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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 1997 Commission No. 0-27288
EAGLE USA AIRFREIGHT, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0094895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3214 LODESTAR
HOUSTON, TEXAS 77032
(Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281)-821-0300
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. _____
At November 26, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $237,726,777
based on the closing price of such stock on such date of $30.625.
At November 26, 1997, the number of shares outstanding of registrant's Common
Stock was 18,267,861.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 1998 Annual
Meeting of Shareholders to be held on February 23, 1998 are incorporated by
reference in Part III of this Form 10-K. Such definitive proxy statement will
be filed with the Securities and Exchange Commission not later than 120 days
subsequent to September 30, 1997.
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TABLE OF CONTENTS
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 21
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 22
Item 13. Certain Relationships and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . 22
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
Eagle USA Airfreight, Inc. ("Eagle" and together with its
subsidiaries, the "Company") is engaged in the business of providing air
freight forwarding and other transportation and logistics services.
Historically, the Company has grown through the expansion of its domestic air
freight forwarding customer base and terminal network. In the past two fiscal
years, the Company has rapidly expanded its terminal network from 37 in
September 1995 to 60 in September 1997. As the Company has expanded nationwide,
it has broadened the services it provides to include local pick-up and delivery
and truck brokerage services as well as various "value added" logistics
services. Recently, the Company has begun expanding its international air
freight forwarding operations and establishing arrangements with cargo agents
in international locations. The Company believes that its growth has been
largely attributable to its ability to work closely with its customers to
provide customized freight shipping services on a price competitive basis.
INDUSTRY OVERVIEW
As business requirements for efficient and cost-effective distribution
services have increased, so has the importance and complexity of effectively
managing freight transportation. Businesses increasingly strive to minimize
inventory levels, perform manufacturing and assembly operations in different
locations and distribute their products to numerous destinations. As a result,
companies frequently desire expedited or time-definite shipment services. Time-
definite shipments are required to be delivered at a specific, typically less
expedited time, which may result in lower rates than expedited shipments.
Companies requiring some form of expedited or time-definite handling
generally have two principal alternatives to transport freight: they may use an
air freight forwarder or ship via a fully integrated carrier. An air freight
forwarder procures shipments from customers, makes arrangements for
transportation of the cargo on a carrier and may arrange both for pick-up from
the shipper to the carrier and for delivery of the shipment from the carrier to
the recipient. Air freight forwarders often tailor the routing of each shipment
to meet the price and service requirements of the customer. Fully integrated
carriers provide pick-up and delivery service, primarily through their own
captive fleets of trucks and aircraft. Since air freight forwarders select from
various transportation options in routing customer shipments, they are often
able to serve their customers less expensively and with greater flexibility
than integrated carriers. In addition to the high fixed expenses associated
with owning, operating and maintaining fleets of aircraft, trucks and related
equipment, integrated carriers often have significant restrictions on delivery
schedules and shipment weight, size and type. Air freight forwarders, however,
generally handle shipments of any size and can offer customized shipping
options, thus offering an effective alternative for shippers of freight.
Most air freight forwarders, like the Company, focus on the shipment
of heavy cargo and do not directly compete for the majority of their business
with integrated shippers of primarily small parcels such as Federal Express
Corporation, United Parcel Service of America, Inc., Airborne Freight
Corporation, DHL Worldwide Express, Inc. and the United States Postal Service,
certain of which on occasion serve as a source of cargo space to forwarders.
However, certain integrated carriers, such as Emery Air Freight Corporation and
BAX Global, Inc., focus on shipment of heavy cargo in competition with
forwarders. Additionally, most air freight forwarders do not generally compete
with the major commercial airlines, which to a certain extent depend on
forwarders to procure shipments and supply freight to fill cargo space on their
scheduled flights.
The domestic air freight forwarding industry is highly fragmented.
Many industry participants are capable of meeting only a portion of their
customers' required transportation service needs. Some national domestic air
freight forwarders rely on networks of terminals operated by franchisees or
agents. The Company believes that the development and operation of
Company-owned terminals and staff under the supervision of the Company's
management have enabled it to provide a higher degree of financial and
operational control and service assurance than that offered by franchise-based
networks.
DOMESTIC AIR FREIGHT FORWARDING SERVICES
The Company's freight forwarding operations involve obtaining shipment
orders from customers, determining the best means to transport the shipment to
its destination and arranging and monitoring all aspects of the shipment.
Typically, the transportation is provided by a commercial air carrier. In
addition, the Company prepares all required shipping documents and delivers
shipments to the transporting carrier. For much of its customer traffic, the
Company makes arrangements for three separate transportation segments--pick-up
from the shipper to the Company's terminal in the origin city, shipment via air
or overland carrier and delivery from the Company's terminal in the destination
city to the recipient. Local transportation services
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are performed either by independent cartage companies or, increasingly, by the
Company's Eagle Freight Services subsidiary as described below under "--Local
Delivery Services." If delivery schedules permit, the Company will typically
use lower-cost, overland truck transportation services, including those
obtained through its truck brokerage operations. As part of its routine
services, the Company also provides handling, packing and containerizing
services, arranges for the tracking of shipments, provides physical breakbulk
and arranges for insurance.
The Company neither owns nor operates any aircraft and, consequently,
places no restrictions on delivery schedules or shipment size. It arranges for
transportation of its customers' shipments via commercial airlines and, to a
lesser extent, air cargo carriers. All of the Company's air shipments can be
accommodated by either narrow-body or wide- body aircraft. The Company selects
the carrier for a shipment on the basis of route, departure time, available
cargo capacity and cost. The Company has begun regularly-scheduled dedicated
charters of four cargo airplanes under short term leases to service specific
transportation lanes. On occasion, the Company charters cargo aircraft for use
in other transportation lanes, as needed.
Due to the high volume of freight controlled by the Company, it is
able to obtain discounted rates from airlines and is often able to reserve
space at times when available space is limited. As a result, the Company can
provide shipment options not directly available to its customers. Occasionally,
the Company is able to consolidate shipments to further reduce its costs of
transportation. The Company's rate schedule generally offers increasing
discounts for shipment options with later scheduled delivery times. The
Company's per pound rates are also based on shipment weight and generally
decrease as the weight of the shipment increases.
The Company offers its customers five major delivery schedule options:
(i) next flight - immediate pick-up and placement of the shipment on the next
available flight; (ii) next day AM priority - shipments that take precedence
for delivery by the morning of the following day; (iii) next day PM - shipments
delivered by the afternoon of the following day; (iv) second day - shipments
delivered by the afternoon of the second following day; and (v) economy -
shipments typically delivered by the afternoon of the third - fifth day after
shipment. The Company draws on its logistics expertise to provide forwarding
services that are customized to meet the needs of the customer and, in addition
to regularly scheduled service, offers customized schedules to do so. In
addition, the Company's services are customized to address each client's
individual shipping requirements, generally without restrictions on shipment
weight, size or type. Once the requirements for an individual shipment have
been established, the Company proactively manages the execution of the shipment
to ensure the fulfillment of the customer's service requirements.
During the fiscal year ended September 30, 1997, the Company's
principal forwarding customers included shippers of computers and other
electronic and high-technology equipment, printed and publishing materials,
automotive parts, trade show exhibit materials, telecommunications equipment,
machinery and machine parts and apparel. Shipments that are relatively less
time-sensitive or for which expedited delivery is not economical are often
shipped second day or economy. These options enhance the Company's opportunity
to achieve savings by the use of truck transportation, the consolidation of
shipments and the increased air cargo options afforded by the additional time
for shipment. During the fiscal year ended September 30, 1997, average shipment
weight was approximately 521 pounds, ranging in size from small packages of
documents to 60,000 pound deliveries of trade show exhibit material. Although
the Company imposes no size or weight restrictions on shipments, it focuses on
shipments of over 50 pounds. As a result, it does not directly compete for most
of its business with overnight courier or small parcel companies, such as
Federal Express Corporation and United Parcel Service of America, Inc. Such
companies typically use their own captive airplane fleets, which on occasion
serve as a source of cargo space for the Company's forwarding operations.
When acting as a forwarder, the Company is legally responsible to its
customer for the safe delivery of the customer's cargo to its ultimate
destination, subject to a contractual limitation on liability to the lesser of
$0.50 per pound or $50 for domestic flights and the greater of $50 or $20 per
kilogram ($9.07 per pound) for international flights. However, because an air
freight forwarder's relationship to an airline is that of a shipper to a
carrier, the airline generally has the same responsibility to the Company as
the Company has to its customers. Additionally, shippers may purchase insurance
on shipments. The Company may have sole carrier liability for a shipment prior
to or after delivery to the carrier, and in certain other cases. The Company's
claims expenses have generally been limited, totaling $652,000, $468,000, and
$324,000 for the fiscal years ended 1997, 1996 and 1995, respectively.
The Company's ability to serve its customers depends on the
availability of air cargo space, including that on passenger and cargo airlines
that service the relevant transportation lanes. Shortages of cargo space are
most likely to develop around holidays and in especially heavy transportation
lanes. In addition, available cargo space could be reduced as a result of
decreases in the number of passenger airlines serving particular transportation
lanes at particular times, which could occur as a result of
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economic conditions, transportation strikes, regulatory changes and other
factors beyond the control of the Company. Although the Company does not
believe that the lack of cargo space has had a significant impact on its
ability to book cargo space to date, future operating results could be
adversely affected by significant shortages of suitable cargo space and
associated increases in rates charged by passenger airlines for cargo space.
INTERNATIONAL AIR FREIGHT FORWARDING SERVICES
The Company continues to expand its international forwarding
operations by entering into agreements with independent cargo agents at
strategic worldwide locations. These agents provide breakbulk, pick-up and
delivery, and customs brokerage services for cargo generated by the Company's
North American based locations, as well as arranging for overseas sales of
cargo bound for North America. The Company plans to expand its overseas
presence through a variety of means that may include exclusive or nonexclusive
agency agreements, direct equity positions within selected overseas agencies
and strategic acquisitions. The Company is also emphasizing the marketing of
its international services throughout its North American network, particularly
at some of its largest locations, including: Atlanta, Chicago, Dallas, Houston,
Los Angeles, Miami, Monterrey (Mexico), New York, San Francisco, and Toronto
(Canada). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
To support its international operations, in the third quarter of
fiscal year 1997 the Company received certification from the Federal Maritime
Commission as an NVOCC (Non-Vessel Owning Common Carrier) to facilitate the
handling of ocean shipments. Additionally, the Company intends to pursue a
customs brokerage license from the U.S. Department of the Treasury. The
Company generated $20.9 million in international revenues in the fiscal year
ended September 30, 1997, or an increase of $11.1 million over the previous
fiscal year ended September 30, 1996. The Company intends to utilize its
relationships with the major U.S. based air carriers to secure competitive rate
and space agreements for its international cargo. In addition, the Company
continues to emphasize the use of both Eagle Transportation Services and Eagle
Freight Services to facilitate the pick-up, delivery and line-haul for the
domestic portion of international freight shipments. The Company is also
developing an exclusive international information management system which is
expected to utilize Internet-based technology to facilitate its operations and
communications network.
The Company's international operations may be influenced by a number
of factors and subject to risks, many which are beyond the Company's control,
including the volume of international trade, economic and political conditions
in the United States and abroad, work stoppages, exchange controls, currency
fluctuations, wars and other armed conflicts and laws relating to tariffs,
trade restrictions, foreign investment and taxation.
LOCAL DELIVERY SERVICES
Through its subsidiary, Eagle Freight Services, Inc., the Company
provides same-day local pick-up and delivery services, both for shipments for
which it is acting as an air freight forwarder as well as for third-party
customers requiring pick-up and delivery within the same metropolitan area. The
Company believes that Eagle Freight Services provides an important complement
to its air freight forwarding services by allowing for quality control over the
critical pick-up and delivery segments of the transportation process as well as
allowing for prompt, updated information on the status of a customer's shipment
at each step in such process. Eagle Freight Services focuses on obtaining and
servicing those accounts with a relatively high volume of business, which the
Company believes provides a greater potential for profitability than a broader
base of small, infrequent customers. The Company is in the process of upgrading
the information systems used by Eagle Freight Services. Such improvements
included bar code and signature scanners that are currently being field tested
and would allow for enhanced tracking of shipments and real-time access by
shippers of receipt signatures for proof of delivery information. The Company
used a portion of the proceeds from its initial public offering to fund this
upgrade during fiscal years 1997 and 1996
Eagle Freight Services commenced service in Houston in 1989 and in
recent years has rapidly expanded its operations. On October 1, 1994, the
Company acquired a 50% ownership interest in Eagle Freight Services and
acquired the remaining 50% at the closing of the initial public offering on
December 6, 1995. As of September 30, 1997, local delivery services were
offered in 43 of the 60 cities in which the Company's terminals were located,
with 15 of such locations being established during fiscal 1997. Such cities are
generally the sites of the Company's busiest forwarding operations. The Company
currently intends to initiate local pick-up and delivery services in
approximately 20 additional locations in fiscal 1998, although such plans may
change based on several factors. Eagle Freight Services is currently offered at
one location without airfreight forwarding operations. On-demand pick-up and
delivery services are available 24 hours a day, seven days a week. In most
locations, delivery drivers are independent contractors who operate their own
vehicles. The Company's Houston and Columbus operations
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include a number of Company-owned or leased trailers, trucks and other ground
equipment primarily to service certain specific customer accounts.
During the fiscal years ended September 30, 1997 and 1996, Eagle
Freight Services had revenues of $65.0 million and $31.7 million, respectively.
Approximately $47.9 million and $20.2 million of such revenues in the fiscal
years ended September 30, 1997 and 1996, respectively, were attributable to the
Company's air freight forwarding operations, which were approximately 83% and
63%, respectively, of the total cost of providing local pick-up and delivery
for the Company's freight forwarding customers. The remaining $17.1 million and
$11.5 million, respectively, of Eagle Freight Service's revenues in such years
was attributable to local delivery services for third-party (non-forwarding)
customers.
TRUCK BROKERAGE
In April 1995, the Company established Eagle Transportation Services,
Inc. the Company's truck brokerage subsidiary, to provide additional logistical
support to its forwarding operations and, to a lesser extent, to provide
truckload service to selected customers. Eagle Transportation Services locates
and secures capacity when overland transportation is the most efficient means
of meeting customer delivery requirements, especially in cases of air freight
customers choosing the economy delivery option. The use of Eagle Transportation
Services enables the Company to meet delivery requirements without having to
rely on third-party truck brokerage services. Additionally, by providing for
its own truck brokerage, the Company has been able to achieve greater
efficiencies and utilize purchasing power over transportation providers. Eagle
Transportation Services does not own any trucks, but instead utilizes carriers
or independent owner-operators of trucks and trailers on an as-needed basis.
The Company utilizes its relationships with a number of independent trucking
companies to obtain truck and trailer space. If space is not available through
such companies, the Company utilizes electronic bulletin boards to communicate
with independent truckers as to the Company's needs. The average length of haul
was approximately 1,061 and 1,245 miles, during the fiscal years ended
September 30, 1997 and 1996, respectively. Eagle Transportation Services is
operated out of the Company's Houston offices. As with local pick-up and
delivery services, the Company views Eagle Transportation Services primarily as
a means of maintaining quality control and enhancing customer service of its
core air freight forwarding business as well as a means of capturing a portion
of profits that would otherwise be earned by third parties. The Company may
expand its truck brokerage operations selectively in the future beyond
providing support to its air freight operations, to providing truck brokerage
services to customers that do not utilize the Company's air freight services.
INFORMATION SYSTEMS
A primary component of the Company's business strategy is the
continued development of advanced information systems. The Company has invested
substantial management and financial resources in the development of its
information systems in an effort to provide accurate and timely information to
its management and customers. The Company believes the ability to provide
accurate up-to-date information on the status of shipments, both internally (to
ensure on-time delivery and efficient operations) and to customers (through
whatever medium they request), will become increasingly important.
The Company has developed and continues to upgrade its information
systems. The Company's integrated information systems (collectively,
"Worldport") include logistics information, management information and
accounting systems. A central computer located at the Company's headquarters in
Houston, Texas is accessible from computer terminals located at all of its
facilities and from computer terminals located at the facilities of many of the
Company's customers through the use of a toll-free dial-in program developed by
the Company. The Worldport system provides a comprehensive source of
information for managing the logistics of the Company's sourcing and
distribution activities. Specifically, the Worldport system permits the Company
to track the flow of a particular shipment from purchase order through the
transportation process to the point of delivery. Through the system, the
Company can also access daily financial information for the entire Company, a
particular terminal, a particular customer or a given shipment. Worldport
permits on-line entry and retrieval of shipment, pricing, scheduling, booking
and tracking data and interfaces with the Company's management information and
accounting systems. Electronic data interchange connections to selected
airlines permit instant retrieval by the Company, and those of its customers
interfacing with Worldport, of information on the status of shipments in the
custody of those airlines. Worldport's electronic data interchange also allows
for status updates, electronic invoicing, funds exchange and file exchange.
Worldport provides the Company's sales force with margin information on
customers and shipments, thereby enhancing the Company's ability to bid
aggressively for future forwarding business and to avoid committing to
unprofitable shipments. Worldport can provide the Company's management and
customers with reports customized to meet their information requirements. The
Company believes that its systems have been instrumental in the productivity of
its personnel and the quality of its operations and service, and have resulted
in substantial reductions in paperwork and expedited the entry, processing,
retrieval and dissemination of critical
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information, both internally and to customers. The Company's web site allows
customers to obtain shipment tracing information via the Internet.
The expansion of the Company's local pick-up and delivery service is
expected to further improve the Company's logistics system by enabling data
with respect to a shipment to be input remotely from point of pick-up through
point of delivery. The Company has purchased and is field testing the use of
remote hand-held bar code and signature scanners for use by its pick-up and
delivery operations. Worldport is integrated with these scanners to
automatically apply the proof of delivery information to the system. This
information is then made immediately available to all on-line locations as well
as customers' dial-in facilities, allowing for enhanced tracking of shipments
and immediate viewing by shippers of receipt signatures.
The Company's systems also include Eagle-Ship (formally, ASAM), which
allows its customers to automate their shipping process and consolidate their
shipping systems. Eagle-Ship was developed by, and through January 2001 is
licensed to the Company from, ASAM International, which is restricted from
making the system available to most other major air freight forwarders during
that time. For customers using Eagle-Ship, the Company provides a dedicated
personal computer, printer and bar code scanner that allow the customer's
shipping dock personnel to process and weigh boxes, record the shipment,
produce customized box labels and print an Eagle house airway bill or bill of
lading. Eagle-Ship also provides customers with weight analysis, tariff
reporting, assistance in consolidation of like orders and price comparison
among shipping options.
Eagle-Ship enables the Company's customers to process shipments for
many carriers with one personal computer and to compare the cost and service
options of various carriers, consolidate Eagle-Ship label printing and generate
reports that profile the customer's shipping activity. Eagle-Ship is designed
to run shipping systems for United Parcel Service of America, Inc., Federal
Express Corporation, Airborne Freight Corporation and Emery Air Freight
Corporation, and can be customized to run the systems of up to 99 other air and
truck carriers. The Company believes that Eagle-Ship gives it a competitive
advantage among a growing number of customers that are resistant to the
proliferation of dedicated shipper systems because of the cost, complexity and
dock space required to maintain a separate personal computer for each carrier,
and that the use of Eagle-Ship should lead to increased use of the Company's
services by helping to ensure that customers will allocate dock space to
Eagle-Ship rather than multiple systems from other carriers. Although
Eagle-Ship does provide customers with assistance in selecting competitors for
the Company's shipping services, the Company believes that much of such
information, such as that relating to Federal Express Corporation, is used in
the delivery of documents and small packages, which constitute a small portion
of the Company's cargoes, and that, overall, Eagle-Ship will demonstrate to
customers the advantages of the Company's services in comparison to its more
direct competitors. As of September 30, 1997 and 1996, the Company had
installed 62 and 31, respectively, Eagle-Ship personal computers for its
customers. The Company believes that Eagle-Ship enhances its ability to market
to national accounts.
LOGISTICS SERVICES
Many customers are increasingly demanding more than the simple
movement of freight from their transportation suppliers. To meet these needs,
suppliers, such as the Company, seek to customize their services, by, among
other things, providing information on the status of materials, components and
finished goods through the logistics pipeline and providing performance reports
on and proof of delivery for each shipment.
The Company utilizes its logistics expertise to maximize the
efficiency and performance of its forwarding and other transportation services
to its customers. In addition, the Company provides transportation consulting
services and makes available its expertise and resources to assist customers in
balancing their transportation needs against budgetary constraints by
developing logistics plans for its customers. The Company staffs and manages
the shipping department of certain of its customers that outsource their
transportation function and may seek to provide outsourcing services to other
customers in the future. The Company also provides other ancillary services,
such as electronic data interchange, custom shipping reports, computerized
tracking of shipments, customs brokerage, air charters, warehousing, cargo
assembly and protective packing and crating.
The Company has established Eagle Exhibitor Services, an internal
group that focuses on the special needs of exhibitors in the trade show
industry. In addition to air freight forwarding and charter services, this
group provides special exhibit handling, by-appointment delivery, caravan
services and short-term warehousing.
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MARKETING AND CUSTOMERS
The Company's customers include large manufacturers and distributors
of computers and other electronic and high-technology equipment, printed and
publishing materials, automotive parts, trade show exhibit materials,
telecommunications equipment, machinery and machine parts and apparel. For the
fiscal year ended September 30, 1997, no customer accounted for greater than
10% of the Company's revenues. Adverse conditions in the industries of the
Company's customers or loss of a significant customer could negatively impact
the Company. The Company expects that demand for the Company's services (and
consequently its results of operations) will continue to be sensitive to
domestic and, increasingly, global economic conditions and other factors beyond
its control.
The Company markets its services through an organization consisting of
approximately 175 full-time salespersons supported by the sales efforts of
senior management, its six regional managers, its ten regional sales managers,
its terminal managers and its national services center. The Company plans to
emphasize the marketing of international services through a separate sales
force. Managers at each terminal are responsible for customer service and
coordinate the reporting of customers' requirements and expectations with the
regional managers and regional sales managers. In addition, the regional
managers are responsible for the financial performance of the stations in their
region. Company employees are available 24 hours a day to respond to customer
inquiries.
The Company has increased its emphasis on obtaining high-revenue
national accounts with multiple shipping locations. These accounts typically
impose numerous requirements on those competing for their freight business,
such as electronic data interchange and proof of delivery capabilities, the
ability to generate customized shipping reports and a nationwide network of
terminals. These requirements often limit the competition for these accounts to
integrated carriers and a very small number of forwarders. The Company believes
that its recent growth and development has enabled it to more effectively
compete for and obtain these accounts.
