-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EurDh3o42djLEww3OzJiTNJpgtlsaNClBSuh2e5ZXNunBuXjBO6Hs9u+f3rA3JKm Q/CduMmF5EC6W+Q/Jy9eLA== 0000912057-00-006906.txt : 20000225 0000912057-00-006906.hdr.sgml : 20000225 ACCESSION NUMBER: 0000912057-00-006906 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 DATE AS OF CHANGE: 20000223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA ARTS GROUP INC CENTRAL INDEX KEY: 0000924645 STANDARD INDUSTRIAL CLASSIFICATION: 2750 IRS NUMBER: 770354419 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14641 FILM NUMBER: 544535 BUSINESS ADDRESS: STREET 1: 521 CHARCOT AVENUE CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4083242020 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number: 0-24294 MEDIA ARTS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 77-0354419 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 521 Charcot Ave, San Jose, California 95131 (Address of principal executive offices and zip code) Registrant's telephone number: (408) 324-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, was 12,981,859 at December 31, 1999. This report consists of 20 pages of which this page is number 1. 1 MEDIA ARTS GROUP, INC. FORM 10-Q INDEX
Page ------ Part I: Financial Information Item 1: Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of December 31, 1999 and March 31, 1999 3 Condensed Consolidated Statements of Income for the Three and Nine Month Periods Ended December 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended December 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3: Quantitative and Qualitative Disclosures About Market Risk 17 Part II: Other Information Item 1: Legal Proceedings 18 Item 2: Changes in Securities 18 Item 3: Defaults upon Senior Securities 18 Item 4: Submission of Matters to a Vote of Security Holders 18 Item 5: Other Information 18 Item 6: Exhibits and Reports on Form 8-K 18 Signatures 19
2 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, UNAUDITED)
December 31, March 31, 1999 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 4,459 $ 6,361 Accounts receivable, net 29,538 22,354 Inventories 19,431 16,683 Prepaid expenses and other current assets 6,522 5,346 Deferred income taxes 5,319 5,288 --------- --------- Total current assets 65,269 56,032 Property and equipment, net 17,120 10,971 Notes receivable 3,567 -- Cash value of life insurance 1,650 920 Other assets 245 223 --------- --------- Total assets $ 87,851 $ 68,146 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,132 $ 4,883 Commissions payable 1,129 981 Accrued royalties 1,235 1,339 Accrued compensation costs 2,981 2,274 Accrued expenses 3,033 1,942 Income taxes payable 7,073 2,828 --------- --------- Total current liabilities 22,583 14,247 Deferred compensation cost 1,969 908 Convertible notes 1,200 1,200 --------- --------- Total liabilities 25,752 16,355 --------- --------- Stockholders' equity: Common Stock 88 88 Additional paid-in capital 37,839 37,367 Retained earnings 28,298 17,976 Treasury stock (4,126) (3,640) --------- --------- Total stockholders' equity 62,099 51,791 --------- --------- Total liabilities and stockholders' equity $ 87,851 $ 68,146 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
Three Months Ended Nine Months Ended December 31, December 31, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales $ 42,481 $ 39,020 $ 102,850 $ 94,954 Cost of sales 15,229 12,872 38,129 31,146 --------- --------- --------- --------- Gross profit 27,252 26,148 64,721 63,808 --------- --------- --------- --------- Operating expenses Selling and marketing 8,254 10,026 26,057 24,774 General and administrative 7,288 6,428 21,607 16,548 --------- --------- --------- --------- Total operating expenses 15,542 16,454 47,664 41,322 --------- --------- --------- --------- Operating income 11,710 9,694 17,057 22,486 Interest income (expense) (10) 55 (3) 421 --------- --------- --------- --------- Income before income taxes 11,700 9,749 17,054 22,907 Provision for income taxes 4,619 3,847 6,732 8,861 --------- --------- --------- --------- Net income $ 7,081 $ 5,902 $ 10,322 $ 14,046 ========= ========= ========= ========= Net income per share: Basic $ 0.55 $ 0.46 $ 0.80 $ 1.09 Diluted $ 0.54 $ 0.44 $ 0.79 $ 1.02 Shares used in net income per share computation: Basic 12,961 12,912 12,939 12,928 Diluted 13,021 13,466 13,101 13,813
See accompanying notes to condensed consolidated financial statements. 4 MEDIA ARTS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
Nine Months Ended December 31, 1999 1998 --------- --------- Cash flows from operating activities: Net income $ 10,322 $ 14,046 Adjustments to reconcile to net cash provided by operating activities: Depreciation 2,898 1,544 Amortization of intangibles 9 19 Deferred income taxes (31) (295) Provision for returns and allowances 408 1,588 Provision for losses on accounts receivable (316) (216) Changes in assets and liabilities: Accounts receivable (7,276) (6,943) Receivables from related parties (9) (29) Inventories (3,954) (5,034) Prepaid expenses and other assets 383 (1,750) Accounts payable 2,249 (161) Commissions payable 148 642 Accrued compensation costs 707 (822) Income taxes payable and refundable, net 4,245 460 Accrued expenses (559) 514 Accrued royalties (104) 761 Deferred compensation liability 1,061 -- --------- --------- Net cash provided by operations 10,181 4,324 --------- --------- Cash flows from investing activities: Acquisitions of property and equipment (10,729) (6,370) Disposals of galleries 4,544 -- Increase in cash surrender value of life insurance (730) -- Acquisition of gallery, net of cash acquired -- (321) --------- --------- Net cash used in investing activities (6,915) (6,691) --------- --------- Cash flows from financing activities: Receipt of notes receivable (5,624) -- Proceeds from payments of notes receivable 470 -- Proceeds from issuance of common stock 472 988 Purchases of treasury stock (486) (3,245) --------- --------- Net cash used in financing activities (5,168) (2,257) --------- --------- Net decrease in cash and cash equivalents (1,902) (4,624) Cash and cash equivalents at beginning of period 6,361 16,401 --------- --------- Cash and cash equivalents at end of period $ 4,459 $ 11,777 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 MEDIA ARTS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - Basis of Presentation The consolidated financial statements of Media Arts Group, Inc. (the "Company") include the accounts of its wholly owned subsidiaries, Lightpost Publishing, Inc. and Thomas Kinkade Stores, Inc., and Exclaim Technologies, Inc. ("Exclaim"), a majority owned subsidiary. The Company primarily designs, manufactures, markets and retails branded art-based home accessories, collectibles and gift products based on the works of the artist Thomas Kinkade. The Company's primary products are canvas and paper lithographs that feature Mr. Kinkade's unique use of light and his peaceful and inspiring themes. Exclaim is an Internet based applications service provider, developing products for the business-to-business market for the art, gift and home decor industries, as well as business-to-consumer e-commerce for Thomas Kinkade based products. The condensed interim consolidated financial statements of Media Arts Group, Inc. have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. The information included in this report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all material adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results of the interim period ended December 31, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year which ends March 31, 2000. NOTE 2 - Net income per share The following summarizes the effects of the assumed issuance of dilutive securities on weighted average shares for basic net income per share (in thousands): 6
Three Months Ended Nine Months Ended December 31, December 31, 1999 1998 1999 1998 --------- --------- --------- --------- Weighted average number of shares - basic 12,961 12,912 12,939 12,928 Incremental shares from assumed issuance of stock options 60 554 162 885 --------- --------- --------- --------- Weighted average number of shares - diluted 13,021 13,466 13,101 13,813 ========= ========= ========= =========
NOTE 3 - Inventories Inventories consisted of (in thousands):
December 31, March 31, 1999 1999 --------- --------- Raw materials $ 2,808 $ 2,579 Work-in-process 3,543 1,235 Finished goods 13,080 12,869 --------- --------- $ 19,431 $ 16,683 ========= =========
NOTE 4 - Sale of Company-owned stores During the nine months ended December 31, 1999, Media Arts has sold 21 of its Company-owned stores to Signature Gallery owners. Through these sales, $1.2 million of inventory and $1.7 million of fixed assets were sold. In addition, the Company has received $3.8 million in notes receivable in connection with these sales. The terms on the notes are generally five to seven years and bear interest of 8.5%. The Company has not recognized any gains on the sales of Company-owned stores due to the significant notes receivable that have been taken. The Company will continue to defer the recognition of gains on past and future sales until such time that the sales of all Company-owned stores which the Company intends to sell are substantially complete and the likelihood of a net gain from store sales is virtually certain. Deferred gains total $1.5 million as of December 31, 1999 and will be recognized approximately in line with payments on outstanding notes. 7 NOTE 5 - Operating Segments and Geographic Information Media Arts has three operating segments: wholesale, retail and Internet. The wholesale segment includes sales to the Company's branded distribution channel (which includes Company-owned Thomas Kinkade Stores, and independently owned Thomas Kinkade Signature Galleries and Showcase dealers), other independent dealers and strategic partners such as QVC, Avon and Hallmark. Media Arts' retail segment consists of sales by Company-owned Thomas Kinkade Stores. The Internet segment consists of the development of vertical business-to-business trade communities that will link buyers and sellers together to create supply chain efficiencies. The first industry applications are intended to be the fine art, gift and collectibles, furniture and home decor industries. The Company believes that these business-to-business Internet products may be scalable and may leverage Exclaim into other highly fragmented industries. The Company intends to continue funding Exclaim for the immediately foreseeable future, although the Company may seek outside capital investments in the future and discontinue its funding, which may result in reducing its ownership interest to a level that would no longer require consolidation in its financial statements. The operating segments have management teams that report directly to the Chief Operating Decision Maker ("CODM"), as defined by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The CODM evaluates performance and allocates resources to each operating segment based on its net sales and operating profits or business opportunities for diversification. Information on the Company's reportable segments is as follows (in thousands): 8
Three Months Ended Nine Months Ended December 31, December 31, 1999 1998 1999 1998 --------- --------- --------- --------- Revenues: External wholesale $ 38,838 $ 29,695 $ 87,511 $ 73,794 Intersegment wholesale 2,235 4,549 8,423 12,872 Retail 3,630 9,325 15,227 21,160 Internet 13 -- 112 -- Eliminations (2,235) (4,549) (8,423) (12,872) --------- --------- --------- --------- Total company $ 42,481 $ 39,020 $ 102,850 $ 94,954 ========= ========= ========= ========= Operating income (loss): Wholesale $ 15,532 $ 10,541 $ 25,143 $ 25,471 Retail (962) (310) (3,094) (892) Internet (1,924) -- (3,252) -- Eliminations (936) (537) (1,740) (2,093) --------- --------- --------- --------- Total company $ 11,710 $ 9,694 $ 17,057 $ 22,486 ========= ========= ========= ========= Assets: Wholesale $ 76,491 $ 54,309 Retail 6,391 14,481 Internet 6,845 -- Eliminations (1,876) (4,423) --------- --------- Total company $ 87,851 $ 64,367 ========= ========= Depreciation: Wholesale $ 626 $ 483 $ 1,832 $ 1,277 Retail 258 112 938 267 Internet 101 -- 128 -- --------- --------- --------- --------- Total company $ 985 $ 595 $ 2,898 $ 1,544 ========= ========= ========= ========= Capital expenditures: Wholesale $ 1,152 $ 1,143 $ 4,045 $ 3,899 Retail -- 1,022 72 2,471 Internet 3,262 -- 6,612 -- --------- --------- --------- --------- Total company $ 4,414 $ 2,165 $ 10,729 $ 6,370 ========= ========= ========= =========
Media Arts currently does not sell to geographic regions outside the United States, Canada and the UK. Currently sales to Canada and the UK are immaterial. During the three and nine month periods ended December 31, 1999 and 1998 no customer accounted for greater than 10% of net sales. 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth below should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I - - - Item 1 of this Quarterly Report and the Company's Annual Report on Form 10-K for the year ended March 31, 1999 which contains the audited financial statements and notes thereto for the years ended March 31, 1999, 1998 and 1997 and Management's Discussion and Analysis of Financial Condition and Results of Operations for those respective periods. Forward looking statements in this Quarterly Report on Form 10-Q as well as the Company's Annual Report on Form 10-K for the year ended March 31, 1999, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Stockholders are cautioned that all forward-looking statements pertaining to the Company involve risks and uncertainties, including, without limitation, other risks detailed from time to time in the Company's periodic reports and other information filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS Net Sales Net sales for the quarter ended December 31, 1999 were $42.5 million, an 8.9% increase compared to the $39.0 million reported for the quarter ended December 31, 1998. The increase in net sales was primarily attributable to the increase in the number of Signature Galleries. Net sales for the nine months ended December 31, 1999 were $102.9 million, up 8.3% from $95.0 million during the nine months ended December 31, 1998 primarily attributable to the increase in the number of Signature Galleries offset by a sales decrease during the first quarter of fiscal 2000. Gross Profit Gross profit increased by $1.1 million, or 4.2%, to $27.3 million for the quarter ended December 31, 1999 compared to $26.1 million for the quarter ended December 31, 1998. Gross profit was $64.7 million for the nine months ended December 31, 1999 compared to $63.8 million in the prior year. Consolidated gross margin was 64.2% and 62.9% for the three and nine month periods ended December 31, 1999 compared to 67.0% and 67.2% for the same periods in the prior year. The increase in gross profit in absolute terms was due primarily to increased sales levels. The softening in gross margin was primarily a result of the planned loss of retail margin for 21 Thomas Kinkade Stores sold to Signature Gallery dealers during the nine months ended December 31, 1999. 10 Selling and Marketing Expenses Selling and marketing expenses were $8.3 million and $26.1 million for the three and nine month periods ended December 31, 1999 compared to $10.0 million and $24.8 million for the same periods in the prior year. As a percentage of net sales, selling and marketing expenses were 19.4% and 25.3% for the three and nine month periods ended December 31 ,1999 compared to 25.7% and 26.1% for the same periods in the prior year. Selling and marketing expenses decreased in absolute terms for the quarter primarily due to lower sales compensation resulting from the transfer of Company-owned stores as well as lower promotional expenses. Selling and marketing expenses increased in absolute terms for the nine months ended December 31, 1999 primarily due to increased advertising expenses. As a percentage of sales, selling and marketing expenses decreased for the quarter and the nine month period due to increased sales compared to the prior periods. General and Administrative Expenses General and administrative expenses were $7.3 million and $21.6 million for the three and nine month periods ended December 31, 1999 compared to $6.4 million and $16.5 million for the same periods in the prior year. Expressed as a percentage of net sales, general and administrative expenses were 17.2% and 21.0% for the three and nine month periods ended December 31, 1999 compared to 16.5% and 17.4% for the same periods in the prior year. The increase in general and administrative expenses for the quarter was primarily due to $1.8 million for Internet business expenses initiated this year, partially offset by cost reductions resulting from the transfer of Company-owned stores. The increase in general and administrative expenses for the nine months ended December 31, 1999 was primarily due to $3.0 million for Internet business expenses initiated this year as well as a non-recurring charge during the September quarter of $1.3 million for severance payments related to cost reductions and certain settlement payments under key management contracts. Wholesale Segment Net sales to wholesale accounts include sales to our branded distribution channel, including independently owned Signature Galleries and Showcase dealers, our Company-owned Thomas Kinkade Stores, other independent dealers and strategic partners, as well as revenue generated from licensing arrangements. Net sales to wholesale customers before intersegment eliminations increased 19.9% to $41.1 million in the December 1999 quarter compared to $34.2 million in the December 1998 quarter. The increase in net sales for this segment was primarily due to the increase in the number of Signature Galleries open during the quarter. Net sales to wholesale customers before intersegment eliminations for the nine months ended December 31, 1999 were $95.9 million, up 10.7% from $86.7 million during the same period in the prior year. Sales to Signature Galleries increased 59.0% to $21.3 million in the December 1999 quarter from $13.4 million in December 1998 quarter due to an increase in the number of Signature Galleries to 282 as of December 31, 1999 from 157 as of one year ago. 11 Operating income for the wholesale segment before intersegment eliminations increased 47.3% to $15.5 million in the December 1999 quarter compared to $10.5 million in the December 1998 quarter. Operating margin for the wholesale segment before intersegment eliminations increased to 37.8% in the December 1999 quarter from 30.8% in the December 1998 quarter. The increase was primarily due to increased sales compared to the prior period. Operating income before intersegment eliminations decreased 1.3% to $25.1 million during the nine months ended December 31, 1999 compared to $25.5 million in the same period in the prior year. Operating margin for the wholesale segment before intersegment eliminations for the nine months ended December 31, 1999 decreased to 26.2% from 29.4% for the same period in the prior year. The decrease was due primarily to a $1.3 million non-recurring charge during the September quarter for severance payments related to cost reductions and certain settlement payments under key management contracts. Retail Segment Net sales for the retail segment, consisting of sales by Company-owned Thomas Kinkade Stores, decreased 61.1% to $3.6 million in the December 1999 quarter compared to $9.3 million in the December 1998 quarter. The decrease in net sales was due directly to the transfer of Thomas Kinkade Stores to Signature Gallery dealers and declining same store sales due to the announcement and conversions of Company-owned stores offset by the opening of new Company-owned stores during fiscal 1999. There were 12 Company-owned stores as of December 31, 1999 compared to 30 as of December 31, 1998. Eight stores were transferred to Signature Gallery dealers during the December 1999 quarter, bringing the total number of Thomas Kinkade Stores transferred to 21. As planned, we expected to transfer the majority of our Company-owned stores to Signature Gallery owners by the end of fiscal 2000. Net sales for the retail segment during the nine months ended December 31, 1999 decreased 28.0% to $15.2 million from $21.2 million for the same period in the prior year. Operating losses for the retail segment increased 210.3% to $962,000 in the December 1999 quarter compared to $310,000 in the December 1998 quarter. Operating losses for the nine months ended December 31, 1999 increased 246.9% to $3.1 million from $892,000 for the same period in the prior year. The increase in operating losses was primarily due to the sale of more profitable stores, decreased sales and increased per store advertising and promotional activities. Our retail segment purchases products from our wholesale segment at the same price as external wholesale customers. Internet Segment Net sales for the Internet segment for the three and nine month periods ended December 31, 1999 were $13,000 and $112,000. There were no Internet segment operations during the three and nine month periods ended December 31, 1998. Net sales for the Internet segment consist of subscription fees paid by retailers for access to a web-based gift store and gallery management system, named Storefront. Storefront is designed 12 to assist gallery owners with inventory management, customer contact management and automated purchasing and point of sale processing. As of December 31, 1999, net sales of Storefront have been made solely to Signature Galleries. We believe that there will be opportunities to sell Storefront to other galleries and gift stores outside of the existing Thomas Kinkade branded distribution network. In addition, we believe that Storefront may be marketed to other markets outside of fine art, gift and collectibles. Operating losses for the Internet segment were $1.9 million and $3.3 million for the three and nine month periods ended December 31, 1999. There were no Internet segment operations during the three and nine month periods ended December 31, 1998. Operating expenses of the Internet segment consist primarily of salaries and consulting expenses related to the development of Exclaim's existing and future products. Interest Income (Expense) Interest expense was $10,000 and $3,000 for the three and nine month periods ended December 31, 1999. Interest income was $55,000 and $421,000 for the three and nine months ended December 31, 1998. The decrease in interest income was due to decreased cash balances. Provision for Income Tax The provision for income taxes was $4.6 million and $6.7 million for the three and nine month periods ended December 31, 1999 compared to $3.8 million and $8.9 million for the same periods in the prior year. The effective income tax rate for the three and nine month periods ended December 31, 1999 was 39.5%, compared to 39.5% and 38.7% for the same periods in the prior year. Seasonality; Fluctuations in Quarterly Results Our business has experienced, and is expected to continue to experience, significant seasonal fluctuations in net sales and income. Our net sales historically have been highest in the December quarter and lower in the subsequent March and June quarters. Despite overall increases in annual net sales in fiscal 1999, net sales in the December 1998 quarter were $39.0 million and sales in the subsequent March 1999 and June 1999 quarters were $31.4 million and $25.7 million. We believe that the seasonal effect is due to customer buying patterns, particularly with respect to holiday purchases, and is typical of the home decorative accessories, collectibles and gift product industries. We expect these seasonal trends to continue in the foreseeable future. Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate as a result of numerous factors including: - - - Demand for the art of Thomas Kinkade and our Thomas Kinkade products (including new product categories and series), - - - Our ability to achieve our expansion plans, - - - The timing, mix and number of new product releases, 13 - - - The successful implementation of the Signature Gallery program and expansion of distribution generally, - - - The increased operating expenses of Exclaim as it pursues expansion of its business-to-business initiatives, - - - The reduction in our ownership of Exclaim in the likely event of obtaining outside capital, - - - The successful entrance into new distribution channels such as our e-commerce web site, launched subsequent to December 31, 1999, - - - The sales of Storefront to new customers outside of our existing dealer network and the successful launch and customer acceptance of Exclaim's products generally, - - - Our ability to implement strategic business alliances, - - - Our ability to hire and train new manufacturing, sales and administrative personnel, - - - Continued implementation of manufacturing efficiencies, - - - Timing of product deliveries, and - - - The incurrence of other operating costs. In addition, since a significant portion of our net sales are generated from orders received in the quarter, net sales in any quarter are substantially dependent on orders booked in that quarter. Our results may also fluctuate based on extraordinary events. Accordingly, the results of operations in any quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year or any future quarter. Fluctuations in operating results may also result in volatility in the price of our common stock. LIQUIDITY AND CAPITAL RESOURCES Our primary source of funds in the first nine months of fiscal 2000 has been from our operations. Our working capital as of December 31, 1999 was $42.7 million, compared to $41.8 million as of March 31, 1999. Net cash provided by operations for the first nine months of fiscal 2000 was $10.2 million consisting primarily of income from operations adjusted by increases in accounts receivable, inventory and income taxes payable. Accounts receivable increased due to increased sales levels as well as higher sales during the last month of the quarter. Inventory increased due to increased distribution and the purchase of full edition sizes of most of the new releases in the past year. Recently, we have begun purchasing less than full editions of new releases and we have seen inventory remain relatively constant in contrast to sequential sales increases over the previous two quarters. However, should we diversify or expand our product offerings in the future, increases in inventory could occur. Income taxes payable increased due to increased income. Net cash provided by operations for the first nine months of fiscal 1999 was $4.3 million consisting primarily of income from operations adjusted by increases in accounts receivable and inventory. Net cash used in investing activities was $6.9 million for the first nine months of fiscal 2000 and primarily related to investment in Internet related technologies and capital expenditures for property and equipment 14 offset by the transfer of 21 Company-owned stores to Signature Gallery dealers. Net cash used in investing activities was $6.7 million in the first nine months of fiscal 1999. The Company anticipates that total capital expenditures in fiscal 2000 will be approximately $14 million, and will relate primarily to Internet business development and continued manufacturing and infrastructure investments. Net cash used in financing activities was $5.2 million in the first nine months of fiscal 2000 compared to $2.3 million in the first nine months of fiscal 1999. Cash used in financing activities during the first nine months of fiscal 2000 was primarily for financing the sales of 21 Company-owned stores and promissory notes received during the September 1999 quarter related to the implementation of changes in our credit policies. Net cash used in financing activities during the first nine months of fiscal 1999 was related primarily to the purchase of shares of our Common Stock under our continuing stock repurchase program. In the current fiscal year, we have not made any stock repurchases since the June 1999 quarter. We have a $20 million secured bank line-of-credit facility that may be increased to $30 million if our rolling four quarter consolidated earnings before interest, taxes, depreciation and amortization exceeds $30 million for two consecutive quarters. The line-of-credit bears interest at either the bank's current reference rate or the effective LIBOR rate plus 1.5%. There were no outstanding borrowings under this credit facility as of December 31, 1999. We intend to continue funding Exclaim for the immediately foreseeable future, although we may seek outside capital investments in the future and discontinue our funding, which may result in reducing our ownership interest to a level that would no longer require consolidation in our financial statements. We intend to relocate our offices and manufacturing facilities to built to order facilities to be constructed in Morgan Hill, California (approximately 20 miles south of our present location) during the March quarter of fiscal 2001 and the June quarter of fiscal 2002. While this move may cause a slight disruption to our operations, we are timing it to occur during our slowest time of the year. In connection with the move, we will incur certain one-time costs during the March quarter of fiscal 2001 and the June quarter of fiscal 2002. At this time, we do not foresee these costs to be significant to our operations or financial position. We believe that this move will be beneficial in the long term by 1) reducing our monthly rent and reducing exposure to future rent increases in the competitive commercial real estate market in the Silicon Valley, 2) consolidating our operations into a single campus versus our current operations that are spread out in several areas of a commercial office park and 3) providing capacity for future growth in our operations. Our working capital requirements in the foreseeable future will change depending on the rate of our expansion, our operating results and any other adjustments in our operating plan as needed in response to competition, acquisition opportunities or unexpected events. We believe that existing borrowing capacity under our line-of-credit, together with revenues from operations, will be sufficient to meet our working capital requirements throughout fiscal 2000. However, there can be no assurance that we will not seek additional capital in the future as a result of expansion or otherwise. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products may be coded to accept only two-digit entries in the date code field and now that the Year 2000 has commenced, these code fields need to accept four digit entries to distinguish years beginning with "19" from those beginning with "20." As a result, computer systems and/or software products used by many companies have been upgraded to comply with such Year 2000 requirements. 15 Our Year 2000 Project (the "Project") was substantially complete by the end of fiscal 1999. The scope and content of the Project included: - - - Assessing the ability of computer programs and embedded computer chips to distinguish between the year 1900 and the year 2000, - - - Conducting a review of our information technology ("IT") and non-IT systems to identify those areas that could be affected by Year 2000 issues, - - - Developing a comprehensive, risk-based plan to address IT and non-IT systems and products, as well as dependencies on our business partners, - - - Completing an inventory and risk-assessment of our computer systems and related technology, and - - - Developing and carrying out the testing and remediation process. As part of the remediation process, in fiscal 1999 we upgraded our main IT system and related JD Edwards software, IBM AS400 and PC-based network to be Year 2000 compliant. The total cost for ensuring Year 2000 compliance was not material to our financial position. The total cost of the Year 2000 Project was approximately $1 million, including upgrades for the JD Edwards software, the IBM AS400 and the PC-based network. To date, no significant Year 2000 problems have occurred, and we believe that with the current modifications to existing software and conversions to new software, the Year 2000 problem will not pose significant operational issues for our operations in the future. However, we cannot accurately predict a "worst case scenario" with regard to our Year 2000 issues. We understand we may encounter difficulties interfacing or interconnecting with third party systems, whether or not those systems claim to be "compliant," and therefore have completed an inventory and risk assessment of our outside vendors and have identified those key vendors that represent a significant risk. Part of our preparation included preparing contingency plans in the event of non-compliance by those vendors. Overall, we believe Year 2000 risks with key vendors and suppliers are low because many are small manufacturers with relatively simple business systems, however, we cannot guarantee that the systems of those vendors and suppliers, or other companies on which we rely, will be Year 2000 compliant. Failure by another company to convert their systems to be Year 2000 compliant could require us to incur unanticipated expenses to remedy problems, which could have a material adverse effect on our business, operating results and financial condition. To date, none of our key vendors have had significant Year 2000 problems which have impacted our operations. 16 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and borrowings. We do not use derivative financial instruments in our investment portfolio and our investment portfolio only includes highly liquid instruments purchased with an original maturity of 90 days or less and are considered to be cash equivalents. We did not have short-term investments as of December 31, 1999. We are subject to fluctuating interest rates that may impact, adversely or otherwise, our results from operations or cash flows for our variable rate cash and cash equivalents and borrowings. We do not expect any material loss with respect to our investment portfolio. The table below presents principal (or notational) amounts and related weighted average interest rates for our investment portfolio and debt obligations (in thousands):
December 31, March 31, 1999 1999 ---------- ---------- Assets: Cash and cash equivalents $ 4,459 $ 6,361 Average interest rate 0.36% 4.20% Liabilities: Bank line-of-credit $ -- $ -- Interest rate (bank reference rate) 8.50% 8.25% Convertible note payable to related party $ 1,200 $ 1,200 Fixed interest rate 8.00% 8.00%
17 PART II - Other Information ITEM 1. LEGAL PROCEEDINGS - Not Applicable ITEM 2. CHANGES IN SECURITIES - Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5. OTHER INFORMATION - Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10.38 - Business Loan Agreement between Bank of America and the Company, dated October 27, 1999 and First Amendment to Loan Agreement dated October 27, 1999. (b) Exhibit 10.39 - Lease Agreement between TBI-Madrone I, LLC and the Company, dated December 20, 1999. (c) Exhibit 10.40 - Lease Agreement between TBI-Mission West, LLC and the Company, dated December 20, 1999. (d) Exhibit 10.41 - Lease Agreement between TBI-Mission West, LLC and the Company, dated December 20, 1999. (e) Exhibit 27 - Financial Data Schedule (EDGAR version only) (f) Reports on Form 8-K - none 18 MEDIA ARTS GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDIA ARTS GROUP, INC. (Registrant) By /s/ Craig Fleming -------------------------------------- Craig Fleming President & Chief Executive Officer By /s/ Michael J. Catelani -------------------------------------- Michael J. Catelani Vice President of Finance (Principal Accounting Officer) Date: February 14, 2000 19 EXHIBIT INDEX Exhibit Number 10.38 Business Loan Agreement between Bank of America and the Company, dated October 27, 1999 and First Amendment to Loan Agreement dated October 27, 1999. 10.39 Lease Agreement between TBI-Madrone I, LLC and the Company, dated December 20, 1999. 10.40 Lease Agreement between TBI-Mission West, LLC and the Company, dated December 20, 1999. 10.41 Lease Agreement between TBI-Mission West, LLC and the Company, dated December 20, 1999. 27 Financial Data Schedule 20 EX-10.38 2 EXHIBIT 10.38 Exhibit 10.38 BUSINESS LOAN AGREEMENT This Agreement dated as of October 27, 1999, is among Media Arts Group, Inc., a Delaware corporation ("MAGI"), Lightpost Publishing, Inc., a California corporation ("Lightpost," and together with MAGI, each a "Borrower" and collectively the "Borrowers") and Bank of America, N.A. (the "Bank"). 1. REVOLVING LINE OF CREDIT AMOUNT AND TERMS 1.1 Line of Credit Amount. (a) During the availability period described below, the Bank will provide a line of credit to the Borrowers. The amount of the line of credit (the "Commitment") is Twenty Million Dollars ($20,000,000), and is subject to increase as provided in Section 1.7 below. (b) This is a revolving line of credit providing for cash advances and letters of credit. During the availability period, each Borrower may repay principal amounts and reborrow them, subject to the limits set forth herein. (c) Each advance must be for at least Five Hundred Thousand Dollars ($500,000), or integral multiples thereof, or for the amount of the remaining available line of credit, if less. (d) Each Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the outstanding amounts of any letters of credit, including amounts drawn on letters of credit and not yet reimbursed, to exceed the Commitment. 1.2 Availability Period. The line of credit is available between the date of this Agreement and September 30, 2001 (the "Expiration Date") unless any Borrower is in default. 1.3 Interest Rate. (a) Unless Borrowers elect an optional interest rate as described below, the interest rate is the Bank's Reference Rate. (b) The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 1.4 Repayment Terms. (a) Borrowers will pay interest on any principal outstanding under this line of credit on December 1, 1999, and then on the first day of each month thereafter until payment in full of any principal outstanding under this line of credit. (b) Borrowers will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. Any interest period for an optional interest rate (as described below) shall expire no later than the Expiration Date. (c) Borrowers may prepay the loan in full or in part at any time. 1.5 Optional Interest Rate. Instead of the interest rate based on the Bank's Reference Rate, Borrowers may elect the optional interest rate listed below for this line of credit during interest periods agreed to by the Bank and the Borrowers. The optional interest rate shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a "Portion." The following optional interest rate is available: (a) The LIBOR Rate plus one and one-half (1.50) percentage points. 1.6 Letters of Credit. (a) This line of credit may be used for financing: (i) commercial letters of credit with a maximum maturity of 364 days but not to extend more than 90 days beyond the Expiration Date. Each commercial letter of credit will require drafts payable at sight or up to 90 days after sight. (ii) The amount of the letters of credit outstanding at any one time (including amounts drawn on the letters of credit and not yet reimbursed) may not exceed Ten Million Dollars ($10,000,000) for all letters of credit, which amount is subject to increase as provided in Section 1.7 below. (b) Each Borrower agrees: (i) that any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. (ii) that if there is an Event of Default under this Agreement, to immediately prepay and make the Bank whole for any outstanding letters of credit. (iii) that the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank. (iv) to sign the Bank's form Application and Agreement for Commercial Letter of Credit. (v) to pay any standard issuance and/or other fees that the Bank notifies the Borrowers will be charged for issuing and processing letters of credit for the Borrowers. (vi) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges. 1.7 Commitment Enhancement Event. (a) The Borrowers may make a Commitment Enhancement Election if (i) MAGI notifies the Bank of the occurrence of a Commitment Enhancement Event (as such term is defined below) and that the Borrowers intend to make a Commitment Enhancement Election, (ii) the Borrowers pay the fee to the Bank required under Section 3.1(c) of this Agreement, and (iii) no Event of Default, as such term is defined in Article 10 of this Agreement, and no event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing. (b) For purposes of this Agreement, a "Commitment Enhancement Event" occurs if the Borrowers' consolidated Adjusted EBITDA (as such term is defined in Section 8.5 of this Agreement) for any two consecutive fiscal quarters, as measured pursuant to Section 8.6 of this Agreement (i.e., Adjusted EBITDA for a fiscal quarter is measured at the end of that quarter, using the results of that quarter and each of the three immediately preceding quarters), is at least Thirty Million Dollars ($30,000,000). (c) Upon the occurrence of a Commitment Enhancement Event, the making by the Borrowers of a Commitment Enhancement Election and the satisfaction by the Borrowers of the requirements set forth in Section 1.7(a): (i) the amount of the Commitment shall be increased to Thirty Million Dollars ($30,000,000), (ii) the amount of the sublimit for commercial letters of credit set forth in Section 1.6(a)(ii) shall be increased to Twenty Million Dollars ($20,000,000), (iii) the minimum Adjusted EBITDA Debt Coverage Ratio required under Section 8.5 of this Agreement shall be increased to 1.50:1.0, and (iv) the minimum Adjusted EBITDA required under Section 8.6 of this Agreement shall be increased to Twenty-Five Million Dollars ($25,000,000). 