any
entry of the Demised Premises.
2. No awnings or other projections shall be attached to the outside walls of
the Building. No curtains, blinds, shades or screens shall be attached to
or hung in, or used in connection with, any window or door of the Demised
Premises, without the prior written consent of Landlord. Such curtains,
blinds, shades or screens must be of a quality type, design and color, and
attached in the manner, approved by Landlord.
3. No sign, insignia, advertisement, object, notice or other lettering shall
be exhibited, inscribed, painted or affixed by Tenant on any part of the
outside or inside of the Demised Premises or the Building without the
prior written consent of Landlord.
In the event of the violation of the foregoing by Tenant, at Tenant's cost
and expense Landlord may remove the same without any liability. Interior
signs and letters on doors and directory tablets shall, if and when
approved by Landlord, be inscribed, painted or affixed at the expense of
Tenant, and shall be of a size, color, and style acceptable to Landlord.
4. No showcases or other articles shall be put in front of or affixed to any
part of the exterior of the Building. No showcases shall be placed in any
elevator lobby or common area.
5. The janitor closets and other plumbing fixtures shall not be used for any
purpose other than those for which they were designed or constructed, and
no sweepings, rubbish, rags, acids or other substances shall be thrown or
deposited therein. All damages resulting from any misuse of the fixtures
by Tenant, its servants, employees, agents, visitors, or licensees shall
be borne by Tenant.
6. Tenant shall not drill into, or in any way deface, any part of the Demised
Premises or the Building. The Building slab consists of poured concrete
with post tension cables. No penetrations of any kind such as boring,
cutting, or stringing of wires is permitted, except with prior written
consent of the Landlord and as Landlord may direct. Tenant shall not lay
linoleum, or other similar floor covering, so that the same shall come in
direct contact with the floor of the Demised Premises.
7. No animals, fish or birds of any kind shall be brought into or kept in or
about the Building.
8. No noise, including, but not limited to, music or the playing of musical
instruments, recordings, radio or television which, in the judgment of
Landlord, reasonably exercised, might disturb the use or enjoyment by any
other occupant of any space in the Building. Tenant shall not throw
anything out of the doors, windows or down the passageways.
9. Tenant, its servants, employees, agents, visitors or licensees, shall not
at any time bring or keep upon the Demised Premises any explosive fluid,
chemical or substance, or any inflammable or combustible objects or
materials.
10. Additional locks, bolts, magnetic cards or other security devices
(collectively "Security Devices") of any kind which shall not be operable
by Landlord's Master Security Device for the Building shall not be placed
upon any of the doors or windows by Tenant, nor shall any changes be made
in any Security Devices which shall make them inoperable by Landlord's
Master Security Device. Tenant shall, upon the termination of its
B-1
tenancy, turn over to the Building Management all keys, cards or other
Security Devices either furnished to, or otherwise procured by, Tenant and
in the event of the loss of any Security Devices furnished by Building
Management, Tenant shall pay to Building Management the cost thereof.
11. All removals, or the carrying in or out of any safes, freight, furniture,
packages, boxes or crates must take place during such hours and in such
elevators as Landlord may determine from time to time. Landlord reserves
the right to inspect all objects and matter to be brought into the
Building and to exclude from the Building all objects and matter which
violate any of these Rules and Regulations or the Lease of which these
Rules and Regulations are a part. Landlord may require any person leaving
the Building with any package or other object or matter, to submit a pass,
signed by a pre-determined authorized signature, listing such package or
object or matter, from the tenant from whose premises the package or
object or matter is being removed, but the establishment and enforcement
of such requirement shall not impose any responsibility on Landlord for
the protection of Tenant against the removal of property from the Demised
Premises. Landlord shall in no way, be liable to Tenant for damages or
loss arising from the admission, exclusion or ejection of any person to or
from the Demised Premises or the Building under the provisions of this
Rule 11 or of Rule 15 thereof.
12. Tenant shall not occupy or permit any portion of the Demised Premises to
be occupied as an office for a public stenographer or public typist, for
the storage or manufacture of beer, wine or liquor, or for the possession,
storage, manufacture or sale of narcotics, tobacco or any controlled
substance in any form or as a barber, beauty or manicure shop, or as an
employment or travel bureau. Tenant shall not engage or pay any employees
on the Demised Premises, except those actually working for Tenant on the
Demised Premises, nor advertise for laborers giving an address at the
Demised Premises. Tenant shall not use the Demised Premises or any part
thereof, or permit the Demised Premises or any part thereof to be used,
for manufacturing, or sale at auction of merchandise, goods or property of
any kind.