COMPETITION AND INDUSTRY TRENDS
Competition within the freight industry is intense. Although the
industry is highly fragmented, with a large number of participants, the Company
competes most often with a relatively small number of forwarders with
nationwide networks and the capability to provide the breadth of services
offered by the Company and with fully integrated carriers focusing on heavy
cargo, including Emery Air Freight Corporation and BAX Global, Inc. The Company
also encounters competition from passenger and cargo air carriers, trucking
companies and others. As the Company expands its international operations, it
expects to encounter increased competition from those forwarders that have a
predominantly international focus, including Fritz Companies Inc., Expeditors
International of Washington Inc., Circle Group, Inc. and Air Express
International Corporation, as well as from its competitors for domestic
forwarding. Many of the Company's competitors have substantially greater
financial resources than the Company. The Company also encounters competition
from regional and local air freight forwarders, cargo sales agents and brokers,
surface freight forwarders and carriers and associations of shippers organized
for the purpose of consolidating their members' shipments to obtain lower
freight rates from carriers. The Company believes that quality of service,
including reliability, responsiveness, expertise and convenience, scope of
operations, information technology and price are the most important competitive
factors in its industry.
EMPLOYEES
The Company had approximately 1,575 full-time employees at September
30, 1997, including 175 sales personnel. None of the Company's employees are
currently covered by a collective bargaining agreement. The Company has
experienced no work stoppages and considers its relations with its employees to
be good. The Company also has contracts with approximately 659 independent
owner/operators of local delivery services as of September 30, 1997. The
independent owner/operators own, operate and maintain the vehicles they use in
their work for the Company and may employ qualified drivers of their choice.
Company-owned vehicles are driven by 137 Company employees as of September 30,
1997.
The Company pays its entire sales force and most of its operations
personnel what it believes is significantly more than the industry average and
offers a broad-based compensation plan to these employees. Sales personnel are
paid a gross commission on shipments sold, while operations personnel and
management are paid bonuses based on the profitability of their terminals, as
well as the profitability of the Company. To ensure quality control and the
profitability of accounts, terminal managers retain the final approval on all
accounts.
8
<PAGE> 9
From time to time, third parties, including the Internal Revenue
Service ("IRS") and state authorities, have sought to assert, and at times have
been successful in asserting, that independent owner/operators in the
transportation industry, including those of the type utilized in connection
with the Company's local pick-up and delivery operations, are "employees,"
rather than "independent contractors," thus requiring the withholding of
employee and payroll taxes. Although the Company believes that the independent
owner/operators utilized by it are not employees, there can be no assurance
that the IRS and state authorities will not challenge this position, or that
federal and state tax or other applicable laws, or interpretations thereof,
will not change. If they do, the Company could incur additional employee
benefit-related expenses and could be liable for additional taxes, penalties
and interest for prior periods and additional taxes for future periods. From
time to time drivers for Eagle Freight Services are involved in accidents.
Although most of these drivers are independent contractors, there can be no
assurance that the Company will not be held liable for the actions of such
drivers or that claims against the Company will not exceed the amount of
insurance coverage. An increase in the costs relating to accidents, claims or
insurance could adversely affect the Company.
REGULATION
The Company's air freight forwarding business is subject to
regulation, as an indirect air cargo carrier, under the Federal Aviation Act by
the Department of Transportation, although air freight forwarders are exempted
from most of such Act's requirements by the Economic Aviation Regulations
promulgated thereunder. The Company's foreign air freight forwarding operations
are subject to similar regulation by the regulatory authorities of the
respective foreign jurisdictions. The air freight forwarding industry is
subject to regulatory and legislative changes which can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and the costs of providing, services to customers.
The Company's delivery operations are subject to various state and
local regulations and, in many instances, require permits and licenses from
state authorities. In addition, certain of the Company's delivery operations
are regulated by the Surface Transportation Board. These state and federal
authorities have broad power, including the power to approve certain mergers,
consolidations and acquisitions, and the power to regulate the delivery of
certain types of shipments and operations within certain geographic areas, and
the Surface Transportation Board has the power to regulate motor carrier
operations, approve certain rates, charges and accounting systems and require
periodic financial reporting. Interstate motor carrier operations are also
subject to safety requirements prescribed by the Federal Department of
Transportation. In some potential locations for the Company's delivery
operations, state and local permits and licenses may be difficult to obtain.
The Company's truck brokerage operations require it to be regulated as
a property broker by the Surface Transportation Board for which the Company has
obtained a property broker license and surety bond. The Company's current
domestic customs brokerage agents are, and any such future internal customs
brokerage operations will be, subject to the licensing requirements of the
United States Department of the Treasury and are regulated by the United States
Customs Service. The Company's foreign customs brokerage agents are licensed in
and subject to the regulations of their respective countries. The Federal
Maritime Commission will regulate the Company's expected ocean forwarding
operations (the "FMC"). The FMC licenses ocean freight forwarders. Indirect
ocean carriers (Non-Vessel Operating Common Carriers) are subject to FMC
regulation, under the FMC tariff filing and surety bond requirements, and under
the Shipping Act of 1984, particularly those terms proscribing rebating
practices.
In the United States, the Company is subject to federal, state and
local provisions relating to the discharge of materials into the environment or
otherwise for the protection of the environment. Similar laws apply in many
foreign jurisdictions in which the Company may operate in the future. Although
current operations have not been significantly affected by compliance with
these environmental laws, governments are becoming increasingly sensitive to
environmental issues, and the Company cannot predict what impact future
environmental regulations may have on its business. The Company does not
anticipate making any material capital expenditures for environmental control
purposes during the remainder of the current or succeeding fiscal years.
Certain federal officials are considering implementing increased
security measures with respect to air cargo. There can be no assurance as to
what, if any, regulations will be adopted or, if adopted, as to their ultimate
effect on the Company. The Company does not believe that costs of regulatory
compliance have had a material adverse impact on its operations to date.
However, failure of the Company to comply with the applicable regulations or to
maintain required permits or licenses could result in substantial fines or
revocation of the Company's operating permits or authorities. There can be no
assurance as to the degree or cost of future regulations on the Company's
business.
9
<PAGE> 10
ITEM 2. PROPERTIES
As of September 30, 1997, the Company's corporate office occupied
approximately 51,000 square feet of space in facilities located in Houston,
Texas. All corporate office space is leased under agreements that expire in
1998. The Company's 60 terminal locations typically are located at or near
major metropolitan airports and occupy approximately 1,000 to 52,000 square
feet of leased space each and typically consist of offices, warehouse space,
bays for loading and unloading and facilities for packing. In addition, the
Company has locations that are limited to sales and administrative activities.
Currently, other than its Newark terminal, all of such properties are leased,
although the Company may purchase or construct facilities if it believes it can
do so on a more attractive basis. The Company has purchased a site near its
Houston terminal and is constructing a new terminal, warehouse and headquarters
facility expected to be completed in February 1998. Generally, each terminal
location lease is for a term of three to six years and expires between fiscal
1998 and fiscal 2003. From time to time, the Company may expand or relocate
certain terminals to accommodate growth.
The Company's terminals as of September 30, 1997 were:
<TABLE>
<CAPTION>
LOCATION AIRPORT SERVED MONTH AND YEAR OPENED
-------- -------------- ---------------------
<S> <C> <C>
Houston, Texas* Houston Intercontinental Airport March 1984
Dallas, Texas* Dallas Ft. Worth International Airport November 1988
St. Louis, Missouri* Lambert St. Louis International Airport February 1989
Atlanta, Georgia* Atlanta Hartsfield International Airport October 1989
Los Angeles, California* Los Angeles International Airport May 1991
San Francisco, California* San Francisco International Airport June 1991
Chicago, Illinois* Chicago O'Hare International Airport February 1992
Newark, New Jersey* Newark International Airport May 1992
Boston, Massachusetts* Boston Logan International Airport February 1993
Charlotte, North Carolina* Charlotte Douglas International Airport March 1993
Denver, Colorado* Denver International Airport March 1993
San Antonio, Texas* San Antonio International Airport March 1993
El Paso, Texas El Paso International Airport September 1993
Orlando, Florida* Orlando International Airport September 1993
San Diego, California* San Diego Lindbergh Field International Airport October 1993
Seattle, Washington* Seattle Tacoma International Airport October 1993
Kansas City, Missouri* Kansas City International Airport January 1994
Oklahoma City, Oklahoma* Will Rogers International Airport January 1994
Raleigh-Durham, North Carolina* Raleigh-Durham Airport January 1994
Austin, Texas* Robert Mueller Municipal Airport February 1994
Greenville, South Carolina* Greenville/Spartanburg Airport March 1994
Cincinnati, Ohio* Cincinnati/N. Kentucky International Airport April 1994
Minneapolis, Minnesota* Minneapolis St. Paul International Airport May 1994
Memphis, Tennessee* Memphis International Airport July 1994
Detroit, Michigan* Detroit Metro Airport September 1994
Portland, Oregon* Portland International Airport September 1994
Baltimore, Maryland/Washington, D.C.* Baltimore/Washington International Airport September 1994
Phoenix, Arizona* Phoenix Sky Harbor International Airport November 1994
Cleveland, Ohio* Cleveland Hopkins International Airport December 1994
Philadelphia, Pennsylvania* Philadelphia International Airport December 1994
McAllen, Texas* McAllen Miller International Airport January 1995
Albuquerque, New Mexico* Albuquerque International Airport June 1995
Las Vegas, Nevada McCarran International Airport July 1995
Indianapolis, Indiana* Indianapolis International Airport July 1995
Sacramento, California* Sacramento Metro Airport July 1995
San Juan, Puerto Rico Luis Munoz Marin International Airport August 1995
Pittsburgh, Pennsylvania* Pittsburgh International Airport September 1995
Milwaukee, Wisconsin* Mitchell International Field December 1995
New Orleans, Louisiana* New Orleans International Airport January 1996
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
LOCATION AIRPORT SERVED MONTH AND YEAR OPENED
-------- -------------- ---------------------
<S> <C> <C>
Miami, Florida* Miami International Airport March 1996
Hartford, Connecticut Bradley International Airport April 1996
Salt Lake City, Utah Salt Lake City International Airport May 1996
Honolulu, Hawaii Honolulu International Airport May 1996
Columbus, Ohio* Port Columbus International Airport June 1996
Tulsa, Oklahoma Tulsa International Airport July 1996
Omaha, Nebraska Eppley Airport July 1996
Tucson, Arizona* Tucson International Airport July 1996
Laredo, Texas Laredo International Airport October 1996
Anchorage, Alaska Anchorage International Airport October 1996
Richmond, Virginia* Richmond International Airport October 1996
Toronto, Ontario* Pearson International Airport December 1996
Monterey, Mexico Aeropuerto Internacional Mariano Escobedo April 1997
South Bend, Indiana Michiana Regional Airport April 1997
Harrisburg, Pennsylvania * Harrisburg International Airport April 1997
Washington, D.C.** Dulles International Airport April 1997
Boise, Idaho Boise Air Terminal June 1997
Reno, Nevada Reno/Tahoe International June 1997
Nashville, Tennessee * Barryfield Nashville Airport July 1997
Little Rock, Arkansas Little Rock National Airport August 1997
Guadalajara, Mexico Aeropuerto Internacional Miguel Hidalgo September 1997
Mexico City, Mexico Aeropuerto Internacional De La CD. De Mexico September 1997
</TABLE>
-----------------------
* Includes Eagle Freight Services local pick-up and delivery operations.
** Eagle Freight Services location only.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
In December 1997, the U.S. Equal Employment Opportunity Commission
("EEOC") issued a Commissioner's Charge against the Company and certain of its
subsidiaries (the "Commissioner's Charge") pursuant to Sections 706 and 707 of
Title VII of the Civil Rights Act of 1964, as amended ("Title VII"). The
Company intends to vigorously defend against the allegations contained in the
Commissioner's Charge. In the Commissioner's Charge, the EEOC charged the
Company and certain of its subsidiaries with violations of Section 703 of Title
VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal
Pay Act of 1963, resulting from (i) engaging in unlawful discriminatory hiring,
recruiting, and promotion practices and maintaining a hostile work environment,
based on one or more of race, national origin, age and gender, (ii) failures to
investigate, (iii) failures to maintain proper records and (iv) failures to file
accurate reports. The Commissioner's Charge states that the persons aggrieved
include all Blacks, Hispanics, Asians and females who are, have been or might be
affected by the alleged unlawful practices. The Company cannot currently
predict with any great degree of certainty the length of time it will take to
resolve this matter, the likely outcome of this matter or the effect of any such
outcome. An adverse determination of the matters in the Commissioner's Charge
would likely result in a civil action by the EEOC that could seek back pay,
other compensatory damages, and punitive damages for the allegedly aggrieved
persons.
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. Except as described above, the
Company is not currently a party to any material litigation and is not aware of
any litigation threatened against it which it believes would have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, the following information is included in Part I
of this Form 10-K.
The following table sets forth certain information concerning the
executive officers of the Company as of October 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James R. Crane 43 Chairman, President and Chief Executive Officer
Douglas A. Seckel 46 Chief Financial Officer, Secretary and Treasurer
OTHER KEY EMPLOYEES:
Ron Talley 46 Chief Operating Officer (since December, 1997)
Dan DiGregorio 43 Vice President of Management Information Systems
Wayne Tompkins 46 Senior Vice President of Operations
</TABLE>
The following background material is provided for each executive
officer and other key employees, including employment history for at least the
last five years:
James R. Crane has served as President and a director of the Company
since he founded the Company in March 1984.
Douglas A. Seckel has served as Chief Financial Officer of the Company
since April 1989, has served as Secretary and Treasurer of the Company since
May 1991 and has served as director of the Company since May 1995. Mr. Seckel
and Mr. Crane are first cousins.
Ron Talley was appointed Chief Operating Officer of the Company in
December 1997. He joined the Company in 1990 as a station manager, and later
served as a regional manager. In 1996, he served as a Senior Vice President of
Eagle Freight Services, Eagle Transportation and Eagle Charter, and most
recently, he has served as Senior Vice President of Air and Truck Operations for
the Company. Prior to joining the Company, Mr. Talley served as a station
manager at Holmes Freight Lines from 1982 to 1990. From 1979 to 1982, Mr.
Talley held a variety of management positions with Trans Con Freight Lines.
From 1969 to 1979, Mr. Talley served in several management positions at Roadway
Express.
Dan DiGregorio has served as Vice President of Management Information
Systems since October 1996. Previously, Mr. DiGregorio served as a director of
Worldwide Technical Support for Air Express International Corp. since 1986 and
has over 20 years experience related to management information systems in
international and domestic airfreight forwarding operations.
Wayne Tompkins has served as Senior Vice President of Operations since
October 1996. Mr. Tompkins joined the Company in January 1996 and served as the
manager of the Company's San Francisco terminal during a transitional period
before assuming his current position. Prior to joining the Company, he served
as President of Red Arrow Freight Lines Inc. from 1994 to 1995 and served in
various senior management positions at Roadway Express Inc. from 1976 to 1993.
Mr. Tompkins has over 20 years of transportation experience.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
(a) The Company's common stock has been publicly traded through
the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol
EUSA since the Company's initial public offering effective November 30, 1995.
The following table sets forth the quarterly high and low closing sales prices
for each indicated quarter of fiscal 1997 and 1996, as adjusted retroactively
for a 2-for-1 stock split which occurred August 1, 1996:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
December 31, 1995 13 1/8 9 1/8
March 31, 1996 15 1/2 12 1/4
June 30, 1996 19 13 3/4
September 30, 1996 26 17 1/4
December 31,1996 27 3/4 25 1/4
March 31, 1997 33 1/2 25 1/4
June 30, 1997 31 3/8 18
September 30, 1997 36 1/8 24 1/8
</TABLE>
There were approximately 1,674 shareholders of record (including
brokerage firms and other nominees) of the Company's common stock as of
November 26, 1997.
From October 1992 to the Company's initial public offering, the
Company was an S Corporation and distributed to its shareholders all of its
taxable income. Prior to its initial public offering, the Company made
distributions of cash and/or notes to its pre-IPO shareholders in an estimated
amount of $2.7 million and $14.6 million in fiscal 1996 and 1995, respectively.
A final payment on the notes of approximately $635,000 was made during the
fiscal year ended September 30, 1997. Since its initial public offering, the
Company has not paid cash dividends on its common stock and it is the current
intention of management to retain earnings to finance the growth of the
Company's business. The Company's credit facility limits dividend payments to
25% of the Company's cumulative net worth generated after the date of the
initial public offering.
(b) Use of Proceeds.
The Company's Registration Statement on Form S-1 (Registration No.
33-97606), as amended, with respect to the initial public offering (the
"Offering") of shares of Company's Common Stock, par value $0.001 per share
(the "Common Stock"), was declared effective by the Securities and Exchange
Commission on November 30, 1995. The Offering commenced on December 1, 1995,
and has since terminated, resulting in the sale by the Company of 2,300,000
shares of Common Stock on December 6, 1995 (including 300,000 shares of Common
Stock sold pursuant to the exercise of the underwriters' over-allotment
option). The shares sold constitute all of the shares of Common Stock covered
by the Registration Statement. The managing underwriters for the Offering were
Donaldson, Lufkin & Jenrette Securities Corporation and The Robinson-Humphrey
Company, Inc.
The aggregate price to the public for the shares sold in the Offering
was $37,950,000. The expenses incurred by the Company with respect to the
Offering were as follows:
<TABLE>
<S> <C>
Underwriter Discounts and Commissions . . . . . . . . . . . . $ 2,656,500
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . 734,000
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,390,500
===========
</TABLE>
Approximately $22,000 of Other Expenses consisted of payments to a
corporation owned by the Company's Chairman of the Board in reimbursement for
expenses related to the use of that corporation's owned aircraft in the
Offering. None of the other amounts set forth above as Other Expenses were
direct or indirect payments to directors or officers of the Company or their
associates, to persons owning ten percent or more of any class of equity
securities of the Company or to affiliates of the Company.
The net proceeds to the Company from the Offering were $34.6 million.
As of September 30, 1997, the Company has used such net proceeds as follows:
(i) to repay $2.1 million of indebtedness outstanding under the Company's
revolving credit
13
<PAGE> 14
facility, (ii) to repay $11.6 million of promissory notes outstanding to
certain of the Company's directors and officers, (iii) to pay $3.9 million of
expenses relating to the upgrade of the Company's information systems, (iv) to
pay $5.6 million for a fiscal 1997 acquisition, (v) to pay $900,000 to purchase
the site of the Company's Newark terminal, and (vi) to make $10.5 million in
temporary investments. Except as set forth in clause (ii), none of such
payments were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning ten percent or more of any class
of equity securities of the Company or to affiliates of the Company.
Recent Sales of Unregistered Securities.
As described in more detail under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" the Company issued 33,362 shares of Common Stock on September 19,
1997 as partial consideration for the acquisition of the assets of Michael
Burton Enterprises, Inc. Such transaction is exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof as a
transaction not involving any public offering.
As described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-General" above and the Company's Prospectus
dated November 30, 1995, concurrent with the closing of Company's initial
public offering on December 6, 1995, the Company issued 223,025 shares of
Common Stock to James R. Crane to purchase his interests in the Company's
subsidiaries. Such transaction is exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) thereof as a transaction not
involving any public offering.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company
which have been derived from consolidated financial statements that have been
audited by Price Waterhouse LLP, independent accountants. The selected
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $291,767 $185,445 $126,214 $83,276 $47,425
Operating income 25,699 17,849 12,205 5,886 2,390
Net Income(1) 16,798 11,481 7,507 3,554 1,462
Net income per share (1)(2) .90 .66 .51 -- --
Weighted average shares outstanding (2) 18,682 17,521 14,782 12,000 12,000
OPERATING DATA:
Gross margin 43.9% 44.3% 42.7% 40.2% 39.9%
Operating margin 8.8% 9.6% 9.7% 7.0% 5.0%
Operating ratio (3) 91.2% 90.4% 90.3% 93.0% 95.0%
Same terminal revenue growth(4) 48.7% 29.3% 29.1% 44.0% 63.0%
Air freight terminals at period end 60 47 37 27 14
Local delivery locations at period end 44 28 11 0 0
Freight forwarding shipments 832,704 524,685 382,583 291,956 178,545
Average revenue per freight forwarding $329 $331 $314 $285 $266
shipment
Average weight (lbs) per freight 521 576 608 520 506
forwarding shipment
BALANCE SHEET DATA: (at year end)
Working capital $60,638 $41,487 $6,852 $3,510 $1,025
Total assets 106,871 71,729 24,468 16,612 9,884
Long-term indebtedness, net of 0 0 8,474 11 18
current portion
Shareholders' equity 80,504 50,442 1,699 5,031 2,032
</TABLE>
- -----------------------
(1) Net income for fiscal 1996, 1995, 1994, and 1993 includes a pro forma
charge of $945, $3,682, $1,916 and $823, respectively, which
represents the estimated federal income taxes that would have been
reported had Eagle USA been a C Corporation prior to December 4, 1995.
(2) Net income per share for fiscal 1996 and 1995 is computed by dividing
net income by the weighted average number of shares of common stock
outstanding during the period, adjusted to include the following: (i)
the retroactive restatement giving effect to the 2-for-1 stock split
in August 1996; (ii) the weighted average of common stock equivalents
issuable upon exercise of stock options, less the number of shares
that could have been repurchased with the exercise proceeds using the
treasury stock method; and (iii) the number of shares required to be
sold by the Company to fund S Corporation shareholder distributions
upon closing of the initial public offering. The computation for the
year ended September 30, 1996 also includes the number of shares that
the Company's Chairman of the Board received upon the closing of the
initial public offering in connection with the Company's acquisition
of interests in subsidiaries. Historical earnings per share is not
provided for fiscal 1994 and 1993, as such inclusion is considered to
be irrelevant.
(3) Operating expenses as a percentage of revenue.
(4) Percentage increase in revenues for those terminals open as of the
beginning of the prior fiscal year.