2. OPTIONAL INTEREST RATES 2.1 Optional Rates. Each optional interest rate is a rate per year. Interest will be paid on the last day of each interest period, and, if the interest period is longer than 30 days, then on the first day of each month during the interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrowers have designated another optional interest rate for the Portion. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. 2.2 LIBOR Rate. The election of LIBOR Rates shall be subject to the following terms and requirements: (a) The interest period during which the LIBOR Rate will be in effect will be one, two, three, four, five, six, seven, eight, nine, ten, eleven, or twelve months. The first day of the interest period must be a day other than a Saturday or a Sunday on which the Bank is open for business in California, New York and London and dealing in offshore dollars (a "LIBOR Banking Day"). The last day of the interest period and the actual number of days during the interest period will be determined by the Bank using the practices of the London inter-bank market. (b) Each LIBOR Rate Portion will be for an amount not less than the following: (i) for interest periods of four months or longer, Five Hundred Thousand Dollars ($500,000). (ii) for interest periods of one, two or three months, One Million Dollars ($1,000,000). (c) The "LIBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) London Inter-Bank Offered Rate LIBOR Rate = ------------------------------ (1.00 - Reserve Percentage) Where, (i) "London Inter-Bank Offered Rate" means the interest rate at which the Bank's London Branch, London, Great Britain, would offer U.S. dollar deposits for the applicable interest period to other major banks in the London inter-bank market at approximately 11:00 a.m. London time two (2) London Banking Days before the commencement of the interest period. A "London Banking Day" is a day on which the Bank's London Branch is open for business and dealing in offshore dollars. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) Borrowers shall irrevocably request a LIBOR Rate Portion no later than 12:00 noon San Francisco time on the LIBOR Banking Day preceding the day on which the London Inter-Bank Offered Rate will be set, as specified above. For example, if there are no intervening holidays or weekend days in any of the relevant locations, the request must be made at least three days before the LIBOR Rate takes effect. (e) Borrowers may not elect a LIBOR Rate with respect to any principal amount which is scheduled to be repaid before the last day of the applicable interest period. (f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). (g) The Bank will have no obligation to accept an election for a LIBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate Portion are not available in the London inter-bank market; or (ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate Portion. 3. FEES AND EXPENSES. 3.1 Fees. (a) Loan fee. Borrowers agree to pay a loan fee in the amount of Fifty Thousand Dollars ($50,000). This fee is due on or before the date of this Agreement. (b) Unused commitment fee. Borrowers agree to pay a fee on any difference between the Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during each fiscal quarter of the Borrowers, and shall be payable five days after the end of each such fiscal quarter and upon the Expiration Date. The fee will be calculated at 0.175% per year. The calculation of credit outstanding shall include the undrawn amount of letters of credit. (c) Fee Upon Increase of Commitment. Concurrently with the making by Borrowers of a Commitment Enhancement Election under Section 1.7 of this Agreement, Borrowers shall pay to the Bank a fee of Twenty-Five Thousand Dollars ($25,000). 3.2 Expenses. Borrowers agree to immediately repay the Bank for reasonable expenses that include, but are not limited to, filing, recording and search fees, appraisal fees, title report fees and documentation fees. 3.3 Reimbursement Costs. (a) Borrowers agree to reimburse the Bank for any reasonable expenses incurred in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees up to an amount not exceeding $35,000, including any allocated costs of the Bank's in-house counsel. (b) Borrowers agree to reimburse the Bank for the cost of periodic audits and appraisals of the personal property collateral securing this Agreement, at such intervals during the continuance of an Event of Default as the Bank may reasonably require. The audits and appraisals may be performed by employees of the Bank or by independent appraisers. 4. COLLATERAL 4.1 Personal Property. Borrowers' obligations to the Bank under this Agreement and under any other agreement required hereunder will be secured by personal property each Borrower now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by each Borrower. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of each Borrower to the Bank (excluding any consumer credit covered by the federal Truth in Lending law, unless Borrowers have otherwise agreed in writing). All personal property collateral securing any other present or future obligations of Borrowers to the Bank shall also secure this Agreement. (a) Machinery, equipment, and fixtures. (b) Inventory. (c) Receivables. (d) Patents, trademarks, copyrights and other general intangibles, including without limitation all rights of MAGI under that certain License Agreement dated December 3, 1997 (the "License Agreement") between the MAGI and Thomas Kinkade (the "Artist"). 5. DISBURSEMENTS, PAYMENTS AND COSTS 5.1 Requests for Credit. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 5.2 Disbursements and Payments. Each disbursement by the Bank and each payment by Borrowers will be: (a) made at the Bank's branch (or other location) selected by the Bank from time to time; (b) made for the account of the Bank's branch selected by the Bank from time to time; (c) made in immediately available funds, or such other type of funds selected by the Bank; and (d) evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require Borrowers to sign one or more promissory notes. 5.3 Telephone and Telefax Authorization. (a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates and telefax requests for the issuance of letters of credit given by any one of the individuals authorized to sign loan agreements on behalf of each Borrower. (b) Advances will be deposited in and repayments will be withdrawn from MAGI's account number 14870-003541, or such other of any Borrower's accounts with the Bank as designated in writing by the Borrowers. (c) Borrowers indemnify and excuse the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions the Bank reasonably believes are made by any individual authorized by Borrowers to give such instructions, except for any act of the Bank constituting gross negligence or willful misconduct. This indemnity and excuse will survive this Agreement's termination. (d) Each Borrower hereby designates MAGI as its representative and agent on its behalf for the purposes of making requests for extensions of credit, giving instructions with respect to the disbursement of the proceeds of advances, selecting interest rate options, requesting letters of credit, and giving and receiving all other notices and consents hereunder or under any other agreement, instrument or document executed in connection herewith. MAGI hereby accepts such appointment. The Bank may regard any notice or other communication from MAGI as a notice or communication from all of the Borrowers, and may give any notice or communication required or permitted to be given to any Borrower or Borrowers hereunder to MAGI on behalf of such Borrower or Borrowers. Each Borrower agrees that each notice, election, representation and warranty, covenant, agreement and undertaking made on its behalf by MAGI shall be deemed for all purposes to have been made by such Borrower and shall be binding upon and enforceable against such Borrower to the same extent as if the same had been made directly by such Borrower. 5.4 Direct Debit. (a) Borrowers agree that interest and principal payments and any fees charged hereunder will be deducted automatically on the due date from MAGI's account number 14870-003541, or such other of any Borrower's accounts with the Bank as designated in writing by Borrowers. (b) The Bank will debit the account on the dates the payments become due. If a due date does not fall on a banking day, the Bank will debit the account on the first banking day following the due date. (c) Borrowers will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds in the account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 5.5 Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California. For amounts bearing interest at an offshore rate (if any), a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California and dealing in offshore dollars. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 5.6 Taxes. (a) If any payments to the Bank under this Agreement are made from outside the United States, Borrowers will not deduct any foreign taxes from any payments they make to the Bank. If any such taxes are imposed on any payments made by Borrowers (including payments under this paragraph), Borrowers will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. Borrowers will confirm that they have paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. (b) Payments made by Borrowers to the Bank will be made without deduction of United States withholding or similar taxes. If any Borrower is required to pay U.S. withholding taxes, such Borrower will pay such taxes in addition to the amounts due to the Bank under this Agreement. If such Borrower fails to make such tax payments when due, Borrowers indemnify the Bank against any liability for such taxes, as well as for any related interest, expenses, additions to tax, or penalties asserted against or suffered by the Bank with respect to such taxes. 5.7 Additional Costs. Borrowers will pay the Bank, on demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 5.8 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. 5.9 Default Rate. Upon the occurrence and during the continuation of any default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate which is two (2.0) percentage point(s) higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 5.10 Interest Compounding. At the Bank's sole option in each instance, any interest, fees or costs which are not paid when due under this Agreement shall bear interest from the due date until paid at the Bank's Reference Rate plus two percentage points (2%). This may result in compounding of interest. 5.11 Overdrafts. At the Bank's sole option in each instance, the Bank may do one of the following: (a) The Bank may make advances under this Agreement to prevent or cover an overdraft on any account of Borrowers with the Bank. Each such advance will accrue interest from the date of the advance or the date on which the account is overdrawn, whichever occurs first, at the interest rate described in this Agreement. (b) The Bank may reduce the amount of credit otherwise available under this Agreement by the amount of any overdraft on any account of Borrowers with the Bank. This paragraph shall not be deemed to authorize Borrowers to create overdrafts on any account of any Borrower with the Bank. 6. CONDITIONS 6.1 Initial Conditions Precedent. The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend the initial credit to Borrowers under this Agreement: (a) Authorizations. Evidence that the execution, delivery and performance by each Borrower of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. (b) Governing Documents. A copy of each Borrower's certificate of incorporation and bylaws. (c) Security Agreements. Signed original security agreements, assignments, financing statements and fixture filings (together with collateral in which the Bank requires a possessory security interest) which the Bank requires. (d) Evidence of Priority. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing. (e) Consent to Removal. For any personal property collateral located on real property which is subject to a mortgage or deed of trust or which is not owned by any Borrower, a Consent to Removal from the owner of the real property and the holder of any mortgage or deed of trust. (f) Insurance. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. (g) Environmental Information. A completed Bank form Environmental Questionnaire. (h) Legal Opinion. A written opinion from legal counsel to the Borrowers covering such matters as the Bank may require, including but not limited to the matters to be confirmed under Section 6.1(l) below. The legal counsel and the terms of the opinion must be acceptable to the Bank. (i) Good Standing. Certificates of good standing for each Borrower from its state of formation and from any other state in which each Borrower is required to qualify to conduct its business. (j) Payment of Fees. Payment of all accrued and unpaid expenses incurred by the Bank as required by the paragraph entitled "Reimbursement Costs." (k) Auditor's Management Letter. Copies of the management letters, and correspondence relating to management letters, sent or received by Borrowers to or from the Borrowers' auditor in connection with the most recent annual financial statements audited by such auditor (or if no such management letter was prepared, a letter from such auditor stating that no deficiencies were noted that would otherwise be addressed in a management letter), and, upon request, a copy of the Borrowers' plan, timetable and budget to address the year 2000 problem, together with periodic updates and expenses incurred to date, any third party assessment of the Borrowers' year 2000 remediation efforts, any year 2000 contingency plans, and any estimates of the Borrowers' potential litigation exposure (if any) resulting from the year 2000 problem. (l) Confirmation. (i) Receipt of a written confirmation from Thomas Kinkade ("Artist") confirming that, upon the occurrence and during the continuance of an Event of Default, the Bank shall have the right to liquidate the inventory collateral referred to in Section 4.1(b) of this Agreement (including without limitation the then-existing inventory of products under the License Agreement) in accordance with applicable law, but not subject to any geographic or other marketing restrictions set forth in the License Agreement. (ii) Evidence of the amendment of the License Agreement to provide that no default under any agreement between Borrowers and the Bank gives the Artist the right to terminate the License Agreement unless (x) such default is an Event of Default hereunder, and (y) such Event of Default shall have continued (and shall not have been waived) for a period of 180 days after the date on which the Bank gives written notice of such Event of Default to Borrowers. (m) Retail Leases. A certificate of Borrowers signed by an authorized officer of MAGI, setting forth the following information with respect to each Retail Lease: the location of the leased property, the date the leased property was sold by the Borrowers (or by a subsidiary of the Borrowers) to the tenant under the Retail Lease, the name of the tenant (and if the tenant is a business organization, the type of business organization and the state or other jurisdiction where the tenant is organized), the principal terms of the sale (including, without limitation, the sale price and the schedule for the payment of the sale price to the Borrowers), a schedule of the remaining rental and other payments owing (by fiscal year of the Borrowers) under the lease, and the nature and principal terms of the direct or contingent liability of the Borrowers under the lease "Retail Lease" means each lease of real property operated by a third party where the inventory of a Borrower is sold or to be sold, if a Borrower is primarily or secondarily liable for the obligation of the tenant under such lease or has otherwise guaranteed (in whole or in part) the obligations of the tenant under such lease. (n) Other Items. Any other items that the Bank reasonably requires. 6.2 Other Conditions Precedent. Each of the following conditions precedent must be satisfied before the Bank is required to make any extension of credit hereunder: (a) Continuation of Representations and Warranties(b)Continuation of Representations and Warranties. The representations and warranties contained in this Agreement and in any instrument, agreement or certificate executed and delivered in connection herewith shall be true and correct on and as of such date with the same effect as if made on and as of such date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date). (b) No Existing Default. No Event of Default (or event which with notice or lapse of time or both shall constitute an Event of Default) shall exist or shall result from such extension of credit. (c) Due Diligence. The Bank shall be satisfied with the results of such due diligence regarding the Borrowers as the Bank deems appropriate in its sole discretion. (d) Other Documentation(e)Other Documentation. The Bank shall have received such other documentation as it may require in connection with such extension of credit, including without limitation resolutions of the Board of Directors of each Borrower authorizing such extension of credit. 7. REPRESENTATIONS AND WARRANTIES When Borrowers sign this Agreement, and until the Bank is repaid in full, each Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation: 7.1 Organization of Borrowers. Each Borrower and each subsidiary of a Borrower is a corporation duly formed and existing under the laws of the state where organized. 7.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within each Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 7.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of each Borrower, enforceable against such Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable against such Borrower. 7.4 Good Standing. In each state in which a Borrower or a subsidiary of a Borrower does business, such Borrower or subsidiary is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes. 7.5 No Conflicts. This Agreement does not conflict with any law, agreement, or obligation by which any Borrower is bound. 7.6 Financial Information. All financial and other information that has been or will be supplied to the Bank, including the Borrowers' audited financial statement dated as of March 31, 1999 and the Borrowers' unaudited financial statements dated June 30, 1999 is: (a) sufficiently complete to give the Bank accurate knowledge of the Borrowers' financial condition, including all material contingent liabilities. (b) in compliance with all government regulations that apply. Since the date of the financial statement specified above, there has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of any Borrower or any subsidiary of any Borrower, or of the Borrowers and their subsidiaries taken as a whole. 7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or threatened against any Borrower or any subsidiary of a Borrower which, if lost, would impair the financial condition of any Borrower or any such subsidiary, or impair the ability of such Borrower to repay the loan, except as have been disclosed in writing to the Bank. 7.8 Collateral. All collateral required in this Agreement is owned by the grantor of the security interest free of any title defects or any liens or interests of others, except as set forth on Schedule 7.8 attached hereto. 7.9 Permits, Franchises. Each Borrower and each subsidiary of a Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. Without limitation of the foregoing, the License Agreement is in full force and effect, and no Borrower is aware of any existing default under the License Agreement. 7.10 Other Obligations. No Borrower or subsidiary of a Borrower is in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 7.11 Income Tax Matters. No Borrower has knowledge of any pending assessments or adjustments of its income tax, or the income tax for any of its subsidiaries, for any year. 7.12 No Tax Avoidance Plan. The obtaining of credit by Borrowers from the Bank under this Agreement does not have as a principal purpose the avoidance of U.S. withholding taxes. 7.13 No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 7.14 Insurance. Each Borrower and each subsidiary of a Borrower has obtained, and maintained in effect, the insurance coverage required in the "Covenants" section of this Agreement. 7.15 ERISA Plans. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30-day notice. (ii) No action by any Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with any Borrower or any subsidiary of a Borrower within the meaning of Sections 414(b) or (c) of the Code. (iv) "PBGC" means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by any Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 7.16 Location of Borrowers. Each Borrower's place of business (or, if such Borrower has more than one place of business, its chief executive office) is located at the address listed under such Borrower's signature on this Agreement. 7.17 Environmental Matters. No Borrower or subsidiary of a Borrower (a) is in violation of any health, safety, or environmental law or regulation regarding hazardous substances and (b) is the subject of any claim, proceeding, notice, or other communication regarding hazardous substances. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. 7.18 Year 2000 Compliance. Each Borrower and each subsidiary of a Borrower has conducted a comprehensive review and assessment of its systems and equipment applications and made inquiry of its key suppliers, vendors and customers with respect to the "year 2000 problem" (that is, the inability of computers, as well as embedded microchips in non- computing devices, to properly perform date-sensitive functions with respect to certain dates prior to and after December 31, 1999). Based on that review and inquiry, no Borrower believes the year 2000 problem, including costs of remediation, will result in a material adverse change in the business condition (financial or otherwise), operations, properties or prospects of any Borrower or any subsidiary of a Borrower, or in the ability of any Borrower to repay the credit. Each Borrower and each subsidiary of a Borrower has developed adequate contingency plans to ensure uninterrupted and unimpaired business operation in the event of a failure of its own or a third party's systems or equipment due to the year 2000 problem, including those of vendors, customers, and suppliers. 8. COVENANTS Borrowers agree, so long as credit is available under this Agreement and until the Bank is repaid in full: 8.1 Use of Proceeds. To use the proceeds of the credit only for working capital and other general corporate purposes. 8.2 Use of Proceeds - Ineligible Securities. Not to use any portion of the proceeds of the credit to purchase during the underwriting period, or for thirty days thereafter, Ineligible Securities underwritten by Banc of America Securities LLC. Banc of America Securities LLC is a wholly-owned subsidiary of BankAmerica Corporation, and is a registered broker-dealer which is permitted to underwrite and deal in certain Ineligible Securities. "Ineligible Securities" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Sect. 24, Seventh), as amended. The restrictions of this paragraph shall also cover Ineligible Securities underwritten by any other present or future subsidiary of BankAmerica Corporation which underwrites Ineligible Securities. 8.3 Financial Information. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time: (a) Within 95 days of the Borrowers' fiscal year end, the Borrowers' annual financial statements. These financial statements must be audited (with an opinion not qualified in any manner, including not qualified due to possible errors generated by financial reporting and related systems due to the year 2000 problem) by a Certified Public Accountant acceptable to the Bank. The statements shall be prepared on a consolidated basis. (b) Within 50 days of the end of each of the first three fiscal quarters in each fiscal year of the Borrowers, and within 95 days of the end of the final fiscal quarter in each fiscal year of the Borrowers, the Borrowers' quarterly financial statements. These financial statements may be prepared by Borrowers. The statements shall be prepared on a consolidated and consolidating basis. (c) Promptly, upon sending or receipt, copies of any management letters and correspondence relating to management letters, sent or received by the Borrowers to or from the Borrowers' auditor, or, if no management letter is prepared, a letter from such auditor stating that no deficiencies were noted that would otherwise be addressed in a management letter, and, upon request, a copy of the Borrowers' plan, timetable and budget to address the year 2000 problem, together with periodic updates and expenses incurred to date, any third party assessment of any Borrower's year 2000 remediation efforts, any year 2000 contingency plans, and any estimates of any Borrower's potential litigation exposure (if any) resulting from the year 2000 problem. (d) Copies of MAGI's Form 10-K Annual Report, Form 10-Q Quarterly Report and Form 8-K Current Report within 30 days after the date of filing with the Securities and Exchange Commission. (e) Within the period(s) provided in (a) and (b) above, a compliance certificate of Borrowers signed by an authorized financial officer of MAGI, substantially in the form of Exhibit A attached hereto, setting forth (i) the information and computations (in sufficient detail) to establish that such Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished, (ii) information and computations (in sufficient detail) to establish the Borrowers' Defaulted Lease Exposure (as such term is defined in Section 8.5 of this Agreement) at the end of the period covered by the financial statements then being furnished, and (iii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action such Borrower is taking and proposes to take with respect thereto. (f) Promptly upon receipt, copies of all notices, orders, or other communications regarding (i) any enforcement action by any governmental authority relating to health, safety, the environment, or any hazardous substances with regard to the property, activities, or operations of any Borrower or any subsidiary of a Borrower, or (ii) any claim against any Borrower or any subsidiary of a Borrower regarding hazardous substances. 8.4 Quick Ratio. To maintain on a consolidated basis a ratio of quick assets to current liabilities of at least 1.25:1.0. "Quick assets" means cash, short-term cash investments in non-affiliated entities, net trade receivables and marketable securities not classified as long-term investments. "Current liabilities" shall mean (a) all obligations classified as current liabilities under generally accepted accounting principles, plus (b) all principal amounts outstanding under revolving lines of credit, whether classified as current or long-term, which are not already included under (a) above. 8.5 Adjusted EBITDA Debt Coverage Ratio. To maintain on a consolidated basis an Adjusted EBITDA Debt Coverage Ratio of at least 1.00:1.0. provided that on and after the occurrence of the events described in Section 1.7(c) of this Agreement, Borrowers shall be required to maintain on a consolidated basis an Adjusted EBITDA Debt Coverage Ratio of at least 1.50:1.0. "Adjusted EBITDA Debt Coverage Ratio" means the ratio of Senior Funded Debt to Adjusted EBITDA. "Senior Funded Debt" means, without duplication, all combined and consolidated indebtedness of Borrowers having an original maturity of one year or longer (a) for borrowed money, (b) which has been incurred in connection with the acquisition of property or assets, including without limitation capitalized covenants not to compete included as part of the liabilities of such person, (c) which is evidenced by a promissory note or other instrument, (d) which is secured by a mortgage, security interest or other lien on any asset of any Borrower or any subsidiary of a Borrower, whether or not such Borrower or subsidiary has assumed or become liable for the payment of such indebtedness, or (e) which consists of rent or other amounts due or to become due under capitalized leases. "Senior Funded Debt" also includes, without duplication of the foregoing, the combined and consolidated obligations and agreements of Borrowers to become liable as a surety, guarantor, accommodation endorser, or otherwise for or upon the Senior Funded Debt of any other person, firm or corporation. Without limitation of the foregoing, "Senior Funded Debt" of Borrowers includes all liabilities of Borrowers incurred under this Agreement, but does not include liabilities subordinated to the Bank in a manner acceptable to the Bank (using the Bank's standard form). "Adjusted EBITDA" means the following, computed without duplication on a consolidated basis for Borrowers: (i) the sum of net income before taxes, plus interest expense, plus depreciation, depletion, amortization and other non-cash charges, plus any extraordinary loss items, (ii) minus any extraordinary income items, (iii) minus the current Defaulted Lease Exposure, and (iv) plus the amount of any cash rental payments made by Borrowers in reduction of the Defaulted Lease Exposure. This ratio will be calculated at the end of each fiscal quarter, using the results of that quarter and each of the 3 immediately preceding quarters. The current portion of long term liabilities and the current Defaulted Lease Exposure will be measured as of the last day of the calculation period. "Defaulted Lease Exposure" means the aggregate of the following for each Defaulted Retail Lease: (x) if a Borrower has agreed to pay any amount in settlement of its obligations under such Defaulted Retail Lease, the amount of such settlement (which settlement amount shall not be deemed to be a cash rental payment for purposes of the computation of Adjusted EBITDA), and (y) in all other events, twelve months' rent under such Defaulted Retail Lease. The amount of the Defaulted Lease Exposure shall not be reduced by any payment made by either Borrower on account of any component of the Defaulted Lease Exposure. "Defaulted Retail Lease" means any Retail Lease where there has occurred any uncured default by the tenant, if the default consists of a failure to make a payment when due or gives the landlord the right to cause a Borrower to directly assume all or a portion of the obligations of the tenant under such Retail Lease. 8.6 Minimum Adjusted EBITDA. To maintain on a consolidated basis a minimum Adjusted EBITDA of at least Sixteen Million Dollars ($16,000,000); provided that on and after the occurrence of the events described in Section 1.7(c) of this Agreement Borrowers shall be required to maintain on a consolidated basis a minimum Adjusted EBITDA of at least Twenty-Five Million Dollars ($25,000,000). This amount will be calculated at the end of each fiscal quarter, using the results of that quarter and each of the three immediately preceding quarters. 8.7 Minimum Net Income. To earn on a consolidated basis net income after taxes and extraordinary items of at least One Million Dollars ($1,000,000) for the fiscal quarter of the Borrowers ending on September 30, 1999, of at least Two Million Dollars ($2,000,000) for each of the fiscal quarters of the Borrowers ending on December 31, 1999 and March 31, 2000, of at least One Million Dollars ($1,000,000) for the fiscal quarter of the Borrowers ending on June 30, 2000, and of at least Two Million Dollars ($2,000,000) for each fiscal quarter of the Borrowers thereafter. 8.8 Tangible Net Worth. To maintain on a consolidated basis tangible net worth equal to at least the sum of the following: (a) Fifty Million Dollars ($50,000,000); plus (b) the sum of 50% of net income after income taxes (without subtracting losses) earned in each quarterly accounting period commencing on or after October 1, 1999; plus (c) the net proceeds from any equity securities issued after the date of this Agreement; plus (d) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities after the date of this Agreement. "Tangible net worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, deferred receivables, and other like intangibles, and monies due from officers, directors, employees or shareholders of the Borrowers) plus liabilities subordinated to the Bank in a manner acceptable to the Bank (using the Bank's standard form) less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. 8.9 Trusts. Not to transfer any assets of any Borrower to a trust (other than the trust established under the Trust Agreement Pursuant to the Media Arts Group, Inc. Management Deferred Compensation Plan dated as of June 15, 1998) unless the trust is acceptable to the Bank in form and content, and the trustee guarantees payment of the Borrowers' obligations under this Agreement prior to any such transfer. 8.10 Other Debts. Not to, and not permit any of its subsidiaries to, have outstanding or incur any direct or contingent liabilities or capitalized lease obligations (other than those to the Bank), or become liable for the liabilities of others, without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Additional debts and capitalized lease obligations for business purposes which do not exceed a total principal amount of Five Million Dollars ($5,000,000) outstanding at any one time. (e) Contingent liabilities of the Borrowers with respect to any Retail Lease disclosed pursuant to Section 6.1(m) of this Agreement. 8.11 Other Liens. Not to, and not permit any of its subsidiaries to, create, assume, or allow any security interest or lien (including judicial liens) on property any Borrower or any such subsidiary now or later owns, except: (a) Deeds of trust and security agreements in favor of the Bank. (b) Liens for taxes not yet due. (c) Liens outstanding on the date of this Agreement disclosed in writing to the Bank. (d) Additional liens securing indebtedness permitted under Section 8.10(d) of this Agreement. 8.12 Capital Expenditures. Not to spend or incur obligations (including the total amount of any capital leases) on a consolidated basis for more than Twelve Million Five Hundred Thousand Dollars ($12,500,000) in the fiscal year ending March 31, 2000, and more than Fifteen Million Dollars ($15,000,000) in the fiscal year ending March 31, 2001, in either case to acquire fixed assets. 8.13 Dividends. Not to, and not permit any of its subsidiaries to, declare or pay any dividends on any of its shares except dividends payable in capital stock of a Borrower or such a subsidiary, and not to purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto without having received the prior written consent of the Bank, which consent shall not be unreasonably withheld so long as (a) no default or Event of Default shall have occurred hereunder or shall result from such payment or acquisition, and the Borrowers shall have provided the Bank with a compliance certificate containing their representations and warranties to such effect, and (b) the Borrowers shall have repaid in full all advances under the line of credit, including amounts drawn on letters of credit and not yet reimbursed (and no advance under the line of credit shall be required for such payment or acquisition). 8.14 Loans and Investments. Not to, and not permit any of its subsidiaries to, make any loans or other extensions of credit to, or make any investments in, or make any capital contributions or other transfers of assets to, any individual or entity, except for: (a) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business to non-affiliated entities; (b) investments in any of the following: (i) certificates of deposit; (ii) U.S. treasury bills and other obligations of the federal government; and (iii) other investments as permitted under the investment policy of the Borrowers attached as Exhibit B hereto; (c) loans to and investments in Exclaim Technologies ("Exclaim") by MAGI during the fiscal year of MAGI ending March 31, 2000 not in excess of Nine Million Dollars ($9,000,000) (no more than Five Million Dollars ($5,000,000) of which may be invested after the date of this Agreement); (d) existing loans to and investments by MAGI in Thomas Kinkade Stores, Inc., a California corporation, Thomas Kinkade Media, Inc., a California corporation, as described in the most recent consolidated financial statements of MAGI provided to the Bank pursuant to Section 7.6 of this Agreement; (e) loans to and investments by MAGI in wholly-owned subsidiaries of MAGI (in addition to the loans and investments permitted under Section 8.14(d) above) not in excess of an aggregate of Two Million Five Hundred Thousand Dollars ($2,500,000) at any time outstanding; and (f) investments that do not exceed an aggregate amount of One Million Dollars ($1,000,000) during the period from the date hereof to and including September 30, 2001. 8.15 Change of Ownership. (a) Not to cause, permit, or suffer (i) any change, direct or indirect, in any Borrower's capital ownership, or in the capital ownership of any subsidiary of any Borrower, in excess of 10%, except as specifically provided in Section 8.15(b) below, (ii) any "Change in Control," as such term is defined in the License Agreement, or (iii) any other change in the ownership of any Borrower or any subsidiary of any Borrower, if the result thereof is to accelerate or increase amounts payable to any employee or consultant of any Borrower. (b) Notwithstanding the provisions of clause (i) of Section 8.15(a), MAGI may sell more than an aggregate of 10% of the stock of Exclaim in one or more transactions to one or more persons or entities, provided that (i) so long as Exclaim is at least 50% owned by the Borrowers, the business of Exclaim shall be limited in all material respects to the sale of goods and performance of services through means of the Internet, and Exclaim shall not own more than $2,500,000 of inventory and accounts receivable on a combined basis at any time; (ii) prior to the consummation of any sale or sales of the stock of Exclaim or other transactions that would result in MAGI being the owner of less than 50% of the outstanding voting stock of Exclaim, the Borrowers shall have provided the Bank with a pro forma consolidated balance sheet, income statement and cash flow statement of the Borrowers, based on recent financial statements, which shall be complete and shall fairly present in all material respects the assets, liabilities, financial condition and results of operations of the Borrowers during the Compliance Period (as hereinafter defined), but excluding Exclaim as a consolidated subsidiary of MAGI, and such pro forma financial statements shall indicate on a pro forma basis (and containing the calculations necessary to demonstrate compliance with Sections 8.4, 8.5, 8.6, 8.7 and 8.8 of this Agreement as of the last day of the period covered by the attached financial statements that giving effect to such exclusion, no Event of Default would have occurred hereunder at any time during the Compliance Period; and (iii) upon the consummation of any sale or sales of the stock of Exclaim or other transactions that result in MAGI being the owner of less than 50% of the outstanding voting stock of Exclaim or that otherwise results in Exclaim no longer being deemed to be a subsidiary of MAGI,, the Borrowers shall cause Exclaim to comply with all covenants and agreements set forth in Sections 8.20, 8.25 and 8.29 of this Credit Agreement applicable to the Borrowers. For purposes of this Agreement, "Compliance Period" shall mean the four complete fiscal quarters of the Borrowers preceding any sale of the stock of Exclaim or other transaction that results in MAGI being the owner of less than 50% of the outstanding voting stock of Exclaim (but excluding any fiscal quarter commencing prior to October 1, 1999), plus the current fiscal quarter of the Borrowers in which such sale or other transaction takes place, plus any remaining fiscal quarters of the Borrowers during the fiscal year of the Borrowers in which such sale or other transaction takes place. For example, (1) if any such sale or other transaction takes place on February 1, 2000, then the Compliance Period shall be the period from October 1, 1999 to and including March 31, 2000, and (2) if any such sale or other transaction takes place on December 1, 2000, then the Compliance Period shall be the period from October 1, 1999 to and including March 31, 2001. 8.16 Out of Debt Period. To either (a) repay any advances in full, and not to draw any additional advances on its revolving line of credit, for a period of at least thirty (30) consecutive days, or (b) reduce the outstanding principal balance on the revolving line of credit to an amount not exceeding Five Million Dollars ($5,000,000) for a period of at least sixty (60) consecutive days, in each case during the period from the date of this Agreement to and including September 30, 2001. For the purposes of this paragraph, "advances" does not include undrawn amounts of outstanding letters of credit. 