13. Tenant shall not obtain, purchase or accept for use in the Demised
Premises cleaning, floor polishing or other similar services from any
persons not authorized by Building Management in writing to furnish such
services, provided always that the charges for such services by persons
authorized by Building Management are not excessive. Such services shall
be furnished only at such hours, in such places, within the Demised
Premises, and under a purchase order or contract for waxing, rug
shampooing, venetian blind washing/cleaning, furniture polishing, removal
of garbage or towel service in the Demised Premises issued by and from
companies or persons approved by the Building Management.
14. Landlord shall have the right to prohibit any advertising or identifying
sign by Tenant which in Landlord's judgment, reasonably exercised, tends
to impair the appearance of the Building or its desirability as a building
for offices, and upon written notice from Landlord, Tenant shall refrain
from or discontinue such advertising or identifying sign.
15. The Building Management requires persons entering the Building before 7:00
a.m. and after 6:00 p.m. during normal business days to sign in and out of
the Visitors Log book located at the Security Desk. Building Management
will furnish passes to persons for whom Tenant requests same in writing.
Tenant shall be responsible for all persons for whom Tenant requests such
a pass and shall be liable for all acts or omissions of such persons.
16. Tenant shall, at Tenant's expense, provide artificial light and electrical
energy for the employees of Landlord and/or Landlord's contractors while
doing janitor service or other cleaning in the Demised Premises and while
making repairs or alterations in the Demised Premises.
17. The Demised Premises shall not be used for lodging or sleeping or for any
immoral or illegal purpose.
18. The requirements of Tenant will be attended to only upon application at
the office of the Building. Employees of Building Management shall not
perform any work or do anything outside of their regular duties, unless
under special instructions from Landlord.
B-2
19. Canvassing, soliciting and peddling in the Building are prohibited, and
Tenant shall cooperate to prevent the same.
20. There shall not be used in the Demised Premises, or in the public halls of
the Building, either by Tenant or by jobbers or any others, in the moving
or delivery or receipt of safes, freight, furniture, packages, boxes,
crates, paper office material, or any other matter or thing, any hand
trucks except those equipped with rubber tires, side guards and such other
safeguards as Landlord shall reasonably require. No hand trucks shall be
used in passenger elevators, and no such passenger elevators shall be used
for moving, delivery or receipt of the aforementioned articles.
21. Tenant shall not cause or permit any odors of cooking or other processes
or any unusual or objectionable odors to emanate from the premises which
would annoy other occupants of the Building or create a public or private
nuisance. No cooking shall be done in the Demised Premises except as is
expressly permitted in the Lease.
22. There shall be no smoking of cigarettes, cigars, pipes, etc. or any
illegal substances within the Building. The Building is considered to be a
non-smoking Building; therefore, all those who wish to smoke shall smoke
outside of the Building. There shall be no smoking in the lavatories or
stairwells. New York State Law permits companies to designate a certain
enclosed area within their premises as a smoking area as well as
individual offices the doors of which can be closed to those around them.
23. Landlord reserves the right to rescind, alter or waive any rule or
regulation at any time prescribed for the Building when, in its judgment,
it deems it necessary or desirable for the safety, care and appearance of
the Building, or the preservation of good order therein, or the operation
or maintenance of the Building or the equipment thereof, or the comfort of
tenants or others in the Building. No recision, alteration or waiver of
any rule or regulation in favor of any one occupant shall operate as a
recision, alteration or waiver in favor of Tenant or any other occupant.
(b) INSTRUCTIONS TO MOVING CONTRACTORS
1. The direction of the Building Management will be followed at all times.
2. No furniture and/or materials will be moved in or out of the Building from
8:00 am to 6:00 pm, Monday through Friday, unless approved by the
Landlord.
3. The moving contractor must submit, not later than two weeks prior to the
move, a written schedule which indicates the date and time the move will
commence and also the time for the completion of the move.
4. All routes over finished floors will be protected with a minimum 3/8"
plywood/masonite runway, which is to be picked up at the close of each
work day.
5. Appropriate warning signs are to be posted in all public corridors and
lobbies used.
6. Temporary staging of furniture and equipment in public areas is not
permitted.
7. All area traveled are to be broom cleaned at the close of each day.
Elevators are to be swept and debris carried from the car, NOT across the
door opening.
8. Workmen should use the toilet facilities provided by the general
contractor.
9. The load limit of 3,500 pounds in the passenger elevator is NOT to be
exceeded. Only the elevator designated by Building Management for use by
Tenant's contractors shall be so employed.