15
<PAGE> 16
Forward Looking Statements. The statements contained in all parts of
this document (including the portion, if any, appended to the Form 10-K)
including, but not limited to, those relating to the availability of cargo
space; the Company's overseas presence and the plans for and effects and results
of international air freight forwarding services and agreements for
international cargo; future international revenue and international market
growth; the future expansion and results of the Company's terminal network;
plans for local delivery services and truck brokerage; future improvements in
the Company's information systems and logistic systems and services;
technological advancements; future marketing results; construction of the new
facilities; the effect of litigation; future costs of transportation; future
operating expenses; technological advancements; future margins; any seasonality
of the Company's business; future dividend plans; future acquisitions; effects
of Columbus and any other acquisition; use of offering proceeds; ability to
continue growth and implement growth and business strategy; the ability of
expected sources of liquidity to support working capital and capital expenditure
requirements; the tax benefit of any stock option exercises; fiscal 1998
expectations; and any other statements regarding future growth, future cash
needs, future terminals, future operations, business plans, future financial
results, financial targets and goals and any other statements which are not
historical facts are forward-looking statements. When used in this document, the
words "anticipate," "estimate," "expect," "may," "plans," "project," and similar
expressions are intended to be among the statements that identify
forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, those relating to the Company's dependence on its
ability to attract and retain skilled managers and other personnel; the intense
competition within the freight industry; the uncertainty of the Company's
ability to manage and continue its growth and implement its business strategy;
the Company's dependence on the availability of cargo space to serve its
customers; the potential for liabilities if certain independent owner/operators
that serve the Company are determined to be employees; effects of regulation;
results of litigation; the Company's vulnerability to general economic
conditions and dependence on its principal customers; the control by the
Company's principal shareholder; the Company's potential exposure to claims
involving its local pick-up and delivery operations; the Company's future
financial and operating results, cash needs and demand for its services; and the
Company's ability to maintain and comply with permits and licenses, as well as
other factors detailed in this document and the Company's other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated. The Company undertakes
no responsibility to update for changes related to these or any other factors
that may occur subsequent to this filing.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations should be read in conjunction with the
Company's consolidated financial statements and the notes thereto.
GENERAL
During the past two fiscal years, the Company's revenues increased at
a compound annual rate of 52.1% to $291.8 million in the fiscal year ended
September 30, 1997 from $126.2 million in the fiscal year ended September 30,
1995, and its operating income increased at a compound annual rate of 45.1% to
$25.7 million in fiscal 1997 from $12.2 million in fiscal 1995. The Company's
recent growth has been generated almost exclusively by increasing the number of
terminals operated by the Company and growth in revenue produced by existing
terminals. Since October 1, 1995, it has added 23 terminals, increasing the
total to 60 at September 30, 1997. At that date, 13 of these 60 terminals had
been open less than 12 months.
The Company plans to continue to expand its terminal network. The
Company currently plans to open terminals in approximately 15 additional cities
in fiscal 1998. Such plans, however, are subject to change based on a variety
of factors. The expansion of the Company's terminals is expected to occur
primarily in the United States, Canada and Mexico. The Company may complement
its internal expansion with selective acquisitions.
The opening of a new terminal generally has an initial negative impact
on the Company's profitability due to operating losses of the new terminal. The
opening of a new terminal generally does not require significant capital
expenditures. Additionally, personnel costs are contained at the time of the
opening of a new terminal because commissions are generally not paid until
salesmen achieve minimum sales levels and until managers achieve terminal
profitability. Although future new terminals may be opened in cities smaller
than those in which the Company's more mature terminals are located, the
Company believes the results of new terminals should benefit from a ready base
of business provided by its existing customers.
16
<PAGE> 17
The Company intends to continue to expand its international freight
forwarding business. International shipments typically generate higher revenues
per shipment than domestic shipments. The Company anticipates that the costs of
transportation for international freight will be higher than for domestic
freight as a percentage of such revenues, resulting in lower gross margins than
domestic shipments; however, the Company does not expect its operating expenses
to increase in proportion to such revenues. The Company also intends to
continue the growth of its local pick- up and delivery operations. By providing
local pick-up and delivery services with respect to shipments for which it is
the freight forwarder, the Company has been able to increase its gross margin
with respect to such shipments because it captures margins which were
previously paid to third parties. However, the Company's local pick-up and
delivery services provided to other (non-forwarding) customers generate a lower
gross margin than the Company's domestic forwarding operations due to their
higher transportation costs as a percentage of revenues.
Effective October 1, 1992, Eagle elected to be treated as an S
Corporation under Subchapter S of the Internal Revenue Code and comparable
provisions of certain state tax laws. From October 1, 1992 until the
termination of its S Corporation status, the Company paid no federal income
tax. For financial reporting purposes, for periods prior to the Company's
initial public offering, Eagle recorded a provision for state income taxes for
all states in which it operated. The Company also has recorded for fiscal 1996
and 1995 the federal income tax liability for each of its subsidiaries, which
had paid federal income taxes. Shortly prior to the initial public offering in
December 1995, Eagle's status as an S Corporation was terminated, and for
periods thereafter, Eagle has been liable for federal income taxes and state
income taxes in certain states. Prior to the closing of the initial public
offering, Eagle declared distributions payable both in cash and in the form of
special distribution notes in an amount equal to all of Eagle's undistributed S
Corporation earnings up through such closing. The final payment of these notes
was made in fiscal 1997. The Company has no plans to pay any dividends or
distributions in the foreseeable future.
On October 1, 1994, the Company purchased a 50% interest in Eagle
Freight Services, Inc. and C&D Freight Services of California, Inc. from a
third party and, during fiscal 1995 purchased a 50% interest in Freight
Services Management, Inc. from the Company's Chairman of the Board and
initiated operation of Eagle USA Transportation Services, Inc. and Eagle USA
Import Brokers, Inc. (the "Eagle Subsidiaries"). The remaining interests in the
Eagle Subsidiaries were purchased from the Company's Chairman of the Board
immediately prior to the closing of the initial public offering in December
1995. Because Eagle controlled the Eagle Subsidiaries, results for fiscal 1995
and 1996 reflect the operations of all of the Eagle Subsidiaries as if they had
been 100% owned by the Company as of the beginning of the period presented.
The Company has experienced significant growth primarily through
increases in sales at existing terminals and opening new terminals. The Company
has also recently completed the acquisition of the assets of a Columbus, Ohio
transportation provider. See "--Liquidity and Capital Resources." The Company
anticipates that its growth strategy in the future will include internal growth
in its domestic and international freight forwarding, local pick-up and
delivery and truck brokerage business, and could also include additional
acquisitions. The Company's ability to continue its growth will depend on a
number of factors, including existing and emerging competition, the ability to
open new terminals, the ability to maintain profit margins in the face of
competitive pressures, the continued recruitment, training and retention of
operating and management employees, the strength of demand for its services and
the availability of capital to support such growth and the ability to identify,
negotiate and fund acquisitions when appropriate. International operations are
likely to involve increased costs and risks including those related to foreign
regulation, intensified competition, currency fluctuations and exchange
controls. Acquisitions involve risks, including those relating to the
integration of acquired business, retention of prior levels of business,
retention of employees, diversion of management attention, amortization of
acquired intangible assets, unexpected liabilities and other problems. There
can be no assurance that the Company will be successful in implementing any of
its business strategy or plans for future growth.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share." The
Company will adopt SFAS 128 as required effective October 1, 1997. SFAS 128
replaces the presentation of primary earnings per share with a presentation of
"basic" earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. It also requires
presentation of diluted earnings per share, which reflects the potential
dilution that could occur if securities convertible into common stock were
exercised. See Note 1 of Notes to Consolidated Financial Statements.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table presents certain statement of income data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of transportation 56.1 55.7 57.3
---- ---- ----
Gross profit 43.9 44.3 42.7
Personnel costs 23.2 22.5 22.1
Other selling, general and administrative expenses 11.9 12.2 10.9
---- ---- ----
Operating expenses 35.1 34.7 33.0
---- ---- ----
Operating income 8.8% 9.6% 9.7%
==== === ===
Net income 5.8% 6.2% 6.0%
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1996
Revenues increased 57.3% to $291.8 million in fiscal 1997 from $185.4
million in fiscal 1996 primarily due to increases in the number of shipments
and total weight of cargo shipped, which resulted from an increase in the
number of terminals open during such period, an increase in penetration in
existing markets, and the addition of significant national account customers.
The number of shipments increased 58.7% (in part attributable to an increased
number of smaller shipments during the UPS strike) and the total weight of
cargo shipped increased 43.5% over fiscal 1996. For those terminals open as of
the beginning of fiscal 1996, revenues increased approximately 48.7% to $253.4
million in fiscal 1997 from $170.5 million in fiscal 1996. Revenues for fiscal
1997 were comprised of $273.7 million of forwarding revenues, $17.1 million of
local pick-up and delivery revenues and $1.0 million of other freight
forwarding revenues. Total local pick-up and delivery revenues for the
Company's Eagle Freight Services subsidiary for fiscal 1997 were $65.0 million,
an amount that includes $47.9 million of intercompany sales to Eagle (which
were eliminated upon consolidation) and $17.1 million in services to
third-party (non-forwarding) customers.
Cost of transportation increased as a percentage of revenues to 56.1%
in fiscal 1997 from 55.7% in fiscal 1996. The increase was the result of
several factors. For the period October 1996 to May 1997, several of the
Company's transportation providers implemented a fuel surcharge which was not
in effect during fiscal 1996. Increased revenues from international freight
(which generally have lower gross margins than domestic shipments), which were
$20.9 million in fiscal 1997 as compared to $9.8 million in fiscal 1996, also
contributed to the higher cost of transportation as a percentage of revenues.
Additionally, the reinstatement on March 7, 1997 of the Federal Air Cargo
Transportation Excise Tax (the "Federal Excise Tax"), which had previously
expired January 1, 1997, negatively impacted cost of transportation as a
percentage of revenues for the year. In fiscal 1996, the Federal Excise Tax
expired January 1, 1996 and was not reinstated until August 27, 1996. These
factors were additionally offset by the continued expansion of the Company's
local pick-up and delivery operations, which enabled the Company to capture
margins previously paid to third parties. Cost of transportation increased in
absolute terms by 58.4% to $163.6 million in fiscal 1997 from $103.3 million in
fiscal 1996 as a result of increases in air freight shipped. Gross margins
decreased to 43.9% in fiscal 1997 from 44.3% in fiscal 1996. Gross profit
increased 56.0% to $128.2 million in fiscal 1997 from $82.1 million in fiscal
1996.
Operating expenses increased as a percentage of revenues to 35.1% in
fiscal 1997 from 34.7% in fiscal 1996. Operating expenses increased in
absolute terms by 59.4% to $102.5 million in fiscal 1997 from $64.3 million in
fiscal 1996. Personnel costs increased as a percentage of revenues to 23.2% in
fiscal 1997 from 22.5% in fiscal 1996, and increased in absolute terms by 62.9%
to $67.8 million due to increased staffing needs associated with the opening of
13 new terminals and to a lesser extent with respect to the UPS strike,
expanded operations at existing terminals and increased revenues, which
resulted in an increase in commissions and expanded corporate infrastructure.
Such personnel costs include all compensation expenses, including those
relating to sales commissions and salaries to headquarters employees and
executive officers. Other selling, general and administrative expenses
decreased as a percentage of revenues to 11.9% in fiscal 1997 from 12.2% in
fiscal 1996, and increased in absolute terms by 52.8% to $34.6 million in
fiscal 1997 from $22.7 million in fiscal 1996. In fiscal 1997, selling expenses
decreased by 0.2% and other general and administrative expenses decreased by
0.1% compared to fiscal 1996. The absolute
18
<PAGE> 19
increases in selling, general and administrative expenses were due to overall
increases in the level of the Company's activities in fiscal year 1997.
Operating income increased 44.0% to $25.7 million in fiscal 1997 from
$17.8 million in fiscal 1996 for the reasons indicated above. Non-operating
income increased to approximately $1.7 million in fiscal 1997 from
approximately $934,000 in fiscal 1996 due to increased amounts of short-term
investments as a result of the cash proceeds from the Company's initial and
secondary public offerings and a one-time payment of $375,000, in reimbursement
of internal costs related to the February 1997 secondary public offering (see
"--Liquidity and Capital Resources").
Income before income taxes increased 45.8% to $27.4 million in fiscal
1997 from $18.8 million in fiscal 1996. Provision for income taxes for fiscal
1997 was $10.6 million compared to provision for income taxes of $6.4 million
for fiscal 1996. A portion of the increase in provision for income taxes was
from the termination of Eagle's S Corporation status shortly prior to the
initial public offering on December 6, 1995. Net income increased 35.2% to
$16.8 million in fiscal 1997 from net income of $12.4 million in fiscal 1996
and increased 46.3% from pro forma net income of $11.5 million in fiscal 1996.
Net income per share increased 36.4% to $0.90 in fiscal 1997 from $0.66 pro
forma net income per share in fiscal 1996.
The Company's fiscal 1997 results were affected by the United Parcel
Service ("UPS") strike occurring during a two-week period in the fourth quarter
of fiscal 1997 as the Company shipped freight that would have ordinarily been
shipped by UPS. The Company estimates that the UPS strike resulted in
approximately $6 million in incremental revenue which generated approximately
5% after tax profit on such revenue. The strike had a slightly positive impact
on gross profit margin as the increased traffic from the strike carried higher
yields on a per-pound basis. The strike, however, resulted in higher operating
expenses (primarily personnel costs) which offset these higher yields. The
Company does not expect to retain any of the business it gained through the UPS
strike, as the two companies generally occupy separate niches within the
freight transportation marketplace.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995
Revenues increased 46.9% to $185.4 million in fiscal 1996 from $126.2
million in fiscal 1995 primarily due to increases in the number of shipments
and total weight of cargo shipped, which resulted from an increase in the
number of terminals open during such period, an increase in penetration in
existing markets, and the addition of significant national account customers.
For those terminals open as of the beginning of fiscal 1995, revenues increased
approximately 29.3% to $151.6 million in fiscal 1996 from $117.2 million in
fiscal 1995. Revenues for fiscal 1996 were comprised of $173.4 million of
forwarding revenues, $11.5 million of local pick-up and delivery revenues and
$500,000 of other freight forwarding revenues. Total local pick-up and delivery
revenues for the Company's Eagle Freight Services subsidiary for fiscal 1996
were $31.7 million, an amount that includes $20.2 million of inter-company
sales to Eagle (which were eliminated upon consolidation) and $11.5 million in
services to third party (non-forwarding) customers.
Cost of transportation decreased as a percentage of revenues to 55.7%
in fiscal 1996 from 57.3% in fiscal 1995. The decrease was primarily
attributable to the continued expansion of the local pick-up and delivery
operations, enabling the Company to capture margins previously paid to third
parties, and to a lesser extent was attributable to the January 1, 1996
expiration of the Federal Excise Tax, which was reinstated on August 27, 1996.
Cost of transportation increased in absolute terms by 42.8% to $103.3 million
in fiscal 1996 from $72.4 million in fiscal 1995 as a result of increases in
air freight shipped. Gross margin increased to 44.3% in fiscal 1996 from 42.7%
in fiscal 1995. Gross profit increased 52.5% to $82.1 million in fiscal 1996
from $53.9 million in fiscal 1995.
Operating expenses increased as a percentage of revenues to 34.7% in
fiscal 1996 from 33.0% in fiscal 1995. Operating expenses increased in
absolute terms by 54.4% to $64.3 million in fiscal 1996 from $41.6 million in
fiscal 1995. Personnel costs increased slightly as a percentage of revenues to
22.5% in fiscal 1996 from 22.1% in fiscal 1995, and increased in absolute terms
by 49% to $41.6 million due to increased staffing needs associated with the
opening of ten new terminals, expanded operations at existing terminals and
increased revenues, which resulted in an increase in commissions. Such costs
include all compensation expenses, including those relating to sales
commissions and salaries and to headquarters employees and executive officers.
Other selling, general and administrative expenses increased as a percentage of
revenues to 12.2% in fiscal 1996 from 10.9% in fiscal 1995, and increased in
absolute terms by 65.4% to $22.7 million in fiscal 1996 from $13.7 million in
fiscal 1995. In fiscal 1996, selling expenses increased by 0.1% and other
general and administrative expenses increased 1.2% compared to fiscal 1995. The
19
<PAGE> 20
absolute increases in selling, general and administrative expenses were due to
overall increases in the level of the Company's activities in fiscal year 1996.
Operating income increased 46.2% to $17.8 million in fiscal 1996 from
$12.2 million in fiscal 1995 for the reasons indicated above. Non-operating
income increased to approximately $934,000 in fiscal 1996 from approximately
$319,000 in fiscal 1995 due to increased amounts of short-term investments as a
result of the cash proceeds from the Company's initial public offering.
Income before income taxes increased 50.0% to $18.8 million in fiscal
1996 from $12.5 million in fiscal 1995. Provision for income taxes for fiscal
1996 was $6.4 million compared to provision for income taxes of $1.3 million
for fiscal 1995. Provision for income tax for fiscal 1996 included federal
taxes for the portion of the year following the initial public offering when
Eagle became a C corporation. For fiscal 1996 and 1995, provision for income
taxes included state income taxes and federal income taxes paid by the Eagle
Subsidiaries. Pro forma net income increased 52.9% to $11.5 million in fiscal
1996 from $7.5 million in fiscal 1995. Pro forma net income per share increased
29.4% to $0.66 per share in fiscal 1996 from $0.51 per share in fiscal 1995,
even with the significant increase in shares outstanding as a result of the
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments decreased $2.3 million
to $27.8 million at September 30, 1997 from $30.1 million at September 30,
1996. At September 30, 1997, the Company had working capital of $60.6 million
and a current ratio of 3.30 compared to working capital of $41.5 million and a
current ratio of 2.95 at September 30, 1996. The Company's working capital has
increased primarily as a result of the proceeds from the Company's secondary
public offering, profitable growth associated with the expansion of the
Company's operations and the resultant increase in accounts receivable and
payable. Capital expenditures for the fiscal year ended September 30, 1997 were
approximately $6.5 million. The Company believes that cash flow from
operations, its $10 million credit facility and the remaining proceeds from its
public offerings will be adequate to support its normal working capital and
capital expenditures requirements for at least the next 12 months.
Other than its initial and 1997 public offerings, the Company's cash
generated from operations has been its primary source of liquidity, although it
has from time to time made limited use of bank borrowing and lease purchase
arrangements. The Company has a $10 million revolving credit facility with
NationsBank of Texas, N.A. As of September 30, 1997, no amounts were
outstanding under this credit facility. The borrowing base under the credit
facility is equal to 80% of eligible accounts receivable and was approximately
$40.5 million as of October 31, 1997. Borrowings under the credit facility bear
interest, at the Company's option, at the bank's prime rate or LIBOR plus an
interest margin based on leverage ratios. The credit facility expires and
borrowings under the credit facility are due in January 1998. Borrowings under
the credit facility are collateralized by substantially all of the Company's
inventory and accounts receivable. The credit facility's covenants restrict the
incurrence of other debt in an amount exceeding $1 million, include
restrictions on liens, investments and acquisitions, require the maintenance of
minimum net worth, a fixed charge coverage ratio of 2 to 1 and a leverage ratio
not greater than 2.25 to 1 and restrict the payment of dividends to 25% of the
Company's cumulative net worth generated after the date of the initial public
offering. The Company expects to retain all available earnings generated by its
operations for the development and growth of its business and does not
anticipate paying any cash dividends on its common stock in the foreseeable
future.
On January 10, 1997, the Company entered into a five-year operating
lease agreement with two unrelated parties for financing the construction of
its Houston terminal, warehouse and headquarters facility (the Houston
facility). Estimated costs of the Houston facility are $8.0 million. Under the
terms of the lease agreement, average monthly lease payments are estimated to
be approximately $59,000 (including monthly interest costs based upon LIBOR
rate plus 200 basis points) beginning upon the completion of the construction
of the facility and continuing for a term of 52 months with a balloon payment
equal to the outstanding lease balance (initially equal to the cost of the
facility) due at the end of the lease term. The Company has an option,
exercisable at any time during the lease term, and under certain circumstances
may be obligated, to acquire the facility for an amount equal to the
outstanding lease balance. In the event the Company does not exercise the
purchase option, and is not otherwise required to acquire the facility, it is
subject to a deficiency payment computed as the amount equal to the outstanding
lease balance minus the then current fair market value of the Houston facility.
The Company expects that the amount of any such deficiency payment would be
expensed. As of September 30, 1997, the lease balance was approximately $4
million. Construction of the facility is estimated to be completed in February
1998.
The Company made distributions of cash and/or notes to its pre-IPO
shareholders in an estimated amount of $2.7 million and $14.6 million during
the fiscal years ended September 30, 1996 and 1995. Prior to the closing of the
initial public offering,
20
<PAGE> 21
the Company paid a series of distributions of cash and notes in an amount
estimated to equal all of its previously undistributed S Corporation earnings.
A final payment on the notes of approximately $635,000 was made during the
fiscal year ended September 30, 1997 resulting in a total in such cash and note
payments of approximately $17.9 million.
As of September 30, 1997, the Company had outstanding non-qualified
stock options to purchase an aggregate of 2,109,600 shares of common stock at
exercise prices equal to the fair market value of the underlying common stock
on the dates of grant (prices ranging from $1.25 to $35.125). At the time a
non-qualified stock option is exercised, the Company will generally be entitled
to a deduction for federal and state income tax purposes equal to the
difference between the fair market value of the common stock on the date of
exercise and the option price. As a result of exercises for the years ended
September 30, 1997 and 1996 of non-qualified stock options to purchase an
aggregate of 452,489 and 296,566 shares of common stock, the Company is
entitled to a federal income tax deduction of approximately $10.2 million and
$8.2 million. Assuming an effective tax rate of 40%, the Company expects to
realize a tax benefit of approximately $4.1 million and $3.4 million in fiscal
1997 and 1996, respectively; accordingly, the Company recorded such an increase
in other current assets and additional paid-in capital pursuant to the
provisions of FAS No. 109, "Accounting for Income Taxes". Any exercises of
non-qualified stock options in the future at exercise prices below the then
fair market value of the common stock may also result in tax benefits for the
difference between such amounts, although there can be no assurance as to
whether or not such exercises will occur, the amount of any deductions or the
Company's ability to fully utilize such tax deductions.
In February 1997, the Company completed an underwritten secondary
public offering of 1,779,922 shares of its common stock at a price to the
public of $28.25 per share. The Company sold 232,164 of these shares, and the
net proceeds received by the Company after deducting underwriting discounts and
commissions were $6.2 million and will be used for general corporate purposes.
The Company did not receive any of the proceeds from the sale of the 1,547,758
of these shares sold by Daniel S. Swannie, a former executive officer and
director of the Company. Pursuant to an agreement between the Company and Mr.