8.17 Notices to Bank. To promptly notify the Bank in writing of: (a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against any Borrower or any subsidiary of any Borrower (or any guarantor). (b) any substantial dispute between any Borrower (or any subsidiary of any Borrower, or any guarantor) and any government authority. (c) any material failure to comply with this Agreement. (d) any material adverse change in the business condition (financial or otherwise), operations, properties or prospects of any Borrower (or any subsidiary of any Borrower, or any guarantor), or any material adverse change in the ability of any Borrower (or any guarantor) to repay the credit. (e) any change in any Borrower's name, legal structure, place of business, or chief executive office if such Borrower has more than one place of business. (f) the receipt of any notice or communication regarding (i) any threatened or pending investigation or enforcement action by any governmental authority or any other claim relating to health, safety, the environment, or any hazardous substances with regard to any Borrower's property, activities, or operations or (ii) any belief or suspicion of any Borrower that hazardous substances exist on or under such Borrower's real property. (g) (i) any default (or any event which with notice or the passage of time or both could become a default) under any obligation guaranteed by any Borrower (or any subsidiary of any Borrower, or any guarantor), which obligations shall include without limitation any obligation of a Borrower under or with respect to any Retail Lease; or (ii) the receipt of any notice or communication alleging the existence or regarding the present or future possibility of the existence of any such default or potential default. Each notice under this Section 8.17(g) with respect to any obligation or potential obligation of a Borrower under a Retail Lease shall (in addition to the other information required under this Section 8.17(g)) set forth the amount of rental and other payments due and owing under such Retail Lease as of the date of such notice, and the amount of such rental and other payments owing under such Retail Lease during the twelve-month period following the date of such notice. 8.18 Books and Records. To maintain, and to cause each subsidiary of a Borrower to maintain, adequate books and records. 8.19 Audits. To allow the Bank and its agents to inspect the properties of each Borrower and each subsidiary of a Borrower (including taking and removing samples for environmental testing) and examine, audit, and make copies of books and records at any reasonable time. If any Borrower's or any such subsidiary's properties, books or records are in the possession of a third party, the Borrowers authorize that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. The Bank has no duty to inspect the properties of any Borrower or subsidiary, or to examine, audit, or copy books and records and the Bank shall not incur any obligation or liability by reason of not making any such inspection or inquiry. In the event that the Bank inspects the properties of any Borrower or subsidiary, or examines, audits, or copies books and records, the Bank will be acting solely for the purposes of protecting the Bank's security and preserving the Bank's rights under this Agreement. No Borrower nor any other party is entitled to rely on any inspection or other inquiry by the Bank. The Bank owes no duty of care to protect any Borrower or any other party or entity against, or to inform Borrowers or any other party or entity of, any adverse condition that may be observed as affecting any Borrower's or subsidiary's properties or premises, or any Borrower's or subsidiary's business. In the event that the Bank has a duty or obligation under applicable laws, regulations or legal requirements to disclose any report or findings made as a result of, or in connection with, any site visit, observation or testing by the Bank, the Bank may make such a disclosure to Borrowers or any other party. 8.20 Compliance with Laws. To comply, and to cause each of its subsidiaries to comply, with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over any Borrower's or subsidiary's business. 8.21 Preservation of Rights. To maintain and preserve all rights, privileges, and franchises Borrowers now have. Without limitation of the foregoing, the Borrowers will not consent to any material modification or amendment of the License Agreement without having received the prior written consent of the Bank, which consent shall not be unreasonably withheld. 8.22 Maintenance of Properties. To make any repairs, renewals, or replacements to keep Borrowers' properties in good working condition. 8.23 Perfection of Liens. To help the Bank perfect and protect its security interests and liens, and reimburse it for related costs it incurs to protect its security interests and liens. 8.24 Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 8.25 Insurance. (a) Insurance Covering Collateral. To maintain all risk property damage insurance policies covering the tangible property comprising the collateral. Each insurance policy must be for the full replacement cost of the collateral and include a replacement cost endorsement. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. (b) General Business Insurance. To maintain insurance satisfactory to the Bank as to amount, nature and carrier covering property damage (including loss of use and occupancy) to any of the properties of either Borrower or any subsidiary of a Borrower, public liability insurance including coverage for contractual liability, product liability and workers' compensation, and any other insurance which is usual for the businesses of the Borrowers and the subsidiaries of the Borrowers. (c) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 8.26 Additional Negative Covenants. Not to, and not to permit any subsidiary of any Borrower to, without the Bank's written consent: (a) engage in any business activities substantially different from any of Borrowers' or such subsidiaries' present businesses. (b) liquidate or dissolve any business of any Borrower or any subsidiary of any Borrower. (c) enter or permit any subsidiary to enter into any consolidation, merger, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company. (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so. (e) sell, assign, lease, transfer or otherwise dispose of all or a substantial part of the business or assets of any Borrower or any subsidiary of a Borrower, other than (i) assets of Thomas Kinkade Stores, Inc., (ii) sales of retail store locations owned by a Borrower, or (iii) as otherwise permitted under Section 8.15(b) of this Agreement). (f) enter into any sale and leaseback agreement covering any of its fixed assets. (g) acquire or purchase a business or its assets for a consideration, including assumption of direct or contingent debt, in excess of Five Million Dollars ($5,000,000) in the aggregate for all such acquisitions and purchases made from the date hereof to and including the Expiration Date; provided that (i) on and after the occurrence of the events described in Section 1.7(c) of this Agreement, the maximum aggregate consideration for acquisitions and purchases permitted hereunder shall increase to Ten Million Dollars ($10,000,000), (ii) no acquisition or purchase of a business or its assets shall be permitted hereunder unless such business had a positive net income after taxes (or a net loss after taxes not in excess of $250,000) for both its current fiscal year and its most recently concluded fiscal year; (iii) the Bank shall receive at least thirty days prior written notice of such acquisition or purchase, which notice shall include a reasonably detailed description of such acquisition or purchase, (iv) the business and assets acquired in such Permitted Acquisition shall be free and clear of all liens (other than those permitted under Section 8.11 of this Agreement); (v) at or prior to the closing of such acquisition or purchase, the Bank will be granted a first priority perfected lien and security interest in all assets acquired pursuant thereto (or in the assets and capital stock of any business acquired pursuant thereto), and Borrowers (and such business) shall have executed such documents and taken such actions as may be required by the Bank in connection therewith, (vi) if such acquisition or purchase is the acquisition or purchase of a corporation or other entity, then at or prior to the closing of such acquisition or purchase, such entity will guaranty the obligations of Borrowers to the Bank, and such entity shall have taken such actions as may be required by the Bank in connection therewith, and (vii) at the time of such acquisition or purchase and after giving effect thereto, no default or Event of Default shall have occurred and be continuing. 8.27 ERISA Plans. With respect to a Plan subject to Title IV of ERISA, to give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30-day notice. (b) Any action by any Borrower, any subsidiary of any Borrower or any ERISA Affiliate to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 8.28 Compliance with Environmental Requirements. With regard to the property, activities and operations of any Borrower or any subsidiary of a Borrower, to comply with the recommendations of any qualified environmental engineer or orders or directions issued by any governmental authority relating to health, safety, the environment, or any hazardous substances including those orders or directives requiring the investigation, clean-up, or removal of hazardous substances. 8.29 Transactions with Affiliates. Not to, and not permit any of its subsidiaries to, enter into any transaction with any executive, officer, director or shareholder (or any relative of any of the foregoing), or to with any entity affiliated with any Borrower or such subsidiary, except upon fair and reasonable terms no less favorable to such Borrower or subsidiary than it would obtain in a comparable arm's-length transaction with a person or entity not an affiliate of such Borrower or subsidiary. 9. HAZARDOUS WASTE Borrowers will indemnify and hold harmless the Bank from any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrowers' property or operations or property leased to Borrowers. The indemnity includes but is not limited to attorneys' fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. This indemnity will survive repayment of Borrowers' obligations to the Bank. 10. DEFAULT If any of the following events (herein, an "Event of Default") occurs, the Bank may do one or more of the following: declare Borrowers in default, stop making any additional credit available to Borrowers, and require Borrowers to repay their entire debt immediately and without prior notice. If an Event of Default occurs under the paragraph entitled "Bankruptcy, " below, then the entire debt outstanding under this Agreement will automatically be due immediately. 10.1 Failure to Pay. (a) Any Borrower fails to make a payment of principal and interest when due under this Agreement, or (b) any Borrower shall fail to pay any other amount to the Bank when due and such failure shall continue for a period of seven (7) days. 10.2 Lien Priority. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any material property given as security for this Agreement (or any guaranty). 10.3 False Information. Any Borrower (or any subsidiary of any Borrower, or any guarantor) has given the Bank information or representations that is false or misleading in any material respect. 10.4 Bankruptcy. Any Borrower (or any subsidiary of any Borrower, or any guarantor) files a bankruptcy petition, a bankruptcy petition is filed against any Borrower (or any subsidiary of any Borrower, or any guarantor) or any Borrower (or any subsidiary of any Borrower, or any guarantor) makes a general assignment for the benefit of creditors. The default will be deemed cured if any bankruptcy petition filed against any Borrower (or any subsidiary of any Borrower, or any guarantor) is dismissed within a period of 45 days after the filing; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrowers during that period. 10.5 Receivers. A receiver or similar official is appointed for the business of any Borrower (or any subsidiary of any Borrower, or any guarantor), or any such business is terminated, or any Borrower (or any subsidiary of any Borrower, or any guarantor) is liquidated or dissolved. 10.6 Judgments. Any judgments or arbitration awards are entered against any one or more Borrowers (or any subsidiary of any Borrower, or any guarantor), or any Borrower (or any subsidiary of any Borrower, or any guarantor) enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of Five Hundred Thousand Dollars ($500,000) or more in excess of any insurance coverage. 10.7 Government Action. Any government authority takes action that the Bank believes materially adversely affects any Borrower's (or any guarantor's) financial condition or ability to repay. 10.8 Material Adverse Change. A material adverse change occurs, or is reasonably likely to occur, in any Borrower's (or any guarantor's) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 10.9 Cross-default. Any default occurs under any agreement in connection with any credit any Borrower (or any subsidiary of any Borrower, or any guarantor) or any of Borrower's related entities or affiliates has obtained from anyone else or which any Borrower (or any subsidiary of any Borrower, or any guarantor) or any of such Borrower's related entities or affiliates has guaranteed (other than a Retail Lease) if the default consists of failing to make a payment when due or gives the other lender the right to accelerate the obligation. 10.10 Default under License Agreement. Any material default by any Borrower or any subsidiary of any Borrower under the License Agreement, or any termination or cancellation of the License Agreement. 10.11 Default under Related Documents. Any guaranty, subordination agreement, security agreement, deed of trust, or other document required by this Agreement is violated or no longer in effect. 10.12 Other Bank Agreements. Any Borrower (or any subsidiary of any Borrower, or any guarantor) fails to meet the conditions of, or fails to perform any obligation under any other agreement any Borrower (or any subsidiary of any Borrower, or any guarantor) has with the Bank or any affiliate of the Bank. If the breach does not consist of a failure to pay any amount when due to the Bank and, in the Bank's opinion, the breach is capable of being remedied, the breach will not be considered an Event of Default under this Agreement for a period of ten (10) days after the date on which the Bank gives written notice of the breach to the Borrowers; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrowers during that period. 10.13 ERISA Plans. Any one or more of the following events occurs with respect to a Plan of any Borrower subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject such Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of such Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by any Borrower or any ERISA Affiliate. 10.14 Other Breach Under Agreement. Any Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article. This includes any failure by any Borrower to comply with any financial covenants set forth in this Agreement, whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to such Borrower or the Bank. 11. ENFORCING THIS AGREEMENT; MISCELLANEOUS 11.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied. 11.2 California Law. This Agreement is governed by California law. 11.3 Successors and Assigns. This Agreement is binding on Borrowers' and the Bank's successors and assignees. The Borrowers agree that they may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about Borrowers with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against Borrowers. 11.4 Arbitration. (a) This paragraph concerns the resolution of any controversies or claims between any one or more Borrowers and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between Borrowers and the Bank, including claims for injury to persons, property or business interests (torts). (b) At the request of any Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by California law. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. The arbitration will be conducted in San Jose, California. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. (f) The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. (g) The procedure described above will not apply if the controversy or claim, at the time of the proposed submission to arbitration, arises from or relates to an obligation to the Bank secured by real property located in California. In this case, both Borrowers and the Bank must consent to submission of the claim or controversy to arbitration. If both parties do not consent to arbitration, the controversy or claim will be settled as follows: (i) Borrowers and the Bank will designate a referee (or a panel of referees) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored proceedings; (ii) The designated referee (or the panel of referees) will be appointed by a court as provided in California Code of Civil Procedure Section 638 and the following related sections; (iii) The referee (or the presiding referee of the panel) will be an active attorney or a retired judge; and (iv) The award that results from the decision of the referee (or the panel) will be entered as a judgment in the court that appointed the referee, in accordance with the provisions of California Code of Civil Procedure Sections 644 and 645. (h) This provision does not limit the right of Borrowers or the Bank to: (i) exercise self-help remedies such as setoff; (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law, before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (i) The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of Borrowers or the Bank, including the suing party, to submit the controversy or claim to arbitration if the other party contests the lawsuit. However, if the controversy or claim arises from or relates to an obligation to the Bank which is secured by real property located in California at the time of the proposed submission to arbitration, this right is limited according to the provision above requiring the consent of Borrowers and the Bank to seek resolution through arbitration. (j) If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. 11.5 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 11.6 Administration Costs. Borrowers shall pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement. 11.7 Attorneys' Fees. Borrowers shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and in connection with any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against any Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house counsel. 11.8 One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrowers concerning this credit; (b) replace any prior oral or written agreements between the Bank and Borrowers concerning this credit; and (c) are intended by the Bank and Borrowers as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 11.9 Indemnification. Borrowers will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to Borrowers hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit. This indemnity includes but is not limited to attorneys' fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of Borrowers' obligations to the Bank. All sums due to the Bank hereunder shall be obligations of Borrowers, due and payable immediately without demand. 11.10 Notices. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and Borrowers may specify from time to time in writing. 11.11 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 11.12 Counterparts. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 11.13 Joint and Several Liability. (a) Each Borrower agrees that it is jointly and severally liable to the Bank for the payment of all obligations arising under this Agreement, regardless of which Borrower requested, received, used, or directly enjoyed the benefit of, the extensions of credit hereunder, and that such liability is independent of the obligations of the other Borrowers. The Bank may bring an action against any Borrower, whether an action is brought against the other Borrowers or any guarantor. (b) As a separate, additional, continuing and primary obligation each Borrower hereby unconditionally and irrevocably undertakes with the Bank that should all or any portion of the obligations arising under this Agreement not be recoverable from any other Borrower for any reason, then such Borrower shall make payment of such obligations by way of a full indemnity in the manner provided in this Agreement and shall indemnify the Bank against all losses, claims, costs, charges and expenses to which it may be subject or which it may incur under or in connection with this Agreement. The liabilities and obligations of each Borrower under this Section 11.13 shall remain in force notwithstanding any act, omission, neglect, event or other matter whatsoever (other than the irrevocable payment in full of such obligations), regardless of anything which might discharge such Borrower (wholly or in part) or which would have afforded such Borrower a legal or equitable defense under any applicable law. (c) Each Borrower agrees that any release which may be given by the Bank to another Borrower or a guarantor will not release such Borrower from its obligations under this Agreement. Each Borrower, to the extent permitted by applicable law, hereby waives any defense to such obligations that may arise by reason of the disability or other defense or cessation of liability of any other Borrower for any reason other than payment in full. Each Borrower also waives deferral of such obligations arising by reason of the institution of proceedings by or against another Borrower under or pursuant to any insolvency or bankruptcy proceeding, and waives any defense to such obligations that it may have as a result of any holder's election of or failure to exercise any right, power, or remedy, including, without limitation, the failure to proceed first against such other Borrower or any security it holds for such other Borrower's obligations under this Agreement, if any. Without limiting the generality of the foregoing, each Borrower expressly waives all demands and notices whatsoever (except for any demands or notices, if any, that such Borrower expressly is entitled to receive pursuant to the terms of this Agreement), and agrees that the Bank may, without notice (except for such notice, if any, as such Borrower expressly is entitled to receive pursuant to the terms of this Agreement) and without releasing the liability of such Borrower, extend for the benefit of any other Borrower the time for making any payment, waive or extend the performance of any agreement or make any settlement of any agreement for the benefit of any other Borrower, and may proceed against each Borrower, directly and independently of any other Borrower, as such obligee may elect in accordance with this Agreement. (d) Each Borrower waives any right to assert against the Bank any defense, setoff, counterclaim, or claims which such Borrower may have against another Borrower or any other party liable to the Bank for the obligations of Borrowers under this Agreement. (e) Each Borrower consents and agrees that the Bank may, at any time and from time to time, without notice or demand, whether before or after any actual or purported termination, repudiation or revocation of this Agreement by any one or more Borrowers, and without affecting the enforceability or continuing effectiveness hereof as to such Borrower, in accordance with the terms of this Agreement: (i) accept new or additional instruments, documents or agreements; (ii) accept partial payments on the obligations of Borrowers to the Bank; (iii) receive and hold additional security or guarantees for such obligations or any part thereof; (iv) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute, transfer or enforce any security or guarantees, and apply any security and direct the order or manner of sale thereof as the Bank may determine; (v) release any other person or entity (including, without limitation, any other Borrower) from any personal liability with respect to such obligations or any part thereof; (vi) with respect to any person or entity other than such Borrower (including without limitation, any other Borrower), settle, release (by operation of applicable laws or otherwise) liquidate or enforce any such obligations and any security therefor or guaranty thereof in any manner, consent to the transfer of any security and bid and purchase at any sale; or (vii) consent to the merger, change or any other restructuring or termination of the corporate existence of any other Borrower or any other person or entity, and correspondingly agree, in accordance with all applicable provisions of this Agreement, to the restructure of such obligations, and any such merger, change, restructuring or termination shall not affect the liability of any Borrower or the continuing effectiveness hereof, or the enforceability hereof with respect to all or any part of such obligations. (f) Upon the occurrence and during the continuance of any Event of Default, the Bank may enforce this Agreement or any other document independently of any other remedy or security they may have or hold in connection with the obligations of Borrowers to the Bank, and it shall not be necessary for the Bank to marshal assets in favor of any Borrower or any other person or entity or to proceed upon or against or exhaust any security or remedy before proceeding to enforce this Agreement. (g) Each Borrower agrees that it is solely responsible for keeping itself informed as to the financial condition of the other Borrowers and of all circumstances which bear upon the risk of nonpayment. Each Borrower waives any right it may have to require the Bank to disclose to such Borrower any information which the Bank may now or hereafter acquire concerning the financial condition of the other Borrowers. (h) Each Borrower waives all rights to notices of the existence or the creation of new indebtedness by any other Borrower. (i) The Borrowers represent and warrant to the Bank that they are integral parts of a consolidated enterprise, and that each will derive benefit, directly and indirectly, from the collective administration and availability of credit under this Agreement. The Borrowers agree that the Bank will not be required to inquire as to the disposition by any Borrower of funds disbursed in accordance with the terms of this Agreement. (j) Each Borrower waives any right of subrogation, reimbursement, indemnification and contribution (contractual, statutory or otherwise), including without limitation, any claim or right of subrogation under the Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute (or any other applicable law regarding bankruptcy, reorganization, insolvency, administration, administrative receivership, liquidation, receivership, dissolution, winding-up or relief of debtors) which such Borrower may now or hereafter have against any other Borrower with respect to the indebtedness incurred under this Agreement. Each Borrower waives any right to enforce any remedy which the Bank now has or may hereafter have against any other Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by the Bank, until such time as the obligations of Borrowers to the Bank have been paid in full and this Agreement has been terminated. This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA, N.A. MEDIA ARTS GROUP, INC. By /s/ Kenneth E. Jones By /s/ Bud Peterson -------------------------------- -------------------------------- Kenneth E. Jones, Vice President Name: Bud Peterson Title: Corporate Secretary By /s/ John C. Plecque LIGHTPOST PUBLISHING, INC. - - -------------------------------- John C. Plecque, Vice President Address where notices to: By /s/ Bud Peterson the Bank are to be sent -------------------------------- Name: Bud Peterson Title: Corporate Secretary Bank of America, N.A. San Jose RCBO #1487 101 Park Center Drive Address where notices to San Jose, California 95113 the Borrowers are to be sent: Attn: Ken Jones, Vice President Media Arts Group, Inc 521 Charcot Avenue San Jose, California 95131 Attn: Corporate Secretary EXHIBIT A FORM OF COMPLIANCE CERTIFICATE COMPLIANCE CERTIFICATE Financial Statement Date: Reference is made to that certain Business Loan Agreement dated as of October 27, 1999 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among Media Arts Group, Inc, a Delaware corporation and Lightpost Publishing, Inc., a California corporation (each a "Borrower" and collectively, the "Borrowers") and Bank of America, N.A. (the "Bank"). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Credit Agreement. The undersigned hereby certifies as of the date hereof that he/she is the ______________________ of Media Arts Group, Inc., and that, as such, he/she is authorized to execute and deliver this Certificate to the Bank on the behalf of the Borrowers, and that: 1. Attached as Schedule 1 hereto are a true and correct copy of the unaudited [and audited] consolidated and consolidating balance sheets of the Borrowers as of the end of the fiscal quarter [and fiscal year] of the Borrowers ending on ____________________ and the related consolidated and consolidating statements of income and retained earnings for the period ending on the last day of such quarter [and year]. The undersigned certifies that the attached financial statements present fairly, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Borrowers. 2. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrowers during the accounting period covered by the attached financial statements. 3. To the best of the undersigned's knowledge, the Borrowers, during such period, have observed, performed or satisfied all of its covenants and other agreements, and satisfied every condition in the Credit Agreement to be observed, performed or satisfied by the Borrowers, and as of the date of the financial statements attached hereto and the date hereof, no default exists under the Credit Agreement. 4. The financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate and set forth the calculations necessary to demonstrate compliance with Sections 8.4, 8.5, 8.6, 8.7 and 8.8 of the Credit Agreement as of the last day of the period covered by the attached financial statements. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of _________________________. MEDIA ARTS GROUP, INC. By: ---------------------------- Name: Title: AMENDMENT TO BUSINESS LOAN AGREEMENT This Amendment to Business Loan Agreement, dated as of October 27, 1999 (the "Amendment"), is among Media Arts Group, Inc., a Delaware corporation ("MAGI"), Lightpost Publishing, Inc., a California corporation ("Lightpost," and together with MAGI, each a Borrower and collectively the "Borrowers") and Bank of America, N.A. (the "Bank"). A. The Borrowers and the Bank have entered into a certain Business Loan Agreement dated as of October 27, 1999 (the "Loan Agreement"). B. The Borrowers have disclosed to the Bank the existence of the following letters of credit issued by The Dai-Ichi Kangyo Bank, Ltd., New York Branch (the "Issuer") for the account of MAGI (collectively, the "CIT Letters of Credit"): L/C Number Beneficiary Expiration Date Amount SDC-026967 Limar Realty Corp. July 16, 2000 $50,000 SDC-028888 870 Market Street Associates, L.P. January 5, 2000 $100,000 C. The Borrowers have requested that the Bank waive certain conditions precedent set forth in the Loan Agreement and amend the Loan Agreement on the terms and conditions herein contained. NOW, THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the Borrowers and the Bank do hereby mutually agree as follows: AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Loan Agreement. 2. Amendment. 2.1 Section 8.13 of the Loan Agreement is amended by inserting the phrase "(other than Exclaim)" between the words "subsidiaries" and "to" in the first line of such Section. 2.2 Section 8.14 of the Loan Agreement is amended by deleting the word "and" at the end of Section 8.14(e), by replacing the period at the end of Section 8.14(f) with a semicolon and the word "and", and by adding the following as Section 8.14(g): "(g) loans or other extensions of credit to any Borrower's or any such subsidiary's executives or officers not exceeding Five Hundred Thousand Dollars ($500,000) in aggregate principal amount at any time outstanding." 2.3 The Loan Agreement is amended by adding the following thereto as Sections 11.14, 11.15, 11.16 and 11.17: "11.14 Arrangements with CIT Group. Reference is made to each of the agreements dated November 16, 1999 (such Agreements, the "CIT Agreements") between the Bank, the Borrowers and/or The CIT Group/Business Credit, Inc. ("CIT"), which agreements may include without limitation a Pay-Out Letter, a Letter of Credit Indemnity Agreement and a Termination/ Reassignment letter. The Borrowers acknowledge that the Bank has entered into the CIT Agreements at the request of the Borrowers, and that the Borrowers have reviewed and approved the terms of the CIT Agreements. The Borrowers agree that the liability, loss, damages and costs referred to in Section 11.9 of this Agreement include without limitation any and all losses, damages and costs in connection with the CIT Agreements. Without limitation of the foregoing, the Borrowers agree that any sum drawn under a CIT Letter of Credit and not immediately reimbursed by the Borrowers to the Issuer may, at the option of the Bank, be added to the principal amount outstanding under this Agreement, and bear interest and be due as described elsewhere in this Agreement. If there is a default under this Agreement, in addition to all other sums due and owing under the Agreement, the Borrowers shall immediately pay the outstanding amount of the CIT Letters of Credit to the Bank. All amounts due to the Bank hereunder shall be obligations of Borrowers, due and payable immediately and without demand, and shall be absolute, irrevocable and unconditional obligations under any and all circumstances whatsoever and irrespective of any set-off, counterclaim or defense to payment which any Borrower may have against Issuer or any other person, including without limitation any setoff, counterclaim or defense based upon or arising out of (a) any lack of validity or enforceability of any agreement, or (b) any demand, statement or any other document proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect. 11.15 CIT Letters of Credit. The Borrowers agree that on or before November 30, 1999 they shall cause the CIT Letters of Credit to be surrendered by the beneficiaries thereof and cancelled by the Issuer. 11.16 Asbestos Operations and Maintenance Program. Reference is made to the Phase I Environmental Assessment dated June 19, 1997 (the "Assessment") by Eckland Consultants Inc. (the "Consultant") with respect to the real property leased by the Borrowers at 521 Charcot Avenue, San Jose, California 95131 (the "Real Property"). The Borrowers agree that on or prior to December 31, 1999 they shall prepare and implement an Asbestos Operations and Maintenance Program for the Real Property as recommended in the Assessment, which Asbestos Operations and Maintenance Program shall be approved in writing by the Consultant (or by another environmental consultant satisfactory to the Bank). 11.17 Definitions. For purposes of this Agreement, "subsidiary" of a Borrower means any corporation, association, partnership, limited liability company, joint venture or other business entity (a) of which more than 50% of the voting stock, membership interests or other equity interests (in the case of entities other than corporations), is owned or controlled directly or indirectly by the Borrower, or one or more of the Subsidiaries of the Borrower, or a combination thereof, or (b) whose financial results must be consolidated with the consolidated financial results of the Borrower in accordance with generally accepted accounting principles." 3. Waivers. 3.1 Section 6.1(e) of the Loan Agreement requires, as a condition precedent to the extension of the initial credit under the Loan Agreement, that Borrowers provide Bank with a Consent to Removal from any owner of real property and holder of a mortgage or deed of trust on real property, if there is any personal property collateral located on such real property. The Bank agrees to waive the condition precedent set forth in Section 6.1(e) of the Loan Agreement; provided that the Borrowers provide the Bank with the Consents to Removal required under Section 6.1(e) on or before February 16, 2000. 4. Representations and Warranties. When the Borrowers sign this Amendment, each Borrower represents and warrants to the Bank that: (a) giving effect to this Amendment, there is no event which is, or with notice of, or lapse of time, or both would be, a default under the Loan Agreement, (b) giving effect to this Amendment, the representations and warranties of the Borrowers in the Loan Agreement are true on and as of the date hereof as if made on and as of said date, (c) this Amendment is within such Borrower's powers, has been duly authorized and does not conflict with any of such Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement or obligations by which such Borrower is bound. 5. Effect of Amendment. Except as specifically amended above, the Loan Agreement shall remain in full force and effect and is hereby ratified and confirmed. The waiver contained above shall be limited precisely as written and relate solely to the items and times above. Nothing in this Amendment shall be deemed to (a) constitute a waiver of compliance by any Borrower with respect to any other term, provision or condition of the Loan Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that the Bank may now have or may have in the future under applicable law or instrument or agreement referred to therein. 6. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first above written. BANK OF AMERICA, N.A. By: /s/ Kenneth E. Jones -------------------------------- Kenneth E. Jones, Vice President By: /s/ John C. Plecque -------------------------------- John C. Plecque, Vice President MEDIA ARTS GROUP, INC. By: /s/ Bud Peterson -------------------------------- Name: Bud Peterson Title: Corporate Secretary LIGHTPOST PUBLISHING, INC. By: /s/ Bud Peterson -------------------------------- Name: Bud Peterson Title: Corporate Secretary EX-10.39 3 EXHIBIT 10.39 Exhibit 10.39 STANDARD SINGLE-TENANT LEASE - TRIPLE NET 1960 The Alameda, San Jose, CA 95126 (408) 246-3691 THIS LEASE (the "Lease"), for reference purposes only dated December ____, 1999, is entered into by and between TBI-Madrone I, LLC, a California limited liability company ("Landlord"), whose address is c/o Toeniskoetter & Breeding, Inc. Development, 1960 The Alameda, San Jose, California 95126 and Media Arts Group, Inc., a Delaware corporation ("Tenant"), whose address is 521 Charcot Avenue, San Jose, CA 95131. 1. Basic Lease Provisions. 1.1 Premises. Those premises consisting of approximately sixty-one thousand six hundred thirty-two (61,632) square feet located in the Building described in Paragraph 1.2 and more particularly shown on EXHIBIT A. 1.2 Building. That certain one-story office building to be constructed on the Property, consisting of approximately sixty-one thousand six hundred thirty-two (61,632) square feet, and located on Lightpost Way in Morgan Hill, California. The Building is referred to sometimes as "Building 1." 1.3 Anticipated Commencement Date. April 1, 2001. 1.4 Term. Fifteen (15) years. 1.5 Use. General and administrative offices. 1.6 Monthly Rent. $77,040.00/month, subject to adjustment as provided in Paragraph 5.2. 1.7 Security Deposit. None. (See Paragraph 7 regarding Lease Deposit) 1.8 Property. The real property consisting of approximately 4.24 acres, located in the City of Morgan Hill ("City"), County of Santa Clara ("County"), California, and more particularly described on EXHIBIT B, together with the Building to be constructed thereon. 1.9 Brokers. Saratoga Investment Company. 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises. 3. Definitions. The following terms shall have the following meanings in this Lease: 3.1 Alterations. Any alterations, additions or improvements made in, on or about the Building by Tenant after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, drapery and carpentry installations. 3.2 CC&R's. Those certain covenants, conditions and restrictions for Madrone Business Park to be recorded in the Official Records of Santa Clara County. Landlord shall provide Tenant with a copy of the CC&R's prior to the Commencement Date. 3.3 Commencement Date. The Commencement Date shall be the earlier occurring of the following: 3.3.1 Thirty (30) days from the date the City has issued an occupancy permit for the Premises, as evidenced by the City's completion of a final inspection and written approval of the Building Shell and Tenant Improvements as having been completed in accordance with the building permit issued for such improvements; or 3.3.2 Thirty (30) days from the date Tenant substantially commences occupancy of the Premises. Once the actual Commencement Date has been determined pursuant to the foregoing, the parties shall execute a Commencement Date Memorandum in the form attached hereto as EXHIBIT C. 3.4 HVAC. Heating, ventilating and air conditioning. 