10. No more than two trailers will be allowed at the loading dock.
B-3
11. Only rubber wheeled dollies and carts, in good operating condition, may be
used. Excess oil and grease must be removed from wheels to prevent
staining flooring.
12. Reasonable care must be taken at all times to avoid any personal injury or
property damage.
13. All packing and crating materials must be removed at the end of each day,
and not be left to accumulate overnight (fire hazard).
14. The moving contractor must utilize labor that will work in harmony with
other labor in the Building.
The following must be listed on the Certificate of Insurance (Comprehensive
Public Liability) as Additional Insured:
______________________ Acting Agent for
Under the Types of Insurance and Comprehensive Public Liability, the listed
requirements are as follows:
Property Damage Coverage
Bodily Injury of Death: (One Person/More than One)
Commercial General Liability and Automobile Liability (Minimum of
$5,000,000.00)
Automobile Liability
Excess Liability (Umbrella Form $10,000,000.00)
Workmen's Compensation Liability (Statutory Limit)
15. Tenant shall be liable for any damage to the Building or property of
others therein, or any injury to any person caused by Tenant or its moving
contractor(s), their agents or employees, in the course of bringing
Tenant's property into the Demised Premises or the construction or
placement of any improvement or installation therein.
(c) TENANT SECURITY
In order to provide a secure, safe working environment for our tenants, as
well as all visitors, the following procedures have been established:
1. All tenant employees should have a picture identification card. (ID
pictures are normally taken twice a year)
2. All tenants are to park in their assigned tenant spaces only.
3. All tenants must sign in and out of the Building after and before normal
business hours, all day Saturday, Sunday and holidays. The visitor log
book is located at the Security console desk in the main lobby.
4. All desks should be locked. No valuables should be left in offices.
5. All tenants, their visitors and service/repair personnel are restricted to
the tenant floor.
6. A list of Tenant's personnel authorized to sign for property leaving the
Demised Premises is to be provided to the Management Office. Equipment
being removed from the Building shall be accompanied by a letter with one
of the authorized signatures stating the approval.
7. All visitors must park in designated areas. All visitors must sign in and
out of the Building at all times. No visitor is permitted to enter the
Demised Premises after normal business hours unless accompanied by an
authorized tenant.
8. Service and repair personnel must also register at the Security desk or in
the Freight elevator with the security guard.
B-4
9. A lost and found service is provided at Security console and the
Management Office.
10. The Building is equipped with an Emergency Public Address System. Fire
Emergency Wardens are to be provided by the Tenant as part of the Building
fire safety program. Detailed briefing will be accomplished by Building
Management and Building Security. The security console will respond to all
emergencies.
11. In order to limit traffic in the Building, the main floor security console
will accept small parcels and messages for tenants and call the tenant to
pick up at the Security desk during regular business hours unless
Management Office is notified of special delivery or pick up. All large
shipments are received at the loading dock.
B-5
LEASE AGREEMENT
By and Between
SOUTH BROADWAY WP, LLC, Landlord
and
NEW ROCHELLE TELEPHONE CORP., Tenant
at
Building: 75 South Broadway
White Plains, New York
Date: August __, 2003
TABLE OF CONTENTS
Page
ARTICLE 1......................................................................1
DEFINITIONS AND CERTAIN PROVISIONS..........................................1
ARTICLE 2......................................................................3
DEMISE AND DEMISED PREMISES.................................................3
ARTICLE 3......................................................................4
RENT........................................................................4
ARTICLE 4......................................................................4
PREPARING THE DEMISED PREMISES..............................................4
ARTICLE 5......................................................................6
COMMENCEMENT DATE AND READY FOR OCCUPANCY...................................6
ARTICLE 6......................................................................7
COSTS OF OPERATION..........................................................7
ARTICLE 7......................................................................9
HEAT, VENTILATING AND AIR CONDITIONING......................................9
ARTICLE 8.....................................................................10
USE........................................................................10
ARTICLE 9.....................................................................10
ENTRY, RIGHT TO CHANGE PUBLIC PORTIONS.....................................10
OF THE BUILDING, ETC.......................................................10
ARTICLE 10....................................................................11
ADJUSTMENTS OF RENT FOR CHANGES IN.........................................11
REAL ESTATE TAXES..........................................................11
ARTICLE 11....................................................................12
LANDLORD'S SERVICES........................................................12
ARTICLE 12....................................................................14
ELECTRIC SERVICE...........................................................14
ARTICLE 13....................................................................15
CONDEMNATION..................................................................15
ARTICLE 14....................................................................16
REPAIRS....................................................................16
ARTICLE 15....................................................................17
DAMAGE BY FIRE OR OTHER CAUSE..............................................17
ARTICLE 16....................................................................18
INSURANCE..................................................................18
ARTICLE 17....................................................................19
ALTERATIONS................................................................19
ARTICLE 18....................................................................21
TENANT'S PROPERTY..........................................................21
ARTICLE 19....................................................................21
SURRENDER..................................................................21
ARTICLE 20....................................................................22
ESTOPPEL CERTIFICATE.......................................................22
ARTICLE 21....................................................................22
DEFAULTS AND TERMINATION...................................................22
ARTICLE 22....................................................................23
ASSIGNMENT, SUBLETTING, MORTGAGING.........................................23
ARTICLE 23....................................................................25
SECURITY DEPOSIT...........................................................25
ARTICLE 24....................................................................26
SUBORDINATION AND ATTORNMENT...............................................26