Swannie entered into in connection with the offering, Mr. Swannie reimbursed
the Company for all of its out-of-pocket expenses incurred in connection with
the offering and made a payment to the Company of $375,000 for the Company's
estimated internal costs relating to the offering. The agreement also restricts
Mr. Swannie's ability to compete against the Company for a three-year term and
places certain other limitations on his ability to act against the interests of
the Company.
On September 19, 1997, the Company acquired the operating assets and
assumed certain liabilities of Michael Burton Enterprises, Inc., a
transportation and value-added logistics service provider in Columbus, Ohio.
The Company paid approximately $5.6 million in cash and issued 33,362 shares of
common stock in this transaction. The acquisition agreement also provides for
three contingent payments of up to $1.8 million each if certain annual sales
goals are achieved. The acquisition was accounted for as a purchase;
accordingly, the purchase price was allocated over the basis of the estimated
fair market value of the net assets acquired. This allocation resulted in
goodwill of approximately $4.8 million and is being amortized over the
estimated useful life of the business acquired. The results of operations for
the acquired operations were included in the consolidated statement of income
from the acquisition date forward.
SEASONALITY
Historically, the Company's operating results have been subject to a
limited degree to seasonal trends when measured on a quarterly basis. The
second quarter has traditionally been the weakest and the fourth quarter has
traditionally been the strongest. This pattern is the result of, or is
influenced by, numerous factors including climate, national holidays, consumer
demand, economic conditions and a myriad of other similar and subtle forces. In
addition, this historical quarterly trend has been influenced by the growth and
diversification of the Company's terminal network. The Company cannot
accurately forecast many of these factors, nor can the Company estimate
accurately the relative influence of any particular factor and, as a result,
there can be no assurance that historical patterns, if any, will continue in
future periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1--Election of Directors" and to the
Information under the caption "Section 16(a) Reporting Delinquencies" in the
Company's definitive Proxy Statement (the "1998 Proxy Statement") for its
annual meeting of shareholders to be held on February 23, 1998. The 1998 Proxy
Statement will be filed with the Securities and Exchange Commission (the
"Commission") not later than 120 days subsequent to September 30, 1997.
Pursuant to Item 401(b) of Regulation S-K, the information required by
this item with respect to executive officers of the Company is set forth in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 1998 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to September 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the 1998 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to September 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 1998 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to September 30, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of September 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Income for the Three Years Ended September 30, 1997 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows for the Three Years Ended September 30, 1997 . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Shareholders' Equity for the Three Years Ended September 30, 1997 . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules and other statements for which provision is made in the
applicable regulations of the Commission have been omitted because they are not
required under the relevant instructions or are inapplicable.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
*3.1 Second Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to
the Company Registration Statement on Form S-1, Registration No. 33-97606, and incorporated
herein by reference).
*3.2 Amended and Restated Bylaws of the Company, as amended (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-97606, and incorporated herein by
reference).
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
*10.1 1994 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-97606, and incorporated herein by reference).
*10.2 1995 Non-employee Director Stock Option Plan (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-97606, and incorporated herein by
reference).
*10.3 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-97606, and incorporated herein by reference).
*10.4 Shareholders' Agreement dated as of October 1, 1994 among the Company and Messrs. Crane,
Swannie, Seckel and Roberts (filed as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Registration No. 33-97606, and incorporated herein by reference).
*10.5 Form of Indemnification Agreement (filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1, Registration No. 33-97606, and incorporated herein by reference).
*10.6 Credit Agreement dated as of October 18, 1995 between the Company and NationsBank of Texas,
N.A. (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1, Registration
No. 33-97606, and incorporated herein by reference).
*10.7 Employment Agreement dated as of October 1, 1996 between the Company and James R. Crane (filed
as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996).
*10.8 Employment Agreement dated as of October 1, 1996 between the Company and Douglas A. Seckel
(filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996).
10.9 Agreement effective as of October 1, 1997 between the Company and Donald P. Roberts.
*10.10A Lease and Development Agreement dated as of January 10, 1997 between Asset XI Holdings
Company, L.L.C. and the Company (filed as Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996 and incorporated herein by reference).
10.10B Participation Agreement dated as of January 10, 1997 among Asset XI Holdings Company, L.L.C.,
the Company and Bank One, Texas, N.A.
10.10C Loan Agreement dated as of January 10, 1997 between Asset XI Holdings Company, L.L.C. and Bank
One, Texas, N.A..
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference as indicated.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this Annual Report on Form 10-K.
23
<PAGE> 24
EAGLE USA AIRFREIGHT, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
<PAGE> 25
EAGLE USA AIRFREIGHT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of September 30, 1997 and 1996 . . . . . . . . . . . . . . . F-3
Consolidated Statement of Income for the Three Years Ended
September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows for the Three Years
Ended September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Shareholders' Equity for the Three Years
Ended September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eagle USA Airfreight, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Eagle USA
Airfreight, Inc. and its subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 21, 1997
F-2
<PAGE> 27
EAGLE USA AIRFREIGHT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
---- ----
Assets (in thousands, except par values)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,107 $ 26,696
Short-term investments 2,679 3,409
Accounts receivable - trade, net of allowance for doubtful
accounts of $566 and $363, respectively 54,662 30,379
Prepaid expenses and other 4,557 2,290
----------- ---------
Total current assets 87,005 62,774
Property and equipment, net 14,090 8,333
Other assets 5,776 622
----------- ---------
$ 106,871 $ 71,729
=========== =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable - trade $ 7,757 $ 2,459
Accrued transportation costs 6,062 10,818
Accrued compensation and employee benefits 10,454 6,821
Other accrued liabilities 2,094 1,189
----------- ---------
Total current liabilities 26,367 21,287
----------- ---------
Shareholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized
Common stock, $0.001 par value, 30,000 shares authorized,
18,210 and 17,492 shares issued and outstanding 18 17
Additional paid-in capital 52,387 39,124
Retained earnings 28,099 11,301
----------- ---------
80,504 50,442
----------- ---------
Commitments and contingencies (Note 11)
------------ ---------
$ 106,871 $ 71,729
=========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 28
EAGLE USA AIRFREIGHT, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues $ 291,767 $ 185,445 $ 126,214
Cost of transportation 163,616 103,312 72,366
----------- ------------ -----------
128,151 82,133 53,848
----------- ------------ -----------
Operating expenses:
Personnel costs 67,813 41,619 27,939
Other selling, general and administrative
expenses 34,639 22,665 13,704
----------- ------------ -----------
102,452 64,284 41,643
----------- ------------ -----------
Operating income 25,699 17,849 12,205
Interest and other income 1,693 1,079 335
Interest expense (145) (16)
----------- ----------- ----------
Income before provision for income taxes 27,392 18,783 12,524
Provision for income taxes 10,594 6,357 1,335
----------- ------------ -----------
Net income $ 16,798 $ 12,426 $ 11,189
=========== ============ ===========
Earnings per share $ 0.90
===========
Pro forma information:
Net - income as reported $ 12,426 $ 11,189
Pro forma charge in lieu of income
taxes (Note 4) 945 3,682
------------ -----------
Pro forma net income $ 11,481 $ 7,507
============ ===========
Weighted average common shares
outstanding 17,521 14,782
============ ===========
Pro forma net income per share (Note 1) $ 0.66 $ 0.51
============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 29
EAGLE USA AIRFREIGHT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 266,037 $ 172,461 $ 121,914
Cash paid to carriers, suppliers and
employees (259,760) (158,483) (112,471)
Interest received 1,580 968 284
Interest paid (145) (16)
Income taxes paid (6,936) (3,954) (1,150)
----------- ----------- ----------
Net cash provided by operating activities 921 10,847 8,561
----------- ------------ -----------
Cash flows from investing activities:
Purchase of investments (11,350) (27,714) (10,324)
Maturity of investments 12,080 26,232 10,056
Acquisition of business (5,574)
Acquisition of property and equipment (6,524) (7,189) (1,703)
Disposition of property and equipment 319 72 7
Acquisition of subsidiaries (Note 7) (139)
Increase in other assets (300)
Advances to affiliates (737)
Advances to shareholders and employees (67) (684)
Repayments from affiliates 737 563
----------- ------------ -----------
Net cash used by investing activities (11,049) (8,229) (2,961)
----------- ----------- ----------
Cash flows from financing activities:
Payments on indebtedness (2,178) (277)
Proceeds from indebtedness 1,800 613
Issuance of common stock, net of related costs 6,162 34,559
Offering fee paid by selling shareholder 375
Proceeds from exercise of stock options 2,637 628
Payments on shareholder distribution notes (635) (8,209)
Distributions to shareholders (2,701) (6,420)
----------- ------------ ----------
Net cash (used) provided by
financing activities 8,539 23,899 (6,084)
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents (1,589) 26,517 (484)
Cash and cash equivalents, beginning of year 26,696 179 663
----------- ------------ -----------
Cash and cash equivalents, end of year $ 25,107 $ 26,696 $ 179
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 30
EAGLE USA AIRFREIGHT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common stock Additional
------------ paid-in Retained
Shares Amount capital earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 6,000 $ 6 $ 5,025 $ 5,031
Distributions to shareholder (6,420) (6,420)
Special distribution (8,209) (8,209)
Combination of principal
shareholder's interest in
the Company's majority-
owned subsidiaries $ 108 108
Net income 11,189 11,189
------- ------ -------- --------- ----------
Balance at September 30, 1995 6,000 6 108 1,585 1,699
Issuance of common stock to
majority shareholder for
acquisition of subsidiaries
(Note 7) 223
Issuance of common stock,
net of related costs (Note 5) 2,300 2 34,557 34,559
Distributions to shareholders (2,701) (2,701)
Conversion from S Corporation
to C Corporation (Note 4) 457 457
Exercise of stock options 296 628 628
Tax benefit from exercise
of stock options 3,374 3,374
Two-for-one stock split
(issuance of 8,673 shares
of common stock) (Note 8) 8,673 9 (9)
Net income 12,426 12,426
------- ------ -------- --------- ----------
Balance at September 30, 1996 17,492 17 39,124 11,301 50,442
Issuance of common stock, net
of related costs (Note 5) 232 6,162 6,162
Issuance of common stock for
acquisition (Note 3) 33 1,000 1,000
Payment on shareholder
distribution notes (635) (635)
Exercise of stock options 453 1 2,636 2,637
Tax benefit from exercise of
stock options 4,100 4,100
Net income 16,798 16,798
------- ------ -------- --------- ----------
Balance at September 30, 1997 18,210 $ 18 $ 52,387 $ 28,099 $ 80,504
======= ====== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 31
EAGLE USA AIRFREIGHT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PAR VALUES AND PER SHARE AMOUNTS)
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Eagle USA Airfreight, Inc. (the Company) was organized in 1984 to provide
ground and air freight forwarding services. The Company maintains operating
facilities throughout the United States, Mexico and Canada. The Company
operates in one principal industry segment.
Summary of Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements include the accounts of Eagle USA
Airfreight, Inc. and its subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue and expense recognition
Revenues and expenses related to the transportation of freight are recognized
at the time the freight departs the terminal of origin. This method
approximates recognizing revenues and expenses when the shipment is completed.
Cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash equivalents are carried at cost, which approximates market
value.
Short-term investments
At September 30, 1997 and 1996, the Company had short-term investments in U.S.
Treasury Bills and Tax Exempt Municipal Bonds with a carrying value of $2,679
and $3,409, respectively. Securities with a carrying value of $4,449 at
September 30, 1997 mature in less than one year. Such investments are
"available for sale", since the Company has the intent to utilize the funds as
needed. The investments are stated at amortized cost, which approximated
market. Accordingly, no unrealized holding gains or losses have been recorded
by the Company as of September 30, 1997. The Company's short-term investments
in U.S. Treasury Bills at September 30, 1996 matured during fiscal 1997 with no
gain or loss recognized.
F-7
<PAGE> 32
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments and trade receivables. The
Company places its temporary cash investments in short-term federal government
securities which are guaranteed by the U.S. government and tax-exempt municipal
bonds.
The Company provides services to customers in diverse industries located
primarily in the United States. Substantially all sales are denominated in the
U.S. dollar. Management believes that concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base and their dispersion across many
different industries and geographic regions. One customer accounted for
approximately 13.5% of revenue in fiscal 1995. No customer represented 10% or
more of revenues during fiscal 1996 or 1997. The Company performs ongoing
credit evaluations of its customers to minimize credit risk.
Property and equipment
Property and equipment is stated at cost. Property and equipment is
depreciated using the straight line method over its estimated useful life.
Goodwill
Goodwill, which represents the excess of purchase price over the fair value of
net assets acquired, is being amortized on a straight-line basis over the
estimated useful lives of the businesses acquired.
Income taxes
The provision for income taxes is computed based upon the pretax income
included in the consolidated statement of income. The asset and liability
approach is used to recognize deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Prior to the Company's initial public offering, the Company had elected to be
treated as an S Corporation for federal income tax purposes. Accordingly, all
income tax liability was the responsibility of the shareholders. As certain
states do not recognize S Corporation status, the Company remained subject to
income taxation in those jurisdictions. Effective December 4, 1995, the
Company's S Corporation status was terminated and the Company became liable for
federal and state income taxes since that date.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts
F-8
<PAGE> 33
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Earnings per share and pro forma net income per share
Earnings per share and pro forma net income per share are computed by using the
weighted average number of common and common stock equivalent shares
outstanding during the period. Common stock equivalents include the number of
shares issuable upon exercise of stock options less the number of shares that
could have been repurchased with the exercise proceeds and related tax benefits
using the treasury stock method.
As a result of the Company's change from an S Corporation to a C Corporation in
December 1995, presentation of pro forma net income per share is necessary for
the years ended September 30, 1996 and 1995. For purposes of the pro forma net
income per share computation, the two-for-one stock split and the shares issued
to the Company's Chairman of the Board in connection with the acquisition of
his interests in the Company's subsidiaries have been treated as if they had
been effective and outstanding as of October 1, 1994.
The number of shares used in the computation were determined as follows:
<TABLE>
<CAPTION>
Year ended
September 30,
-------------
1997 1996 1995
---- ---- ----
Pro forma Pro forma
Earnings net income net income
per share per share per share
<S> <C> <C> <C>
Weighted average number of common shares
outstanding 17,792 16,234 12,000
Common stock equivalents 890 939 1,243
Effect of shares issued to the Company's
Chairman of the Board 82 446
Number of shares sold by the Company that would
have been necessary to fund pre-IPO S Corporation
distributions 266 1,093
-------- -------- --------
18,682 17,521 14,782
======== ======== ========
</TABLE>
Historical earnings per share is not provided for the fiscal years ended
September 30, 1996 and 1995 as such inclusion is not considered to be
meaningful.
New accounting pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 128 (SFAS 128), "Earnings Per Share". The Company will
adopt SFAS 128 as
F-9
<PAGE> 34
required effective October 1, 1997. SFAS 128 replaces the presentation of
primary earnings per share with a presentation of "basic" earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. It also requires presentation of diluted
EPS, which reflects the potential dilution that could occur if securities to
issue common stock were exercised.
NOTE 2 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
Estimated
useful lives 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Computer equipment, software and
other equipment 5-7 years $ 10,934 $ 7,000
Vehicles 3-5 years 3,960 1,897
Furniture and fixtures 5-7 years 1,031 679
Land 731 731
Leasehold improvements lease terms 2,007 706
--------- ---------
18,663 11,013
Less - accumulated depreciation
and amortization (4,573) (2,680)
--------- --------
$ 14,090 $ 8,333
========= =========
</TABLE>
Computer equipment and software includes $1,582 at September 30, 1997 related
to new scanning and tracking systems for which depreciation and amortization
are expected to begin in December 1997.
NOTE 3 - BUSINESS ACQUISITION:
On September 19, 1997, the Company acquired the operating assets of Michael
Burton Enterprises, Inc., a transportation and value-added logistics service
provider in Columbus, Ohio. The Company issued 33 shares of common stock,
valued at $1,000, and paid approximately $5,574 in cash. The acquisition
agreement also provides for three contingent payments of up to $1,750 each if
certain annual sales goals are achieved over the next three years. The
acquisition was accounted for as a purchase. Accordingly, the purchase price
was allocated on the basis of the estimated fair market value of the net assets
acquired, resulting in goodwill of approximately $4,750. The results of
operations for the acquired business were included in the consolidated
statement of income from the acquisition date forward.
NOTE 4 - INCOME TAXES:
Effective October 1, 1992, the Company elected to be treated as an S
Corporation for federal income tax purposes. Accordingly, no federal income
tax expense was recorded by the Company
F-10
<PAGE> 35
for the year ended September 30, 1995 because operating results are reported in
the individual income tax returns of the shareholders. As certain states do
not recognize S Corporation status, the Company was subject to income taxation
in those jurisdictions. The federal income tax expense recorded in the year
ended September 30, 1995 relates to the separate company income generated by
the Company's subsidiaries, which were all C Corporations for federal income
tax purposes. The Company became a C Corporation in December 1995 as a result
of the public offering.
The Company's income tax provision was comprised of the following for the years
ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
State $ 1,525 $ 1,152 $ 941
Federal 8,686 5,129 468
--------- -------- ----------
10,211 6,281 1,409
--------- -------- ----------
Deferred:
State 67 11 (67)
Federal 316 65 (7)
--------- -------- ----------
383 76 (74)
--------- -------- ----------
Total $ 10,594 $ 6,357 $ 1,335
========= ======== ==========
</TABLE>
A reconciliation of the federal statutory tax rate and the Company's provision
for income taxes is as follows for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes at the applicable federal
statutory rates $ 9,371 $ 6,386 $ 4,258
Tax exempt income (158) (130)
Nondeductible items 330 245 216
State income taxes, net of federal
benefit 1,051 1,163 874
S Corporation taxation benefit (1,307) (4,013)
--------- -------- ----------
Provision for income taxes $ 10,594 $ 6,357 $ 1,335
========= ======== ==========
</TABLE>
As of September 30, 1997, the Company had outstanding nonqualified stock
options to purchase an aggregate of 2,110 shares of common stock at exercise
prices equal to the fair market value of the underlying common stock on the
dates of grant (prices ranging from $1.25 to $35.13 per
F-11
<PAGE> 36
share). At the time a nonqualified stock option is exercised, the Company will
generally be entitled to a deduction for federal and state income tax purposes
equal to the difference between the fair market value of the common stock on
the date of exercise and the option price. As a result of the exercises for
the years ended September 30, 1997 and 1996 of nonqualified stock options to
purchase an aggregate of 452 and 297 shares of common stock, the Company is
entitled to a federal income tax deduction of approximately $10,200 and $8,200.
Assuming an effective tax rate of 40%, the Company realized a tax benefit of
approximately $4,100 and $3,373; accordingly, the Company recorded an increase
to additional paid-in capital and a reduction in current taxes payable pursuant
to the provisions of Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes". Any exercises of nonqualified stock
options in the future at exercise prices below the then fair market value of
the common stock may also result in tax deductions equal to the difference
between such amounts, although there can be no assurance as to whether or not
such exercises will occur, the amount of any deductions or the Company's
ability to fully utilize such tax deductions.
Deferred tax assets and liabilities as of September 30, 1997 and 1996 were
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets:
Bad debt expense $ 221 $ 150
Amortization 50 34
Accruals and other 625 414
-------- ------
896 598
-------- ------
Liabilities:
Depreciation (822) (141)
-------- ------
(822) (141)
-------- ------
$ 74 $ 457
======== ======
</TABLE>
NOTE 5 - SHAREHOLDERS' EQUITY:
On December 6, 1995, the Company completed an underwritten public offering of
2,000 shares of common stock at a price to the public of $16.50 per share. In
connection with the offering, the underwriters fully exercised an
over-allotment option of 300 shares. Proceeds to the Company after deducting
underwriting discounts, commissions and offering costs were approximately
$34,559. Such proceeds have and may continue to be used for general corporate
purposes, including acquisitions and working capital.
On July 8, 1996, the Board authorized a two-for-one stock split, effected in
the form of a stock dividend, payable August 1, 1996 to shareholders of record
on July 24, 1996. All references in the financial statements to earnings per
share information have been retroactively restated to
F-12
<PAGE> 37
reflect the split. The stock split resulted in the issuance of approximately
8,673 new shares of common stock and a reclassification of $9 from retained
earnings to common stock representing the par value of the shares issued.
On February 18, 1997, the Company completed an underwritten secondary public
offering (the secondary public offering) of 1,548 shares of its common stock by
Daniel S. Swannie, a former executive officer and director of the Company, at a
price to the public of $28.25 per share. The Company did not receive any of
the proceeds from the sale of shares by Mr. Swannie. Pursuant to an agreement
between the Company and Mr. Swannie entered into in connection with the
offering, Mr. Swannie reimbursed the Company for all of its out-of-pocket
expenses incurred in connection with the offering and made a payment to the
Company of $375 for the Company's estimated internal costs relating to the
offering. The agreement also restricts Mr. Swannie's ability to compete
against the Company for a three-year term and places certain other limitations
on his ability to act against the interests of the Company. In connection with
the secondary public offering on February 21, 1997, the Company sold 232 shares
of common stock to the underwriters pursuant to an over- allotment option at a
price of $28.25 per share. The net proceeds received by the Company after
deducting underwriting discounts and commissions were $6,162 and will be used
for general corporate purposes.
On November 10, 1997, the Board authorized an increase in the number of common
shares to 100,000 common shares.
NOTE 6 - BENEFIT PLANS AND STOCK PLANS:
Defined Contribution Plans
The Company maintains a 401(K) profit sharing plan for its employees. During
fiscal 1997, 1996 and 1995, the Company elected to match employee contributions
up to 5% of compensation. In addition, the Company has agreed to permit
employees to contribute certain bonuses, up to the maximum allowable, to their
401(K) accounts. Such employee contributions, if made, are also matched by the
Company. During fiscal 1997, 1996 and 1995, the Company made contributions of
$1,574, $970 and $513, respectively.
Stock Option Plans
In September 1994, the Board adopted the Eagle USA Airfreight, Inc. 1994
Long-Term Incentive Plan (the 1994 Plan) whereby certain employees may be
granted options, appreciation rights or awards related to the Company's common
stock. The Board has authorized 3,100 shares to be available for grant
pursuant to the 1994 Plan.
Each option has been granted at an exercise price equal to the fair market
value of the common stock on the date of grant. The options generally vest
ratably over a five-year or seven-year period from the date of issuance (or
100% upon death). The Company has no obligation to repurchase the options
granted. Vested options terminate seven years from the date of grant.