3.5 Interest Rate. Ten and one-half percent (10 1/2%) per annum, however, in no event to exceed the maximum rate of interest permitted by law. 3.6 Landlord's Agents. Landlord's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.7 Outside Area. All areas and facilities within the Property which are exclusive of the Building, including, without limitation, the parking areas, access and perimeter roads, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas and facilities designated by Landlord. Landlord shall at all times have exclusive control of the Outside Area and may at any reasonable time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant, and may reasonably change the configuration or location of the Outside Area with the prior written consent of Tenant, which consent shall not be unreasonably withheld. In exercising any such rights, Landlord shall use diligent efforts to minimize any disruption of Tenant's business. Landlord shall have the right to reconfigure the parking area and ingress to and egress from the parking area, and to modify the directional flow of traffic of the parking area at Landlord's sole expense. 3.8 Real Property Taxes. Any form of assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Property or any part thereof or the rent and other sums payable hereunder by Tenant, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Property or the Building or any part hereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in all or any part of the Property; or (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Property whether or not now customary or within the contemplation of the parties. 3.9 Rent. The net Monthly Rent plus the Additional Rent described in Paragraph 5.2. 3.10 Sublet. Any transfer, sublet, assignment, license agreement, change of ownership, of this Lease or the Tenant's interest in the Lease or any portion thereof. 3.11 Subtenant. The person or entity with whom a Sublet agreement is proposed to be or is made. 3.12 Tenant Improvements. Those interior improvements to the Premises to be constructed by Landlord pursuant to EXHIBIT D. 3.13 Tenant's Agents. Tenant's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.14 Tenant's Personal Property. Tenant's trade fixtures, furniture, equipment and other personal property in the Premises. 4. Lease Term. 4.1 Term. The Term shall be fifteen (15) years, commencing on the Commencement Date, and ending fifteen (15) years thereafter, unless sooner terminated as provided herein. 4.2 Tenant Delays. If the Commencement Date has not occurred on or before the Anticipated Commencement Date set forth in Paragraph 1.3, due solely to the fault of Tenant, then notwithstanding any other provision hereof, Tenant shall pay one day's net Monthly Rent for each day of delay in completion of the Tenant Improvements beyond the Anticipated Commencement Date caused by Tenant's fault. Delays "due solely to the fault" of Tenant shall include those caused by: 4.2.1 Tenant's failure to furnish information to Landlord for the preparation of the Space Plan or Final Plans for the Tenant Improvements in accordance with EXHIBIT D; 4.2.2 Tenant's request for special materials, finishes or installations which are not readily available, provided, however, Landlord shall make a reasonable effort to notify Tenant of any delays concerning any special materials, finishes or installations of which Landlord has commercially reasonable knowledge; 4.2.3 Tenant's failure to reasonably approve the Space Plan for the Tenant Improvements in accordance with the time period set forth in EXHIBIT D; 4.2.4 Tenant's changes in the Space Plan or the Final Plans after their approval by Landlord; 4.2.5 Tenant's failure to complete any of its own improvement work to the extent Tenant delays completion by the City of its final inspection and approval of the Tenant Improvements described in EXHIBIT D; or 4.2.6 Interference with Landlord's work caused by Tenant or by Tenant's contractors or subcontractors. 4.3 Landlord Delays. If the Commencement Date is delayed for any reason other than delays caused by Tenant as defined in Paragraph 4.2 above, then there shall be an abatement of Rent covering the period between the Anticipated Commencement Date and the date when Landlord delivers possession of the Premises to Tenant with the Tenant Improvements substantially completed and all other terms and conditions of this Lease shall remain in full force and effect. If, however, the Commencement Date does not within six (6) months after the Anticipated Commencement Date for any reason other than delays caused by Tenant or delays caused by Force Majeure Conditions, as defined herein, then Tenant shall have the right to terminate this Lease by delivery of written notice to Landlord no later than the date which is seven (7) months from the Anticipated Commencement Date. If the Commencement Date is delayed due to inclement weather, strikes or other labor disturbances, material shortages, casualties, or other causes beyond Landlord's reasonable control ("Force Majeure Conditions"), then the date for substantial completion of the Tenant Improvements, shall be extended for the period of time reasonably attributable to the occurrence of such Force Majeure Condition. 4.4 Early Entry. Tenant shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing Tenant's Personal Property in the Premises. Such early entry shall be at Tenant's sole risk and subject to all the terms and provisions hereof, except for the payment of net Monthly Rent which shall commence on the Commencement Date. Landlord shall have the right to impose such additional conditions on Tenant's early entry as Landlord shall deem reasonably appropriate, and shall further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. 5. Rent. 5.1 Monthly Rent. Tenant shall pay to Landlord, in lawful money of the United States, commencing on the first day of the first month of the Term and continuing thereafter on the first (1st) day of each calendar month throughout the Term, net Monthly Rent in the amount set forth in Paragraph 1.6, subject to adjustment as provided in Paragraph 5.2. Net Monthly Rent shall be payable in advance, without abatement, deduction, claim, offset, prior notice or demand, except as otherwise specifically provided herein. The net Monthly Rent due for the first month of the Term shall be paid by Tenant upon execution of this Lease or secured by a letter of credit until the Commencement Date. 5.2 Adjustments to Monthly Rent. The Monthly Rent shall be adjusted as of the first day of the thirteen (13th) month of the term and every twelve (12) months thereafter (each, an "Adjustment Date") by the percentage increase in the Consumer Price Index, All Urban Consumers, All Items, published by the U.S. Department of Labor, Bureau of Labor Statistics for the San Francisco-Oakland-San Jose Metropolitan Area (1982-84=100) (the "Index"). The Index published for the month immediately preceding each Adjustment Date shall be compared with the Index published for the month immediately preceding the prior Adjustment Date, or in case of the first Adjustment Date, the Index published for the month immediately preceding the Commencement Date, to determine the percentage increase in the Monthly Rent for the next twelve (12) months of the Term; provided, however, that in no event shall the Monthly Rent increase by less than three percent (3%) per annum nor more than eight percent (8%) per annum. If no Index is published for either of the months set forth above, the Index for the next preceding month shall be used. If the base of the Index is revised, the Index increases, if any, shall be calculated with a common base year. If the Index is discontinued or revised, such other governmental index with which it is replaced, with appropriate conversion factors, shall be the basis of the adjustment. 5.3 Development Cost Reductions Based on Financial Assistance from City. If the City of Morgan Hill or the Redevelopment Agency of Morgan Hill provides any financial assistance to Landlord that directly reduces Landlord's cost to develop the Property and/or any of the other properties leased by Tenant at Madrone Business Park, Landlord shall pay to Tenant the amount of such reduction in Landlord's cost in cash or its equivalent. 5.4 Additional Rent. This Lease is intended to be a triple net lease. All monies required to be paid by Tenant under this Lease, including, without limitation, Real Property Taxes pursuant to Paragraph 14, Operating Expenses pursuant to Paragraph 16, and insurance premiums pursuant to Paragraph 20, shall be deemed Additional Rent and shall be payable as of the Commencement Date. 6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. Therefore, notwithstanding the notice provision in Paragraph 25.1.1, if any installment of Rent or any other charge due from Tenant is not received by Landlord within five (5) days after the date such Rent or other charge is past due, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Notwithstanding the foregoing, Landlord agrees to waive the late charge for the first five times during the Term of this Lease that any installment of Rent or charge is late provided that (i) Tenant is not late more than once per year, and (ii) Tenant is not more than fifteen days late in the payment of the Rent or other charge due (i.e., Rent must be paid by the fifteenth day of the month). Initials: /s/ CT /s/ CF /s/ TSG - - ------------------------ -------------------------- Landlord Tenant 7. Lease Deposit. Tenant shall deposit with Landlord upon execution of this Lease the sum of One Hundred Thirty-Two Thousand Five Hundred and no/100ths Dollars ($132,500.00) as a Lease deposit. At Tenant's option, in lieu of a cash Lease deposit Tenant may deliver to Landlord an irrevocable stand-by letter of credit issued by a bank and in a form reasonably acceptable to Landlord. The letter of credit shall be issued initially for a term of twelve (12) months and shall be renewed automatically for consecutive periods of one (1) month until the Commencement Date occurs. Landlord shall refund the cash Lease deposit to Tenant or return such letter of credit within ten (10) days after the Commencement Date. Drawing upon the letter of credit shall be conditioned only upon presentation of the original letter of credit to the issuer thereof accompanied by a certified statement from Landlord that Tenant is in default under the Lease which default is continuing after notice and the expiration of any applicable grace period. The foregoing shall specifically include any breach of this Lease by Tenant which occurs prior to the Commencement Date. The letter of credit shall not be mortgaged, assigned or encumbered in any manner whatsoever by Tenant. The use, application or retention of the letter of credit, or any portion thereof, by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by law, it being intended that Landlord shall not first be required to proceed against the letter of credit, and such use, application or retention shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. No Security Deposit shall be required in connection with this Lease. 8. Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only and not a renewal hereof or any extension for any further term, and in such case, the net Monthly Rent shall be one hundred fifty percent (150%) of the net Monthly Rent payable during the last month of the Term and such month-to-month tenancy shall be subject to every other term, covenant and agreement of this Lease. 9. Condition of Premises. Within thirty (30) days after completion of the Tenant Improvements, Tenant shall conduct a walk-through inspection of the Premises with Landlord and complete a punch-list of items needing additional work by Landlord. Other than the items specified in the punch- list, by taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as improved with the Tenant Improvements in good, clean and completed condition and repair, subject to all applicable laws, codes and ordinances. The punch-list to be prepared by Tenant shall not include any damage to the Premises caused by Tenant's move-in, which damage shall be repaired or corrected by Tenant, at its expense. Tenant acknowledges that neither Landlord nor its Agents have agreed to undertake any Alterations or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. If Tenant fails to submit a punch-list to Landlord within such thirty (30) day period, it shall be deemed that there are no items needing additional work or repair. Landlord's contractor shall complete all reasonable punch-list items within thirty (30) days after the walk-through inspection or as soon as practicable thereafter. Upon completion of such punch-list items, Landlord shall so notify Tenant. Tenant shall approve such completed items in writing to Landlord. If Tenant fails to reasonably approve such items within fifteen (15) days of notice of completion by Landlord, such items shall be deemed approved by Tenant. 10. Use of the Premises. 10.1 Tenant's Use. Tenant shall use the Premises solely for the purposes specified in Paragraph 1.5 and shall not use the Premises for any other purpose without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant acknowledges that the Property is subject and this Lease is subordinate to the CC&R's. Throughout the Term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereof, including the payment by Tenant of any periodic or special dues, assessments, and owners' association fees against the Property. Tenant shall indemnify and hold Landlord and it Agents harmless from and against any liability, loss, expense, damage, attorneys' fees and costs arising out of or in connection with Tenant's failure to perform or comply with the CC&R's. 10.2 Compliance. Tenant shall not use the Premises or suffer or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of duly constituted public authorities now in force or which may hereafter be in force or the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupant of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided, if any. Tenant shall not store or permit to be stored or otherwise placed any other material of any nature whatsoever outside the Building without the prior written consent of Landlord, which shall not be unreasonably withheld. Tenant shall be permitted, however, to park company-owned vehicles and employee vehicles in the parking areas overnight and for short-term periods provided, however, that any vehicles which are larger than an automobile, mini-van or pick-up truck must be screened from view as provided in the CC&R's. 10.3 Hazardous Materials. Tenant, at its sole cost, shall comply with all laws relating to Tenant's storage, use and disposal of hazardous, toxic or radioactive matter, including those materials identified in 22 California Code of Regulations Sections 66261.1 et seq., as they may be amended from time to time (collectively "Hazardous Materials"). If Tenant does store, use or dispose of any Hazardous Materials in, on or about the Premises, other than office supplies and cleaning supplies typically used in administrative offices, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. Tenant shall be solely responsible for and shall defend, indemnify and hold Landlord harmless from and against any liabilities, penalties, damages, costs or expenses (including reasonable attorneys' fees), causes of action, claims and/or judgments arising out of or in connection with any storage, use or disposal of Hazardous Materials in, on or about the Premises or the Property by Tenant, its agents, employees, contractors or invitees. Tenant's obligations hereunder shall survive the termination of this Lease. Landlord represents and warrants, to the best of its actual knowledge, that as of the date of this Lease there are no Hazardous Materials on the Property and the Property is in compliance with all applicable laws, regulations, ordinances and requirements of any governmental agency relating to Hazardous Materials. 11. Quiet Enjoyment. Landlord represents that Landlord has the full right and authority to enter into this Lease and will, as of the Commencement Date, be the fee simple owner of the Property. Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. 12. Alterations. After the Commencement Date, Tenant shall not make or permit any Alterations in, on or about the Premises, except for nonstructural Alterations not exceeding Twenty-Five Thousand and no/100ths Dollars ($25,000.00) in cost during any twelve (12) month period, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and according to plans and specifications reasonably approved in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without the prior written consent of Landlord, make any (i) alterations to the exterior of the Building; (ii) alterations to and penetrations of the roof of the Building; or (iii) alterations visible from outside the Building to which Landlord may withhold Landlord's consent on wholly aesthetic grounds. All Alterations shall be installed at Tenant's sole expense, in compliance with all applicable laws and permit requirements by a licensed contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date, and shall not diminish the value of either the Building or the Premises. All Alterations made by Tenant shall be and become the property of Landlord upon installation and shall not be deemed Tenant's Personal Property; provided, however, that Landlord may, at its option, require that Tenant, at Tenant's expense, remove any or all Alterations installed by Tenant and return the Premises to their condition as of the Commencement Date of this Lease, normal wear and tear excepted and subject to the provisions of Paragraph 23. If Tenant removes any Alterations as required or permitted herein, Tenant shall repair any and all damage to the Premises caused by such removal and return the Premises to their condition as of the Commencement Date, normal wear and tear excepted and subject to the provisions of Paragraph 22. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any Alterations made by it to the Premises. The provisions of this Paragraph 12 shall not apply to the Tenant Improvements which shall be governed by the provisions set forth in the Work Letter Agreement attached as EXHIBIT D. 13. Surrender of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, normal wear and tear and fire or other casualty excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable and licensed service firm (if the HVAC system is maintained by Tenant during the Term of this Lease), and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 12, and all Tenant's Personal Property and repair any damage and perform any restoration work caused by such removal. If Tenant fails to remove such Alterations and Tenant's Personal Property, and such failure continues for ten (10) days after written notice from Landlord, then Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. 14. Real Property Taxes. 14.1 Payment by Tenant. Tenant shall pay to Landlord, as Additional Rent, the Real Property Taxes for the Property as set forth on the most current County assessor's tax statement. Tenant shall reimburse Landlord monthly, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual Real Property Taxes for the applicable fiscal year, prorated for any partial month. Upon Landlord's receipt of the Real Property Tax payment from Tenant, Landlord shall pay the Real Property Taxes to the County prior to delinquency. If any Real Property Taxes increase from time to time due to a new tax statement from the County assessor, Tenant shall pay such increase within thirty (30) days after receipt of a statement from Landlord. Assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges are to be included within the definition of Real Property Taxes for purposes of this Lease. 14.2 Taxes on Tenant Improvements and Personal Property. Notwithstanding any other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. 14.3 Proration. Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included at the commencement or expiration of the Term. 15. Utilities and Services. Tenant shall be responsible for and shall pay promptly all charges for water, gas, electricity, sewer, telephone, refuse pickup, janitorial service and all other utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except that resulting from the negligence or willful misconduct of Landlord. Landlord shall use diligent efforts to promptly correct any failure or interruption caused by the act or neglect of Landlord. 16. Repair and Maintenance. 16.1 Landlord's Obligations. Landlord shall at all times and at its own expense clean, keep and maintain in good order, condition and repair the structural parts of the Building, which structural parts include only the foundation, subflooring, roof structure, and exterior walls, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or cause by Alterations made by Tenant or by Tenant's agents, employees or contractors, which shall be Tenant's responsibility. Landlord shall also maintain, repair and replace the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area and Tenant shall reimburse Landlord for the reasonable costs thereof, as provided in paragraph 16.3. At Landlord's option, Landlord shall have the right to require Tenant to maintain and repair the HVAC system for the Premises. In such case, Tenant shall cause the HVAC system for the Premises to be maintained in good condition at all times and Tenant shall obtain an HVAC system preventative maintenance contract with monthly service which shall be subject to the reasonable approval of Landlord and paid for by Tenant and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventative maintenance. If Tenant is performing the repair and maintenance of the HVAC system, Tenant shall have the benefit of all warranties available to Landlord regarding such equipment. Other than regularly scheduled maintenance of the Premises, it is a condition precedent to all obligations of Landlord to repair and maintain under this Paragraph 16.1 that Tenant shall have notified Landlord in writing of the need for such repairs or maintenance. 16.2 Tenant's Obligations. Tenant shall at all times and at its own expense, clean, keep and maintain in good, safe and sanitary order, condition and repair every part of the interior of the Premises which is not within Landlord's obligation pursuant to Paragraph 16.1. Tenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls, floors, ceilings, interior windows, store front, doors, entrances, plateglass, showcases, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Tenant shall also be responsible for all pest control within the Premises. All glass is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality. 16.3 Tenant to Pay Operating Expenses. Tenant shall pay, as Additional Rent, all reasonable costs and expenses as may be paid or incurred by Landlord in maintaining, operating and repairing the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area ("Operating Expenses"). The Operating Expenses may include, without limitation, the cost of labor, materials, supplies and services used or consumed in operating, maintaining, repairing and replacing the roof membrane, the HVAC system and the Outside Area, including landscaping and sprinkler systems, concrete walkways and paved parking areas; maintaining and repairing signs and site lighting; all utilities provided to the Outside Area; any alterations or improvements required by governmental authority to comply with laws effective after the Commencement Date; the cost of maintaining, repairing and replacing exterior windows and the non-structural components of the roof of the Building; and a management fee not to exceed three percent (3%) of the Monthly Rent. Operating Expenses shall not include costs paid directly by Tenant, principal and interest payments on loans secured by deeds of trust recorded against the Premises or the Property, real estate sales or leasing brokerage commissions, or executive salaries of off-site personnel employed by Landlord except for the charge (or pro rata share) of the property manager of the Property. 16.4 Monthly Payments. From and after the Commencement Date, Tenant shall pay to Landlord on the first day of each calendar month of the Term the estimated monthly Operating Expenses. Such estimated monthly Operating Expenses may be adjusted by Landlord at the end of any calendar quarter on the basis of Landlord's experience and reasonably anticipated costs. Any such adjustment shall be effective as of the calendar month next succeeding receipt by Tenant of written notice of the adjustment. Within one hundred twenty (120) days following the end of each calendar year Landlord shall furnish Tenant a statement of actual Operating Expenses (the "Actual Expenses") for the calendar year and the payments made by Tenant with respect to such period. If Tenant's payments for the Operating Expenses are less than the Actual Expenses, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such statement. If Tenant's payments exceed the Actual Expenses, Landlord shall either offset the excess against the Operating Expenses next thereafter to become due to Landlord, or shall refund the amount of the overpayments to Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments of the Operating Expenses as of the Commencement Date and expiration of the Term. 16.5 Operating Expense Audit. Within twelve (12) months of Tenant's receipt of Landlord's statement of the Actual Expenses, and upon thirty (30) days prior written notice to Landlord, Tenant shall have the right to examine, to copy and to have an audit conducted of all books and records at Landlord's office pertaining to the Actual Expenses for the period covered by Landlord's statement. If Tenant disputes the inclusion or amount of any item or items, Landlord and Tenant will use good faith efforts to settle such dispute within thirty (30) days after notice of such dispute. If the dispute is not settled within this time period, the dispute shall be resolved by a firm of real estate audit professionals ("Audit Professionals") mutually acceptable to Landlord and Tenant. Audit Professionals shall mean, for the purposes of this Paragraph 16.5, an independent firm of certified public accountants with experience in real estate expense reviews. If Landlord and Tenant cannot agree on the Audit Professionals within fifteen (15) days, the Landlord and Tenant shall each, within fifteen (15) days, select one independent firm of Audit Professionals, and the two firms of Audit Professionals shall together, within fifteen (15) days after the last of the two Audit Professionals has been selected, select a third firm of Audit Professionals, which third firm shall be the Audit Professionals to resolve the dispute. The Audit Professionals shall be entitled to review all records relating to the disputed items. The determination of the Audit Professionals shall be final and binding upon both Landlord and Tenant. The expenses of the Audit Professionals shall be borne by Tenant unless the audit discloses an overall overstatement of the Actual Expenses of five percent (5%) or more for the period being audited, in which case Landlord shall pay the audit expenses. If the Audit Professionals determine that Tenant has made an over-payment or under-payment of Operating Expenses then the procedures in Paragraph 16.4 shall be followed. 16.6 Waiver. Tenant waives the provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease. 16.7 Compliance with Government Regulations. Tenant shall, at its cost, comply with, including the making by Tenant of any Alteration to the Premises, all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including state, municipal, County and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of the Premises. 17. Liens. Tenant shall keep the Premises and the Property free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within twenty (20) days after written request by Landlord. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice reasonably deemed proper by Landlord. If Tenant fails to so remove any such lien within the prescribed twenty (20) day period, then Landlord may do so and Tenant shall reimburse Landlord upon demand. Such reimbursement shall include all sums incurred by Landlord including Landlord's reasonable attorneys' fees, with interest thereon at the Interest Rate. 18. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and Landlord's Agents to enter the Premises to inspect the same, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any reasonable time within two hundred seventy (270) days prior to the expiration of the Term to show the Premises to prospective tenants. Landlord shall also have the right to place ordinary "For Lease" signs on the Outside Area. The above rights of entry are subject to reasonable notice and security regulations of Tenant, including the requirement that Landlord or Landlord's Agents be accompanied by an employee of Tenant when entering the Premises, and to the requirement that Landlord shall at all times act in a manner to cause the least possible interference with Tenant's business. 19. Signs. Landlord shall provide space for Tenant's identification sign on an exterior monument sign to be constructed in the Outside Area. In addition, Tenant shall have the right to install a Tenant identification sign on the exterior of the Building, subject to Tenant's receipt of all necessary approvals from the City. All costs of the monument sign structure shall be paid for by Landlord; any costs associated with Tenant's monument sign lettering and/or any Building signage installed by Tenant shall be paid for by Tenant. Tenant shall have no other right to maintain Tenant identification signs in any other location in, on or about the Premises, the Building or the Outside Area and shall not display or erect any other Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The location, size, design, color and other physical aspects of Tenant's identification sign(s) shall be subject to the Landlord's written reasonable approval prior to installation, and any appropriate municipal or other governmental approvals. The cost of maintaining Tenant's identification signs shall be an Operating Expense. The cost of removal of the signs shall be Tenant's sole expense. If Tenant fails to remove any such signs upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. 20. Insurance. 20.1 Tenant's Indemnification. Except to the extent caused by the negligence or willful misconduct of Landlord, and subject to the provisions of Paragraph 21, Tenant hereby agrees to defend, indemnify and hold harmless Landlord and Landlord's Agents from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or in any way attributable to the use or occupancy of the Premises or any part thereof and adjacent areas by the Tenant, the acts or omissions of the Tenant, Tenant's agents, or any contractors brought onto the Premises by Tenant. Tenant agrees that the obligations assumed herein shall survive this Lease. 20.2 Landlord's Indemnification. Subject to the provisions of Paragraph 21, Landlord hereby agrees to defend, indemnify and hold harmless Tenant and Tenant's agents, directors, officers and employees from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or attributable to the negligence or willful misconduct of Landlord or any contractors brought onto the Premises by Landlord. Landlord agrees that the obligations assumed herein shall survive this Lease. 20.3 Tenant's Insurance. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers reasonably acceptable to Landlord which afford the following coverages: 20.3.1 Liability. Commercial general liability insurance in an amount not less than Two Million and no/100ths Dollars ($2,000,000.00) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, products liability, and fire damage legal (in an amount not less than Twenty-Five Thousand and no/100ths Dollars ($25,000.00)), naming Landlord and Landlord's Agents as additional insureds. 20.3.2 Personal Property. All risk or causes of loss - special form property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal Property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO All-Risk form. 20.4 All-Risk Insurance. During the Term Landlord shall maintain all risk or causes of loss - special form property insurance, including inflation endorsement, sprinkler leakage endorsement, at Landlord's option, earthquake and flood coverage, on the Building, excluding coverage of all Tenant's Personal Property located on or in the Premises, but including the Tenant Improvements. Such insurance shall also include insurance against loss of rents on an "All Risk" basis, including, at Landlord's option, earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement). Tenant shall reimburse Landlord monthly, as Additional Rent, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual premiums for such insurance, prorated for any partial month, or on such other periodic basis as Landlord shall elect. Landlord shall provide Tenant with appropriate documentation evidencing the premium costs for such insurance. If the insurance premiums are increased after the Commencement Date due to an increase in premium rates, an increase in the valuation of the Building or its replacement cost, Tenant shall pay such increase within ten (10) days of notice of such increase and receipt of appropriate documentation evidencing such increased insurance premiums. 20.5 Certificates. Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. The certificates shall expressly provide that the interest of Landlord therein shall not be affected by any breach of Tenant of any policy provision for which such certificates evidence coverage. All certificates shall expressly provide that no less than thirty (30) days' prior written notice shall be given Landlord in the event of cancellation of the coverages evidenced by such certificates. Landlord shall deliver to Tenant at the Commencement Date and thereafter at least thirty (30) days prior to the expiration of each such policy, certificates of insurance evidencing the coverages required under Paragraph 20.4 of this Lease. Such certificates shall expressly provide that not less than thirty (30) days prior written notice shall be given Tenant in the event of any cancellation of the coverage evidenced by such certificate. 20.6 Insurance Requirements. All insurance shall be in a form satisfactory to Landlord and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary and noncontributing with any other insurance available to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon shall be deposited with Landlord prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may, upon not less than ten (10) days' prior written notice to Tenant, order such insurance at Tenant's expense and Tenant shall reimburse Landlord. Such reimbursement shall include all sums incurred by Landlord, including Landlord's reasonable attorneys' fees and costs, with interest thereon at the Interest Rate. 20.7 Landlord's Disclaimer. Landlord and Landlord's Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Building, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface, or from any other cause whatsoever except to the extent any such loss or damage is caused by the negligence or willful misconduct of Landlord and such loss or damage is not covered by under any insurance Tenant is required to carry pursuant to Paragraph 20.3.2 of this Lease or any other insurance Tenant elects to carry. Landlord and Landlord's Agents shall not be liable for interference with the light, air, or any latent defect in the Premises. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. 21. Waiver of Subrogation. Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss or damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage, even if such damage may have been caused by the negligence of the other party, its agents or employees. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. 22. Damage or Destruction. 22.1 Partial Damage Insured. If the Premises are damaged by any casualty which is covered under the all-risk or causes of loss - special form insurance carried by Landlord pursuant to Paragraph 20.4, then Landlord shall restore such damage, provided insurance proceeds are available to pay at least ninety-five percent (95%) or more of the cost of restoration and provided such restoration can be completed within one hundred eighty (180) days after the commencement of the work in the reasonable opinion of a registered architect or engineer appointed by Landlord for such determination. In such event, this Lease shall continue in full force and effect, except that Tenant shall be entitled to a proportionate reduction of net Monthly Rent while such restoration takes place, such proportionate reduction to be based upon the extent to which the restoration efforts interfere with Tenant's use of the Premises. Any dispute between Landlord and Tenant as to the amount of any rent reduction hereunder shall be resolved by arbitration, and such arbitration shall comply with and be governed by the California Arbitration Act Sections 1280 through 1294.2 of the California Code of Civil Procedure. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If Tenant does not elect to terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.2 Partial Damage - Uninsured. If the Premises are damaged by a risk not covered by Landlord's insurance, or the proceeds of available insurance are less than ninety-five percent (95%) of the cost of restoration, or the restoration cannot be completed within one hundred eighty (180) days after the commencement of work, in the reasonable opinion of the registered architect or engineer appointed by Landlord for such determination, then Landlord shall have the option either to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the net Monthly Rent to be proportionately abated as provided in Paragraph 22.1; or (ii) give notice to Tenant at any time within thirty (30) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than sixty (60) nor more than ninety (90) days after giving such notice. If notice of termination is given, this Lease shall expire and all interest of Tenant in the Premises shall terminate on such date so specified in such notice and the Monthly Rent, reduced by any proportionate reduction based upon the extent, if any, to which such damage interfered with the use of the Premises by Tenant, shall be paid to the date of such termination; provided, however, that if Landlord elects to terminate this Lease due to an insufficiency in the insurance proceeds available to complete restoration of the Premises, Tenant shall have the right to contribute the amount of any shortfall in insurance proceeds and in such event Landlord shall restore the Premises. Tenant shall notify Landlord of Tenant's election within thirty (30) days after the date Landlord has notified Tenant of Landlord's election to terminate this Lease. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days after commencement of work, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If neither Landlord nor Tenant terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated by either party, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.3 Total Destruction. If the Premises are totally destroyed or the Premises cannot be reasonably restored under applicable laws and regulations or due to the presence of hazardous factors such as earthquake faults, chemical waste and similar dangers, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective the date of the damage. 22.4 Landlord's Obligations. Landlord shall not be required to repair any injury or damage by fire or other cause to, or to make any restoration or replacement of, any panelings, decorations, partitions, railings, floor coverings, or office fixtures which are Alterations or Personal Property installed in the Premises by Tenant or at the expense of Tenant. Tenant shall be required to restore or replace the same excluding those Tenant Improvements defined in the Work Letter Agreement attached hereto. Except for abatement of Monthly Rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration; nor shall Tenant have the right to terminate this Lease as the result of any statutory provision now or hereafter in effect pertaining to the damage and destruction of the Premises, except as expressly provided herein. 22.5 Damage Near End of Term. Anything herein to the contrary notwithstanding, if the Premises are destroyed or significantly damaged during the last twelve (12) months of the Term, unless the Term is extended pursuant to the provisions of Paragraph 40 of this Lease, then Landlord may cancel and terminate this Lease as of the date of the occurrence of such damage. If Landlord does not elects to so terminate this Lease, the repair of such damage shall be governed by the other provisions of this Paragraph 22. 23. Condemnation. If title to all of the Premises or so much thereof is taken or appropriated for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not, in Landlord's and Tenant's mutual reasonable judgment, result in the Premises being suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or Building or part thereof be taken, provided that if the parties disagree, the Lease shall not terminate and the issue as to whether the remaining Premises are suitable for Tenant's continued occupancy for the uses permitted by this Lease shall be submitted into arbitration and such arbitration shall comply and be governed by the California Arbitration Act, Sections 1280 through 1294.2 of the California Code of Civil Procedure. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. If any part of the Premises is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken. If the Premises is so partially taken the Rent and other sums payable hereunder shall be reduced in the same proportion that Tenant's use and occupancy of the Premises is reduced. If the parties disagree as to the suitability of the Premises for Tenant's continued occupancy or the amount of any applicable Rent reduction, the matter shall be resolved by arbitration. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof, except that Landlord shall pay to Tenant from any award received by Landlord an amount allocable to the value of the Tenant Improvements at the time of such award which shall be determined using standard accounting methods for depreciation. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its good will. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to any abatement of Rent except to the extent of interference with Tenant's use of the Premises; provided, however, that in any event Rent shall not be abated if Tenant is separately and directly compensated for such interference by the condemning authority. Any award made to Tenant by reason of such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this paragraph. 24. Assignment and Subletting. 24.1 Landlord's Consent. Tenant shall not enter into a Sublet without Landlord's prior written consent, which consent shall not be unreasonably withheld. Any attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and shall be deemed a material default of this Lease. Each Subtenant shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. 24.2 Information to be Furnished. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; and (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. 24.3 Landlord's Alternatives. At any time within fifteen (15) days after Landlord's receipt of the information specified in Paragraph 24.2, Landlord may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant; (ii) to refuse its consent to the Sublet; or (iii) to terminate this Lease. If Landlord consents to the Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 24.2. 24.4 Executed Counterpart. No Sublet shall be valid nor shall any Subtenant take possession of the Premises until an executed counterpart of the Sublet agreement has been delivered to Landlord. 24.5 Exempt Sublets. Notwithstanding the above, Landlord's prior written consent shall not be required for a Sublet to a subsidiary, affiliate or parent corporation of Tenant, a corporation or partnership into which Tenant merges or consolidates, or a purchaser of all or substantially all of the assets of Tenant, provided that Tenant gives Landlord prior written notice of the name of any such Subtenant and, in the event of an assignment (i) the assignee has a net worth, at the time of such assignment, that is equal to or greater than the net worth of Tenant immediately prior to such assignment, and (ii) the assignee assumes, in writing, for the benefit of Landlord all of Tenant's obligations under the Lease. For purposes of this Paragraph 24, the sale or other transfer of stock by Tenant shall not constitute a "change in ownership" requiring the prior written consent of Landlord unless Tenant is a closely held corporation (i.e., one whose stock is not publicly held and not traded through an exchange or over the counter), and the transfer, on a cumulative basis, is a transfer of twenty-five percent (25%) or more of the voting control of Tenant. 24.6 Sublet Profits. If the Rent received by Tenant from any Sublet exceeds the Rent payable by Tenant under this Lease, Tenant shall pay one-half (1/2) of such excess to Landlord monthly as Additional Rent after first deducting reasonable costs incurred by Tenant in connection with such Sublet for advertising, brokerage commissions, and attorneys' fees. 25. Default. 25.1 Tenant's Default. A default under this Lease by Tenant shall exist if any of the following events shall occur: 25.1.1 If Tenant fails to pay Rent or any other sum required to be paid hereunder within seven (7) days after written notice from Landlord; provided, however, that such notice shall be in lieu of, and not in addition to, any notice required pursuant to Section 1161 of the California Code of Civil Procedure regarding unlawful detainer actions; or 25.1.2 If Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord where such breach could reasonably be cured within such thirty (30) day period; provided, however, that where such failure could not reasonably be cured within the thirty (30) day period, that Tenant shall not be in default if it undertakes commercially reasonable measure to cure such non-performance within the thirty (30) day period and diligently thereafter prosecutes the same to completion; or 25.1.3 If Tenant assigns its assets for the benefit of its creditors; or 25.1.4 If a court shall make or enter any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days. 25.2 Remedies. Upon a default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: 25.2.1 Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due. 25.2.2 Landlord may terminate Tenant's right to possession of the Premises at any time by written notice in accordance with applicable laws, and upon such termination relet the Premises or any part thereof. No act by Landlord other than the giving of express written notice thereof to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount necessary which is to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs of expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 25.2.2(a) and 25.2.2(b) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 25.2.2(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 25.2.3 Landlord may, upon termination of this Lease in accordance with applicable laws, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 25.3 Landlord's Default. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter diligently prosecute the same to completion. 26. Subordination. This Lease is subject and subordinate to any ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Property and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease to be prior and superior thereto, within ten (10) days of written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver any and all reasonable documents or instruments which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, so long as Landlord obtains from the Holder of any such Encumbrance a non-disturbance agreement which provides that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust the Holder shall recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute any and all documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance so long as such documents contain non-disturbance provisions substantially in conformance with the foregoing. Notwithstanding anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Property at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 27. Notices. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally served or in lieu of personal service may be given by mail or by Federal Express or other reputable overnight courier service. If given by mail, such notice shall be deemed to have been given when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, registered or certified, and postage prepaid, addressed to the party to be served. If given by overnight courier service, such notice shall be deemed to be effective upon the next business day after deposit with the courier service. At the date of execution of this Lease, the addresses of Landlord and Tenant are as set forth in the first paragraph of this Lease. After the Commencement Date, all notices to Tenant shall be sent to the Premises with a copy to the address specified in the first paragraph of this Lease. Either party may change its address by giving notice of same in accordance with this paragraph. 28. Attorneys' Fees. If either party brings any action, legal proceeding or arbitration proceeding for damages for an alleged breach of any provision of this Lease, to recover rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. 29. Estoppel Certificates. Tenant shall, within ten (10) days after written request from Landlord, execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord: (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord, or, if there are uncured defaults on the part of Landlord, stating the nature of such uncured defaults, and (c) otherwise evidencing the status of the Lease, as may be required by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. 30. Tenant's Financial Statements. Tenant shall, within ten (10) days after Landlord's written request, deliver to Landlord the current financial statements of Tenant, and financial statements of the two (2) years prior to the current financial statements year, including a balance sheet and profit and loss statement for the most recent prior year, all prepared by or under the direction of a certified public accountant. Landlord shall keep such financial statements confidential and shall not disclose such financial statements to any third party, other than Landlord's members, lenders, prospective lenders and prospective purchasers, without Tenant's prior written consent. 31. Transfer of the Property by Landlord. In the event of any conveyance of the Property and assignment by Landlord of this Lease, Landlord shall be and is hereby entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, and Tenant agrees to attorn to such transferee/assignee. 32. Landlord's Right to Perform Tenant's Covenants. If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection therewith shall be due and payable by Tenant upon receipt of written demand by Landlord, together with interest thereon at the Interest Rate from the date Tenant receives Landlord's written demand to the date of payment by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Rent. 33. Tenant's Remedy. If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Property and out of Rent or other income from the Property received by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Property, and neither Landlord nor Landlord's Agents shall be liable for any deficiency. 34. Mortgagee Protection. If Landlord defaults under this Lease, Tenant will notify by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises, of whom Tenant has been notified in writing, and offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 35. Brokers. Tenant and Landlord warrant and represent that, other than the brokers listed in Paragraph 1.9 above, they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, and that they know of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Tenant and Landlord each agree to defend, indemnify and hold the other party and its Agents from and against any and all liabilities or expenses, including attorneys' fees and costs, arising out of or in connection with claims made by any other broker or individual for commissions or fees on the basis of the acts or omissions of the indemnifying party. 36. Acceptance. Delivery of this Lease, duly executed by Tenant, constitutes an offer to lease the Premises, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. 37. Recording. Neither party shall record this Lease. 38. Modifications for Lender. If, in connection with obtaining financing for the Building or any portion thereof, Landlord's lender shall request reasonable modification to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not adversely affect Tenant's rights hereunder. 39. Parking. Tenant shall have the right to use the Property's parking facilities upon terms and conditions as may from time to time be reasonably established by Landlord. Landlord may, at Landlord's election, establish cross-parking easements between the Property and any adjacent property owned by Landlord or an affiliate of Landlord, provided that such easements do not unreasonably interfere with Tenant's use of the Property. In no event, however, may Landlord establish any parking easements that would permit parking for adjacent properties upon which retail sales activities are conducted. 40. Options to Extend. 40.1 Option Period. Provided that Tenant is not in material default hereunder, either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the initial fifteen (15) year Term of this Lease for three (3) additional periods of five (5) years each (each, an "Option Period") on the same terms, covenants and conditions provided herein, except that upon such renewal the Monthly Rent due hereunder shall be determined pursuant to Paragraph 40.2. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least nine (9) months prior to the expiration of the initial Term of this Lease, or the prior Option Period, as applicable. 40.2 Option Period Rent. The Monthly Rent for each Option Period shall be determined as follows: 40.2.1 The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period in question based upon the then fair market rental value of the Premises as defined in Paragraph 40.2.2. If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option Period shall be the then current fair market rental value of the Premises as determined in accordance with Paragraph 40.2.3, subject to such periodic increases in Monthly Rent as are then customary, in both amount or percentage amounts and frequency, for leases similar to this Lease taking into consideration the same items considered in determining the then fair market rental value of the Premises. 40.2.2 The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Morgan Hill. In no event shall the then fair market monthly rental value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. 40.2.3 Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 40.2.1., each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full-time commercial appraisal experience in the area in which the Premises are located to appraise and set the Monthly Rent. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Monthly Rent. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the Monthly Rent. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the Monthly Rent. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then Presiding Judge of the Santa Clara County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Monthly Rent. If a majority of the appraisers are unable to set the Monthly Rent within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the Monthly Rent. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the Monthly Rent. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, then only the middle appraisal shall be used as the result of the appraisal. After the Monthly Rent has been set, the appraisers shall immediately notify the parties and the parties shall amend this Lease to set forth such amount. 41. Right of First Offer to Purchase. Provided that Tenant is not in material default of any provision of this Lease at the time of exercise, Tenant shall have the right of first offer to purchase the Property or any other property leased by Tenant from Landlord at Madrone Business Park, on the following terms and conditions. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, Landlord shall notify Tenant which of the foregoing properties Landlord is offering for sale (the "Offered Property") and the terms and conditions upon which Landlord would be willing to sell the Offered Property ("Landlord's Notice"). Tenant shall have thirty (30) days after receipt of Landlord's Notice to notify Landlord in writing of Tenant's election to purchase the Offered Property on the terms stated in Landlord's Notice. If Tenant notifies Landlord within such 30-day period of Tenant's desire to purchase the Offered Property on such terms, Landlord and Tenant shall enter into a purchase and sale agreement for the Offered Property on the terms and conditions stated in Landlord's Notice. If, however, Tenant fails to notify Landlord of Tenant's election to purchase the Offered Property within such 30-day period or, if Landlord and Tenant, through no fault of Landlord, fail to execute a purchase and sale agreement within thirty (30) days after the date of Tenant's notice to Landlord, Tenant shall be deemed to have waived its right to purchase the Offered Property and Landlord shall have the right thereafter to offer the Offered Property for sale and to sell the Offered Property to any third party on substantially the terms stated in Landlord's Notice without further notice to Tenant. This right of first offer to purchase is personal to Media Arts Group, Inc., its subsidiaries or successors and shall not be transferred or assigned to any third party. 42. Payment to Tenant Upon Sale of Property. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, and Tenant does not elect to purchase the Offered Property pursuant to Paragraph 41, then so long as Tenant is occupying the Property, upon close of escrow for the sale of the Offered Property Landlord shall pay to Tenant an amount equal to fifteen percent (15%) of the net sales proceeds for the Offered Property which are in excess of the base value of the Offered Property as of the date the Offered Property was completed and first occupied. For purposes of this provision, the "net sales proceeds" shall mean the gross sales price of the Offered Property less the costs incurred by Landlord in closing the sale of the Offered Property including, but not limited to, brokerage commissions, attorneys' fees, title insurance premiums, escrow fees, recording charges, prorations of real property taxes and assessments, survey fees (if paid by Landlord), and fees for environmental site assessments (if paid for by Landlord). The base value shall be determined by taking the annualized triple net rent for the Offered Property, reducing it by the operating reserves and vacancy calculated at seven percent of the triple net rent, then dividing the triple net rent after operating reserves and vacancy by .09 to establish a base value at a nine percent (9%) capitalization rate. The base value of the Property is hereby established as $9,553,000.00. The rights under this Paragraph 42 are personal to Media Arts Group, Inc., its subsidiaries or successors and shall not be transferred or assigned to any third party. 43. Option to Expand. 43.1 Expansion Option Period. Provided that Tenant is not, at the time of exercise, in material default of this Lease, Tenant shall have the option to lease the building to be constructed by Landlord on that certain parcel in Madrone Business Park known as Parcel O, consisting of approximately 3.39 acres (the "Expansion Building"), on the following terms and conditions. Tenant may exercise its option at any time prior to March 30, 2003 (the "Expansion Option Period"). Tenant shall exercise the option by delivery of written notice to Landlord prior to the expiration of the Expansion Option Period. If Tenant fails to exercise the option to lease the Expansion Building prior to the expiration of the Expansion Option Period, Tenant shall be deemed to have waived its right to lease the Expansion Building pursuant to the terms of this Paragraph 43 and thereafter Landlord shall be free to lease the Expansion Building to any third party on such terms as Landlord shall elect without further notice to Tenant. The expansion option granted to Tenant under this Paragraph 43 is personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 43.2 Rent for Expansion Building. If Tenant timely exercises its option to lease the Expansion Building, Landlord and Tenant shall enter into a lease for the Expansion Building on the same terms and conditions set forth herein, except that (i) Landlord shall provide an allowance for the design and construction of tenant improvements to the Expansion Building that is commensurate with the allowance provided under this Lease considering the size and proposed use of the Expansion Building; and (ii) the initial monthly rent for the Expansion Building shall be determined as follows. If Tenant exercises the option on or before March 30, 2002, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $10.00 per square foot. If Tenant exercises the option at any time from April 1, 2002 through March 30, 2003, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $12.00 per square foot. In addition, if Tenant exercises the option at any time after March 30, 2002, then Tenant shall be responsible for payment of the real property taxes and assessments allocable to Parcel O commencing April 1, 2002. 44. General. 44.1 Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. 44.2 Executed Copy. Any fully executed copy of this Lease shall be deemed an original for all purposes. 44.3 Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. 44.4 Separability. If one or more of the provisions contained herein, except for the payment of Rent, is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. 44.5 Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 44.6 Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. 44.7 Binding Effect. The covenants and agreement contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. 44.8 Waiver. The waiver by Landlord or Tenant of any breach of any term, condition or covenant, of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord or payment of Rent hereunder by Tenant shall not be deemed to be a waiver of any preceding breach at the time of acceptance or making of such payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing signed by Landlord or Tenant as applicable. 44.9 Entire Agreement. This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 44.10 Authority. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Tenant to deliver the same to Landlord within fourteen (14) days of Landlord's request therefor shall be deemed a default under this Lease. 44.11 Exhibits. All exhibits, amendments, riders and addenda attached hereto are hereby incorporated herein and made a part hereof. THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. TENANT Dated: December 20, 1999 Media Arts Group, Inc., a Delaware corporation By:/s/ Craig Fleming ---------------------------------- Its: President & CEO By: /s/ Timothy S. Guster ---------------------------------- Its: Sr. VP & Secretary LANDLORD Dated: January 18, 2000 TBI-Madrone I, LLC, a California limited liability company By Toeniskoetter & Breeding, Inc. Development, a California corporation, Managing Member By /s/ Charles Toeniskoetter ---------------------------------- Its President EX-10.40 4 EXHIBIT 10.40 STANDARD SINGLE-TENANT LEASE - TRIPLE NET 1960 The Alameda, San Jose, CA 95126 (408) 246-3691 THIS LEASE (the "Lease"), for reference purposes only dated December ----, 1999, is entered into by and between TBI-Mission West, LLC, a California limited liability company ("Landlord"), whose address is c/o Toeniskoetter & Breeding, Inc. Development, 1960 The Alameda, San Jose, California 95126 and Media Arts Group, Inc., a Delaware corporation ("Tenant"), whose address is 521 Charcot Avenue, San Jose, CA 95131. 1. Basic Lease Provisions. 1.1 Premises. Those premises consisting of approximately one hundred fifty-five thousand five hundred twenty (155,520) square feet located in the Building described in Paragraph 1.2 and more particularly shown on EXHIBIT A. 1.2 Building. That certain one-story building to be constructed on the Property, consisting of approximately one hundred fifty-five thousand five hundred twenty (155,520) square feet, and located on Lightpost Way in Morgan Hill, California. The Building is referred to sometimes as "Building 2." 1.3 Anticipated Commencement Date. April 1, 2001. 1.4 Term. Fifteen (15) years. 1.5 Use. General and administrative offices, assembly and light manufacturing. 1.6 Monthly Rent. $171,072.00/month, subject to adjustment as provided in Paragraph 5.2. 1.7 Security Deposit. None. 1.8 Property. The real property consisting of approximately 8.54 acres, located in the City of Morgan Hill ("City"), County of Santa Clara ("County"), California, and more particularly described on EXHIBIT B, together with the Building to be constructed thereon. 1.9 Brokers. Saratoga Investment Company. 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises. 3. Definitions. The following terms shall have the following meanings in this Lease: 3.1 Alterations. Any alterations, additions or improvements made in, on or about the Building by Tenant after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, drapery and carpentry installations. 3.2 CC&R's. Those certain covenants, conditions and restrictions for Madrone Business Park to be recorded in the Official Records of the Santa Clara County. Landlord shall provide Tenant with a copy of the CC&R's prior to the Commencement Date. 3.3 Commencement Date. The Commencement Date shall be the earlier occurring of the following: 3.3.1 Thirty (30) days from the date the City has issued an occupancy permit for the Premises, as evidenced by the City's completion of a final inspection and written approval of the Building Shell and Tenant Improvements as having been completed in accordance with the building permit issued for such improvements; or 3.3.2 Thirty (30) days from the date Tenant substantially commences occupancy of the Premises. Once the actual Commencement Date has been determined pursuant to the foregoing, the parties shall execute a Commencement Date Memorandum in the form attached hereto as EXHIBIT C. 3.4 HVAC. Heating, ventilating and air conditioning. 3.5 Interest Rate. Ten and one-half percent (10 1/2%) per annum, however, in no event to exceed the maximum rate of interest permitted by law. 3.6 Landlord's Agents. Landlord's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.7 Outside Area. All areas and facilities within the Property which are exclusive of the Building, including, without limitation, the parking areas, access and perimeter roads, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas and facilities designated by Landlord. Landlord shall at all times have exclusive control of the Outside Area and may at any reasonable time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant, and may reasonably change the configuration or location of the Outside Area with the prior written consent of Tenant, which consent shall not be unreasonably withheld. In exercising any such rights, Landlord shall use diligent efforts to minimize any disruption of Tenant's business. Landlord shall have the right to reconfigure the parking area and ingress to and egress from the parking area, and to modify the directional flow of traffic of the parking area at Landlord's sole expense. 3.8 Real Property Taxes. Any form of assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Property or any part thereof or the rent and other sums payable hereunder by Tenant, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Property or the Building or any part hereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in all or any part of the Property; or (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Property whether or not now customary or within the contemplation of the parties. 3.9 Rent. The net Monthly Rent plus the Additional Rent described in Paragraph 5.2. 3.10 Sublet. Any transfer, sublet, assignment, license or concession agreement, change of ownership, of this Lease or the Tenant's interest in the Lease or any portion thereof. 3.11 Subtenant. The person or entity with whom a Sublet agreement is proposed to be or is made. 3.12 Tenant Improvements. Those interior improvements to the Premises to be constructed by Landlord pursuant to EXHIBIT D. 3.13 Tenant's Agents. Tenant's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.14 Tenant's Personal Property. Tenant's trade fixtures, furniture, equipment and other personal property in the Premises. 4. Lease Term. 4.1 Term. The Term shall be fifteen (15) years, commencing on the Commencement Date, and ending fifteen (15) years thereafter, unless sooner terminated as provided herein. 4.2 Tenant Delays. If the Commencement Date has not occurred on or before the Anticipated Commencement Date set forth in Paragraph 1.3, due solely to the fault of Tenant, then notwithstanding any other provision hereof, Tenant shall pay one day's net Monthly Rent for each day of delay in completion of the Tenant Improvements beyond the Anticipated Commencement Date caused by Tenant's fault. Delays "due solely to the fault" of Tenant shall include those caused by: 4.2.1 Tenant's failure to furnish information to Landlord for the preparation of the Space Plan or Final Plans for the Tenant Improvements in accordance with EXHIBIT D; 4.2.2 Tenant's request for special materials, finishes or installations which are not readily available, provided, however, Landlord shall make a reasonable effort to notify Tenant of any delays concerning any special materials, finishes or installations of which Landlord has commercially reasonable knowledge; 4.2.3 Tenant's failure to reasonably approve the Space Plan for the Tenant Improvements in accordance with the time period set forth in EXHIBIT D; 4.2.4 Tenant's changes in the Space Plan or the Final Plans after their approval by Landlord; 4.2.5 Tenant's failure to complete any of its own improvement work to the extent Tenant delays completion by the City of its final inspection and approval of the Tenant Improvements described in EXHIBIT D; or 4.2.6 Interference with Landlord's work caused by Tenant or by Tenant's contractors or subcontractors. 4.3 Landlord Delays. If the Commencement Date is delayed for any reason other than delays caused by Tenant as defined in Paragraph 4.2 above, then there shall be an abatement of Rent covering the period between the Anticipated Commencement Date and the date when Landlord delivers possession of the Premises to Tenant with the Tenant Improvements substantially completed and all other terms and conditions of this Lease shall remain in full force and effect. If, however, the Commencement Date does not occur within six (6) months after the Anticipated Commencement Date for any reason other than delays caused by Tenant or delays caused by Force Majeure Conditions, as defined herein, then Tenant shall have the right to terminate this Lease by delivery of written notice to Landlord no later than the date which is seven (7) months from the Anticipated Commencement Date. If the Commencement Date is delayed due to inclement weather, strikes or other labor disturbances, material shortages, casualties, or other causes beyond Landlord's reasonable control ("Force Majeure Conditions"), then the date for substantial completion of the Tenant Improvements, or the period for reconstructing the Premises after any damage, destruction, or condemnation, as the case may be, shall be extended for the period of time reasonably attributable to the occurrence of such Force Majeure Condition. 4.4 Early Entry. Tenant shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing Tenant's Personal Property in the Premises. Such early entry shall be at Tenant's sole risk and subject to all the terms and provisions hereof, except for the payment of net Monthly Rent which shall commence on the Commencement Date. Landlord shall have the right to impose such additional conditions on Tenant's early entry as Landlord shall deem reasonably appropriate, and shall further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. 5. Rent. 5.1 Monthly Rent. Tenant shall pay to Landlord, in lawful money of the United States, commencing on the first day of the first month of the Term and continuing thereafter on the first (1st) day of each calendar month throughout the Term, net Monthly Rent in the amount set forth in Paragraph 1.6, subject to adjustment as provided in Paragraph 5.2. Net Monthly Rent shall be payable in advance, without abatement, deduction, claim, offset, prior notice or demand, except as otherwise specifically provided herein. The net Monthly Rent due for the first month of the Term shall be paid by Tenant upon execution of this Lease or secured by a letter of credit until the Commencement Date. 5.2 Adjustments to Monthly Rent. The Monthly Rent shall be adjusted as of the first day of the thirteen (13th) month of the Term and every twelve (12) months thereafter (each, an "Adjustment Date") by the percentage increase in the Consumer Price Index, All Urban Consumers, All Items, published by the U.S. Department of Labor, Bureau of Labor Statistics for the San Francisco-Oakland-San Jose Metropolitan Area (1982-84=100) (the "Index"). The Index published for the month immediately preceding each Adjustment Date shall be compared with the Index published for the month immediately preceding the prior Adjustment Date, or in case of the first Adjustment Date, the Index published for the month immediately preceding the Commencement Date, to determine the percentage increase in the Monthly Rent for the next twelve (12) months of the Term; provided, however, that in no event shall the Monthly Rent increase by less than three percent (3%) per annum nor more than eight percent (8%) per annum. If no Index is published for either of the months set forth above, the Index for the next preceding month shall be used. If the base of the Index is revised, the Index increases, if any, shall be calculated with a common base year. If the Index is discontinued or revised, such other governmental index with which it is replaced, with appropriate conversion factors, shall be the basis of the adjustment. 5.3 Development Cost Reductions Based on Financial Assistance from City. If the City of Morgan Hill or the Redevelopment Agency of Morgan Hill provides any financial assistance to Landlord that directly reduces Landlord's cost to develop the Property and/or any of the other properties leased by Tenant at Madrone Business Park, Landlord shall pay to Tenant the amount of such reduction in Landlord's cost in cash or its equivalent. 5.4 Additional Rent. This Lease is intended to be a triple net lease. All monies required to be paid by Tenant under this Lease, including, without limitation, Real Property Taxes pursuant to Paragraph 14, Operating Expenses pursuant to Paragraph 16, and insurance premiums pursuant to Paragraph 20, shall be deemed Additional Rent and shall be payable as of the Commencement Date. 6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. Therefore, notwithstanding the notice provision in Paragraph 25.1.1, if any installment of Rent or any other charge due from Tenant is not received by Landlord within five (5) days after the date such Rent or other charge is past due, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Notwithstanding the foregoing, Landlord agrees to waive the late charge for the first five times during the Term of this Lease that any installment of Rent or charge is late provided that (i) Tenant is not late more than once per year, and (ii) Tenant is not more than fifteen days late in the payment of the Rent or other charge due (i.e., Rent must be paid by the fifteenth day of the month). Initials: /s/ CT /s/ CF /s/ TSG - - ------------------------ -------------------------- Landlord Tenant 7. Security Deposit. None. 8. Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only and not a renewal hereof or any extension for any further term, and in such case, the net Monthly Rent shall be one hundred fifty percent (150%) of the net Monthly Rent payable during the last month of the Term and such month-to-month tenancy shall be subject to every other term, covenant and agreement of this Lease. 9. Condition of Premises. Within thirty (30) days after completion of the Tenant Improvements, Tenant shall conduct a walk-through inspection of the Premises with Landlord and complete a punch-list of items needing additional work by Landlord. Other than the items specified in the punch- list, by taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as improved with the Tenant Improvements in good, clean and completed condition and repair, subject to all applicable laws, codes and ordinances. The punch-list to be prepared by Tenant shall not include any damage to the Premises caused by Tenant's move-in, which damage shall be repaired or corrected by Tenant, at its expense. Tenant acknowledges that neither Landlord nor its Agents have agreed to undertake any Alterations or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. If Tenant fails to submit a punch-list to Landlord within such thirty (30) day period, it shall be deemed that there are no items needing additional work or repair. Landlord's contractor shall complete all reasonable punch-list items within thirty (30) days after the walk-through inspection or as soon as practicable thereafter. Upon completion of such punch-list items, Landlord shall so notify Tenant. Tenant shall approve such completed items in writing to Landlord. If Tenant fails to reasonably approve such items within fifteen (15) days of notice of completion by Landlord, such items shall be deemed approved by Tenant. 10. Use of the Premises. 10.1 Tenant's Use. Tenant shall use the Premises solely for the purposes specified in Paragraph 1.5 and shall not use the Premises for any other purpose without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant acknowledges that the Property is subject and this Lease is subordinate to the CC&R's. Throughout the Term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereof, including the payment by Tenant of any periodic or special dues, assessments, and owners' association fees against the Property. Tenant shall indemnify and hold Landlord and it Agents harmless from and against any liability, loss, expense, damage, attorneys' fees and costs arising out of or in connection with Tenant's failure to perform or comply with the CC&R's. 10.2 Compliance. Tenant shall not use the Premises or suffer or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of duly constituted public authorities now in force or which may hereafter be in force or the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupant of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided, if any. Tenant shall not store or permit to be stored or otherwise placed any other material of any nature whatsoever outside the Building without the prior written consent of Landlord, which shall not be unreasonably withheld. Tenant shall be permitted, however, to park company-owned vehicles and employee vehicles in the parking areas overnight and for short-term periods provided, however, that any vehicles which are larger than an automobile, mini-van or pick-up truck must be screened from view as provided in the CC&R's. 10.3 Hazardous Materials. Tenant, at its sole cost, shall comply with all laws relating to Tenant's storage, use and disposal of hazardous, toxic or radioactive matter, including those materials identified in 22 California Code of Regulations Sections 66261.1 et seq., as they may be amended from time to time (collectively "Hazardous Materials"). If Tenant does store, use or dispose of any Hazardous Materials in, on or about the Premises, other than office supplies and cleaning supplies typically used in administrative offices, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. Tenant shall be solely responsible for and shall defend, indemnify and hold Landlord harmless from and against any liabilities, penalties, damages, costs or expenses (including reasonable attorneys' fees), causes of action, claims and/or judgments arising out of or in connection with any storage, use or disposal of Hazardous Materials in, on or about the Premises or the Property by Tenant, its agents, employees, contractors or invitees. Tenant's obligations hereunder shall survive the termination of this Lease. Landlord represents and warrants, to the best of its actual knowledge, that as of the date of this Lease there are no Hazardous Materials on the Property and the Property is in compliance with all applicable laws, regulations, ordinances and requirements of any governmental agency relating to Hazardous Materials. 11. Quiet Enjoyment. Landlord represents that Landlord has the full right and authority to enter into this Lease and will, as of the Commencement Date, be the fee simple owner of the Property. Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. 12. Alterations. After the Commencement Date, Tenant shall not make or permit any Alterations in, on or about the Premises, except for nonstructural Alterations not exceeding Twenty-Five Thousand and no/100ths Dollars ($25,000.00) in cost during any twelve (12) month period, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and according to plans and specifications reasonably approved in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without the prior written consent of Landlord, make any (i) alterations to the exterior of the Building; (ii) alterations to and penetrations of the roof of the Building; or (iii) alterations visible from outside the Building to which Landlord may withhold Landlord's consent on wholly aesthetic grounds. All Alterations shall be installed at Tenant's sole expense, in compliance with all applicable laws and permit requirements by a licensed contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date, and shall not diminish the value of either the Building or the Premises. All Alterations made by Tenant shall be and become the property of Landlord upon installation and shall not be deemed Tenant's Personal Property; provided, however, that Landlord may, at its option, require that Tenant, at Tenant's expense, remove any or all Alterations installed by Tenant and return the Premises to their condition as of the Commencement Date of this Lease, normal wear and tear excepted and subject to the provisions of Paragraph 23. If Tenant removes any Alterations as required or permitted herein, Tenant shall repair any and all damage to the Premises caused by such removal and return the Premises to their condition as of the Commencement Date, normal wear and tear excepted and subject to the provisions of Paragraph 22. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any Alterations made by it to the Premises. The provisions of this Paragraph 12 shall not apply to the Tenant Improvements which shall be governed by the provisions set forth in the Work Letter Agreement attached as EXHIBIT D. 13. Surrender of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, normal wear and tear and fire or other casualty excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable and licensed service firm (if the HVAC system is maintained by Tenant during the Term of this Lease), and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 12, and all Tenant's Personal Property and repair any damage and perform any restoration work caused by such removal. If Tenant fails to remove such Alterations and Tenant's Personal Property, and such failure continues for ten (10) days after written notice from Landlord, then Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. 14. Real Property Taxes. 14.1 Payment by Tenant. Tenant shall pay to Landlord, as Additional Rent, the Real Property Taxes for the Property as set forth on the most current County assessor's tax statement. Tenant shall reimburse Landlord monthly, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual Real Property Taxes for the applicable fiscal year, prorated for any partial month. Upon Landlord's receipt of the Real Property Tax payment from Tenant, Landlord shall pay the Real Property Taxes to the County prior to delinquency. If any Real Property Taxes increase from time to time due to a new tax statement from the County assessor, Tenant shall pay such increase within thirty (30) days after receipt of a statement from Landlord. Assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges are to be included within the definition of Real Property Taxes for purposes of this Lease. 14.2 Taxes on Tenant Improvements and Personal Property. Notwithstanding any other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. 14.3 Proration. Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included at the commencement or expiration of the Term. 15. Utilities and Services. Tenant shall be responsible for and shall pay promptly all charges for water, gas, electricity, sewer, telephone, refuse pickup, janitorial service and all other utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except that resulting from the negligence or willful misconduct of Landlord. Landlord shall use diligent efforts to promptly correct any failure or interruption caused by the act or neglect of Landlord. 16. Repair and Maintenance. 16.1 Landlord's Obligations. Landlord shall at all times and at its own expense clean, keep and maintain in good order, condition and repair the structural parts of the Building, which structural parts include only the foundation, subflooring, roof structure, and exterior walls, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or cause by Alterations made by Tenant or by Tenant's agents, employees or contractors, which shall be Tenant's responsibility. Landlord shall also maintain, repair and replace the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area and Tenant shall reimburse Landlord for the reasonable costs thereof, as provided in paragraph 16.3. At Landlord's option, Landlord shall have the right to require Tenant to maintain and repair the HVAC system for the Premises. In such case, Tenant shall cause the HVAC system for the Premises to be maintained in good condition at all times and Tenant shall obtain an HVAC system preventative maintenance contract with monthly service which shall be subject to the reasonable approval of Landlord and paid for by Tenant and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventative maintenance. If Tenant is performing the repair and maintenance of the HVAC system, Tenant shall have the benefit of all warranties available to Landlord regarding such equipment. Other than regularly scheduled maintenance of the Premises, it is a condition precedent to all obligations of Landlord to repair and maintain under this Paragraph 16.1 that Tenant shall have notified Landlord in writing of the need for such repairs or maintenance. 16.2 Tenant's Obligations. Tenant shall at all times and at its own expense, clean, keep and maintain in good, safe and sanitary order, condition and repair every part of the interior of the Premises which is not within Landlord's obligation pursuant to Paragraph 16.1. Tenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls, floors, ceilings, interior windows, store front, doors, entrances, plateglass, showcases, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Tenant shall also be responsible for all pest control within the Premises. All glass is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality. 16.3 Tenant to Pay Operating Expenses. Tenant shall pay, as Additional Rent, all reasonable costs and expenses as may be paid or incurred by Landlord in maintaining, operating and repairing the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area ("Operating Expenses"). The Operating Expenses may include, without limitation, the cost of labor, materials, supplies and services used or consumed in operating, maintaining, repairing and replacing the roof membrane, the HVAC system and the Outside Area, including landscaping and sprinkler systems, concrete walkways and paved parking areas; maintaining and repairing signs and site lighting; all utilities provided to the Outside Area; any alterations or improvements required by governmental authority to comply with laws effective after the Commencement Date; the cost of maintaining, repairing and replacing exterior windows and the non- structural components of the roof of the Building; and a management fee not to exceed three percent (3%) of the Monthly Rent. Operating Expenses shall not include costs paid directly by Tenant, principal and interest payments on loans secured by deeds of trust recorded against the Premises or the Property, real estate sales or leasing brokerage commissions, or executive salaries of off-site personnel employed by Landlord except for the charge (or pro rata share) of the property manager of the Property. 16.4 Monthly Payments. From and after the Commencement Date, Tenant shall pay to Landlord on the first day of each calendar month of the Term the estimated monthly Operating Expenses. Such estimated monthly Operating Expenses may be adjusted by Landlord at the end of any calendar quarter on the basis of Landlord's experience and reasonably anticipated costs. Any such adjustment shall be effective as of the calendar month next succeeding receipt by Tenant of written notice of the adjustment. Within one hundred twenty (120) days following the end of each calendar year Landlord shall furnish Tenant a statement of actual Operating Expenses (the "Actual Expenses") for the calendar year and the payments made by Tenant with respect to such period. If Tenant's payments for the Operating Expenses are less than the Actual Expenses, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such statement. If Tenant's payments exceed the Actual Expenses, Landlord shall either offset the excess against the Operating Expenses next thereafter to become due to Landlord, or shall refund the amount of the overpayments to Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments of the Operating Expenses as of the Commencement Date and expiration of the Term. 16.5 Operating Expense Audit. Within twelve (12) months of Tenant's receipt of Landlord's statement of the Actual Expenses, and upon thirty (30) days prior written notice to Landlord, Tenant shall have the right to examine, to copy and to have an audit conducted of all books and records at Landlord's office pertaining to the Actual Expenses for the period covered by Landlord's statement. If Tenant disputes the inclusion or amount of any item or items, Landlord and Tenant will use good faith efforts to settle such dispute within thirty (30) days after notice of such dispute. If the dispute is not settled within this time period, the dispute shall be resolved by a firm of real estate audit professionals ("Audit Professionals") mutually acceptable to Landlord and Tenant. Audit Professionals shall mean, for the purposes of this Paragraph 16.5, an independent firm of certified public accountants with experience in real estate expense reviews. If Landlord and Tenant cannot agree on the Audit Professionals within fifteen (15) days, the Landlord and Tenant shall each, within fifteen (15) days, select one independent firm of Audit Professionals, and the two firms of Audit Professionals shall together, within fifteen (15) days after the last of the two Audit Professionals has been selected, select a third firm of Audit Professionals, which third firm shall be the Audit Professionals to resolve the dispute. The Audit Professionals shall be entitled to review all records relating to the disputed items. The determination of the Audit Professionals shall be final and binding upon both Landlord and Tenant. The expenses of the Audit Professionals shall be borne by Tenant unless the audit discloses an overall overstatement of the Actual Expenses of five percent (5%) or more for the period being audited, in which case Landlord shall pay the audit expenses. If the Audit Professionals determine that Tenant has made an over-payment or under-payment of Operating Expenses then the procedures in Paragraph 16.4 shall be followed. 16.6 Waiver. Tenant waives the provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease. 16.7 Compliance with Government Regulations. Tenant shall, at its cost, comply with, including the making by Tenant of any Alteration to the Premises, all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including state, municipal, County and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of the Premises. 17. Liens. Tenant shall keep the Premises and the Property free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within twenty (20) days after written request by Landlord. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice reasonably deemed proper by Landlord. If Tenant fails to so remove any such lien within the prescribed twenty (20) day period, then Landlord may do so and Tenant shall reimburse Landlord upon demand. Such reimbursement shall include all sums incurred by Landlord including Landlord's reasonable attorneys' fees, with interest thereon at the Interest Rate. 18. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and Landlord's Agents to enter the Premises to inspect the same, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any reasonable time within two hundred seventy (270) days prior to the expiration of the Term to show the Premises to prospective tenants. Landlord shall also have the right to place ordinary "For Lease" signs on the Outside Area. The above rights of entry are subject to reasonable security regulations of Tenant, including the requirement that Landlord or Landlord's Agents be accompanied by an employee of Tenant when entering the Premises, and to the requirement that Landlord shall at all times act in a manner to cause the least possible interference with Tenant's business. 19. Signs. Landlord shall provide space for Tenant's identification sign on an exterior monument sign to be constructed in the Outside Area. In addition, Tenant shall have the right to install a Tenant identification sign on the exterior of the Building, subject to Tenant's receipt of all necessary approvals from the City. All costs of the monument sign structure shall be paid for by Landlord; any costs associated with Tenant's monument sign lettering and/or any Building signage installed by Tenant shall be paid for by Tenant. Tenant shall have no other right to maintain Tenant identification signs in any other location in, on or about the Premises, the Building or the Outside Area and shall not display or erect any other Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The location, size, design, color and other physical aspects of Tenant's identification sign(s) shall be subject to the Landlord's written reasonable approval prior to installation, and any appropriate municipal or other governmental approvals. The cost of maintaining Tenant's identification signs shall be an Operating Expense. The cost of removal of the signs shall be Tenant's sole expense. If Tenant fails to remove any such signs upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. 20. Insurance. 20.1 Tenant's Indemnification. Except to the extent caused by the negligence or willful misconduct of Landlord, and subject to the provisions of Paragraph 21, Tenant hereby agrees to defend, indemnify and hold harmless Landlord and Landlord's Agents from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or in any way attributable to the use or occupancy of the Premises or any part thereof and adjacent areas by the Tenant, the acts or omissions of the Tenant, Tenant's agents, or any contractors brought onto the Premises by Tenant. Tenant agrees that the obligations assumed herein shall survive this Lease. 20.2 Landlord's Indemnification. Subject to the provisions of Paragraph 21, Landlord hereby agrees to defend, indemnify and hold harmless Tenant and Tenant's agents, directors, officers and employees from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or attributable to the negligence or willful misconduct of Landlord or any contractors brought onto the Premises by Landlord. Landlord agrees that the obligations assumed herein shall survive this Lease. 20.3 Tenant's Insurance. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers reasonably acceptable to Landlord which afford the following coverages: 20.3.1 Liability. Commercial general liability insurance in an amount not less than Two Million and no/100ths Dollars ($2,000,000.00) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, products liability, and fire damage legal (in an amount not less than Twenty-Five Thousand and no/100ths Dollars ($25,000.00)), naming Landlord and Landlord's Agents as additional insureds. 20.3.2 Personal Property. All risk or causes of loss - special form property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal Property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO All-Risk form. 20.4 All-Risk Insurance. During the Term Landlord shall maintain all risk or causes of loss - special form property insurance, including inflation endorsement, sprinkler leakage endorsement, at Landlord's option, earthquake and flood coverage, on the Building, excluding coverage of all Tenant's Personal Property located on or in the Premises, but including the Tenant Improvements. Such insurance shall also include insurance against loss of rents on an "All Risk" basis, including, at Landlord's option, earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement). Tenant shall reimburse Landlord monthly, as Additional Rent, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual premiums for such insurance, prorated for any partial month, or on such other periodic basis as Landlord shall elect. Landlord shall provide Tenant with appropriate documentation evidencing the premium costs for such insurance. If the insurance premiums are increased after the Commencement Date due to an increase in premium rates, an increase in the valuation of the Building or its replacement cost, Tenant shall pay such increase within ten (10) days of notice of such increase and receipt of appropriate documentation evidencing such increased insurance premiums. 20.5 Certificates. Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. The certificates shall expressly provide that the interest of Landlord therein shall not be affected by any breach of Tenant of any policy provision for which such certificates evidence coverage. All certificates shall expressly provide that no less than thirty (30) days' prior written notice shall be given Landlord in the event of cancellation of the coverages evidenced by such certificates. Landlord shall deliver to Tenant at the Commencement Date and thereafter at least thirty (30) days prior to the expiration of each such policy, certificates of insurance evidencing the coverages required under Pararaph 20.4 of this Lease. Such certificates shall expressly provide that not less than thirty (30) days prior written notice shall be given Tenant in the event of any cancellation of the coverage evidenced by such certificate. 20.6 Insurance Requirements. All insurance shall be in a form satisfactory to Landlord and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary and noncontributing with any other insurance available to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon shall be deposited with Landlord prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may, upon not less than ten (10) days' prior written notice to Tenant, order such insurance at Tenant's expense and Tenant shall reimburse Landlord. Such reimbursement shall include all sums incurred by Landlord, including Landlord's reasonable attorneys' fees and costs, with interest thereon at the Interest Rate. 20.7 Landlord's Disclaimer. Landlord and Landlord's Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Building, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface, or from any other cause whatsoever except to the extent any such loss or damage is caused by the negligence or willful misconduct of Landlord and such loss or damage is not covered by under any insurance Tenant is required to carry pursuant to Paragraph 20.3.2 of this Lease or any other insurance Tenant elects to carry. Landlord and Landlord's Agents shall not be liable for interference with the light, air, or any latent defect in the Premises. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. 21. Waiver of Subrogation. Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss or damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage, even if such damage may have been caused by the negligence of the other party, its agents or employees. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. 22. Damage or Destruction. 22.1 Partial Damage Insured. If the Premises are damaged by any casualty which is covered under the all-risk or causes of loss - special form insurance carried by Landlord pursuant to Paragraph 20.4, then Landlord shall restore such damage, provided insurance proceeds are available to pay at least ninety-five percent (95%) or more of the cost of restoration and provided such restoration can be completed within one hundred eighty (180) days after the commencement of the work in the reasonable opinion of a registered architect or engineer appointed by Landlord for such determination. In such event, this Lease shall continue in full force and effect, except that Tenant shall be entitled to a proportionate reduction of net Monthly Rent while such restoration takes place, such proportionate reduction to be based upon the extent to which the restoration efforts interfere with Tenant's use of the Premises. Any dispute between Landlord and Tenant as to the amount of any rent reduction hereunder shall be resolved by arbitration, and such arbitration shall comply with and be governed by the California Arbitration Act Sections 1280 through 1294.2 of the California Code of Civil Procedure. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If Tenant does not elect to terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.2 Partial Damage - Uninsured. If the Premises are damaged by a risk not covered by Landlord's insurance, or the proceeds of available insurance are less than ninety-five percent (95%) of the cost of restoration, or the restoration cannot be completed within one hundred eighty (180) days after the commencement of work, in the reasonable opinion of the registered architect or engineer appointed by Landlord for such determination, then Landlord shall have the option either to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the net Monthly Rent to be proportionately abated as provided in Paragraph 22.1; or (ii) give notice to Tenant at any time within thirty (30) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than sixty (60) nor more than ninety (90) days after giving such notice. If notice of termination is given, this Lease shall expire and all interest of Tenant in the Premises shall terminate on such date so specified in such notice and the Monthly Rent, reduced by any proportionate reduction based upon the extent, if any, to which such damage interfered with the use of the Premises by Tenant, shall be paid to the date of such termination; provided, however, that if Landlord elects to terminate this Lease due to an insufficiency in the insurance proceeds available to complete restoration of the Premises, Tenant shall have the right to contribute the amount of any shortfall in insurance proceeds and in such event Landlord shall restore the Premises. Tenant shall notify Landlord of Tenant's election within thirty (30) days after the date Landlord has notified Tenant of Landlord's election to terminate this Lease. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days after commencement of work, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If neither Landlord nor Tenant terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated by either party, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.3 Total Destruction. If the Premises are totally destroyed or the Premises cannot be reasonably restored under applicable laws and regulations or due to the presence of hazardous factors such as earthquake faults, chemical waste and similar dangers, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective the date of the damage. 22.4 Landlord's Obligations. Landlord shall not be required to repair any injury or damage by fire or other cause to, or to make any restoration or replacement of, any panelings, decorations, partitions, railings, floor coverings, or office fixtures which are Alterations or Personal Property installed in the Premises by Tenant or at the expense of Tenant. Tenant shall be required to restore or replace the same excluding those Tenant Improvements defined in the Work Letter Agreement attached hereto. Except for abatement of Monthly Rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration; nor shall Tenant have the right to terminate this Lease as the result of any statutory provision now or hereafter in effect pertaining to the damage and destruction of the Premises, except as expressly provided herein. 22.5 Damage Near End of Term. Anything herein to the contrary notwithstanding, if the Premises are destroyed or significantly damaged during the last twelve (12) months of the Term, unless the Term is extended pursuant to the provisions of Paragraph 40 of this Lease, then Landlord may cancel and terminate this Lease as of the date of the occurrence of such damage. If Landlord does not elects to so terminate this Lease, the repair of such damage shall be governed by the other provisions of this Paragraph 22. 23. Condemnation. If title to all of the Premises or so much thereof is taken or appropriated for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not, in Landlord's and Tenant's mutual reasonable judgment, result in the Premises being suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or Building or part thereof be taken, provided that if the parties disagree, the Lease shall not terminate and the issue as to whether the remaining Premises are suitable for Tenant's continued occupancy for the uses permitted by this Lease shall be submitted into arbitration and such arbitration shall comply and be governed by the California Arbitration Act, Sections 1280 through 1294.2 of the California Code of Civil Procedure. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. If any part of the Premises is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken. If the Premises is so partially taken the Rent and other sums payable hereunder shall be reduced in the same proportion that Tenant's use and occupancy of the Premises is reduced. If the parties disagree as to the suitability of the Premises for Tenant's continued occupancy or the amount of any applicable Rent reduction, the matter shall be resolved by arbitration. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof, except that Landlord shall pay to Tenant from any award received by Landlord an amount allocable to the value of the Tenant Improvements at the time of such award which shall be determined using standard accounting methods for depreciation. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its good will. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to any abatement of Rent except to the extent of interference with Tenant's use of the Premises; provided, however, that in any event Rent shall not be abated if Tenant is separately and directly compensated for such interference by the condemning authority. Any award made to Tenant by reason of such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this paragraph. 24. Assignment and Subletting. 24.1 Landlord's Consent. Tenant shall not enter into a Sublet without Landlord's prior written consent, which consent shall not be unreasonably withheld. Any attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and shall be deemed a material default of this Lease. Each Subtenant shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. 24.2 Information to be Furnished. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; and (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. 24.3 Landlord's Alternatives. At any time within fifteen (15) days after Landlord's receipt of the information specified in Paragraph 24.2, Landlord may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant; (ii) to refuse its consent to the Sublet; or (iii) to terminate this Lease. If Landlord consents to the Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 24.2. 24.4 Executed Counterpart. No Sublet shall be valid nor shall any Subtenant take possession of the Premises until an executed counterpart of the Sublet agreement has been delivered to Landlord. 24.5 Exempt Sublets. Notwithstanding the above, Landlord's prior written consent shall not be required for a Sublet to a subsidiary, affiliate or parent corporation of Tenant, a corporation or partnership into which Tenant merges or consolidates, or a purchaser of all or substantially all of the assets of Tenant, provided that Tenant gives Landlord prior written notice of the name of any such Subtenant and, in the event of an assignment (i) the assignee has a net worth, at the time of such assignment, that is equal to or greater than the net worth of Tenant immediately prior to such assignment, and (ii) the assignee assumes, in writing, for the benefit of Landlord all of Tenant's obligations under the Lease. 24.6 Sublet Profits. If the Rent received by Tenant from any Sublet exceeds the Rent payable by Tenant under this Lease, Tenant shall pay one- half (1/2) of such excess to Landlord monthly as Additional Rent after first deducting reasonable costs incurred by Tenant in connection with such Sublet for advertising, brokerage commissions, and attorneys' fees. 25. Default. 25.1 Tenant's Default. A default under this Lease by Tenant shall exist if any of the following events shall occur: 25.1.1 If Tenant fails to pay Rent or any other sum required to be paid hereunder within seven (7) days after written notice from Landlord; provided, however, that such notice shall be in lieu of, and not in addition to, any notice required pursuant to Section 1161 of the California Code of Civil Procedure regarding unlawful detainer actions; or 25.1.2 If Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord where such breach could reasonably be cured within such thirty (30) day period; provided, however, that where such failure could not reasonably be cured within the thirty (30) day period, that Tenant shall not be in default if it undertakes commercially reasonable measures to cure such non-performance within the thirty (30) day period and diligently thereafter prosecutes the same to completion; or 25.1.3 If Tenant assigns its assets for the benefit of its creditors; or 25.1.4 If a court shall make or enter any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days. 25.2 Remedies. Upon a default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: 25.2.1 Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due. 25.2.2 Landlord may terminate Tenant's right to possession of the Premises at any time by written notice in accordance with applicable laws, and upon such termination relet the Premises or any part thereof. No act by Landlord other than the giving of express written notice thereof to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount necessary which is to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs of expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 25.2.2(a) and 25.2.2(b) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 25.2.2(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 25.2.3 Landlord may, upon termination of this Lease in accordance with applicable laws, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 25.3 Landlord's Default. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter diligently prosecute the same to completion. 26. Subordination. This Lease is subject and subordinate to any ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Property and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease to be prior and superior thereto, within ten (10) days of written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver any and all reasonable documents or instruments which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, so long as Landlord obtains from the Holder of any such Encumbrance a non-disturbance agreement which provides that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust the Holder shall recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute any and all documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance so long as such documents contain non-disturbance provisions substantially in conformance with the foregoing. Notwithstanding anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Property at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 27. Notices. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally served or in lieu of personal service may be given by mail or by Federal Express or other reputable overnight courier service. If given by mail, such notice shall be deemed to have been given when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, registered or certified, and postage prepaid, addressed to the party to be served. If given by overnight courier service, such notice shall be deemed to be effective upon the next business day after deposit with the courier service. At the date of execution of this Lease, the addresses of Landlord and Tenant are as set forth in the first paragraph of this Lease. After the Commencement Date, all notices to Tenant shall be sent to the Premises with a copy to the address specified in the first paragraph of this Lease. Either party may change its address by giving notice of same in accordance with this paragraph. 28. Attorneys' Fees. If either party brings any action, legal proceeding or arbitration proceeding for damages for an alleged breach of any provision of this Lease, to recover rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. 29. Estoppel Certificates. Tenant shall, within ten (10) days after written request from Landlord, execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord: (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord, or, if there are uncured defaults on the part of Landlord, stating the nature of such uncured defaults, and (c) otherwise evidencing the status of the Lease, as may be required by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. 30. Tenant's Financial Statements. Tenant shall, within ten (10) days after Landlord's written request, deliver to Landlord the current financial statements of Tenant, and financial statements of the two (2) years prior to the current financial statements year, including a balance sheet and profit and loss statement for the most recent prior year, all prepared by or under the direction of a certified public accountant. Landlord shall keep such financial statements confidential and shall not disclose such financial statements to any third party, other than Landlord's members, lenders, prospective lenders and prospective purchasers, without Tenant's prior written consent. 31. Transfer of the Property by Landlord. In the event of any conveyance of the Property and assignment by Landlord of this Lease, Landlord shall be and is hereby entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, and Tenant agrees to attorn to such transferee. 32. Landlord's Right to Perform Tenant's Covenants. If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection therewith shall be due and payable by Tenant upon receipt of written demand by Landlord, together with interest thereon at the Interest Rate from the date Tenant receives Landlord's written demand to the date of payment by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Rent. 33. Tenant's Remedy. If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Property and out of Rent or other income from the Property received by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Property, and neither Landlord nor Landlord's Agents shall be liable for any deficiency. 34. Mortgagee Protection. If Landlord defaults under this Lease, Tenant will notify by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises, of whom Tenant has been notified in writing, and offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 35. Brokers. Tenant and Landlord warrant and represent that, other than the brokers listed in Paragraph 1.9 above, they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, and that they know of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Tenant and Landlord each agree to defend, indemnify and hold the other party and its Agents from and against any and all liabilities or expenses, including attorneys' fees and costs, arising out of or in connection with claims made by any other broker or individual for commissions or fees on the basis of the acts or omissions of the indemnifying party. 36. Acceptance. Delivery of this Lease, duly executed by Tenant, constitutes an offer to lease the Premises, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. 37. Recording. Neither party shall record this Lease. 38. Modifications for Lender. If, in connection with obtaining financing for the Building or any portion thereof, Landlord's lender shall request reasonable modification to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not adversely affect Tenant's rights hereunder. 39. Parking. Tenant shall have the right to use the Property's parking facilities upon terms and conditions as may from time to time be reasonably established by Landlord. Landlord may, at Landlord's election, establish cross-parking easements between the Property and any adjacent property owned by Landlord or an affiliate of Landlord, provided that such easements do not unreasonably interfere with Tenant's use of the Proeprty. In no event, however, may Landlord establish any parking easements that would permit parking for adjacent properties upon which retail sales activities are conducted. 40. Options to Extend. 40.1 Option Period. Provided that Tenant is not in material default hereunder, either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the initial fifteen (15) year Term of this Lease for three (3) additional periods of five (5) years each (each, an "Option Period") on the same terms, covenants and conditions provided herein, except that upon such renewal the Monthly Rent due hereunder shall be determined pursuant to Paragraph 40.2. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least nine (9) months prior to the expiration of the initial Term of this Lease, or the prior Option Period, as applicable. 40.2 Option Period Rent. The Monthly Rent for each Option Period shall be determined as follows: 40.2.1 The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period in question based upon the then fair market rental value of the Premises as defined in Paragraph 40.2.2. If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option Period shall be the then current fair market rental value of the Premises as determined in accordance with Paragraph 40.2.3, subject to such periodic increases in Monthly Rent as are then customary, in both amount or percentage amounts and frequency, for leases similar to this Lease taking into consideration the same items considered in determining the then fair market rental value of the Premises. 40.2.2 The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Morgan Hill. In no event shall the then fair market monthly rental value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. 40.2.3 Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 40.2.1., each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full-time commercial appraisal experience in the area in which the Premises are located to appraise and set the Monthly Rent. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Monthly Rent. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the Monthly Rent. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the Monthly Rent. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then Presiding Judge of the Santa Clara County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Monthly Rent. If a majority of the appraisers are unable to set the Monthly Rent within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the Monthly Rent. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the Monthly Rent. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, then only the middle appraisal shall be used as the result of the appraisal. After the Monthly Rent has been set, the appraisers shall immediately notify the parties and the parties shall amend this Lease to set forth such amount. 41. Option to Expand. 41.1 Expansion Option Period. Provided that Tenant is not, at the time of exercise, in material default of this Lease or the lease for that certain building in Madrone Business Park known as Building 3 Tenant shall have the option to lease the building to be constructed by Landlord on that certain parcel in Madrone Business Park known as Parcel M, consisting of approximately 2.68 acres (the "Expansion Building"), on the following terms and conditions. Tenant may exercise its option at any time prior to February 28, 2003 (the "Expansion Option Period"). Tenant shall exercise the option by delivery of written notice to Landlord prior to the expiration of the Expansion Option Period. If Tenant fails to exercise the option to lease the Expansion Building prior to the expiration of the Expansion Option Period, Tenant shall be deemed to have waived its right to lease the Expansion Building pursuant to the terms of this Paragraph 41 and thereafter Landlord shall be free to lease the Expansion Building to any third party on such terms as Landlord shall elect without further notice to Tenant. The expansion option granted to Tenant under this Paragraph 41 is personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 41.2 Rent for Expansion Building. If Tenant timely exercises its option to lease the Expansion Building, Landlord and Tenant shall enter into a lease for the Expansion Building on the same terms and conditions set forth herein, except that (i) Landlord shall provide an allowance for the design and construction of tenant improvements to the Expansion Building that is commensurate with the allowance provided under this Lease and the lease for Building 3 considering the size and proposed use of the Expansion Building; and (ii) the initial monthly rent for the Expansion Building shall be determined as follows. If Tenant exercises the option on or before February 28, 2002, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $9.00 per square foot. If Tenant exercises the option at any time from March 1, 2002 through February 28, 2003, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $10.00 per square foot. In addition, if Tenant exercises the option at any time after February 28, 2002, then Tenant shall be responsible for payment of the real property taxes and assessments allocable to Parcel M commencing March 1, 2002. 42. Right of First Offer to Purchase. Provided that Tenant is not in material default of any provision of this Lease at the time of exercise, Tenant shall have the right of first offer to purchase the Property, any other property leased by Tenant from Landlord at Madrone Business Park, and/or Parcel M (the "Expansion Parcel") on the following terms and conditions. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, or if at any time after February 28, 2003, Landlord elects to sell the Expansion Parcel, Landlord shall notify Tenant which of the foregoing properties Landlord is offering for sale (the "Offered Property") and the terms and conditions upon which Landlord would be willing to sell the Offered Property ("Landlord's Notice"). Tenant shall have thirty (30) days after receipt of Landlord's Notice to notify Landlord in writing of Tenant's election to purchase the Offered Property on the terms stated in Landlord's Notice. If Tenant notifies Landlord within such 30-day period of Tenant's desire to purchase the Offered Property on such terms, Landlord and Tenant shall enter into a purchase and sale agreement for the Offered Property on the terms and conditions stated in Landlord's Notice. If, however, Tenant fails to notify Landlord of Tenant's election to purchase the Offered Property within such 30-day period or, if Landlord and Tenant, through no fault of Landlord, fail to execute a purchase and sale agreement within thirty (30) days after the date of Tenant's notice to Landlord, Tenant shall be deemed to have waived its right to purchase the Offered Property and Landlord shall have the right thereafter to offer the Offered Property for sale and to sell the Offered Property to any third party on substantially the terms stated in Landlord's Notice without further notice to Tenant. This right of first offer to purchase is personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 43. Payment to Tenant Upon Sale of Property. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, and Tenant does not elect to purchase the Offered Property pursuant to Paragraph 42, then so long as Tenant is occupying the Property, upon close of escrow for the sale of the Offered Property Landlord shall pay to Tenant an amount equal to fifteen percent (15%) of the net sales proceeds for the Offered Property which are in excess of the base value of the Offered Property as of the date the Offered Property was completed and first occupied. For purposes of this provision, the "net sales proceeds" shall mean the gross sales price of the Offered Property less the costs incurred by Landlord in closing the sale of the Offered Property including, but not limited to, brokerage commissions, attorneys' fees, title insurance premiums, escrow fees, recording charges, prorations of real property taxes and assessments, survey fees (if paid by Landlord), and fees for environmental site assessments (if paid for by Landlord). The base value shall be determined by taking the annualized triple net rent for the Offered Property, reducing it by the operating reserves and vacancy calculated at seven percent of the triple net rent, then dividing the triple net rent after operating reserves and vacancy by .09 to establish a base value at a nine percent (9%) capitalization rate. The base value of the Property is hereby established as $21,213,000.00. The rights under this Paragraph 43 are personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 44. General. 44.1 Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. 44.2 Executed Copy. Any fully executed copy of this Lease shall be deemed an original for all purposes. 44.3 Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. 44.4 Separability. If one or more of the provisions contained herein, except for the payment of Rent, is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. 44.5 Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 44.6 Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. 44.7 Binding Effect. The covenants and agreement contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. 44.8 Waiver. The waiver by Landlord or Tenant of any breach of any term, condition or covenant, of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord or payment of Rent hereunder by Tenant shall not be deemed to be a waiver of any preceding breach at the time of acceptance or making of such payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing signed by Landlord or Tenant as applicable. 44.9 Entire Agreement. This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 44.10 Authority. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Tenant to deliver the same to Landlord within fourteen (14) days of Landlord's request therefor shall be deemed a default under this Lease. 44.11 Exhibits. All exhibits, amendments, riders and addenda attached hereto are hereby incorporated herein and made a part hereof. THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. TENANT Dated: December 20, 1999 Media Arts Group, Inc., a Delaware corporation By: /s/ Craig Fleming ----------------------------- Its: President & CEO By: /s/ Timothy S. Guster ----------------------------- Its: Sr. VP & Secretary LANDLORD Dated: January 18, 2000 TBI-Mission West, LLC, a California limited liability company By Toeniskoetter & Breeding, Inc. Development, a California corporation, Managing Member By /s/ Charles Toeniskoetter ----------------------------- Its President EX-10.41 5 EXHIBIT 10.41 Exhibit 10.41 STANDARD SINGLE-TENANT LEASE - TRIPLE NET 1960 The Alameda, San Jose, CA 95126 (408) 246-3691 THIS LEASE (the "Lease"), for reference purposes only dated December __, 1999, is entered into by and between TBI - Mission West, LLC, a California limited liability company ("Landlord"), whose address is c/o Toeniskoetter & Breeding, Inc. Development, 1960 The Alameda, San Jose, California 95126 and Media Arts Group, Inc., a Delaware corporation ("Tenant"), whose address is 521 Charcot Avenue, San Jose, CA 95131. 1. Basic Lease Provisions. 1.1 Premises. Those premises consisting of approximately fifty-six thousand five hundred forty-eight (56,548) square feet located in the Building described in Paragraph 1.2 and more particularly shown on EXHIBIT A. 1.2 Building. That certain one-story building to be constructed on the Property, consisting of approximately fifty-six thousand five hundred forty-eight (56,548) square feet, and located on Madrone Parkway in Morgan Hill, California. The Building is referred to sometimes as "Building 3." 1.3 Anticipated Commencement Date. April 1, 2001. 1.4 Term. Fifteen (15) years. 1.5 Use. Assembly, light manufacturing and distribution. 1.6 Monthly Rent. $42,900.00/month, subject to adjustment as provided in Paragraph 5.2. 1.7 Security Deposit. None. 1.8 Property. The real property consisting of approximately 4.11 acres, located in the City of Morgan Hill ("City"), County of Santa Clara ("County"), California, and more particularly described on EXHIBIT B, together with the Building to be constructed thereon. 1.9 Brokers. Saratoga Investment Company. 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises. 3. Definitions. The following terms shall have the following meanings in this Lease: 3.1 Alterations. Any alterations, additions or improvements made in, on or about the Building by Tenant after the Commencement Date, including, but not limited to, lighting, heating, ventilating, air conditioning, electrical, drapery and carpentry installations. 3.2 CC&R's. Those certain covenants, conditions and restrictions for Madrone Business Park to be recorded in the Official Records of the Santa Clara County. Landlord shall provide Tenant with a copy of the CC&R's prior to the Commencement Date. 3.3 Commencement Date. The Commencement Date shall be the earlier occurring of the following: 3.3.1 Thirty (30) days from the date the City has issued an occupancy permit for the Premises, as evidenced by the City's completion of a final inspection and written approval of the Building Shell and Tenant Improvements as having been completed in accordance with the building permit issued for such improvements; or 3.3.2 Thirty (30) days from the date Tenant substantially commences occupancy of the Premises. Once the actual Commencement Date has been determined pursuant to the foregoing, the parties shall execute a Commencement Date Memorandum in the form attached hereto as EXHIBIT C. 3.4 HVAC. Heating, ventilating and air conditioning. 3.5 Interest Rate. Ten and one-half percent (10 1/2%) per annum, however, in no event to exceed the maximum rate of interest permitted by law. 3.6 Landlord's Agents. Landlord's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.7 Outside Area. All areas and facilities within the Property which are exclusive of the Building, including, without limitation, the parking areas, access and perimeter roads, sidewalks, landscaped areas, service areas, trash disposal facilities, and similar areas and facilities designated by Landlord. Landlord shall at all times have exclusive control of the Outside Area and may at any reasonable time temporarily close any part thereof, exclude and restrain anyone from any part thereof, except the bona fide customers, employees and invitees of Tenant, and may reasonably change the configuration or location of the Outside Area with the prior written consent of Tenant, which consent shall not be unreasonably withheld. In exercising any such rights, Landlord shall use diligent efforts to minimize any disruption of Tenant's business. Landlord shall have the right to reconfigure the parking area and ingress to and egress from the parking area, and to modify the directional flow of traffic of the parking area at Landlord's sole expense. 3.8 Real Property Taxes. Any form of assessment, license, fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (i) determined by the area of the Property or any part thereof or the rent and other sums payable hereunder by Tenant, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Property or the Building or any part hereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in all or any part of the Property; or (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Property whether or not now customary or within the contemplation of the parties. 3.9 Rent. The net Monthly Rent plus the Additional Rent described in Paragraph 5.2. 3.10 Sublet. Any transfer, sublet, assignment, license agreement, change of ownership, of this Lease or the Tenant's interest in the Lease or any portion thereof. 3.11 Subtenant. The person or entity with whom a Sublet agreement is proposed to be or is made. 3.12 Tenant Improvements. Those interior improvements to the Premises to be constructed by Landlord pursuant to EXHIBIT D. 3.13 Tenant's Agents. Tenant's authorized agents, partners, subsidiaries, directors, officers, and employees. 3.14 Tenant's Personal Property. Tenant's trade fixtures, furniture, equipment and other personal property in the Premises. 4. Lease Term. 4.1 Term. The Term shall be fifteen (15) years, commencing on the Commencement Date, and ending fifteen (15) years thereafter, unless sooner terminated as provided herein. 4.2 Tenant Delays. If the Commencement Date has not occurred on or before the Anticipated Commencement Date set forth in Paragraph 1.3, due solely to the fault of Tenant, then notwithstanding any other provision hereof, Tenant shall pay one day's net Monthly Rent for each day of delay in completion of the Tenant Improvements beyond the Anticipated Commencement Date caused by Tenant's fault. Delays "due solely to the fault" of Tenant shall include those caused by: 4.2.1 Tenant's failure to furnish information to Landlord for the preparation of the Space Plan or Final Plans for the Tenant Improvements in accordance with EXHIBIT D; 4.2.2 Tenant's request for special materials, finishes or installations which are not readily available, provided, however, Landlord shall make a reasonable effort to notify Tenant of any delays concerning any special materials, finishes or installations of which Landlord has commercially reasonable knowledge; 4.2.3 Tenant's failure to reasonably approve the Space Plan for the Tenant Improvements in accordance with the time period set forth in EXHIBIT D; 4.2.4 Tenant's changes in the Space Plan or the Final Plans after their approval by Landlord; 4.2.5 Tenant's failure to complete any of its own improvement work to the extent Tenant delays completion by the City of its final inspection and approval of the Tenant Improvements described in EXHIBIT D; or 4.2.6 Interference with Landlord's work caused by Tenant or by Tenant's contractors or subcontractors. 4.3 Landlord Delays. If the Commencement Date is delayed for any reason other than delays caused by Tenant as defined in Paragraph 4.2 above, then there shall be an abatement of Rent covering the period between the Anticipated Commencement Date and the date when Landlord delivers possession of the Premises to Tenant with the Tenant Improvements substantially completed and all other terms and conditions of this Lease shall remain in full force and effect. If, however, the Commencement Date does not occur within six (6) months after the Anticipated Commencement Date for any reason other than delays caused by Tenant or delays caused by Force Majeure Conditions, as defined herein, then Tenant shall have the right to terminate this Lease by delivery of written notice to Landlord no later than the date which is seven (7) months after the Anticipated Commencement Date. If the Commencement Date is delayed due to inclement weather, strikes or other labor disturbances, material shortages, casualties, or other causes beyond Landlord's reasonable control ("Force Majeure Conditions"), then the date for substantial completion of the Tenant Improvements, or the period for reconstructing the Premises after any damage, destruction, or condemnation, as the case may be, shall be extended for the period of time reasonably attributable to the occurrence of such Force Majeure Condition. 4.4 Early Entry. Tenant shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing Tenant's Personal Property in the Premises. Such early entry shall be at Tenant's sole risk and subject to all the terms and provisions hereof, except for the payment of net Monthly Rent which shall commence on the Commencement Date. Landlord shall have the right to impose such additional conditions on Tenant's early entry as Landlord shall deem reasonably appropriate, and shall further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. 5. Rent. 5.1 Monthly Rent. Tenant shall pay to Landlord, in lawful money of the United States, commencing on the first day of the first month of the Term and continuing thereafter on the first (1st) day of each calendar month throughout the Term, net Monthly Rent in the amount set forth in Paragraph 1.6, subject to adjustment as provided in Paragraph 5.2. Net Monthly Rent shall be payable in advance, without abatement, deduction, claim, offset, prior notice or demand, except as otherwise specifically provided herein. The net Monthly Rent due for the first month of the Term shall be paid by Tenant upon execution of this Lease or secured by a letter of credit until the Commencement Date. 5.2 Adjustments to Monthly Rent. The Monthly Rent shall be adjusted as of the first day of the thirteen (13th) month of the term and every twelve (12) months thereafter (each, an "Adjustment Date") by the percentage increase in the Consumer Price Index, All Urban Consumers, All Items, published by the U.S. Department of Labor, Bureau of Labor Statistics for the San Francisco-Oakland-San Jose Metropolitan Area (1982-84=100) (the "Index"). The Index published for the month immediately preceding each Adjustment Date shall be compared with the Index published for the month immediately preceding the prior Adjustment Date, or in case of the first Adjustment Date, the Index published for the month immediately preceding the Commencement Date, to determine the percentage increase in the Monthly Rent for the next twelve (12) months of the term; provided, however, that in no event shall the Monthly Rent increase by less than three percent (3%) per annum nor more than eight percent (8%) per annum. If no Index is published for either of the months set forth above, the Index for the next preceding month shall be used. If the base of the Index is revised, the Index increases, if any, shall be calculated with a common base year. If the Index is discontinued or revised, such other governmental index with which it is replaced, with appropriate conversion factors, shall be the basis of the adjustment. 5.3 Development Cost Reductions Based on Financial Assistance from City. If the City of Morgan Hill or the Redevelopment Agency of Morgan Hill provides any financial assistance to Landlord that directly reduces Landlord's cost to develop the Property and/or any of the other properties leased by Tenant at Madrone Business Park, Landlord shall pay to Tenant the amount of such reduction in Landlord's cost in cash or its equivalent. 5.4 Additional Rent. This Lease is intended to be a triple net lease. All monies required to be paid by Tenant under this Lease, including, without limitation, Real Property Taxes pursuant to Paragraph 14, Operating Expenses pursuant to Paragraph 16, and insurance premiums pursuant to Paragraph 20, shall be deemed Additional Rent and shall be payable as of the Commencement Date. 6. Late Payment Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent and other charges provided for under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult or impracticable to fix. Therefore, notwithstanding the notice provision in Paragraph 25.1.1, if any installment of Rent or any other charge due from Tenant is not received by Landlord within five (5) days after the date such Rent or other charge is past due, Tenant shall pay to Landlord an additional sum equal to five percent (5%) of the amount overdue as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. Notwithstanding the foregoing, Landlord agrees to waive the late charge for the first five times during the Term of this Lease that any installment of Rent or charge is late provided that (i) Tenant is not late more than once per year, and (ii) Tenant is not more than fifteen days late in the payment of the Rent or other charge due (i.e., Rent must be paid by the fifteenth day of the month). Initials: /s/ CT /s/ CF /s/ TSG - - ------------------------ ------------------------ Landlord Tenant 7. Security Deposit. None. 8. Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only and not a renewal hereof or any extension for any further term, and in such case, the net Monthly Rent shall be one hundred fifty percent (150%) of the net Monthly Rent payable during the last month of the Term and such month-to-month tenancy shall be subject to every other term, covenant and agreement of this Lease. 9. Condition of Premises. Within thirty (30) days after completion of the Tenant Improvements, Tenant shall conduct a walk-through inspection of the Premises with Landlord and complete a punch-list of items needing additional work by Landlord. Other than the items specified in the punch- list, by taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as improved with the Tenant Improvements in good, clean and completed condition and repair, subject to all applicable laws, codes and ordinances. The punch-list to be prepared by Tenant shall not include any damage to the Premises caused by Tenant's move-in, which damage shall be repaired or corrected by Tenant, at its expense. Tenant acknowledges that neither Landlord nor its Agents have agreed to undertake any Alterations or construct any Tenant Improvements to the Premises except as expressly provided in this Lease. If Tenant fails to submit a punch-list to Landlord within such thirty (30) day period, it shall be deemed that there are no items needing additional work or repair. Landlord's contractor shall complete all reasonable punch-list items within thirty (30) days after the walk-through inspection or as soon as practicable thereafter. Upon completion of such punch-list items, Landlord shall so notify Tenant. Tenant shall approve such completed items in writing to Landlord. If Tenant fails to reasonably approve such items within fifteen (15) days of notice of completion by Landlord, such items shall be deemed approved by Tenant. 10. Use of the Premises. 10.1 Tenant's Use. Tenant shall use the Premises solely for the purposes specified in Paragraph 1.5 and shall not use the Premises for any other purpose without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant acknowledges that the Property is subject and this Lease is subordinate to the CC&R's. Throughout the Term, Tenant shall faithfully and timely perform and comply with the CC&R's and any modification or amendments thereof, including the payment by Tenant of any periodic or special dues, assessments, and owners' association fees against the Property. Tenant shall indemnify and hold Landlord and it Agents harmless from and against any liability, loss, expense, damage, attorneys' fees and costs arising out of or in connection with Tenant's failure to perform or comply with the CC&R's. 10.2 Compliance. Tenant shall not use the Premises or suffer or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law, rule, regulation or requirement of duly constituted public authorities now in force or which may hereafter be in force or the requirements of the Board of Fire Underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Tenant shall not commit any public or private nuisance or any other act or thing which might or would disturb the quiet enjoyment of any other tenant of Landlord or any occupant of nearby property. Tenant shall place no loads upon the floors, walls or ceilings in excess of the maximum designed load determined by Landlord or which endanger the structure; nor place any harmful liquids in the drainage systems; nor dump or store waste materials or refuse or allow such to remain outside the Building proper, except in the enclosed trash areas provided, if any. Tenant shall not store or permit to be stored or otherwise placed any other material of any nature whatsoever outside the Building without the prior written consent of Landlord, which shall not be unreasonably withheld. Tenant shall be permitted, however, to park company-owned vehicles and employee vehicles in the parking areas overnight and for short-term periods provided, however, that any vehicles which are larger than an automobile, mini-van or pick-up truck must be screened from view as provided in the CC&R's. 10.3 Hazardous Materials. Tenant, at its sole cost, shall comply with all laws relating to Tenant's storage, use and disposal of hazardous, toxic or radioactive matter, including those materials identified in 22 California Code of Regulations Sections 66261.1 et seq., as they may be amended from time to time (collectively "Hazardous Materials"). If Tenant does store, use or dispose of any Hazardous Materials in, on or about the Premises, other than office supplies and cleaning supplies typically used in administrative offices, Tenant shall notify Landlord in writing at least ten (10) days prior to their first appearance on the Premises. Tenant shall be solely responsible for and shall defend, indemnify and hold Landlord harmless from and against any liabilities, penalties, damages, costs or expenses (including reasonable attorneys' fees), causes of action, claims and/or judgments arising out of or in connection with any storage, use or disposal of Hazardous Materials in, on or about the Premises or the Property by Tenant, its agents, employees, contractors or invitees. Tenant's obligations hereunder shall survive the termination of this Lease. Landlord represents and warrants, to the best of its actual knowledge, that as of the date of this Lease there are no Hazardous Materials on the Property and the Property is in compliance with all applicable laws, regulations, ordinances and requirements of any governmental agency relating to Hazardous Materials. 11. Quiet Enjoyment. Landlord represents that Landlord has the full right and authority to enter into this Lease and will, as of the Commencement Date, be the fee simple owner of the Property. Landlord covenants that Tenant, upon performing the terms, conditions and covenants of this Lease, shall have quiet and peaceful possession of the Premises as against any person claiming the same by, through or under Landlord. 12. Alterations. After the Commencement Date, Tenant shall not make or permit any Alterations in, on or about the Premises, except for nonstructural Alterations not exceeding Twenty-Five Thousand and no/100ths Dollars ($25,000.00) in cost during any twelve (12) month period, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and according to plans and specifications reasonably approved in writing by Landlord. Notwithstanding the foregoing, Tenant shall not, without the prior written consent of Landlord, make any (i) alterations to the exterior of the Building; (ii) alterations to and penetrations of the roof of the Building; or (iii) alterations visible from outside the Building to which Landlord may withhold Landlord's consent on wholly aesthetic grounds. All Alterations shall be installed at Tenant's sole expense, in compliance with all applicable laws and permit requirements by a licensed contractor, shall be done in a good and workmanlike manner conforming in quality and design with the Premises existing as of the Commencement Date, and shall not diminish the value of either the Building or the Premises. All Alterations made by Tenant shall be and become the property of Landlord upon installation and shall not be deemed Tenant's Personal Property; provided, however, that Landlord may, at its option, require that Tenant, at Tenant's expense, remove any or all Alterations installed by Tenant and return the Premises to their condition as of the Commencement Date of this Lease, normal wear and tear excepted and subject to the provisions of Paragraph 23. If Tenant removes any Alterations as required or permitted herein, Tenant shall repair any and all damage to the Premises caused by such removal and return the Premises to their condition as of the Commencement Date, normal wear and tear excepted and subject to the provisions of Paragraph 22. Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the maintenance and repair of any Alterations made by it to the Premises. The provisions of this Paragraph 12 shall not apply to the Tenant Improvements which shall be governed by the provisions set forth in the Work Letter Agreement attached as EXHIBIT D. 13. Surrender of the Premises. Upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its condition existing as of the Commencement Date, normal wear and tear and fire or other casualty excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable and licensed service firm (if the HVAC system is maintained by Tenant during the Term of this Lease), and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's Alterations required to be removed pursuant to Paragraph 12, and all Tenant's Personal Property and repair any damage and perform any restoration work caused by such removal. If Tenant fails to remove such Alterations and Tenant's Personal Property, and such failure continues for ten (10) days after written notice from Landlord, then Landlord may retain such property and all rights of Tenant with respect to it shall cease, or Landlord may place all or any portion of such property in public storage for Tenant's account. Tenant shall be liable to Landlord for costs of removal of any such Alterations and Tenant's Personal Property and storage and transportation costs of same, and the cost of repairing and restoring the Premises, together with interest at the Interest Rate from the date of expenditure by Landlord. 14. Real Property Taxes. 14.1 Payment by Tenant. Tenant shall pay to Landlord, as Additional Rent, the Real Property Taxes for the Property as set forth on the most current County assessor's tax statement. Tenant shall reimburse Landlord monthly, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual Real Property Taxes for the applicable fiscal year, prorated for any partial month. Upon Landlord's receipt of the Real Property Tax payment from Tenant, Landlord shall pay the Real Property Taxes to the County prior to delinquency. If any Real Property Taxes increase from time to time due to a new tax statement from the County assessor, Tenant shall pay such increase within thirty (30) days after receipt of a statement from Landlord. Assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges are to be included within the definition of Real Property Taxes for purposes of this Lease. 14.2 Taxes on Tenant Improvements and Personal Property. Notwithstanding any other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations and Tenant Improvements of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay prior to delinquency all taxes assessed or levied against Tenant's Personal Property in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. 14.3 Proration. Tenant's liability to pay Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included at the commencement or expiration of the Term. 15. Utilities and Services. Tenant shall be responsible for and shall pay promptly all charges for water, gas, electricity, sewer, telephone, refuse pickup, janitorial service and all other utilities, materials and services furnished directly to or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service furnished to the Premises, except that resulting from the negligence or willful misconduct of Landlord. Landlord shall use diligent efforts to promptly correct any failure or interruption caused by the act or neglect of Landlord. 16. Repair and Maintenance. 16.1 Landlord's Obligations. Landlord shall at all times and at its own expense clean, keep and maintain in good order, condition and repair the structural parts of the Building, which structural parts include only the foundation, subflooring, roof structure, and exterior walls, except for any damage thereto caused by the negligence or willful acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by reason of the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease, or cause by Alterations made by Tenant or by Tenant's agents, employees or contractors, which shall be Tenant's responsibility. Landlord shall also maintain, repair and replace the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area and Tenant shall reimburse Landlord for the reasonable costs thereof, as provided in paragraph 16.3. At Landlord's option, Landlord shall have the right to require Tenant to maintain and repair the HVAC system for the Premises. In such case, Tenant shall cause the HVAC system for the Premises to be maintained in good condition at all times and Tenant shall obtain an HVAC system preventative maintenance contract with monthly service which shall be subject to the reasonable approval of Landlord and paid for by Tenant and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventative maintenance. If Tenant is performing the repair and maintenance of the HVAC system, Tenant shall have the benefit of all warranties available to Landlord regarding such equipment. Other than regularly scheduled maintenance of the Premises, it is a condition precedent to all obligations of Landlord to repair and maintain under this Paragraph 16.1 that Tenant shall have notified Landlord in writing of the need for such repairs or maintenance. 16.2 Tenant's Obligations. Tenant shall at all times and at its own expense, clean, keep and maintain in good, safe and sanitary order, condition and repair every part of the interior of the Premises which is not within Landlord's obligation pursuant to Paragraph 16.1. Tenant's repair and maintenance obligations shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls, floors, ceilings, interior windows, store front, doors, entrances, plateglass, showcases, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire extinguisher equipment within the Premises, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Tenant shall also be responsible for all pest control within the Premises. All glass is at the sole risk of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind, size and quality. 16.3 Tenant to Pay Operating Expenses. Tenant shall pay, as Additional Rent, all reasonable costs and expenses as may be paid or incurred by Landlord in maintaining, operating and repairing the roof membrane of the Building, the HVAC system for the Premises, and the Outside Area ("Operating Expenses"). The Operating Expenses may include, without limitation, the cost of labor, materials, supplies and services used or consumed in operating, maintaining, repairing and replacing the roof membrane, the HVAC system and the Outside Area, including landscaping and sprinkler systems, concrete walkways and paved parking areas; maintaining and repairing signs and site lighting; all utilities provided to the Outside Area; any alterations or improvements required by governmental authority to comply with laws effective after the Commencement Date; the cost of maintaining, repairing and replacing exterior windows and the non-structural components of the roof of the Building; and a management fee not to exceed three percent (3%) of the Monthly Rent. Operating Expenses shall not include costs paid directly by Tenant, principal and interest payments on loans secured by deeds of trust recorded against the Premises or the Property, real estate sales or leasing brokerage commissions, or executive salaries of off-site personnel employed by Landlord except for the charge (or pro rata share) of the property manager of the Property. 16.4 Monthly Payments. From and after the Commencement Date, Tenant shall pay to Landlord on the first day of each calendar month of the Term the estimated monthly Operating Expenses. Such estimated monthly Operating Expenses may be adjusted by Landlord at the end of any calendar quarter on the basis of Landlord's experience and reasonably anticipated costs. Any such adjustment shall be effective as of the calendar month next succeeding receipt by Tenant of written notice of the adjustment. Within one hundred twenty (120) days following the end of each calendar year Landlord shall furnish Tenant a statement of actual Operating Expenses (the "Actual Expenses") for the calendar year and the payments made by Tenant with respect to such period. If Tenant's payments for the Operating Expenses are less than the Actual Expenses, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such statement. If Tenant's payments exceed the Actual Expenses, Landlord shall either offset the excess against the Operating Expenses next thereafter to become due to Landlord, or shall refund the amount of the overpayments to Tenant, in cash, as Landlord shall elect. There shall be appropriate adjustments of the Operating Expenses as of the Commencement Date and expiration of the Term. 16.5 Operating Expense Audit. Within twelve (12) months of Tenant's receipt of Landlord's statement of the Actual Expenses, and upon thirty (30) days prior written notice to Landlord, Tenant shall have the right to examine, to copy and to have an audit conducted of all books and records at Landlord's office pertaining to the Actual Expenses for the period covered by Landlord's statement. If Tenant disputes the inclusion or amount of any item or items, Landlord and Tenant will use good faith efforts to settle such dispute within thirty (30) days after notice of such dispute. If the dispute is not settled within this time period, the dispute shall be resolved by a firm of real estate audit professionals ("Audit Professionals") mutually acceptable to Landlord and Tenant. Audit Professionals shall mean, for the purposes of this Paragraph 16.5, an independent firm of certified public accountants with experience in real estate expense reviews. If Landlord and Tenant cannot agree on the Audit Professionals within fifteen (15) days, the Landlord and Tenant shall each, within fifteen (15) days, select one independent firm of Audit Professionals, and the two firms of Audit Professionals shall together, within fifteen (15) days after the last of the two Audit Professionals has been selected, select a third firm of Audit Professionals, which third firm shall be the Audit Professionals to resolve the dispute. The Audit Professionals shall be entitled to review all records relating to the disputed items. The determination of the Audit Professionals shall be final and binding upon both Landlord and Tenant. The expenses of the Audit Professionals shall be borne by Tenant unless the audit discloses an overall overstatement of the Actual Expenses of five percent (5%) or more for the period being audited, in which case Landlord shall pay the audit expenses. If the Audit Professionals determine that Tenant has made an over-payment or under-payment of Operating Expenses then the procedures in Paragraph 16.4 shall be followed. 16.6 Waiver. Tenant waives the provisions of Sections 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to make repairs and deduct the expenses of such repairs from the Rent due under this Lease. 16.7 Compliance with Government Regulations. Tenant shall, at its cost, comply with, including the making by Tenant of any Alteration to the Premises, all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including state, municipal, County and federal governments and their departments, bureaus, boards and officials) arising from the use or occupancy of the Premises. 17. Liens. Tenant shall keep the Premises and the Property free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord and its Agents harmless from all liability and cost, including attorneys' fees and costs, in connection with or arising out of any such lien or claim of lien. Tenant shall cause any such lien imposed to be released of record by payment or posting of a proper bond acceptable to Landlord within twenty (20) days after written request by Landlord. Tenant shall give Landlord written notice of Tenant's intention to perform work on the Premises which might result in any claim of lien at least ten (10) days prior to the commencement of such work to enable Landlord to post and record a Notice of Nonresponsibility or other notice reasonably deemed proper by Landlord. If Tenant fails to so remove any such lien within the prescribed twenty (20) day period, then Landlord may do so and Tenant shall reimburse Landlord upon demand. Such reimbursement shall include all sums incurred by Landlord including Landlord's reasonable attorneys' fees, with interest thereon at the Interest Rate. 18. Landlord's Right to Enter the Premises. Tenant shall permit Landlord and Landlord's Agents to enter the Premises to inspect the same, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective lenders and purchasers, to make necessary repairs, to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord, and at any reasonable time within two hundred seventy (270) days prior to the expiration of the Term to show the Premises to prospective tenants. Landlord shall also have the right to place ordinary "For Lease" signs on the Outside Area. The above rights of entry are subject to reasonable security regulations of Tenant, including the requirement that Landlord or Landlord's Agents be accompanied by an employee of Tenant when entering the Premises, and to the requirement that Landlord shall at all times act in a manner to cause the least possible interference with Tenant's business. 19. Signs. Landlord shall provide space for Tenant's identification sign on an exterior monument sign to be constructed in the Outside Area. In addition, Tenant shall have the right to install a Tenant identification sign on the exterior of the Building, subject to Tenant's receipt of all necessary approvals from the City. All costs of the monument sign structure shall be paid for by Landlord; any costs associated with Tenant's monument sign lettering and/or any Building signage installed by Tenant shall be paid for by Tenant. Tenant shall have no other right to maintain Tenant identification signs in any other location in, on or about the Premises, the Building or the Outside Area and shall not display or erect any other Tenant identification sign, display or other advertising material that is visible from the exterior of the Building. The location, size, design, color and other physical aspects of Tenant's identification sign(s) shall be subject to the Landlord's written reasonable approval prior to installation, and any appropriate municipal or other governmental approvals. The cost of maintaining Tenant's identification signs shall be an Operating Expense. The cost of removal of the signs shall be Tenant's sole expense. If Tenant fails to remove any such signs upon termination of this Lease, Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord for such amounts shall be deemed Additional Rent. 20. Insurance. 20.1 Tenant's Indemnification. Except to the extent caused by the negligence or willful misconduct of Landlord, and subject to the provisions of Paragraph 21, Tenant hereby agrees to defend, indemnify and hold harmless Landlord and Landlord's Agents from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or in any way attributable to the use or occupancy of the Premises or any part thereof and adjacent areas by the Tenant, the acts or omissions of the Tenant, Tenant's agents, or any contractors brought onto the Premises by Tenant. Tenant agrees that the obligations assumed herein shall survive this Lease. 20.2 Landlord's Indemnification. Subject to the provisions of Paragraph 21, Landlord hereby agrees to defend, indemnify and hold harmless Tenant and Tenant's agents, directors, officers and employees from and against any and all damage, loss, liability or expense including, without limitation, attorneys' fees and legal costs suffered directly or by reason of any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily injury and property damage sustained by such person or persons which arises out of, is occasioned by or attributable to the negligence or willful misconduct of Landlord or any contractors brought onto the Premises by Landlord. Landlord agrees that the obligations assumed herein shall survive this Lease. 