ARTICLE 25....................................................................27
BROKER.....................................................................27
ARTICLE 26....................................................................27
RE-ENTRY AND REMEDIES ON TENANT'S DEFAULT..................................27
ARTICLE 27....................................................................28
NOTICES....................................................................28
ARTICLE 28....................................................................28
LEGAL REQUIREMENTS.........................................................28
ARTICLE 29....................................................................29
LIABILITY OF LANDLORD AND TENANT'S INDEMNITY...............................29
ARTICLE 30....................................................................30
DAMAGES....................................................................30
ARTICLE 31....................................................................31
WAIVERS....................................................................31
ARTICLE 32....................................................................31
EXCAVATION.................................................................31
ARTICLE 33....................................................................31
SUCCESSORS AND ASSIGNS.....................................................31
ARTICLE 34....................................................................32
MISCELLANEOUS..............................................................32
ARTICLE 35....................................................................33
RELOCATION.................................................................33
EXHIBIT A......................................................................1
FLOOR PLAN OF DEMISED PREMISES AND TENANT'S PRELIMINARY PLANS..................1
EXHIBIT B......................................................................1
RULES AND REGULATIONS.......................................................1
INDEX
A
Adjustments of Rent for Changes in:Real Estate Taxes..........................13
After Hours HVAC Charges.......................................................1
Air Conditioning..............................................................11
Alterations...................................................................23
Assignment....................................................................27
Attornment....................................................................29
B
Base Operating Year............................................................1
Base Rent......................................................................1
Base Tax Year..................................................................1
Broker.....................................................................1, 31
Building.......................................................................1
Building Standard..............................................................1
C
Commencement Date...........................................................1, 8
Condemnation..................................................................18
Costs of Operation.............................................................9
D
Damage by Fire or Other Cause.................................................20
Damages.......................................................................35
Defaults......................................................................26
Definitions....................................................................1
Demised Premises............................................................2, 4
Designated Parking Spaces......................................................2
E
Electric Energy Charge.........................................................2
Electric Service..............................................................17
Entry.........................................................................12
Estoppel Certificate..........................................................25
Events of Force Majeure........................................................2
Excavation....................................................................36
Expiration Date................................................................2
G
Guarantor......................................................................2
H
Heat..........................................................................11
I
Insurance.....................................................................21
Interest Rate..................................................................2
L
Landlord and Others in Interest................................................2
Landlord's Contribution........................................................2
Landlord's Services...........................................................15
Leased Floor Space.............................................................2
Legal Requirements............................................................33
Liability of Landlord.........................................................33
M
Managing Agent.................................................................2
Miscellaneous.................................................................37
Mortgaging....................................................................27
N
Notices.......................................................................32
P
Permitted Use..................................................................2
Preparing the Demised Premises.................................................5
Prepayment.....................................................................2
R
Ready for Occupancy............................................................8
Real Property..................................................................2
Re-Entry and Remedies on Tenant's Default.....................................31
Relocation....................................................................39
Rent........................................................................2, 4
Rent Year......................................................................3
Repairs.......................................................................19
Right to Change Public Portions:of the Building, etc..........................12
S
Security Deposit...........................................................3, 29
Standard Business Hours........................................................3
Subletting....................................................................27
Subordination.................................................................29
Successors and Assigns........................................................37
Surrender.....................................................................25
T
Tenant.........................................................................3
Tenant's Indemnity............................................................33
Tenant's Plans.................................................................3
Tenant's Property..........................................................3, 25
Tenant's Proportionate Share...................................................3
Tenant's Work..................................................................3
Term...........................................................................3
Termination...................................................................26
3
U
Use...........................................................................12
V
Ventilating...................................................................11
W
Waivers.......................................................................36