F-13
<PAGE> 38
Additional awards may be granted under the 1994 Plan in the form of cash, stock
or stock appreciation rights. The stock appreciation right awards may consist
of the right to receive payment in cash or common stock. Any award may be
subject to certain conditions, including continuous service with the Company or
achievement of certain business objectives.
On September 29, 1995, the Board adopted the Eagle USA Airfreight, Inc. 1995
Nonemployee Director Stock Option Plan (the Director Plan), whereby the Company
may grant stock options to purchase up to 200 shares of common stock to its
nonemployee directors at the fair market price on the date of grant.
As of September 30, 1997, options to purchase 2,110 shares of common stock of
the Company under both plans were outstanding as follows:
<TABLE>
<CAPTION>
Exercise
price
Options per share
------- ----------
<S> <C> <C>
Outstanding at September 30, 1994 895 $ 2.50
Forfeited during 1995 (55) 2.50
Granted during 1995 5 8.00
-------
Outstanding at September 30, 1995 845 2.50- 8.00
Granted prior to stock split 535 16.50 - 37.50
Effect of stock split (Note 9) 1,237 1.25 - 18.75
Granted 22 19.25 - 20.25
Forfeited (149) 1.25
Exercised (297) 1.25 - 8.25
-------
Outstanding at September 30, 1996 2,193 1.25 - 20.25
Granted 437 19.25 - 35.13
Forfeited (68) 1.25 - 25.75
Exercised (452) 1.25 - 19.25
-------
Outstanding at September 30, 1997 2,110 $ 1.25 - 35.13
=======
Shares available for grant at end of year 298
=======
Options vested at end of year 684
=======
</TABLE>
The two-for-one stock split resulted in the issuance of an additional option
for each one outstanding and a 50% reduction in the exercise price for all
outstanding options (Note 5).
F-14
<PAGE> 39
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------- -----------------------------
Average Weighted Weighted
Range of remaining average average
exercise prices Number life price Number price
--------------- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.25 - $1.25 830 4.0 $ 1.25 264 $ 1.25
$4.00 - $14.00 742 5.6 12.40 402 12.64
$15.38 - $30.63 530 6.3 22.74 18 16.99
$33.00 - $35.13 8 7.0 34.52 0 0.00
----- ---- ------- ----- ------
$1.25 - $35.13 2,110 5.16 $10.69 684 $ 8.36
===== ==== ====== ==== ======
</TABLE>
The Company applies APB25 and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
these plans. The weighted average fair values of options granted during 1997
and 1996 were $12.50 and $6.62, respectively. Had compensation cost for the
Company's option plans been determined based upon the fair value at the grant
dates for awards under these plans consistent with the method set forth under
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", the Company's net income for the year ended
September 30, 1997 and pro forma net income for the year ended September 30,
1996 would have been reduced by $2,490 and $636, respectively. Earnings per
share for fiscal 1997 and pro forma net income per share for fiscal 1996 would
have been reduced by $0.13 and $0.04, respectively.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes options-repricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: expected
volatility of 44% and 70%, risk-free interest rates of 6.3% and 6.1%, zero
dividend yield and an expected life of six years. The disclosure requirements
of SFAS 123 are not applicable to options granted in fiscal 1995. The pro
forma effects for 1997 and 1996 are not indicative of the pro forma effects in
future years.
NOTE 7 - RELATED PARTY TRANSACTIONS:
Effective, October 1, 1994, the Company acquired 50% of the common stock of
Eagle Freight Services, Inc. (EFS), formerly C&D Freight Services, Inc., and
C&D Freight Services of California, Inc. (C&D) for an aggregate purchase price
of $250 in cash. Effective January 1, 1995, the Company acquired 50% of
Freight Services Management, Inc. (FSMI) for a nominal amount. The
acquisitions were accounted for as purchases. Shortly before the closing of
the initial public offering in December 1995, the Company acquired the
remaining 50% of EFS, C&D and FSMI from the principal shareholder. The
operating results of such subsidiaries have been consolidated with the Company
since October 1, 1994 as if the Company owned 100% of these entities. The
Company's results of operations for fiscal 1994 would not have varied
F-15
<PAGE> 40
materially from actual results had the subsidiaries been consolidated during
fiscal 1994. EFS and C&D provide same-day local delivery and distribution
management services. FSMI provides outsourcing of logistics and delivery
management services to certain customers of the Company.
During fiscal 1995, the Company and its principal shareholder formed Eagle USA
Transportation Services, Inc. (ETSI), to provide truck brokerage services
principally to the Company, and Eagle USA Import Brokers, Inc. (EIBI), to
provide certain customs brokerage services in connection with the Company's
international shipments. The Company owned 70% of ETSI and EIBI while the
Company's principal shareholder owned the remaining 30% interests. Effective
as of the dates of formation of ETSI and EIBI, the Company's consolidated
accounts include the accounts of ETSI and EIBI as if they were wholly owned
since the Company controls ETSI and EIBI. The Company acquired the remaining
30% interests of ETSI and EIBI from the principal shareholder shortly before
the closing of the initial public offering of common stock, in exchange for
shares of common stock of the Company.
The Company issued 223 pre-split shares of common stock to its principal
shareholder to affect 100% ownership of these subsidiaries.
The Company utilizes an aircraft owned by an entity that is controlled by the
principal shareholder and is charged $1.4 per hour for actual usage. Total
travel expense during fiscal years ended September 30, 1997, 1996 and 1995
related to the aircraft was $125, $72 and $77, respectively.
NOTE 8 - FINANCING ARRANGEMENTS:
The Company has a number of operating lease agreements, principally for
computer equipment, office space and freight operation facilities. These
leases are noncancelable and expire on various dates through 2002. Following
is a summary of future minimum rental payments required under the operating
leases that have initial or remaining noncancelable lease terms in excess of
one year:
<TABLE>
<CAPTION>
Year ended
September 30,
-------------
<S> <C>
1998 $ 5,172
1999 4,031
2000 2,596
2001 1,795
Thereafter 833
----------
$ 14,427
==========
</TABLE>
Rent expense under all noncancelable operating leases during 1997, 1996 and
1995 was $4,773, $3,062 and $1,877, respectively.
F-16
<PAGE> 41
On January 10, 1997, the Company entered into a five-year operating lease
agreement with two unrelated parties for financing the construction of its
Houston terminal, warehouse and headquarters facility (the Houston facility).
Estimated costs of the Houston facility are approximately $8 million. Under
the terms of the lease agreement, average monthly lease payments are
approximately $59 (including monthly interest costs based upon LIBOR rate plus
200 basis points) beginning October 1, 1997 through January 2, 2002 with a
balloon payment equal to the outstanding lease balance (initially equal to the
cost of the facility) due on January 2, 2002. The Company has an option,
exercisable at any time during the lease term to acquire the facility for an
amount equal to the outstanding lease balance. In the event the Company does
not exercise the purchase option, it is subject to a deficiency payment
computed as the amount equal to the outstanding lease balance minus the then
current fair market value of the Houston facility. As of September 30, 1997,
the lease balance was approximately $4,000.
On October 18, 1995 the Company obtained a $10,000 revolving line of credit
facility from a bank. The facility bears interest at variable rates tied to a
bank LIBOR rate, matures in January 1998 and is secured by accounts receivable.
The Company may borrow up to 80% of eligible accounts receivable, must maintain
certain financial ratios and may not declare dividends in excess of 25% of
cumulative net worth generated subsequent to the Company's initial public
offering. The facility is guaranteed by certain of the Company's subsidiaries.
During fiscal year 1996, the Company borrowed $1,800 pursuant to such facility.
A portion of the proceeds from the initial public offering were used to repay
this indebtedness. No amount was outstanding under the facility during the
year ended September 30, 1997.
F-17
<PAGE> 42
NOTE 9 - STATEMENT OF CASH FLOWS:
Following is a reconciliation of net income to net cash provided by operating
activities for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:-
Net income $ 16,798 $ 12,426 $ 11,189
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts 1,447 743 758
Depreciation and amortization 2,092 1,124 700
Deferred income tax expense (benefit) 383 76 (74)
Other income 694
Change in assets and liabilities, net:
Trade accounts receivable (24,486) (13,727) (5,109)
Prepaid expenses and other assets (1,086) (272) (720)
Accounts payable and other accrued liabilities 5,079 10,477 1,817
---------- ---------- ----------
Net cash provided by operating
activities $ 921 $ 10,847 $ 8,561
========== ========== ==========
</TABLE>
Supplemental information on noncash investing and financing activities:
Dividends of $8,209 were declared in fiscal 1995 in the form of Special
Distribution Notes.
The exercise of employee stock options resulted in a reduction of the
Company's tax liability and an increase in its additional paid-in capital of
$4,100 and $3,374 in fiscal 1997 and 1996.
A 2-for-1 stock split was paid on August 1, 1996 and resulted in a charge of
$9 to common stock and retained earnings.
The conversion from S Corporation resulted in the establishment of $457 of
deferred tax asset and an increase in additional paid-in capital.
F-18
<PAGE> 43
NOTE 10 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following is a summary of the Company's unaudited quarterly financial
information for the years ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended,
--------------------------------------------------------------
December 31, March 31, June 30, September 30,
1996 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 67,586 $ 61,489 $ 71,301 $ 91,391
Operating income 7,198 4,025 6,352 8,124
Income before provision for
income taxes 7,471 4,726 6,726 8,469
Net income 4,514 2,948 4,104 5,232
Earnings per share 0.24 0.16 0.22 0.28
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended,
------------------------------------------------------------
December 31, March 31, June 30, September 30,
1995 1996 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $40,698 $39,051 $48,240 $57,456
Operating income 4,259 3,330 4,515 5,745
Income before provision for
income taxes 4,291 3,625 4,805 6,062
Pro forma net income (1) 2,543 2,106 3,114 3,718
Pro forma net income per
share (2) 0.16 0.11 0.17 0.20
</TABLE>
(1) As a result of the initial public offering, Eagle USA's status as an S
Corporation terminated effective December 4, 1995. Pro forma net income
used to compute pro forma net income per share for the first quarter of
fiscal 1996, reflected the incremental estimated federal tax provision that
would have been reported had Eagle USA been a C-Corporation during these
periods. Pro forma and actual net income do not vary for the last three
quarters of fiscal 1996.
(2) Quarterly pro forma net income per share is computed using the method
outlined in Note 1.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a party to various legal claims and
proceedings arising in the ordinary course of business. The Company is not
currently a party to any material litigation and is not aware of any litigation
threatened against it that could have a material effect on its business.
F-19
<PAGE> 44
The Company has agreed to indemnify its shareholders for any possible tax
contingencies relating to periods during which the Company was an S
Corporation.
F-20
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: December 18, 1997
EAGLE USA AIRFREIGHT, INC.
By: /S/ DOUGLAS A. SECKEL
-----------------------------------
Douglas A. Seckel
Chief Financial Officer, Secretary
and Treasurer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ JAMES R. CRANE Chairman, President and Chief Executive Officer December 18, 1997
- ---------------------------- (Principal Executive Officer)
James R. Crane
/S/ DOUGLAS A. SECKEL Chief Financial Officer, Secretary and Treasurer December 18, 1997
- ---------------------------- and Director (Principal Financial and Accounting
Douglas A. Seckel Officer)
/S/ NEIL E. KELLEY Director December 18, 1997
- ------------------------------
Neil E. Kelley
/S/ WILLIAM P. O'CONNELL Director December 18, 1997
- ----------------------------
William P. O'Connell
/S/ FRANK J. HEVRDEJS Director December 18, 1997
- --------------------------------
Frank J. Hevrdejs
</TABLE>
24
<PAGE> 46
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
*3.1 Second Amended and Restated Articles of Incorporation of
the Company (filed as Exhibit 3.1 to the Company
Registration Statement on Form S-1, Registration
No. 33-97606, and incorporated herein by reference).
*3.2 Amended and Restated Bylaws of the Company, as amended
(filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, Registration No. 33-97606, and
incorporated herein by reference).
*10.1 1994 Long-Term Incentive Plan (filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1,
Registration No. 33-97606, and incorporated herein by
reference).
*10.2 1995 Non-employee Director Stock Option Plan (filed as
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-97606, and incorporated
herein by reference).
*10.3 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1,
Registration No. 33-97606, and incorporated herein by
reference).
*10.4 Shareholders' Agreement dated as of October 1, 1994 among
the Company and Messrs. Crane, Swannie, Seckel and
Roberts (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1, Registration No.
33-97606, and incorporated herein by reference).
*10.5 Form of Indemnification Agreement (filed as Exhibit 10.6
to the Company's Registration Statement on Form S-1,
Registration No. 33-97606, and incorporated herein by
reference).
*10.6 Credit Agreement dated as of October 18, 1995 between the
Company and NationsBank of Texas, N.A. (filed as Exhibit
10.8 to the Company's Registration Statement on Form
S-1, Registration No. 33-97606, and incorporated herein
by reference).
*10.7 Employment Agreement dated as of October 1, 1996 between
the Company and James R. Crane (filed as Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996).
*10.8 Employment Agreement dated as of October 1, 1996 between
the Company and Douglas A. Seckel (filed as Exhibit 10.8
to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996).
10.9 Agreement effective as of October 1, 1997 between the
Company and Donald P. Roberts.
*10.10A Lease and Development Agreement dated as of January 10,
1997 between Asset XI Holdings Company, L.L.C. and the
Company (filed as Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1996 and incorporated herein by reference).
10.10B Participation Agreement dated as of January 10, 1997 among
Asset XI Holdings Company, L.L.C., the Company and Bank
One, Texas, N.A.
10.10C Loan Agreement dated as of January 10, 1997 between Asset
XI Holdings Company, L.L.C. and Bank One, Texas, N.A.
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
- --------------------------
* Incorporated by reference as indicated.
<PAGE> 1
EXHIBIT 10.9
EMPLOYEE AGREEMENT
THIS AGREEMENT (the "Agreement") made and entered into
effective as of October 1, 1997, by and between EAGLE USA AIR FREIGHT, INC., a
Texas corporation with its principal office at 3838 N. Sam Houston Parkway,
Suite 510, Houston, Harris County, Texas 77032 (the "Company"), and Donald P.
Roberts, an individual residing in Montgomery County, Texas ("Employee");
W I T N E S S E T H:
WHEREAS, Employee has resigned from service as an officer of
the Company and from any executive functions with the Company effective as of
the date of this Agreement; and
WHEREAS, Employee and the Company agree to provide herein a
waiver and release of claims in consideration for this Agreement; and
WHEREAS, the Company desires to secure the further services of
Employee in the capacity as an employee and advisor to the Company; and
WHEREAS, in consideration of such arrangements, which
arrangements represent the mutual and respective desires of both Employee and
the Company, the parties hereto are willing to enter into this Agreement upon
the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein, the parties hereto agree as follows:
1. Resignation by Employee: Effective as of October 1,
1997 (the "Effective Date"), Employee hereby resigns as Chief Marketing Officer
of the Company. Employee further resigns from any other executive position or
office relating to the affairs of the Company except membership on the
Company's Board of Directors.
2. Continued Employment Relationship: During the
Employment Term (as defined below), Employee shall perform such services as the
President of the Company shall request. In performing such services, Employee
shall not be an officer of the Company. Notwithstanding anything to the
contrary contained herein, any such services requested of Employee shall:
(i) be requested by written notice to Employee at
least three days prior to the time the Company desires Employee to
perform such services; shall be during regular business hours of the
Company or such times for entertainment as are in accordance with
Employee's past practice with the Company or such other times as
mutually agreed; shall be utilized in increments of no less than five
hours; and shall not be required to be performed on any date that
Employee has specified by written notice to the Company at least ten
days in advance ("Unavailability Dates") but not to exceed ten
Unavailability Dates per calendar month, or any two (2) consecutive
periods for vacation of not less than ten (10) days, such periods
aggregating not more than twenty- one Unavailability Dates during a
calendar year
-1-
<PAGE> 2
which he designates as vacation, it being understood that Employee
will be engaging in other personal and business activities and travel
related thereto;
(ii) relate to entertaining customers of the
Company, interviewing prospective employees of the Company, attending
and participating in group meetings of Company sales staff and, to the
extent mutually agreed, other services or activities, including those
of a type performed by Employee prior to the Effective Date;
(iii) not involve travel by Employee outside Harris
and Montgomery Counties, Texas unless Employee specifically consents
thereto which consent will not be unreasonably withheld; and
(iv) not require Employee to perform such services
for more than thirty (30) hours in any calendar month.
Employee agrees to utilize commercially reasonable best efforts in performing
such services. Except as specifically prohibited hereby, Employee may engage
in other personal and business activities.
3. Term:
(a) Employment and Termination. The Company hereby
engages Employee for a two year period beginning on the Effective Date and
ending on September 30, 1999 (the "Employment Term"). Notwithstanding the
foregoing, Employee's employment under this agreement shall terminate earlier
upon:
(i) Employee's disability which prevents Employee
from performing services, with reasonable accommodation, for any
consecutive ninety-day period, or Employee's death; or
(ii) Written notice by the Company to Employee of
termination for "Cause." For purposes of this Agreement "Cause" shall
mean (A) Employee's repeated and intentional failure or refusal to
perform to the reasonable satisfaction of the Company any duty or
task, or more than one duty or task, delegated to him in accordance
with this Agreement or Employee's repeated and intentional failure or
refusal to observe and keep any and all covenants or obligations on
his part to be performed or kept under the terms of this Agreement or
other policies and guidelines from time to time established by the
Company that are generally applicable to all employees, which repeated
and intentional failure or refusal is not cured within ten days after
written notice thereof from the Company, or (B) Employee's conviction
of a felony crime involving theft from the Company, embezzlement or
other illegal conduct which in the judgment of the Company could
damage the business or reputation of the Company; or
(iii) Written notice by Employee to the Company
that Employee is terminating the Agreement and resigning from
employment hereunder because of the Company's material failure or
refusal to observe and keep any material covenant or obligation on the
Company's part to be performed or kept under the terms of this
Agreement,
-2-
<PAGE> 3
which material failure or refusal is not cured within ten (10) days
after written notice thereof from Employee to the Company.
(b) Company Obligation on Termination of Employment.
In the event of Employee's termination of employment prior to the expiration of
the Employment Term, then:
(i) In the event such termination of employment
is due to death or disability under Section 3(a)(i) or resignation due
to a material breach by the Company under Section 3(a)(iii), then the
Company shall be obligated to pay to Employee or his estate Employee's
compensation under Section 4(a) for a period commencing on (a) the
date of Employee's death, (b) the last day of the ninety (90) day
disability period provided in Section 3(a)(i), above, or (c) the
effective date of Employee's resignation pursuant to Section
3(a)(iii), above, and ending on the expiration of the Employment Term.
At any time during the Employment Term, and to the extent possible,
the Company shall maintain in full force and effect for Employee
during such period specified in the immediately preceding sentence,
all group insurance that Employee was entitled to participate in
immediately prior to the time of such termination. Under no
circumstances shall Employee be required to mitigate the amount of any
payment of compensation under Section 4(a) due under this Section
3(b)(i).
(ii) In the event such termination occurs due to
voluntary termination by Employee or due to termination by the Company
for Cause under Section 3(a)(ii), the Company shall have no obligation
to provide any of the compensation under Section 4 attributable to
period after the date of termination of employment.
4. Compensation:
a. Base Salary. Commencing at the Effective
Date, the Company shall pay Employee during the term of Employee's
employment under this Agreement a base salary equal to $300,000 per
annum. The base salary, less any applicable withholding taxes, shall
be paid to Employee in accordance with the Company's normal payroll
practices in effect with respect to other employees of the Company.
b. Reimbursement for Expenses. The Company will
reimburse Employee for all reasonable out-of-pocket expenses incurred
by him in connection with his performance of services under this
Agreement; provided, however, that any out-of-pocket expense in excess
of $1,000 must have been approved in advance by the Company. The
Company will pay $550 per month for base dues at Lochnivar country
club, but the Company shall not reimburse Employee for other country
club or golf club dues or expenses (except expenses to be reimbursed
pursuant to the immediately preceding sentence).
c. Insurance. The Company shall provide
Employee with dental and medical insurance coverages at such cost and
to the same extent made available by the Company to its employees
generally.
-3-
<PAGE> 4
d. Incentive Plan. Employee shall not be
eligible to participate in the Company's Five-Year Incentive Plan and
no additional amounts shall be owed to Employee with respect thereto
for any period after the Effective Time.
e. Company Vehicle. As soon as practicable
following the Effective Date, the Company shall transfer to Employee
title to the Company vehicle furnished to Employee by the Company
immediately prior to the Effective Date, and Employee shall after the
Effective Date be responsible for all expenses associated with the
vehicle.
f. 401(k) Plan. Employee shall be entitled to
participate in the Company's 401(k) Plan.
5. Disclosure of Proprietary Information: Employee
recognizes and agrees that he has and will continue to have access to a
substantial amount of proprietary, confidential and trade secret information
and materials (collectively "Proprietary Information") relating to the
Company's customers, pricing structures and policies, credit terms, and to the
business of the Company. The Proprietary Information has been and will
continue to be disclosed or made available to him exclusively in connection
with the performance of services for the Company and the performance of his
duties as a director of the Company. Employee shall not publish, disseminate,
distribute, disclose, sell, assign, transfer, copy, remove from the Company's
premises, commercially exploit, or otherwise make use of any Proprietary
Information to or for the use or benefit of Employee or any other person, firm,
corporation or entity, except as specifically authorized in writing by the
Board of Directors of the Company or as required for the due and proper
performance of his duties and obligations under this Agreement. In addition,
Employee shall employ all necessary safeguards and precautions in order to
insure that unauthorized access to the Proprietary Information is not afforded
to any person, firm, corporation or entity. Employee agrees that he shall
continue to maintain the confidentiality of the Proprietary Information at all
times except: (i) if the information becomes readily ascertainable by the
public (other than by reason of a breach of this Section 5), and, when viewed
as a whole does not qualify for legal protection, or (ii) if disclosure is
required pursuant to order of a court of competent jurisdiction.
6. Noncompetition and Related Matters: Conditioned upon
the Employee not having terminated employment under Section 3(a)(iii), Employee
agrees that during the Employment Term and for a period of 2 years following
the expiration of the Employment Term (the "Non-compete Period"), he shall not,
directly or indirectly, as an owner, operator, employee, representative,
shareholder, officer, director, partner, venturer, equityholder, consultant,
advisor or in any other capacity, within a one hundred (100) mile radius of any
location where the Company (directly or through agents or others) is operating,
or at any time during the Employment Term is planning to operate, (i) engage in
any business activity in direct competition with the business in which the
Company is currently engaged, (ii) solicit such business from any of the
customers or accounts of the Company, or (iii) become the employee of, or
otherwise render services to or on behalf of, any enterprise which competes
directly with the current business of the Company. Notwithstanding the
foregoing, Employee may purchase or otherwise acquire up to (but not more than)
5 percent of any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise), whether or not such
enterprise is in competition with the Company, if
-4-
<PAGE> 5
such securities are listed on any national or regional securities exchange or
have been registered under Section 12(g) of the Securities Exchange Act of
1934.