20.3 Tenant's Insurance. Tenant agrees to maintain in full force and effect at all times during the Term, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers reasonably acceptable to Landlord which afford the following coverages: 20.3.1 Liability. Commercial general liability insurance in an amount not less than Two Million and no/100ths Dollars ($2,000,000.00) combined single limit for both bodily injury and property damage which includes blanket contractual liability broad form property damage, personal injury, completed operations, products liability, and fire damage legal (in an amount not less than Twenty-Five Thousand and no/100ths Dollars ($25,000.00)), naming Landlord and Landlord's Agents as additional insureds. 20.3.2 Personal Property. All risk or causes of loss - special form property insurance (including, without limitation, vandalism, malicious mischief, inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal Property located on or in the Premises. Such insurance shall be in the full amount of the replacement cost, as the same may from time to time increase as a result of inflation or otherwise, and shall be in a form providing coverage comparable to the coverage provided in the standard ISO All-Risk form. 20.4 All-Risk Insurance. During the Term Landlord shall maintain all risk or causes of loss - special form property insurance, including inflation endorsement, sprinkler leakage endorsement, at Landlord's option, earthquake and flood coverage, on the Building, excluding coverage of all Tenant's Personal Property located on or in the Premises, but including the Tenant Improvements. Such insurance shall also include insurance against loss of rents on an "All Risk" basis, including, at Landlord's option, earthquake and flood, in an amount equal to the Monthly Rent and Additional Rent, and any other sums payable under the Lease, for a period of twelve (12) months commencing on the date of loss. Such insurance shall name Landlord and its Agents as named insureds and include a lender's loss payable endorsement in favor of Landlord's lender (Form 438 BFU Endorsement). Tenant shall reimburse Landlord monthly, as Additional Rent, on the first day of each calendar month of the Term, one-twelfth (1/12th) of the annual premiums for such insurance, prorated for any partial month, or on such other periodic basis as Landlord shall elect. Landlord shall provide Tenant with appropriate documentation evidencing the premium costs for such insurance. If the insurance premiums are increased after the Commencement Date due to an increase in premium rates, an increase in the valuation of the Building or its replacement cost, Tenant shall pay such increase within ten (10) days of notice of such increase and receipt of appropriate documentation evidencing such increased insurance premiums. 20.5 Certificates. Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. The certificates shall expressly provide that the interest of Landlord therein shall not be affected by any breach of Tenant of any policy provision for which such certificates evidence coverage. All certificates shall expressly provide that no less than thirty (30) days' prior written notice shall be given Landlord in the event of cancellation of the coverages evidenced by such certificates. Landlord shall deliver to Tenant at the Commencement Date and thereafter at least thirty (30) days prior to the expiration of each such policy, certificates of insurance evidencing the coverages required under Paragraph 20.4 of this Lease. Such certificates shall expressly provide that not less than thirty (30) days prior written notice shall be given Tenant in the event of any cancellation of the coverage evidenced by such certificate. 20.6 Insurance Requirements. All insurance shall be in a form satisfactory to Landlord and shall be carried with companies that have a general policy holder's rating of not less than "A" and a financial rating of not less than Class "X" in the most current edition of Best's Insurance Reports; shall provide that such policies shall not be subject to material alteration or cancellation except after at least thirty (30) days' prior written notice to Landlord; and shall be primary and noncontributing with any other insurance available to Landlord. The policy or policies, or duly executed certificates for them, together with satisfactory evidence of payment of the premium thereon shall be deposited with Landlord prior to the Commencement Date, and upon renewal of such policies, not less than thirty (30) days prior to the expiration of the term of such coverage. If Tenant fails to procure and maintain the insurance required hereunder, Landlord may, upon not less than ten (10) days' prior written notice to Tenant, order such insurance at Tenant's expense and Tenant shall reimburse Landlord. Such reimbursement shall include all sums incurred by Landlord, including Landlord's reasonable attorneys' fees and costs, with interest thereon at the Interest Rate. 20.7 Landlord's Disclaimer. Landlord and Landlord's Agents shall not be liable for any loss or damage to persons or property resulting from fire, explosion, falling plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which may leak from any part of the Building, or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface, or from any other cause whatsoever except to the extent any such loss or damage is caused by the negligence or willful misconduct of Landlord and such loss or damage is not covered by under any insurance Tenant is required to carry pursuant to Paragraph 20.3.2 of this Lease or any other insurance Tenant elects to carry. Landlord and Landlord's Agents shall not be liable for interference with the light, air, or any latent defect in the Premises. Tenant shall give prompt written notice to Landlord in case of a casualty, accident or repair needed in the Premises. 21. Waiver of Subrogation. Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant each hereby waive all rights of recovery against the other on account of loss or damage occasioned to such waiving party for its property or the property of others under its control to the extent that such loss or damage is insured against under any insurance policies which may be in force at the time of such loss or damage, even if such damage may have been caused by the negligence of the other party, its agents or employees. Tenant and Landlord shall, upon obtaining policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease and Tenant and Landlord shall cause each insurance policy obtained by such party to provide that the insurance company waives all right of recovery by way of subrogation against either Landlord or Tenant in connection with any damage covered by such policy. 22. Damage or Destruction. 22.1 Partial Damage Insured. If the Premises are damaged by any casualty which is covered under the all-risk or causes of loss - special form insurance carried by Landlord pursuant to Paragraph 20.4, then Landlord shall restore such damage, provided insurance proceeds are available to pay at least ninety-five percent (95%) or more of the cost of restoration and provided such restoration can be completed within one hundred eighty (180) days after the commencement of the work in the reasonable opinion of a registered architect or engineer appointed by Landlord for such determination. In such event, this Lease shall continue in full force and effect, except that Tenant shall be entitled to a proportionate reduction of net Monthly Rent while such restoration takes place, such proportionate reduction to be based upon the extent to which the restoration efforts interfere with Tenant's use of the Premises. Any dispute between Landlord and Tenant as to the amount of any rent reduction hereunder shall be resolved by arbitration, and such arbitration shall comply with and be governed by the California Arbitration Act Sections 1280 through 1294.2 of the California Code of Civil Procedure. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If Tenant does not elect to terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.2 Partial Damage - Uninsured. If the Premises are damaged by a risk not covered by Landlord's insurance, or the proceeds of available insurance are less than ninety-five percent (95%) of the cost of restoration, or the restoration cannot be completed within one hundred eighty (180) days after the commencement of work, in the reasonable opinion of the registered architect or engineer appointed by Landlord for such determination, then Landlord shall have the option either to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the net Monthly Rent to be proportionately abated as provided in Paragraph 22.1; or (ii) give notice to Tenant at any time within thirty (30) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than sixty (60) nor more than ninety (90) days after giving such notice. If notice of termination is given, this Lease shall expire and all interest of Tenant in the Premises shall terminate on such date so specified in such notice and the Monthly Rent, reduced by any proportionate reduction based upon the extent, if any, to which such damage interfered with the use of the Premises by Tenant, shall be paid to the date of such termination; provided, however, that if Landlord elects to terminate this Lease due to an insufficiency in the insurance proceeds available to complete restoration of the Premises, Tenant shall have the right to contribute the amount of any shortfall in insurance proceeds and in such event Landlord shall restore the Premises. Tenant shall notify Landlord of Tenant's election within thirty (30) days after the date Landlord has notified Tenant of Landlord's election to terminate this Lease. If it is anticipated by Landlord that such restoration cannot be completed within one hundred eighty (180) days after commencement of work, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after receipt of written notice of the estimated repair period; provided, however, this one hundred eighty (180) day period will be extended to the extent of any delay caused by Force Majeure Conditions, up to and including an additional one hundred twenty (120) days. Landlord shall provide Tenant with written notice of the estimated repair period as soon as reasonably possible following the damage or destruction. If neither Landlord nor Tenant terminate this Lease as permitted herein, Landlord shall promptly commence the process of obtaining the necessary permits and approvals and repair the Premises and the Tenant Improvements. If, however, this Lease is terminated by either party, Landlord shall refund to Tenant any Rent previously paid by Tenant which is allocable to the period after the date of damage or destruction. 22.3 Total Destruction. If the Premises are totally destroyed or the Premises cannot be reasonably restored under applicable laws and regulations or due to the presence of hazardous factors such as earthquake faults, chemical waste and similar dangers, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective the date of the damage. 22.4 Landlord's Obligations. Landlord shall not be required to repair any injury or damage by fire or other cause to, or to make any restoration or replacement of, any panelings, decorations, partitions, railings, floor coverings, or office fixtures which are Alterations or Personal Property installed in the Premises by Tenant or at the expense of Tenant. Tenant shall be required to restore or replace the same excluding those Tenant Improvements defined in the Work Letter Agreement attached hereto. Except for abatement of Monthly Rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration; nor shall Tenant have the right to terminate this Lease as the result of any statutory provision now or hereafter in effect pertaining to the damage and destruction of the Premises, except as expressly provided herein. 22.5 Damage Near End of Term. Anything herein to the contrary notwithstanding, if the Premises are destroyed or significantly damaged during the last twelve (12) months of the Term, unless the Term is extended pursuant to the provisions of Paragraph 40 of this Lease, then Landlord may cancel and terminate this Lease as of the date of the occurrence of such damage. If Landlord does not elects to so terminate this Lease, the repair of such damage shall be governed by the other provisions of this Paragraph 22. 23. Condemnation. If title to all of the Premises or so much thereof is taken or appropriated for any public or quasi-public use under any statute or by right of eminent domain so that reconstruction of the Premises will not, in Landlord's and Tenant's mutual reasonable judgment, result in the Premises being suitable for Tenant's continued occupancy for the uses and purposes permitted by this Lease, this Lease shall terminate as of the date that possession of the Premises or Building or part thereof be taken, provided that if the parties disagree, the Lease shall not terminate and the issue as to whether the remaining Premises are suitable for Tenant's continued occupancy for the uses permitted by this Lease shall be submitted into arbitration and such arbitration shall comply and be governed by the California Arbitration Act, Sections 1280 through 1294.2 of the California Code of Civil Procedure. A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes of this paragraph. If any part of the Premises is taken and the remaining part is reasonably suitable for Tenant's continued occupancy for the purposes and uses permitted by this Lease, this Lease shall, as to the part so taken, terminate as of the date that possession of such part of the Premises is taken. If the Premises is so partially taken the Rent and other sums payable hereunder shall be reduced in the same proportion that Tenant's use and occupancy of the Premises is reduced. If the parties disagree as to the suitability of the Premises for Tenant's continued occupancy or the amount of any applicable Rent reduction, the matter shall be resolved by arbitration. No award for any partial or entire taking shall be apportioned. Tenant assigns to Landlord its interest in any award which may be made in such taking or condemnation, together with any and all rights of Tenant arising in or to the same or any part thereof, except that Landlord shall pay to Tenant from any award received by Landlord an amount allocable to the value of the Tenant Improvements at the time of such award which shall be determined using standard accounting methods for depreciation. Nothing contained herein shall be deemed to give Landlord any interest in or require Tenant to assign to Landlord any separate award made to Tenant for the taking of Tenant's Personal Property, for the interruption of Tenant's business, or its moving costs, or for the loss of its good will. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to any abatement of Rent except to the extent of interference with Tenant's use of the Premises; provided, however, that in any event Rent shall not be abated if Tenant is separately and directly compensated for such interference by the condemning authority. Any award made to Tenant by reason of such temporary taking shall belong entirely to Tenant and Landlord shall not be entitled to share therein. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this paragraph. 24. Assignment and Subletting. 24.1 Landlord's Consent. Tenant shall not enter into a Sublet without Landlord's prior written consent, which consent shall not be unreasonably withheld. Any attempted or purported Sublet without Landlord's prior written consent shall be void and confer no rights upon any third person and shall be deemed a material default of this Lease. Each Subtenant shall agree in writing, for the benefit of Landlord, to assume, to be bound by, and to perform the terms, conditions and covenants of this Lease to be performed by Tenant. Notwithstanding anything contained herein, Tenant shall not be released from liability for the performance of each term, condition and covenant of this Lease by reason of Landlord's consent to a Sublet unless Landlord specifically grants such release in writing. 24.2 Information to be Furnished. If Tenant desires at any time to Sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (i) the name of the proposed Subtenant; (ii) the nature of the proposed Subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed Sublet and a copy of the proposed Sublet form containing a description of the subject premises; and (iv) such financial information, including financial statements, as Landlord may reasonably request concerning the proposed Subtenant. 24.3 Landlord's Alternatives. At any time within fifteen (15) days after Landlord's receipt of the information specified in Paragraph 24.2, Landlord may, by written notice to Tenant, elect: (i) to consent to the Sublet by Tenant; (ii) to refuse its consent to the Sublet; or (iii) to terminate this Lease. If Landlord consents to the Sublet, Tenant may thereafter enter into a valid Sublet of the Premises or portion thereof, upon the terms and conditions and with the proposed Subtenant set forth in the information furnished by Tenant to Landlord pursuant to Paragraph 24.2. 24.4 Executed Counterpart. No Sublet shall be valid nor shall any Subtenant take possession of the Premises until an executed counterpart of the Sublet agreement has been delivered to Landlord. 24.5 Exempt Sublets. Notwithstanding the above, Landlord's prior written consent shall not be required for a Sublet to a subsidiary, affiliate or parent corporation of Tenant, a corporation or partnership into which Tenant merges or consolidates, or a purchaser of all or substantially all of the assets of Tenant, provided that Tenant gives Landlord prior written notice of the name of any such Subtenant and, in the event of an assignment (i) the assignee has a net worth, at the time of such assignment, that is equal to or greater than the net worth of Tenant immediately prior to such assignment, and (ii) the assignee assumes, in writing, for the benefit of Landlord all of Tenant's obligations under the Lease. 24.6 Sublet Profits. If the Rent received by Tenant from any Sublet exceeds the Rent payable by Tenant under this Lease, Tenant shall pay one-half (1/2) of such excess to Landlord monthly as Additional Rent after first deducting reasonable costs incurred by Tenant in connection with such Sublet for advertising, brokerage commissions, and attorneys' fees. 25. Default. 25.1 Tenant's Default. A default under this Lease by Tenant shall exist if any of the following events shall occur: 25.1.1 If Tenant fails to pay Rent or any other sum required to be paid hereunder within seven (7) days after written notice from Landlord; provided, however, that such notice shall be in lieu of, and not in addition to, any notice required pursuant to Section 1161 of the California Code of Civil Procedure regarding unlawful detainer actions; or 25.1.2 If Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure such breach within thirty (30) days after written notice from Landlord where such breach could reasonably be cured within such thirty (30) day period; provided, however, that where such failure could not reasonably be cured within the thirty (30) day period, that Tenant shall not be in default if it undertakes commercially reasonable measures to cure such non-performance within the thirty (30) day period and diligently thereafter prosecutes the same to completion; or 25.1.3 If Tenant assigns its assets for the benefit of its creditors; or 25.1.4 If a court shall make or enter any decree or order other than under the bankruptcy laws of the United States adjudging Tenant to be insolvent; or approving as properly filed a petition seeking reorganization of Tenant; or directing the winding up or liquidation of Tenant and such decree or order shall have continued for a period of thirty (30) days. 25.2 Remedies. Upon a default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: 25.2.1 Landlord may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate this Lease, and Landlord shall have the right to collect Rent when due. 25.2.2 Landlord may terminate Tenant's right to possession of the Premises at any time by written notice in accordance with applicable laws, and upon such termination relet the Premises or any part thereof. No act by Landlord other than the giving of express written notice thereof to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute termination of Tenant's right to possession. On termination, Landlord has the right to remove all Tenant's Personal Property and store same at Tenant's cost and to recover from Tenant as damages: (a) The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus (b) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (c) The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (d) Any other amount necessary which is to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs of expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (e) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 25.2.2(a) and 25.2.2(b) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 25.2.2(c) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 25.2.3 Landlord may, upon termination of this Lease in accordance with applicable laws, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 25.3 Landlord's Default. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the nature of such default; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such thirty (30) day period and thereafter diligently prosecute the same to completion. 26. Subordination. This Lease is subject and subordinate to any ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Property and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") shall require that this Lease to be prior and superior thereto, within ten (10) days of written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver any and all reasonable documents or instruments which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, so long as Landlord obtains from the Holder of any such Encumbrance a non-disturbance agreement which provides that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust the Holder shall recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute any and all documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance so long as such documents contain non-disturbance provisions substantially in conformance with the foregoing. Notwithstanding anything to the contrary set forth in this paragraph, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Property at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 27. Notices. Any notice or demand required or desired to be given under this Lease shall be in writing and shall be personally served or in lieu of personal service may be given by mail or by Federal Express or other reputable overnight courier service. If given by mail, such notice shall be deemed to have been given when seventy-two (72) hours have elapsed from the time when such notice was deposited in the United States mail, registered or certified, and postage prepaid, addressed to the party to be served. If given by overnight courier service, such notice shall be deemed to be effective upon the next business day after deposit with the courier service. At the date of execution of this Lease, the addresses of Landlord and Tenant are as set forth in the first paragraph of this Lease. After the Commencement Date, all notices to Tenant shall be sent to the Premises with a copy to the address specified in the first paragraph of this Lease. Either party may change its address by giving notice of same in accordance with this paragraph. 28. Attorneys' Fees. If either party brings any action, legal proceeding or arbitration proceeding for damages for an alleged breach of any provision of this Lease, to recover rent, or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and costs. 29. Estoppel Certificates. Tenant shall, within ten (10) days after written request from Landlord, execute and deliver to Landlord any documents, including estoppel certificates, in the form prepared by Landlord: (a) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the Rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord, or, if there are uncured defaults on the part of Landlord, stating the nature of such uncured defaults, and (c) otherwise evidencing the status of the Lease, as may be required by a lender making a loan to Landlord to be secured by deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord. 30. Tenant's Financial Statements. Tenant shall, within ten (10) days after Landlord's written request, deliver to Landlord the current financial statements of Tenant, and financial statements of the two (2) years prior to the current financial statements year, including a balance sheet and profit and loss statement for the most recent prior year, all prepared by or under the direction of a certified public accountant. Landlord shall keep such financial statements confidential and shall not disclose such financial statements to any third party, other than Landlord's members, lenders, prospective lenders and prospective purchasers, without Tenant's prior written consent. 31. Transfer of the Property by Landlord. In the event of any conveyance of the Property and assignment by Landlord of this Lease, Landlord shall be and is hereby entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the date of such conveyance and assignment, and Tenant agrees to attorn to such transferee/assignee. 32. Landlord's Right to Perform Tenant's Covenants. If Tenant fails to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation of Tenant under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All sums so paid by Landlord and all penalties, interest and costs in connection therewith shall be due and payable by Tenant upon receipt of written demand by Landlord, together with interest thereon at the Interest Rate from the date Tenant receives Landlord's written demand to the date of payment by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Rent. 33. Tenant's Remedy. If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Property and out of Rent or other income from the Property received by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Property, and neither Landlord nor Landlord's Agents shall be liable for any deficiency. 34. Mortgagee Protection. If Landlord defaults under this Lease, Tenant will notify by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage covering the Premises, of whom Tenant has been notified in writing, and offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 35. Brokers. Tenant and Landlord warrant and represent that, other than the brokers listed in Paragraph 1.9 above, they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, and that they know of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Tenant and Landlord each agree to defend, indemnify and hold the other party and its Agents from and against any and all liabilities or expenses, including attorneys' fees and costs, arising out of or in connection with claims made by any other broker or individual for commissions or fees on the basis of the acts or omissions of the indemnifying party. 36. Acceptance. Delivery of this Lease, duly executed by Tenant, constitutes an offer to lease the Premises, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. 37. Recording. Neither party shall record this Lease. 38. Modifications for Lender. If, in connection with obtaining financing for the Building or any portion thereof, Landlord's lender shall request reasonable modification to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent thereto, provided such modifications do not adversely affect Tenant's rights hereunder. 39. Parking. Tenant shall have the right to use the Property's parking facilities upon terms and conditions as may from time to time be reasonably established by Landlord. Landlord may, at Landlord's election, establish cross-parking easements between the Property and any adjacent property owned by Landlord or an affiliate of Landlord, provided that such easements do not unreasonably interfere with Tenant's use of the Property. In no event, however, may Landlord establish any parking easements that would permit parking for adjacent properties upon which retail sales activities are conducted. 40. Options to Extend. 40.1 Option Period. Provided that Tenant is not in material default hereunder, either at the time of exercise or at the time the extended term commences, Tenant shall have the option to extend the initial fifteen (15) year Term of this Lease for three (3) additional periods of five (5) years each (each, an "Option Period") on the same terms, covenants and conditions provided herein, except that upon such renewal the Monthly Rent due hereunder shall be determined pursuant to Paragraph 40.2. Tenant shall exercise its option by giving Landlord written notice ("Option Notice") at least nine (9) months prior to the expiration of the initial Term of this Lease, or the prior Option Period, as applicable. 40.2 Option Period Rent. The Monthly Rent for each Option Period shall be determined as follows: 40.2.1 The parties shall have fifteen (15) days after Landlord receives the Option Notice within which to agree on the Monthly Rent for the Option Period in question based upon the then fair market rental value of the Premises as defined in Paragraph 40.2.2. If the parties agree on the Monthly Rent for the Option Period within fifteen (15) days, they shall immediately execute an amendment to this Lease stating the Monthly Rent for the Option Period. If the parties are unable to agree on the Monthly Rent for the Option Period within fifteen (15) days, then, the Monthly Rent for the Option Period shall be the then current fair market rental value of the Premises as determined in accordance with Paragraph 40.2.3, subject to such periodic increases in Monthly Rent as are then customary, in both amount or percentage amounts and frequency, for leases similar to this Lease taking into consideration the same items considered in determining the then fair market rental value of the Premises. 40.2.2 The "then fair market rental value of the Premises" shall be defined to mean the fair market rental value of the Premises as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, design and location of the Premises, and the rent for comparable buildings located in Morgan Hill. In no event shall the then fair market monthly rental value of the Premises for the Option Period be less than the Monthly Rent last payable under the Lease. 40.2.3 Within seven (7) days after the expiration of the fifteen (15) day period set forth in Paragraph 40.2.1., each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years' full-time commercial appraisal experience in the area in which the Premises are located to appraise and set the Monthly Rent. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the Monthly Rent. If the two (2) appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the Monthly Rent. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to elect a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) appraisers are given to set the Monthly Rent. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days' notice to the other party, can apply to the then Presiding Judge of the Santa Clara County Superior Court, for the selection of a third appraiser who meets the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the Monthly Rent. If a majority of the appraisers are unable to set the Monthly Rent within the stipulated period of time, the three (3) appraisals shall be added together and their total divided by three (3); the resulting quotient shall be the Monthly Rent. If, however, the low appraisal and/or the high appraisal are/is more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2); the resulting quotient shall be the Monthly Rent. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, then only the middle appraisal shall be used as the result of the appraisal. After the Monthly Rent has been set, the appraisers shall immediately notify the parties and the parties shall amend this Lease to set forth such amount. 41. Option to Expand. 41.1 Expansion Option Period. Provided that Tenant is not, at the time of exercise, in material default of this Lease or the lease for Building 2 Tenant shall have the option to lease the building to be constructed by Landlord on that certain parcel in Madrone Business Park known as Parcel M, consisting of approximately 2.68 acres (the "Expansion Building") on the following terms and conditions. Tenant may exercise its option at any time prior to February 28, 2003 (the "Expansion Option Period"). Tenant shall exercise the option by delivery of written notice to Landlord prior to the expiration of the Expansion Option Period. If Tenant fails to exercise the option to lease the Expansion Building prior to the expiration of the Expansion Option Period, Tenant shall be deemed to have waived its right to lease the Expansion Building pursuant to the terms of this Paragraph 41 and thereafter Landlord shall be free to lease the Expansion Building to any third party on such terms as Landlord shall elect without further notice to Tenant. The expansion option granted to Tenant under this Paragraph 41 is personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 41.2 Rent for Expansion Buildings. If Tenant timely exercises its option to lease the Expansion Building, Landlord and Tenant shall enter into a lease for the Expansion Building on the same terms and conditions set forth herein, except that (i) Landlord shall provide an allowance for the design and construction of tenant improvements to the Expansion Building that is commensurate with the allowance provided under this Lease and the lease for Building 2 considering the size and proposed use of the Expansion Building; and (ii) the initial monthly rent for the Expansion Building shall be determined as follows. If Tenant exercises the option on or before February 28, 2002, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $9.00 per square foot. If Tenant exercises the option at any time from March 1, 2002 through February 28, 2003, the initial monthly rent shall be calculated based on a twelve percent (12%) return on total project costs for the Expansion Building, using a land value fixed at $10.00 per square foot. In addition, if Tenant exercises the option at any time after February 28, 2002, then Tenant shall be responsible for payment of the real property taxes and assessments allocable to Parcel M commencing March 1, 2002. 42. Right of First Offer to Purchase. Provided that Tenant is not, at the time of exercise, in material default of any provision of this Lease or the lease of that certain building in Madrone Business Park known as Building L, Tenant shall have the right of first offer to purchase the Property, any other property leased by Tenant from Landlord at Madrone Business Park, and/or Parcel M (the "Expansion Parcel") on the following terms and conditions. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, or if at any time after February 28, 2003, Landlord elects to sell the Expansion Parcel, Landlord shall notify Tenant which of the foregoing properties Landlord is offering for sale (the "Offered Property") and the terms and conditions upon which Landlord would be willing to sell the Offered Property ("Landlord's Notice"). Tenant shall have thirty (30) days after receipt of Landlord's Notice to notify Landlord in writing of Tenant's election to purchase the Offered Property on the terms stated in Landlord's Notice. If Tenant notifies Landlord within such 30-day period of Tenant's desire to purchase the Offered Property on such terms, Landlord and Tenant shall enter into a purchase and sale agreement for the Offered Property on the terms and conditions stated in Landlord's Notice. If, however, Tenant fails to notify Landlord of Tenant's election to purchase the Offered Property within such 30-day period or, if Landlord and Tenant, through no fault of Landlord, fail to execute a purchase and sale agreement within thirty (30) days after the date of Tenant's notice to Landlord, Tenant shall be deemed to have waived its right to purchase the Offered Property and Landlord shall have the right thereafter to offer the Offered Property for sale and to sell the Offered Property to any third party on substantially the terms stated in Landlord's Notice without further notice to Tenant. This right of first offer to purchase is personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 43. Payment to Tenant Upon Sale of Property. If at any time during the Term of this Lease Landlord elects to sell the Property or any other property leased by Tenant from Landlord at Madrone Business Park, and Tenant does not elect to purchase the Offered Property pursuant to Paragraph 42, then so long as Tenant is occupying the Property, upon close of escrow for the sale of the Offered Property Landlord shall pay to Tenant an amount equal to fifteen percent (15%) of the net sales proceeds for the Offered Property which are in excess of the base value of the Offered Property as of the date the Offered Property was completed and first occupied. For purposes of this provision, the "net sales proceeds" shall mean the gross sales price of the Offered Property less the costs incurred by Landlord in closing the sale of the Offered Property including, but not limited to, brokerage commissions, attorneys' fees, title insurance premiums, escrow fees, recording charges, prorations of real property taxes and assessments, survey fees (if paid by Landlord), and fees for environmental site assessments (if paid for by Landlord). The base value shall be determined by taking the annualized triple net rent for the Offered Property, reducing it by the operating reserves and vacancy calculated at seven percent of the triple net rent, then dividing the triple net rent after operating reserves and vacancy by .09 to establish a base value at a nine percent (9%) capitalization rate. The base value of the Property is hereby established as $5,320,000.00. The rights under this Paragraph 43 are personal to Media Arts Group, Inc., its subsidiaries and successors and shall not be transferred or assigned to any third party. 44. General. 44.1 Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. 44.2 Executed Copy. Any fully executed copy of this Lease shall be deemed an original for all purposes. 44.3 Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. 44.4 Separability. If one or more of the provisions contained herein, except for the payment of Rent, is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. 44.5 Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 44.6 Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. 44.7 Binding Effect. The covenants and agreement contained in this Lease shall be binding on the parties hereto and on their respective successors and assigns to the extent this Lease is assignable. 44.8 Waiver. The waiver by Landlord or Tenant of any breach of any term, condition or covenant, of this Lease shall not be deemed to be a waiver of such provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord or payment of Rent hereunder by Tenant shall not be deemed to be a waiver of any preceding breach at the time of acceptance or making of such payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing signed by Landlord or Tenant as applicable. 44.9 Entire Agreement. This Lease is the entire agreement between the parties, and there are no agreements or representations between the parties except as expressed herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 44.10 Authority. If Tenant is a corporation or a partnership, each individual executing this Lease on behalf of said corporation or partnership, as the case may be, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said entity in accordance with its corporate bylaws, statement of partnership or certificate of limited partnership, as the case may be, and that this Lease is binding upon said entity in accordance with its terms. Landlord, at its option, may require a copy of such written authorization to enter into this Lease. The failure of Tenant to deliver the same to Landlord within fourteen (14) days of Landlord's request therefor shall be deemed a default under this Lease. 44.11 Exhibits. All exhibits, amendments, riders and addenda attached hereto are hereby incorporated herein and made a part hereof. THIS LEASE is effective as of the date the last signatory necessary to execute the Lease shall have executed this Lease. TENANT Dated: December 20, 1999 Media Arts Group, Inc., a Delaware corporation By: /s/ Craig Fleming ----------------------------- Its: President & CEO By: /s/ Timothy S. Guster ----------------------------- Its: Sr. VP & Secretary LANDLORD Dated: January 18, 2000 TBI - Mission West, LLC, a California limited liability company By Toeniskoetter & Breeding, Inc. Development, a California corporation, Managing Member By /s/ Charles Toeniskoetter ----------------------------- Its President EX-27 6 EXHIBIT 27
5 1,000 9-MOS MAR-31-2000 DEC-31-1999 4,459 0 31,688 2,150 19,431 65,269 24,833 7,713 87,851 22,583 0 0 0 88 62,011 87,851 102,850 102,850 38,129 47,664 0 833 71 17,054 6,732 10,322 0 0 0 10,322 .80 .79
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