7. No Solicitation: Employee agrees that he shall not,
directly or indirectly, during the Non- compete Period, (i) take any action to
solicit or divert any business or customers away from the Company, (ii) induce
customers, suppliers, agents or other persons under contract or otherwise
associated or doing business with the Company to terminate, reduce or diminish
any such association or business with or from the Company and/or (iii) induce
any person in the employment of the Company or any exclusive consultant to the
Company to (A) terminate such employment or consulting arrangement or (B)
accept employment or enter into any consulting arrangement with anyone other
than the Company.
8. Nondisparagement: As a material inducement to the
Company to enter into this Agreement, Employee agrees that during the
Non-compete Period he will not (i) publicly criticize or disparage the Company
or any affiliate, or privately criticize or disparage the Company or any
affiliate in a manner intended or reasonably calculated to result in public
embarrassment to, or injury to the reputation of, the Company or any affiliate
in any community in which the Company or any affiliate is engaged in business;
or (ii) intentionally commit damage to the property of the Company or any
affiliate or otherwise engage in any illegal conduct which is injurious to the
business or reputation of the Company or any affiliate. As used in this
Agreement, the term "affiliate" means the Company; any direct or indirect
subsidiary of the Company; any other entity in which the Company, or any of its
direct or indirect subsidiaries owns more than 50% of the outstanding equity
interests; any officer, director or employee of the Company or of any of the
foregoing entities, but only to the extent that the proscribed activity of
Employee described above in this Section 8 deals with or concerns any such
officer, director or employee in their role as such officer, director or
employee, or relates to their business activities or skills; and any former
officer, director or employee of the Company or of any of the foregoing
entities, but only to the extent that the proscribed activity of Employee
described above in this Section 8 deals with or concerns any such officer,
director or employee in their role as such officer, director or employee, or
relates to their business activities or skills.
9. Injunctive Relief: Employee recognizes and agrees
that any violation of any of the provisions contained in Sections 5, 6, 7 or 8
hereof will cause such damage or injury to the Company as would be irreparable
and continuing, that the exact amount of such damage might be difficult to
ascertain and that, for such reason, among others, the Company shall be
entitled, as a matter of course, to a temporary restraining order and a
temporary and permanent injunction restraining any further violation of any
such provision. Such right to injunctive relief shall be in addition to, and
not in limitation of, any other rights and remedies the Company may have
against Employee, including without limitation the right to recover damages for
any breach or threatened breach, including without limitation the recovery of
damages from Employee. Employee specifically agrees that such limitations as
to the period of time, geographic area and type and scope of restriction on his
activities specified in this Agreement are reasonable and necessary for the
protection of the goodwill or other business interests of the Company and its
affiliates. If any provision of this Agreement is found by a court of
competent jurisdiction to be unreasonably broad, oppressive or unenforceable,
such court (i) shall narrow the scope of this Agreement in order to ensure that
the application thereof is not unreasonably broad, oppressive or unenforceable,
and (ii) to the fullest extent permitted by law, shall enforce this Agreement
as though reformed.
-5-
<PAGE> 6
10. Releases:
a. Except with respect to Employee's right to
the benefits set forth in this Agreement, the sufficiency of which is
hereby acknowledged, Employee hereby releases, acquits and forever
discharges (i) the Company from any and all "Claims" (as hereinafter
defined) against the Company including any and all Claims on account
of, related to, or arising out of the facts and circumstances
surrounding Employee's employment or termination of employment as an
officer of the Company or its affiliates which Employee ever had, now
has or may have from the date of his commencement of employment with
the Company to the date of his resignation as an officer of the
Company, and (ii) the officers, Directors and employees of the Company
and its affiliates from any and all Claims known to Employee at the
date hereof, including any and all Claims on account of, related to,
or arising out of the facts and circumstances surrounding Employee's
employment or termination of employment as an officer of the Company
or its affiliates which Employee ever had, now has or may have from
the date of his commencement of employment with the Company to the
date of his resignation as an officer of the Company. "Claims" shall
mean any damages, losses, causes of action, expenses, claims, demands
and liability of whatever kind and character, including, but not
limited to, any claims, such as those of any federal, state, or local
law dealing with discrimination in employment. The Company agrees
that this release shall not affect any right or Claim that Employee
has pursuant to any director's and officer's liability insurance
policy maintained by the Company to be indemnified and insured, from
and after the date of this Agreement, for any Claims arising against
Employee as a result of his service as an officer and a director of
the Company.
b. Except with respect to the Company's rights
set forth in this Agreement, the sufficiency of which are hereby
acknowledged, the Company and its affiliates hereby release, acquit,
and forever discharge Employee, his personal legal representatives and
heirs, from any and all Claims against Employee known to the Company
or its affiliates at the date hereof, including any and all Claims on
account of, related to, or arising out of the facts and circumstances
surrounding Employee's employment or termination of employment as an
officer of the Company or its affiliates, which the Company or its
affiliates ever had, now has or may have from the date of Employee's
commencement of employment with the Company to the date hereof; and
the Company hereby agrees to indemnify, defend and hold Employee
harmless with respect to any claim, demand or action related to the
Claims released in this Section 10.b.
c. Notwithstanding anything to the contrary
contained herein, this Section 10 shall not in any way affect any
existing right or claim of Employee to exercise and acquire capital
stock of the Company pursuant to any stock option, warrant or other
contractual right.
11. Effect of Prior Agreements: This Agreement contains
the entire understanding between the parties hereto relating to the subject
matter hereof and supersedes any other prior agreement between the Company and
Employee, it being specifically agreed that the Chief Marketing Officer
Employment Agreement dated October 10, 1996 between the Company and Employee is
hereby terminated and all parties are released from any obligation thereunder.
-6-
<PAGE> 7
12. General Provisions:
a. Nonassignability. Except as otherwise
provided herein, neither this Agreement nor any right or interest
hereunder shall be subject, in any manner, to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge,
whether voluntary or involuntary, by operation of law or otherwise,
and any attempt at such shall be void; and further provided, that any
such benefit to Employee hereunder shall not in any way be subject to
the debts, contracts, liabilities, engagements or torts of Employee,
nor shall it be subject to attachment or legal process for or against
Employee.
b. Applicable Law; Jurisdiction. The parties
intend and agree that the terms and provisions of this Agreement and
the performance of the parties hereunder shall be governed only by the
laws of the State of Texas. The parties agree to submit exclusively
to the jurisdiction of the courts located in Harris County, Texas with
respect to any matter arising under this Agreement or its enforcement
and that such jurisdiction shall be exclusive over the jurisdiction of
any courts located outside of Harris County, Texas.
c. Source of Payment. All payment provided in
this Agreement shall be paid in cash from the general funds of the
Company, and no special or separate funds shall be established and no
other segregation of assets shall be made to assure payments.
Employee shall have no right, title, or interest whatever in or to any
investments which the Company may make to aid the Company in meeting
its obligations hereunder. Nothing contained in this Agreement, and
no action taken pursuant to this provision, shall create or be
construed to create a trust of any kind, or a fiduciary relationship,
between the Company and Employee or any other person. To the extent
that any person acquires a right to receive payments from the Company
hereunder, such right shall be no greater than the right of an
unsecured creditor of the Company.
13. Modification and Waiver:
a. Amendment of Agreement. This Agreement may
not be modified or amended except by an instrument in writing signed
by the parties hereto.
b. Waiver. No term or condition of this
Agreement shall be deemed to have been waived, nor shall there be an
estoppel against the enforcement
-7-
<PAGE> 8
of any provision of this Agreement, except by written instrument of
the party charged with such waiver or estoppel.
14. Notices: All written notices or communications
hereunder shall be addressed as follows:
To the Company:
Eagle USA Air Freight, Inc.
3838 N. Sam Houston Pkwy.
Suite 510
Houston, Texas 77032
Attn.: James R. Crane, President
To Employee:
Donald P. Roberts
3 Lace Wing
The Woodlands, Texas 77380
With a copy to:
Leonard J. Meyer, Esq.
Zimmerman, Axelrad, Meyer, Stern & Wise, P.C.
3040 Post Oak Blvd.
Suite 1300
Houston, Texas 77056
All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy
or facsimile transmission, upon confirmation of receipt by the sender of such
transmission or (iii) if sent by registered or certified mail, on the fifth day
after the day on which such notice is mailed.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its officer thereunto duly authorized, and Employee has signed
this Agreement, all as of the day first above written.
EAGLE USA AIR FREIGHT, INC.
By:/s/ Douglas A. Seckel
------------------------------------
/s/ Donald P. Roberts
---------------------------------------
Donald P. Roberts ("Employee")
-8-
<PAGE> 1
EXHIBIT 10.10B
================================================================================
PARTICIPATION AGREEMENT
Dated as of January 10, 1997
among
ASSET XI HOLDINGS COMPANY, L.L.C., as Lessor
EAGLE USA AIRFREIGHT, INC., as Lessee
and
BANK ONE, TEXAS, N.A., as Lender
---------------------------------------------
Lease Financing
for Eagle USA Airfreight, Inc.
Corporate Headquarters and Warehouse Facility
Harris County, Texas
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS; INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2 ACQUISITION, CONSTRUCTION AND LEASE; LOAN;
NATURE OF TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2.1 Agreement to Acquire, Construct, Fund and Lease. . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2.2 Funding of Construction Costs; Loan and Contribution. . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.3 Nature of Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.4 Amounts Due Hereunder and Under Lease and Loan Agreement. . . . . . . . . . . . . . . . . . . 4
SECTION 2.5 Controlling Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.6 Permitted Applications of Loan Advances and Contribution Advances. . . . . . . . . . . . . . 5
SECTION 2.7 Covenants Concerning the Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3 CONDITIONS PRECEDENT; DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3.1 Conditions to the Obligations of the Lessor and the Lender on the Closing Date. . . . . . . . 8
SECTION 3.2 Conditions to Subsequent Fundings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3.3 Completion Date Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 3.4 Conditions to the Obligations of the Lessee. . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 3.5 Appraisal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4 REPRESENTATIONS AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4.1 Representations of the Lessee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4.2 Representations and Covenants of the Lessor. . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.3 Covenant of Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4.4 Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 5 COVENANTS OF THE LESSEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.1 Qualification as to Corporate Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.2 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.3 Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.4 Affirmative and Negative Covenants of Lessee. . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6 TRANSFERS BY LESSOR AND LENDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 6.1 Lessor Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 6.2 Lender Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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SECTION 7 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 7.1 General Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 7.2 Environmental Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 7.3 Proceedings in Respect of Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 7.4 General Tax Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 7.5 Increased Costs, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.6 End of Term Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.7 Exculpations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.8 Role of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.9 Lender's Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.10 Lessor's Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 8 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.1 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.3 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.4 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.5 Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.6 Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.7 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.8 No Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 8.9 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.11 Submission to Jurisdiction; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.12 Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.13 Waiver of Consumer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
APPENDIX I Definitions and Interpretation
APPENDIX II Form of Request for Loan Advance
APPENDIX III Loan Payment Schedule
EXHIBIT A Form of Ground Lease
EXHIBIT B Form of Lease
EXHIBIT C Form of Loan Agreement
EXHIBIT D Form of Mortgage
EXHIBIT E Form of Assignment of Lease and Rents
EXHIBIT F Form of Non-Disturbance and Attornment Agreement
EXHIBIT G Form of Security Agreement and Assignment
EXHIBIT H Form of Opinion of Counsel to the Lessee
EXHIBIT I Form of Opinion of Counsel to the Lessor
EXHIBIT J Form of Architect's Certificate
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PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT, dated as of January 10, 1997, is among
ASSET XI HOLDINGS COMPANY, L.L.C., a Massachusetts limited liability company,
as Lessor, EAGLE USA AIRFREIGHT, INC., a Texas corporation, as Lessee, and BANK
ONE TEXAS, N.A., a national banking association, as Lender.
W I T N E S E T H:
WHEREAS, in accordance with the terms and provisions of this
Participation Agreement, the Ground Lease, Lease, the Loan Agreement, the Note
and the other Operative Documents, (i) the Lessor has acquired a leasehold
interest in the Land and has agreed to lease the Land to the Lessee, (ii) the
Lessee has agreed to construct the Improvements on the Land for the Lessor and
has agreed to lease the Improvements from the Lessor as part of the Leased
Property under the Lease, (iii) the Lessor and the Lessee wish to obtain, and
the Lender has agreed to provide, funding in the amount of up to $7,600,000 for
the acquisition of the Land and the development and construction of the
Improvements, and (iv) Lessor has agreed to make Contribution Advances from its
own equity resources in an aggregate sum not to exceed $400,000 to pay a
portion of the cost of acquisition of the Land and the development and
construction of the Improvements;
NOW, THEREFORE, in consideration of the mutual agreements contained in
this Participation Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1
DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and
not defined herein shall have the meanings assigned thereto in Appendix I
hereto for all purposes hereof and the rules of interpretation set forth in
Appendix I hereto shall apply to this Participation Agreement.
SECTION 2
ACQUISITION, CONSTRUCTION AND LEASE; LOAN;
NATURE OF TRANSACTION
SECTION 2.1 Agreement to Acquire, Construct, Fund and Lease.
(a) Land. Subject to the terms and conditions of this
Participation Agreement, on the Closing Date (i) the Lessor shall acquire the
leasehold interest in the Land created by the Ground Lease, (ii) the Lessor
shall sublease the Land to the Lessee pursuant to the Lease and (iii) the
Lessee shall lease the Land from the Lessor pursuant to the Lease.
<PAGE> 5
(b) Improvements. Subject to the terms and conditions of
this Participation Agreement and the other Operative Documents, (i) the Lessee
has agreed, pursuant to the terms of the Lease, to construct and install the
Improvements on the Land for the Lessor, (ii) the Lessor has agreed to obtain
funding for all or a portion of the Development Costs of the Leased Property,
(iii) the Lessor has agreed to lease the Improvements as part of the Leased
Property to the Lessee pursuant to the Lease and (iv) the Lessee has agreed to
lease the Improvements from the Lessor pursuant to the Lease.
SECTION 2.2 Funding of Construction Costs; Loan and Contribution.
(a) Subject to the terms and conditions of this
Participation Agreement and the Loan Agreement, the Lender has agreed to make
the Loan to the Lessor up to the amount of its Loan Commitment in order finance
Development Costs of the Leased Property. Subject to the terms and conditions
of this Participation Agreement, the Lessor has agreed to make available to the
Lessee Contribution Advances up to the amount of its Equity Commitment for the
payment of Development Costs from and after the Closing Date through the
Completion Date. As provided in subsection (b) below, (i) the Lender shall
from time to time, upon the receipt of a Funding Requisition from the Lessee,
make Loan Advances as requested in such Funding Requisition, and the Lessor
shall from time to time, make Contribution Advances as requested in such
Funding Requisition. Except as provided in subsection (c) of this Section,
Lessor, in turn, shall remit the proceeds of each Loan Advance and each
Contribution Advance to Lessee, and Lessee shall use the proceeds of each such
Loan Advance and each such Contribution Advance to pay, or reimburse itself for
paying, Development Costs, as provided in Section 2.6 hereof. Except as
provided in Sections 2.2 (c) and 2.2 (d), Lessor hereby directs the Lender to
make disbursements of each Loan Advance and each Contribution Advance directly
to the Lessee or as otherwise directed in the applicable Funding Requisition.
Lessor will only direct the Lender otherwise if an Event of Default has
occurred and is continuing. The Loan shall (i) be a term and construction loan
consisting of the aggregate total of the Loan Advances, (ii) be in an amount
not to exceed the Loan Commitment, (iii) bear interest as to each Loan Advance
from the date such Loan Advance was made in accordance with Section 2.4 of the
Loan Agreement, payable on each Loan Payment Date, (iv) bear interest as to
overdue amounts at the Overdue Rate, (v) be repayable as to principal as
provided in Appendix III to the Loan Agreement, commencing on the nineteenth
(19th) Loan Payment Date, with a final scheduled Loan Payment Date on the
Scheduled Termination Date, (vi) be evidenced by the Note and (vii) have the
other terms and conditions as provided in the Loan Agreement and the Note. The
Contribution shall (i) be in an amount not to exceed the Equity Commitment,
(ii) be repayable in full (subject to the provisions of Section 15.6 of the
Lease) on the Scheduled Termination Date, (iii) bear a pre-tax cumulative
return equal to the Contribution Return, and (iv) be subject to such other
terms and conditions as the Lessor and the Lessee shall agree. Under the
Lease, the Lessee agrees to pay the Facility Rent to Lessor in respect of the
Contribution Return on each Rent Payment Date after the Completion Date.
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(b) Within five (5) Business Days after the Closing Date,
and on any date thereafter to and including the third Business Day next
preceding the Completion Date, the Lessee, acting for itself and on behalf of
the Lessor, shall have the right to submit to the Lessor and the Lender a
Funding Requisition requesting Loan Advances and Contribution Advances. Each
such Funding Requisition shall be addressed jointly to the Lessor and the
Lender and be substantially in the form attached hereto as Appendix II. Each
Funding Requisition shall (i) request that the Lender and the Lessor make a
Loan Advance and a Contribution Advance (together, a "Funding"), as the case
may be, for Development Costs incurred and not previously reimbursed or paid,
(ii) specify the date not less than three Business Days later than the delivery
of the Funding Requisition on which the Funding is to be made (the "Funding
Date") (provided that if a Funding Requisition requests a Loan Advance for a
Base Rate Loan and the stated Funding Date therein is not a Loan Payment Date,
the Funding Date for the related Contribution Advance shall be deferred until
the next Loan Payment Date), (iii) specify the respective amounts of the Loan
Advance and Contribution Advance to be made with respect to such Funding, (iv)
be irrevocable, and (v) request a Funding of at least $100,000 or such lesser
amount as shall be equal to the difference between the Total Commitments and
the sum of the outstanding principal balance of the Note and the Contribution
(the "Remaining Commitments"). Each Funding Requisition shall constitute a
representation and warranty by the Lessee to the Lender and the Lessor that all
the conditions precedent to such Funding have been satisfied, including but not
limited to those contained in Section 3.2 hereof. Notwithstanding anything to
the contrary contained herein, the Funding Date with respect to any Funding
Requisition after the initial Funding shall be a Loan Payment Date, except that
a Funding Requisition which requests a Loan Advance for a Base Rate Loan may
request a Funding Date with respect to such Loan Advance on any Business Day.
The Lender and the Lessor hereby severally (but not jointly) promise and agree
that, to the extent of the Remaining Commitments, (i) upon the receipt by the
Lender of a properly completed Funding Requisition and so long as all
conditions precedent to the Lender's obligation to make Loan Advances shall
have been satisfied or waived by the Lender, the Lender shall, on the Funding
Date, make a Loan Advance in an amount equal to the product of the Funding
requested therein multiplied by the Lender Ratio in immediately available funds
(for the account of the Lessor) to the Lessee or to such other Person or
Persons as may be specified in such written Funding Requisition, and (ii) upon
the receipt by the Lessor of a properly completed Funding Requisition and so
long as all conditions precedent to the Lessor's obligation to make
Contribution Advances shall have been satisfied or waived by the Lessor, the
Lessor shall, on the Funding Date, make a Contribution Advance in an amount
equal to the product of the Funding requested therein, multiplied by the Equity
Ratio, plus any deferred and unfunded Contribution Advances related to a
Funding which included a Loan Advance for a Base Rate Loan borrowed since the
immediately preceding Loan Payment Date, all in immediately available funds to
Lessee or to such other Person or Persons as may be specified in the applicable
Funding Requisition.
(c) On each Loan Payment Date to and including the
Completion Date, the Lender, without the necessity or requirement of (i) the
submission of a Funding Requisition, (ii) satisfaction of the conditions
precedent set forth in Section 3.2 hereof, or (iii) any notice to or consent of
Lessor or Lessee, shall make a Loan Advance in an amount equal to the interest
due
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<PAGE> 7
and payable to the Lender on the Note on such Loan Payment Date, and the
proceeds of such Loan Advance shall be retained by the Lender to pay all of the
interest then due and payable under the Note; provided, however, that the
Lender shall not be obligated to make a Loan Advance in respect of interest if
an Event of Default shall have occurred and is then continuing. The Lender
shall promptly notify the Lessee of the date and amount of each such Loan
Advance made in respect of this Section 2.2(c).
(d) On each Loan Payment Date to and including the
Completion Date, the Lessor, without the necessity or requirement of (i) the
submission of a Funding Requisition, (ii) satisfaction of the conditions
precedent set forth in Section 3.2 hereof, or (iii) any notice to or consent of
the Lessee, shall be deemed to have made a Contribution Advance in an amount
equal to the Contribution Return then accrued and unpaid with respect to the
Contribution, and the Contribution shall be increased by such amount as payment
of the Contribution Return then so accrued and unpaid. The Lessor shall
promptly notify the Lessee of the date and amount of each such Contribution
Advance deemed to have been made in respect of this Section 2.2(d).
(e) In no event shall the aggregate of all Loan Advances
in respect of the Loan at any time outstanding exceed the Loan Commitment, nor
shall the Contribution at any time outstanding exceed the Equity Commitment.
SECTION 2.3 Nature of Transaction. Notwithstanding the provisions of
Section 4.4 and Section 7.4 hereof, each party hereto acknowledges and agrees
that none of the Lessee, the Lender, the Lessor, the Financial Advisor nor any
other Person has made any representations or warranties to such party
concerning the tax, financial, accounting or legal characteristics or treatment
of the Operative Documents and that each party has obtained and relied solely
upon the advice of its own tax, accounting and legal advisors concerning the
Operative Documents and the accounting, tax, financial and legal consequences
of the transactions contemplated therein.
SECTION 2.4 Amounts Due Hereunder and Under Lease and Loan Agreement.
Anything else herein, in the Loan Agreement or elsewhere to the contrary
notwithstanding, it is the intention of the Lessee, the Lessor and the Lender
that (i) during the period from the Closing Date to the Completion Date,
payment of interest on the Loan on each Loan Payment Date shall be made from a
Loan Advance automatically made by the Lender, as provided in Section 2.2(c) of
this Participation Agreement, (ii) during the period from the Closing Date to
the Completion Date, payment of Contribution Return on the Contribution on each
Loan Payment Date shall be made from a Contribution Advance automatically
deemed to have been made by the Lessor, as provided in Section 2.2(d) of this
Participation Agreement, (iii) from and after the Completion Date, the Lessee
shall be obligated, pursuant to the terms of the Lease, to pay Basic Rent on
each Rent Payment Date in respect of principal and interest due on the Note and
the Contribution Return, (iv) if the Lessee elects the Purchase Option or
becomes obligated to purchase the Leased Property under the Lease, the sum of
(A) the principal amount of the Note, all interest thereon and Breakage Costs,
if any, with respect thereto and all other obligations of the Lessee owing to
the Lender under the Operative Documents plus (B) the
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<PAGE> 8
outstanding Contribution, all accrued and unpaid Contribution Return prorated
to the date of payment, Lessor's Breakage Costs, if any, and all other
obligations of the Lessee owing to the Lessor under the Operative Documents,
shall be paid in full by the Lessee and (v) upon an Event of Default resulting
in an acceleration of the Lessee's obligation to purchase the Leased Property
under the Lease, the amounts then due and payable by the Lessee under the Lease
shall include the sum of (A) all amounts necessary to pay in full the Loan,
accrued interest and Breakage Costs, if any, and all other obligations of the
Lessee owing to the Lender under the Operative Documents plus (B) the
outstanding Contribution, all accrued and unpaid Contribution Return prorated
to the date of payment, Lessor's Breakage Costs, if any, and all other
obligations of the Lessee owing to the Lessor under the Operative Documents,
provided that (vi) in the event Lessee effectively exercises the Remarketing
Option pursuant to the provisions of Section 15.6 of the Lease and duly and
timely fulfills the provisions of clauses (i) through (xiii) of Section 15.6 of
the Lease, Lessee's obligations shall be limited as provided in Section 15.6 of
the Lease. The foregoing notwithstanding, the parties hereto acknowledge and
agree that the obligations of the Lessor (including its members, incorporators,
stockholders, directors, officers, employees and agents) hereunder, under the
Loan Agreement, the Lease and the other Operative Documents are non-recourse as
provided in Section 4.2 of the Loan Agreement and Section 18.12 of the Lease.
SECTION 2.5 Controlling Agreements. In the event of any conflict
between this Participation Agreement and any other Operative Document, this
Participation Agreement shall control. In the event of any conflict between
the Lease and any other Operative Document to which the Lessee is not a party,
the Lease shall control.
SECTION 2.6 Permitted Applications of Loan Advances and Contribution
Advances. The parties hereto agree that the Lessee may apply the proceeds of
Loan Advances and Contribution Advances made under the Loan Agreement for the
payment (or the reimbursement by the Lessee of itself for the payment) of any
or all of the following items (any combination or all of the items together,
the "Development Costs"): (i) costs of Construction of the Improvements,
including costs related to letters of credit, surety bonds, security deposits
or other security in connection with the Construction, the Construction
Contract, any municipal sewer or utility contract, any permit or consent for
any Governmental Authority or other Person, or any other obligation or
requirement relating to the Construction, (ii) capitalized interest on the Loan
and capitalized Contribution Return with respect to the Contribution (but only
to the extent and pursuant to the procedures set forth in Section 2.2(c) and
Section 2.2(d)) and (iii) "soft costs" related to the foregoing, including
architect's fees, engineering fees, permit and license fees and charges,
testing, survey costs, title charges and attorneys' fees and other related
costs and expenses properly attributable to any of the foregoing Development
Costs. The Lessee covenants not to use any Loan Advances or Contribution
Advances to pay, or reimburse itself for paying, for trade fixtures, personal
property or equipment which does not constitute part of the Improvements or to
use the proceeds of Loan Advances or Contribution Advances for working capital.
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SECTION 2.7 Covenants Concerning the Construction.
(a) Changes in Construction Documents. No change will be made in
the Plans and Specifications, the terms and conditions of the Construction
Contract, or the identity of the General Contractor without the prior written
consent of the Lender. The Lender's approval of the Plans and Specifications
shall be for lending purposes only and shall not constitute an assumption of
liability by the Lender with respect to the Lessee, General Contractor, or any
other present or future tenant, occupant or purchaser of the Leased Property.
(b) Conduct of the Construction. The Construction shall commence
within 30 days after the Closing Date. The Improvements shall be completed
prior to the Completion Deadline. In the event of a Construction Force Majeure
Event, the Completion Deadline shall be extended by a period of time equal to
the Construction Force Majeure Event, but in no event to a date later than
January 31, 1999. The Improvements will be constructed substantially in
accordance with the Plans and Specifications and in compliance with all
Applicable Laws. The Improvements will be located entirely upon the Land.
Title to the Leased Property will, during the Construction and on the
Completion Date, be free from all liens, claims, and encumbrances, except for
those created by or arising under the Operative Documents, taxes and
assessments which are a lien but not yet due and payable, liens that are bonded
off in accordance with Sections 53.171 et. seq. or Section 53.201 et. seq. of
the Texas Property Code, as amended, within 30 days of the filing of such lien,
and in any event prior to the commencement of an action to foreclose on such
lien, and any other liens or exceptions which are approved in writing by the
Lender.
(c) Inspections of Construction Records. During normal business
hours and at any time an Event of Default has occurred as is continuing, the
Lessee will make available for inspection by a duly authorized representative
of the Lender any of the Lessee's and General Contractor's books and records
insofar as they relate to the Leased Property at such times as requested by the
Lender when requested to do so and will furnish to the Lender any information
regarding its business affairs and its financial condition.
(d) Reimbursements. The Lessee will reimburse the Lender promptly
for all construction loan costs paid by the Lender in accordance with the
Operative Documents, including but not limited to the costs of title insurance
policies, title examinations, recording fees, surveys, fees of counsel for
services rendered and out-of-pocket expenses for which the Lender is entitled
to be reimbursed pursuant to the Operative Documents, all of which the Lender
is authorized to deduct from the proceeds of disbursements hereunder.
(e) Fixtures and Equipment. No personal property of any kind
intended to be part of the Improvements or paid for with the proceeds of
Advances will be purchased or acquired by the Lessee under any conditional
sales contract or security agreement or any lease agreement, and all such
personal property will be fully paid for before payment therefor becomes past
due or in any event within 30 days after delivery thereof; provided, however,
that the foregoing shall not apply to amounts withheld and unpaid on account of
bona fide disputes with the suppliers thereof.
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<PAGE> 10
(f) Inspections of the Construction. The Lessee shall allow the
Lender and its agents, at all times during normal business hours and at any
time that an Event of Default has occurred and is continuing, (i) the right of
entry and free access to the site of the Improvements and the right to inspect
all work done, labor performed and materials furnished in and about the
Improvements; and (ii) to require to be replaced or otherwise corrected any
material or work that does not comply with the Plans and Specifications.
(g) Insurance Prior to the Completion Date. The Lessee shall
submit to the Lender for its review and approval evidence of builder's risk
insurance coverage or permanent insurance coverage appropriate and satisfactory
to the Lender, on the Leased Property. All insurance policies shall name the
Lessee and the Lender as an additional insured and shall be issued by carriers
with a Best's Insurance Reports policy holder's rating of A+ and a financial
size category acceptable to the Lender and shall include a standard mortgagee
clause (without contribution) in favor of and acceptable to the Lender. The
policies shall provide for the following coverages and any other coverages that
the Lender may from time to time reasonably require:
(1) Builder's "all risk" hazard coverage in the amount of the
replacement cost of the Improvements and all other
improvements and personality on the Leased Property. If the
policy is written on a coinsurance basis, the policy must
contain an agreed amount endorsement as evidence that the
coverage is in an amount sufficient to insure the full amount
of the Loan. Such insurance shall be 100% non-reporting
policies;
(2) Public liability insurance in such amounts (at least
$5,000,000 for personal injury, death or property damage
arising out of any one accident) and with a deductible
satisfactory to the Lender;
(3) Flood hazard coverage, if appropriate, in an amount acceptable
to the Lender and with a deductible acceptable to the Lender;
and
(4) Worker's compensation insurance (including employer's
liability insurance, if available and requested by the Lender)
for all employees, if any, of the Lessee and for all
employees, if any, of the Lessee's managing agent(s) and
contractor(s) engaged on or with respect to the Leased
Property or the Construction in such amounts as are
satisfactory to the Lender, or, if such limits are established
by law, in such amounts. The Lessee may satisfy the
requirements of this clause (4) with respect to employees of
the Lessee's agents and contractors through separate policies
provided by each agent or contractor.
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The initial policies shall be prepaid and the Lessee shall deliver to the
Lender and the Lessee prior to the Closing Date copies of all such policies,
together with original certificates therefor. Copies of all renewal policies
and original certificates therefor shall be deposited with the Lender as
evidence of such insurance. All policies shall contain provisions for thirty
days' written notice to the Lender prior to expiration or cancellation. The
Lessee expressly agrees to permit the Lender to maintain insurance in force by
payment of premiums from undisbursed Loan proceeds. The Lender hereby agrees
that the insurance coverages required to be obtained and maintained by the
Lessee hereunder may be obtained and maintained in the form of blanket
insurance policies, covering both the Leased Property and other properties and
projects owned by the Lessee. Written evidence satisfactory to the Lender of
the existence and coverage of such blanket policies shall be delivered to the
Lender prior to the Closing Date.
(h) Notice of Default. The Lessee shall notify the Lender in
writing within three days of the occurrence thereof of any Default or Event of
Default.
(i) Compliance with Texas Property Code. The Lessee shall fully
comply with Sections 53.101, 53.106 and 53.124(c) of the Texas Property Code.
(j) Construction Bank Account. The Lessee may, at its option,
maintain with the Lender a commercial operating account. All Loan Advances
made by the Lender and all Contribution Advances issued by the Lender on behalf
of the Lessor may be made by depositing the amount thereof directly into such
operating account.
(k) Limitation on Location of Improvements. No portion of the
Improvements shall be constructed in or on that portion of the Land lying
within Block 3, Unrestricted Reserve "F", World/Houston International Business
Center, Section One, a subdivision in Harris County, Texas, according to the
map or plat thereof recorded in Volume 278, Page 25 of the Harris County Map
records, being an area approximately 537.04 feet in length and 8.03 feet in
width, the southern boundary of which is the southern boundary of said Block 3,
Unrestricted Reserve "F", World/Houston International Business Center, and the
northern boundary of which is a portion of the northern boundary of the Land.
SECTION 3
CONDITIONS PRECEDENT; DOCUMENTS
SECTION 3.1 Conditions to the Obligations of the Lessor and the
Lender on the Closing Date. The obligations of the Lessor and the Lender to
carry out their respective obligations under Section 2 of this Participation
Agreement to be performed on the Closing Date shall be subject to the
fulfillment to the satisfaction of, or waiver by, each such party (acting
directly or through its counsel) on or prior to the Closing Date of the
following conditions precedent:
(a) Documents. The following documents shall have been
executed and delivered by the respective parties thereto:
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(i) Participation Agreement. Counterparts of
this Participation Agreement, duly executed by the parties
hereto, shall have been delivered to each of the parties
hereto.
(ii) Ground Lease. Counterparts of the Ground
Lease (substantially in the form of Exhibit A), duly executed
by the Lessor and the Ground Lessor, shall have been delivered
to the Lessor, together with a memorandum thereof in
recordable form;
(iii) Lease. The original of the Lease
(substantially in the form of Exhibit B), together with the
Memorandum of Lease, each duly executed by the Lessee and the
Lessor, provided that the Memorandum of Lease shall be
executed in recordable form, shall have been delivered to the
Lender.
(iv) Loan Agreement, Deed of Trust, Assignment of
Lease and Rents, Note, Non-Disturbance and Attornment
Agreement. Counterparts of the Loan Agreement (substantially
in the form of Exhibit C), duly executed by the Lessor and the
Lender, shall have been delivered to each of the Lessor and
the Lender; counterparts of the Deed of Trust (substantially
in the form of Exhibit D), duly executed by the Lessee and in
recordable form, shall have been delivered to each of the
Lessor and the Lender; the Assignment of Lease and Rents
(substantially in the form of Exhibit E), duly executed by the
Lessor, consented to by the Lessee and in recordable form,
shall have been delivered to the Lender; the Note
(substantially in the form attached as an exhibit to the Loan
Agreement) payable to the order of the Lender, duly executed
by the Lessor, shall have been delivered to the Lender and the
Non-Disturbance and Attornment Agreement (substantially in the
form of Exhibit F) duly executed by the Lessee, Lessor and
Lender and in recordable form shall have been delivered to the
Lender, the Lessor and the Lessee.
(v) Title and Title Insurance. The Lessor and
the Lender shall receive from the Title Insurance Company,
respectively, a Texas form of Leasehold Owner's Policy in the
amount of the Estimated Development Costs (the "Owner's Title
Policy") and a Texas form of Leasehold Loan Policy of title
insurance in the amount of the Loan Commitment (the "Lender's
Title Policy"), each issued by the Title Insurance Company, in
each case, each acceptable in form and substance to Lessee and
the Lender (the Owner's Title Policy and the Lender's Title
Policy, collectively the "Title Policies"). The Title
Policies (A) shall be dated as of the Closing Date, (B) to the
extent permitted under Applicable Law, shall include coverage
over the general exceptions to such Title Policy and shall
contain such affirmative endorsements as to easements and
rights-of-way, encroachments, the nonviolation of covenants
and restrictions, survey matters and other matters as the
Lender and the Lessor shall reasonably request and (C) shall
not contain a "pending disbursements" exception except as to
mechanics' lien claims and except
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as to limiting coverage to the amount of Loan Advances
actually disbursed from time to time.
(vi) Security Agreement and Assignment. The
Security Agreement and Assignment (substantially in the form
of Exhibit G), duly executed by the Lessee, with an
acknowledgement and consent thereto satisfactory to the Lessor
and the Lender duly executed by the General Contractor and
complete copy of the Construction Contract certified by the
Lessee shall have been delivered to the Lender.
(vii) Survey. The Lessee shall have delivered, or
shall have caused to be delivered, to the Lessor and the
Lender, at the Lessee's expense, an accurate survey of the
Leased Property certified to the Lessor and the Lender in a
form satisfactory to the Lessor and the Lender and showing no
state of facts unsatisfactory to the Lessor or the Lender and
prepared within sixty (60) days of the Closing Date by a
licensed surveyor selected by Lessee and reasonably
satisfactory to Lender. Such survey shall (A) be acceptable
to the Title Insurance Company, (B) show no encroachments on
the Land by structures owned by others, and no encroachments
from any part of the Leased Property onto any land owned by
others, except for such encroachments which, in the judgment
of the Lender and its counsel, do not impair in any material
respect the value of the Leased Property or the suitability of
the Leased Property for its intended use, and (C) disclose no
state of facts objectionable to the Lessor, the Lender or the
Title Insurance Company.
(viii) Evidence of Insurance. The Lessor and the
Lender have received from the Lessee certificates of insurance
evidencing compliance with the provisions of both Section 2.7
hereof and Article IX of the Lease (including the naming of
the Lessor and/or the Lender as additional insured or loss
payees with respect to such insurance), in form and substance
reasonably satisfactory to the Lessor and the Lender.
(ix) Lessee's Resolutions and Incumbency
Certificate, Etc. Each of the Lender and the Lessor shall
have received (A) a certificate of the Secretary or an
Assistant Secretary of the Lessee attaching and certifying as
to (1) the resolution of the Lessee's Board of Directors (or
an appropriate committee of such Board) duly authorizing the
execution, delivery and performance by the Lessee of each
Operative Document to which the Lessee is or will be a party,
(2) the incumbency and signatures of Persons authorized to
execute and deliver Operative Documents on the Lessee's
behalf, (3) the Lessee's certificate of incorporation,
certified as of a recent date by the Secretary of State of the
state of the Lessee's incorporation and (4) the Lessee's
by-laws and (B) a good standing certificate for the Lessee
from the appropriate officer of the State of Texas.
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(x) Recording Fees; Transfer Taxes. To the
extent not covered by the Lender's Title Policy, the Lender
shall have received satisfactory evidence of the payment by
the Lessee of all recording and filing fees and taxes with
respect to any recordings or filings made of the Memorandum of
Lease, the Mortgage, the Assignment of Lease and Rents and the
Subordination and Nondisturbance Agreement.
(xi) Opinion of Lessee's Counsel. The opinion of
Judith Y. Robertson, Lessee's general counsel, dated the
Closing Date, and being substantially in the form set forth in
Exhibit H and containing such other matters as the parties to
whom such opinion is addressed shall reasonably request, shall
have been delivered and addressed to each of the Lessor and
the Lender.
(xii) Lessor's Resolution and Incumbency
Certificate. The Lender shall have received a certificate of
the managing member of the Lessor attaching and certifying as
to (A) the managing member's resolution authorizing the
execution, delivery and performance by it of each Operative
Document to which the Lessor is or will be a party and (B) the
incumbency and signatures of Person(s) authorized to execute
and deliver such documents on the Lessor's behalf.
(xiii) Opinion of Lessor's Counsel. The Opinion of
Ropes and Gray, Boston, Massachusetts dated the Closing Date,
substantially is the form of Exhibit I shall have been
delivered and addressed to each of the Lessee and the Lender.
(xiv) Soil Analysis and Environmental Report. The
Lender and the Lessor shall have received and approved (i)
soil analysis report relating to the Leased Property in form
and content satisfactory to the Lender and (ii) an
environmental report which shall certify results related to
toxic and other hazardous substances on the Leased Property.
(xv) Plans and Specifications. Copies of the
Plans and Specifications.
(xvi) Architect Certificate. An certification from
the Architect, substantially is the form of Exhibit J shall
have been delivered to each of the Lessor and the Lender.
(xvii) Utilities. Evidence that all utility
services necessary for construction and use of the
Improvements (including without limitation, electric, gas,
telephone, water and sewer service) are available to the
Leased Property, and the Lessee has the right to connect to
and use all utility services without restriction; and that all
necessary easements to provide such utility services to the
Improvements have been obtained.
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<PAGE> 15
(xviii) Zoning. Evidence of compliance with
applicable zoning ordinances or similar land use restrictions.
(xix) Governmental Authorizations. All
authorizations, if any, required by an governmental authority
for the operation of the Leased Property for the purposes
contemplated by the Plans and Specifications, which are
presently procurable.
(xx) Waiver of Option. An original instrument, in
a form satisfactory to the Lender, executed by Ithaca
Investments, Ltd., a Texas limited liability partnership (the
"Developer"), in recordable form, shall have been delivered to
the Lender waiving the Developer's option to repurchase the
Land created in that certain Declaration of Covenants,
Conditions and Restrictions dated October 5, 1993, recorded in
the Real Property Records of Harris County, Texas under File
Number P500092.
(b) Litigation. No action or proceeding shall have been
instituted or, to the Lessee's knowledge, threatened nor shall any governmental
action, suit, proceeding or investigation be instituted or, to the Lessee's
knowledge, threatened before any Governmental Authority, nor shall any order,
judgment or decree have been issued or proposed to be issued by any
Governmental Authority, to set aside, restrain, enjoin or prevent the
performance of this Participation Agreement or any of the other Operative
Documents or any transaction contemplated hereby or thereby or which would
materially adversely affect the Leased Property or any transaction contemplated
by the Operative Documents or which would result in a Material Adverse Effect.
(c) Legality. In the opinion of the Lender, the Lessor
or their respective counsel, the transactions contemplated by the Operative
Documents shall not violate any Applicable Law, and no change shall have
occurred or been proposed in Applicable Law that would make it illegal for the
Lender or the Lessor to participate in any of the transactions contemplated by
the Operative Documents.
(d) No Events. (i) No Default, Event of Default, Event
of Loss or Event of Taking shall have occurred and be continuing and (ii) no
action shall be pending or, to the Lessee's knowledge, threatened by a
Governmental Authority to initiate a Condemnation or an Event of Taking.
(e) Representations. Each representation and warranty of
the parties hereto or to any other Operative Document contained herein or in
any other Operative Document shall be true and correct in all material respects
as though made on and as of the Closing Date.
(f) No Material Adverse Effect. There shall not have
occurred any event having a Material Adverse Effect since June 30, 1996.
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(g) Fees and Transaction Expenses. The Lessee shall have
paid (i) the remaining $100,000 of the fee owed to the Financial Advisor and
(ii) the reasonable fees and expenses of the Lessor, the Lender and their
respective counsel.
SECTION 3.2 Conditions to Subsequent Fundings. Notwithstanding
anything to the contrary contained herein, or in any other Operative Document,
neither the Lender nor the Lessor shall have any obligation to make any Loan
Advance or Contribution Advance, as the case may be, pursuant to the initial or
any subsequent Funding Requisition, unless each of the following conditions
shall have been satisfied or waived by the Lender with respect to such Funding:
(a) Deliveries. On or prior to each Funding
subsequent to the Initial Loan Advance, the Lessee shall deliver, or cause to
be delivered, the following:
(i) Plans and Specifications. Detailed
architectural, structural, mechanical, and electrical Plans and Specifications
for the Improvements, to the extent not already delivered, to the Lender,
provided, however, that no Advance shall be required to be made for any portion
of Construction of the Improvements until the Plans and Specifications for such
portion of the Improvements shall have been delivered to and approved by the
Lender;
(ii) Title Policy Endorsement. An endorsement to
the Title Policies (A) indicating that since the last Funding Date there has
been no change in the state of title and no survey exceptions not theretofore
approved by the Lessor and the Lender and (B) increasing the coverage of the
Title Policies by an amount equal to the Funding then being made so that the
total amount insured equals, in the case of the Lender's Title Policy, the
total amount of Loan Advances disbursed by the Lender, and in the case of
Lessor's Title Policy, a like amount plus in addition, the amount of the
Contribution, and, in each case, changing the effective date of the Title
Policies to the Funding Date. At the Lender's discretion, any Funding may be
made through the Title Insurance Company. Prior to each Funding Date, the
Lessee shall furnish the Title Insurance Company with lien waivers as required
by the Title Insurance Company through the time of the Funding. No title
indemnities for purposes of insuring around any objection to or condition of
title shall be issued or provided by the Lessee or the Lessor to the Title
Insurance Company without the prior written consent of the Lender;
(iii) Engineer's Certificate. If applicable, a
certification from the Architect or from an engineer approved by the Lender
that the Improvements have been or are being erected within the property
boundaries of the Land and in accordance with all applicable set back
requirements and the approved site plan;
(iv) Improvements Permit. All building permits or
other authorizations required by any Governmental Authority for the
Construction to the extent not previously obtained;
(v) [reserved]
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(b) No Events. (i) No Default, Event of Default, Event
of Loss or Event of Taking shall have occurred and be continuing and (ii) no
action shall be pending or threatened by a Governmental Authority to initiate a
Condemnation or an Event of Taking;
(c) Requisition. Together with the Funding Requisition,
the Lessee shall submit to the Lender a requisition using AIA Form G702 and 703
accompanied by a cost breakdown, the accuracy of which shall be certified by
the Lessee, the Architect and the General Contractor, and such other
information and documentation required hereunder. The Approved Budget shall
serve as the disbursement control for each line item. Neither the Lender nor
the Lessor shall be required to make a Funding for any line item in excess of
the amount shown in the Approved Budget for such line item; provided, however,
that the Lender shall not unreasonably withhold its consent to a reallocation
of amounts within line items in the Approved Budget (other than the line item
for interest reserve) as long as the total cost of the Construction does not
increase;
(d) Timing. Fundings Requisitions after the Initial
Funding shall not be made more often than once a month and the total amount of
all Fundings shall not at any time exceed an amount equal to the sum of the
hard costs of the work completed to date as certified by the Architect on the
aforesaid AIA draw request forms and the soft costs incurred. The Lender
reserves the right to review and approve invoices for all hard and soft costs.
Prior to each Advance, the Lender or its agents may inspect the Leased Property
to verify that the related Funding Requisition accurately reflects the amount
of the Construction with respect thereto;
(e) Loan Out of Balance. If, in the sole judgment of the
Lender, and determined at any time while the Loan is outstanding, the cost of
the Construction increases, the Lessee shall be required to invest the
increased amount in the Construction or deposit such increased amount with the
Lender in an account pledged to the Lessor as security for the Lease and other
Operative Documents in a manner reasonably satisfactory to the Lender or to
provide the Lender such other assurances as to the availability of the funds as
subject to the Lender's approval prior to any Loan Advance;
(f) Completion Deadline. If at any time the Lender
shall, in its sole judgment, estimate and give notice to the Lessee that
substantial completion of the Construction will not occur on or before the
Completion Deadline, then neither the Lender nor the Lessor shall have any
obligation to make further Advances until such time as the Lessee shall have
delivered to the Lender evidence satisfactory to Lender that substantial
completion of the Improvements will occur on or before the Completion Deadline;
(g) Approval of Contracts. Neither the Lender nor the
Lessor shall have any obligation to make any Advances for any Development Costs
due from the Lessee under a contract or subcontract for the Construction if
such contract or subcontract is required to be, but has not been, approved by
the Lender and such approval by the Lender has not been unreasonably withheld
or delayed. Although the Lessee shall not be required to provide to the Lender
the subcontracts for the Construction as a condition precedent to making the
Initial
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<PAGE> 18
Funding, the Lender reserves the right, upon written notice to the Lessee, to
require the Lessee to provide such subcontracts for subsequent Advances;
(h) Compliance with Plans and Specifications. If the
Lender or the Lessor should at any time determine that any part of the work
performed on, or materials incorporated into, the Improvements does not comply
in any material respect with the Plans and Specifications, whether or not the
Development Cost of any such work or materials shall have been included in a
Funding Requisition theretofore made, then neither the Lender nor the Lessor
shall have any obligation to make any further Advances until such work is
corrected, or material is changed, to comply with the Plans and Specifications
and the Lender and the Lessor have received satisfactory evidence to them of
such change and compliance, and Lender and the Lessor shall respectively have
the right to offset against the amount of any subsequent Advance the cost of
the nonconforming work or materials included in prior Fundings.
Notwithstanding the foregoing, the Lender and the Lessor shall continue to make
Advances for other work and materials if, prior to the determination by the
Lender or the Lessor of such nonconformance, the Lessee and/or the Architect
have previously made a similar determination, and the Lessee has delivered to
the Lender and the Lessor evidence reasonably satisfactory to the Lender and
the Lessor that the General Contractor has agreed to correct such work or to
change such materials without requesting an Advance for the cost thereof, and
the General Contractor diligently pursues such work and changes to completion
within 90 days after the determination of the need for corrective action;
(i) Defects in Construction. If the Lender or the Lessor
should at any time reasonably determine that any part of the work performed on
the Improvements has not been performed in a good and workmanlike manner,
whether or not the Development Cost of any such work shall have been included
in a Funding Requisition theretofore made, neither the Lender nor the Lessor
shall have any obligation to make any further Advances until such work is
corrected so as to have been performed in a good and workmanlike manner and the
Lender and the Lessor have received satisfactory evidence of such correction,
and Lender and the Lessor shall have the right to offset against the amount of
any subsequent Advances by the cost of the nonconforming work or materials
included in prior Fundings. Notwithstanding the foregoing, the Lender and the
Lessor shall continue to make Advances for other work and materials if, prior
to the determination by the Lender or the Lessor of such nonconformance, the
Lessee and/or the Architect have previously made a similar determination, and
the Lessee has delivered to the Lender and the Lessor evidence reasonably
satisfactory to the Lender and the Lessor that the General Contractor has
agreed to correct such work or to change such materials without requesting an
Advance for the cost thereof, and the General Contractor diligently pursues
such work and changes to completion within 90 days after the determination of
the need for corrective action; and
(j) Compliance with Codes. If the Lender or the Lessor
should at any time determine that any part of the work performed on, or
materials incorporated into, the Improvements does not comply with all
applicable building codes or other Applicable Law, whether or not the
Development Cost of any such work or materials shall have been included
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in a Funding Requisition theretofore made, then neither the Lender nor the
Lessor shall have any obligation to make any further Advances until such work
is corrected, or material is changed, to cause the same to comply with all
applicable building codes or other Applicable Law and the Lender and the Lessor
have received satisfactory evidence of such correction or change and of such
compliance, and the Lender and the Lessor shall have the right to offset
against the amount of any subsequent Advances for other work and materials by
the cost of the nonconforming work as materials included in prior Fundings.
Notwithstanding the foregoing, the Lender and the Lessor shall continue to make
Advances for other work and materials if, prior to the determination by the
Lender or the Lessor of such nonconformance, the Lessee and/or the Architect
have previously made a similar determination, and the Lessee has delivered to
the Lender and the Lessor evidence reasonably satisfactory to the Lender and
the Lessor that the General Contractor has agreed to correct such work or to
change such materials without requesting an Advance for the cost thereof, and
the General Contractor diligently pursues such work and changes to completion
within 90 days after the determination of the need for corrective action.
SECTION 3.3 Completion Date Conditions. The occurrence of the
Completion Date shall be subject to the fulfillment or satisfaction of, or
waiver by, each party hereto (acting directly or through its counsel) of the
following conditions precedent:
(a) Title Policy Endorsements. The Lessee shall have
furnished to the Lender the following endorsements to its Title Policy (each of
which shall be subject to no exceptions other than those set forth in Schedule
B to its Title Policy): (i) a date-down endorsement (redating and confirming
the coverage provided under the Title Policy and each endorsement thereto) and
(ii) a comprehensive endorsement, in each case, effective as of a date not
earlier than the date of completion of the Construction.
(b) Construction Complete. The Construction shall have
been completed substantially in accordance with the Plans and Specifications
and all Applicable Laws, and the Improvements are ready for occupancy and
operation in the ordinary course of Lessee's business. All fixtures,
equipment, materials and other property contemplated under the Plans and
Specifications to be incorporated or installed in the Leased Property shall
have been incorporated or installed free and clear of all liens except for
Permitted Liens.
(c) Lessee Certification. The Lessee shall have
furnished the Lessor and the Lender with both (i) a certification of the Lessee
that:
(A) all amounts owing to third parties for the
Construction have been paid in full (other than contingent
obligations for which the Lessee has made adequate reserves or
claims being defended in good faith), and to Lessee's
knowledge no litigation or proceedings are pending, or to the
best of the Lessee's knowledge are threatened, against the
Leased Property or the Lessee which would materially adversely
affect (1) the enforceability or priority of this
Participation Agreement or the other Operative Documents and
(2) the ability of the Lessee to
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<PAGE> 20
fully perform its obligations pursuant to and as contemplated
by the terms and provisions of this Participation Agreement
and the other Operative Documents;
(B) all consents, licenses and permits and other
governmental authorizations or approvals required for the
Construction and operation of the Leased Property have been
obtained;
(C) the Leased Property has available all
services of public facilities and other utilities necessary
for use and operation of the Leased Property for its intended
purposes including, without limitation, adequate water, gas
and electrical supply, storm and sanitary sewerage facilities,
telephone and other required public utilities and means of
access between the Improvements and public highways for
pedestrians and motor vehicles;
(D) all agreements, easements and other rights,
public or private, which are necessary to permit the lawful
use and operation of the Leased Property as the Lessee intends
to use the Leased Property under the Lease and which are
necessary to permit the lawful intended use and operation of
all then intended utilities, driveways, roads and other means
of egress and ingress to and from the same have been obtained
and are in full force and effect and the Lessee has no
knowledge of any pending modification or cancellation of any
of the same, and the use of the Leased Property does not
depend on any variance, special exception or other municipal
approval, permit or consent that has not been obtained for its
continuing legal use;
(E) the Construction has been completed
substantially in accordance with the Plans and Specifications
and all Applicable Laws and the Leased Property is ready for
occupancy and operation; and
(F) the Leased Property is in compliance with all
applicable zoning laws and regulations; and
(ii) copies of (A) all final lien waivers regarding the Construction,
together with sworn statements from contractors, subcontractors and material
suppliers and (B) true and complete copies of an "as built" or "record" set of
the Plans and Specifications, and a plat of survey of the Leased Property "as
built" showing all paving, driveways, fences and exterior improvements and
copies of all licenses and permits required by any Governmental Authority
having jurisdiction over the use and occupancy of the Leased Property and for
the operation thereof, including copies of a certificate or certificates of
occupancy for the Leased Property or other legally equivalent permission to
occupy the Leased Property from the Governmental Authority having jurisdiction.
(d) Cutoff Date. The Completion Date shall occur on or prior to
the Completion Deadline.
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SECTION 3.4 Conditions to the Obligations of the Lessee. The
obligations of the Lessee to lease from the Lessor and construct the Leased
Property are subject to the fulfillment on the Closing Date to the satisfaction
of, or waiver by the Lessee of, the following conditions precedent:
(a) General Conditions. The conditions set forth in
Sections 3.1 that require fulfillment by the Lessor and the Lender shall have
been satisfied.
(b) Legality; Desired Accounting Treatment. In the
opinion of the Lessee or its counsel, the transactions contemplated by the
Operative Documents shall not violate any Applicable Law, and no change shall
have occurred, or, with respect to tax laws, shall have been proposed, in
Applicable Law that would make it illegal for the Lessee to participate in any
of the transactions contemplated by the Operative Documents. In addition, the
Lessee shall have no obligation to proceed with the actions contemplated on its
part on the Closing Date if, on or prior to the Closing Date, the Lessee shall
have been advised in writing by its accountants that the Lease will not
constitute an operating lease for purposes of the Lessee's financial reporting.
SECTION 3.5 Appraisal. Lessee agrees to supply the Lender, within
60 days of the Completion Date, with an appraisal report for the Land and the
Improvement, which appraisal report shall be prepared by an independent
appraising firm, and be in form and substance, reasonably acceptable to the
Lender. In the event that the appraised Fair Market Sales Value of the Land
and the Improvement is less than the amount of the Loan Advances and the
Contribution Advances previously made (or deemed made), Lessee agrees to
promptly pay to the Lender an amount equal to the amount by which such Loan
Advances exceed the aforesaid appraised value, which amount shall be applied in
accordance with Section 3 of the Loan Agreement. Any such payment of a portion
of the Loan under the circumstances described in this Section 3.5 shall be
without any premium or penalty to Lessee, but Lessee shall pay Supplemental
Rent in an amount of the Breakage Costs, if any.
SECTION 4
REPRESENTATIONS AND COVENANTS
SECTION 4.1 Representations of the Lessee. Effective as of the date
of execution hereof and as of the Closing Date, the Lessee represents and
warrants to each of the other parties hereto as follows:
(a) Organization; Corporate Powers. The Lessee (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas, (ii) is duly qualified as a foreign corporation and
in good standing under the laws of each other jurisdiction where such
qualification is required and where the failure to be duly qualified and in
good standing would have a Material Adverse Effect and (iii) has all requisite
corporate power and authority to own, operate and encumber its property and
assets and to conduct its business as presently conducted and as proposed to be
conducted in connection with and following the consummation of the transactions
contemplated by the Operative Documents.
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(b) Authority. The Lessee has the requisite corporate
power and authority to execute, deliver and perform the Operative Documents
executed or to be executed by it. The execution, delivery and performance (or
recording or filing, as the case may be) of the Operative Documents, and the
consummation of the transactions contemplated on the part of the Lessee
thereby, have been duly approved by the Board of Directors of the Lessee and no
other corporate proceedings on the part of the Lessee are necessary to
consummate the transactions so contemplated.
(c) Due Execution and Delivery of Operative Documents.
The Operative Documents executed by the Lessee have been duly executed and
delivered (or recorded or filed, as the case may be) by the Lessee, and, in
each case, constitute its legal, valid and binding obligation, enforceable
against it in accordance with each such Operative Document of its respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or limiting creditors'
rights generally or by equitable principles generally.
(d) No Conflict. The execution, delivery and performance
of each Operative Document to which it is a party by the Lessee and each of the
transactions contemplated thereby do not and will not (i) violate any
Applicable Law or Contractual Obligation of the Lessee the consequences of
which violation, singly or in the aggregate, would have a Material Adverse
Effect, (ii) result in or require the creation or imposition of any Lien
whatsoever on the Leased Property (other than Permitted Liens) or (iii) require
any approval of stockholders which has not been obtained.
(e) Governmental Consents. Except as have been made,
obtained or given, no filing or registration with, consent or approval of,
notice to, with or by any Governmental Authority is required to authorize, or
is required in connection with, the execution, delivery and performance by the
Lessee of the Operative Documents, the use of the proceeds of the Loans made to
effect the acquisition of the leasehold interest in the Land and the
Construction of the Improvements, or the legality, validity, binding effect or
enforceability of any Operative Document.
(f) Governmental Regulation. The Lessee is not an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
(g) Requirements of Law. The Lessee is in compliance
with all Requirements of Law applicable to Lessee and its business, in each
case where the failure to so comply would have a Material Adverse Effect,
either individually or together with other such cases.
(h) Rights in Respect of the Leased Property. The Lessee
is not a party to any contract or agreement to sell any interest in the Leased
Property or any part thereof other than pursuant to the Participation
Agreement, the Ground Lease and the Lease.
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(i) Hazardous Materials.
(i) Except in full compliance with all Applicable
Law there are no Hazardous Materials present at, upon, under or within the
Leased Property or released or transported to or from the Leased Property.
(ii) No Governmental Actions have been taken, or
are in process or have been threatened, which could reasonably be expected to
subject the Leased Property, the Lender or the Lessor to any Claims or Liens
under any Environmental Law which would have a materially adverse effect on the
Lessor, the Lender or the Leased Property.
(iii) The Lessee has all Environmental Permits
necessary to operate the Leased Property in accordance with Environmental Laws
and is complying with and has at all times complied with all such Environmental
Permits.
(iv) With respect to the Leased Property, no
notice, notification, demand, request for information, citations, summons,
complaint or order has been issued or filed to or with respect to the Lessee,
and no penalty has been assessed on the Lessee and no investigation or review
is pending or threatened by any Governmental Authority or other Person with
respect to any alleged violation or liability of the Lessee under any
Environmental Law. No material notice, notification, demand, request for
information, citation, summons, complaint or order has been issued or filed to
or with respect to any other Person, no material penalty has been assessed on
any other Person and no investigation or review is pending or threatened by any
Governmental Authority or other Person relating to the Leased Property with
respect to any alleged material violation or liability under any Environmental
Law by any other Person.
(v) The Leased Property and each portion thereof
are presently in compliance with all Environmental Laws, and there are no
present or past facts, circumstances, activities, events, conditions or
occurrences regarding the Leased Property (including, without limitation, the
release or presence of Hazardous Materials) that could reasonably be
anticipated to (A) form the basis of a Claim against the Leased Property, the
Lender, the Lender or the Lessee, (B) cause the Leased Property to be subject
to any restrictions on ownership, occupancy, use or transferability under any
Environmental Law, (C) require the filing or recording of any notice or
restriction relating to the presence of Hazardous Materials in the real estate
records in the county or other appropriate municipality in which the Leased
Property is located or (D) prevent or interfere with the continued operation
and maintenance of the Leased Property as contemplated by the Operative
Documents.
(j) Leased Property. The present condition and use of
the Leased Property conforms with all conditions or requirements of all
existing permits and approvals issued with respect to the Leased Property, and
the present use of the Leased Property and the Lessee's future intended use of
the Leased Property under the Lease does not violate any Applicable Law. No
notices, complaints or orders of violation or non-compliance have been issued
or threatened or contemplated by any Governmental Authority with respect to the
Leased Property or any
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present or intended future use thereof. All agreements, easements and other
rights, public or private, which are necessary to permit the lawful use and
operation of the Leased Property as the Lessee intends to use the Leased
Property under the Lease and which are necessary to permit the lawful intended
use and operation of all presently intended utilities, driveways, roads and
other means of egress and ingress to and from the same have been, or in the
reasonable judgment of the Lessee will be, obtained and are in full force and
effect and the Lessee has no actual knowledge of any pending modification or
cancellation of any of the same.
(k) Qualification of Lessee Representations. The
representations of the Lessee set forth in this Section are qualified by the
conditions that (i) all representations are made and given to the best of the
Lessee's knowledge after due inquiry, (ii) where a representation involves
compliance by the Lessee with an Applicable Law or an Environmental Law such
representation is deemed to be compliance by the Lessee in all material
respects with any such law and (iii) where a representation involves conduct on
the part of the Lessee that does not violate an Applicable Law or an
Environmental Law such representation is deemed to exclude Lessee's
non-material violations of any such law.
SECTION 4.2 Representations and Covenants of the Lessor. Effective
as of the date of execution hereof and as of the Closing Date, the Lessor
represents and warrants to the Lender and the Lessee as follows:
(a) Due Organization; Limited Purpose. The Lessor is a
limited liability company duly organized and validly existing in good standing
under the laws of the State of Massachusetts; is duly qualified as a foreign
limited liability company and in good standing under the laws of the State of
Texas; and has full power, authority and legal right as a limited liability
company to execute, deliver and perform its obligations under this
Participation Agreement and each other Operative Document to which it is or
will be a party. The Lessor further represents, covenants and warrants that
(i) it has been formed and exists for the sole purpose of, and will not engage
in any business or other activity except as necessary in connection with,
acquiring and owning the Leased Property and taking the actions contemplated on
the Lessor's part under the Operative Documents and (ii) except for obligations
and indebtedness of the Lessor represented by and set forth in the Operative
Documents and except for obligations or indebtedness of the Lessor arising
directly or indirectly from the Lessee's failure to discharge the Lessee's
obligations under the Operative Documents, the Lessor will not create, incur,
suffer to be created or incurred, or guarantee any obligation or indebtedness.
(b) Due Authorization; Enforceability, Etc. The
Participation Agreement and each other Operative Document to which the Lessor
is or will be a party have been or will be duly authorized, executed and
delivered by or on behalf of the Lessor and are, or upon execution and delivery
will be, legal, valid and binding obligations of the Lessor enforceable against
it in accordance with their respective terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, or similar laws affecting
creditors' rights generally and by general equitable principles.
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(c) No Conflict. The execution and delivery by the
Lessor of this Participation Agreement and each other Operative Document to
which the Lessor is or will be a party are not or will not, and the performance
by the Lessor of its obligations under each and will not, violate its
certificate of formation or Operating Agreement, do not and will not contravene
any Applicable Law and do not and will not contravene any provision of, or
constitute a default under, any Contractual Obligation of the Lessor, and the
Lessor possesses all requisite regulatory authority to undertake and perform
its obligations under the Operative Documents.
(d) Litigation. There are no pending or threatened
actions or proceedings against the Lessor before any court, arbitrator or
administrative agency that would have a material adverse effect upon the
ability of the Lessor to perform its obligations under this Participation
Agreement or any other Operative Documents to which it is or will be a party.
(e) Lessor Liens. No Lessor Liens or other Liens created
by acts or omissions of the Lessor (other than Liens created by the Operative
Documents) exist on the Closing Date on the Leased Property, or any portion
thereof, and the execution, delivery and performance by the Lessor of this
Participation Agreement or any other Operative Document to which it is or will
be a party will not subject the Leased Property, or any portion thereof, to any
Lessor Liens or other Liens created by the Lessor (other than by the Operative
Documents). Except for Liens against the Leased Property created by the
Operative Documents, Permitted Liens (other than Lessor Liens), Liens
(including Lessor Liens) arising directly or indirectly from the Lessee's
failure to discharge the Lessee's obligations under the Operative Documents,
the Lessor further represents and warrants that it will not create, suffer to
be created or permit any Liens on the Leased Property.
(f) Employee Benefit Plans. The Lessor is not and will
not be making its Contribution Advances hereunder, and is not performing its
obligations under the Operative Documents, with the assets of an "employee
benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I
of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code).
SECTION 4.3 Covenant of Lender. Upon payment by Lessee of the
purchase price for the Leased Property pursuant to Article XV of the Lease,
Lender will release the lien of the Operative Documents against the Leased
Property.
SECTION 4.4 Tax Treatment. (a) The parties hereto agree that it is
the Lessee's intention that for Federal, state and local income Tax purposes
(i) the Lease be treated as the repayment and security provisions of a loan to
the Lessee, all rights to the principal and interest of which have been
assigned by the Lessor to the Lender, (ii) the Lessee be treated as the legal
and beneficial owner entitled to any and all benefits of ownership of the
Property or any part thereof and (iii) all payments of Basic Rent during the
Lease Term be treated as payments of interest and principal, as the case may
be, to the Lender.
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(b) The Lessee agrees that neither it nor any member of any
affiliated group of which it is or may become a member (whether or not
consolidated or combined returns are filed for such affiliated group for
Federal, state or local income Tax purposes) will at any time take any action,
directly or indirectly, or file any return or other document inconsistent with
the intended income Tax treatment set forth in Section 4.4 (a) hereof, and the
Lessee agrees that the Lessee and any such Affiliates will file such returns,
maintain such records, take such actions and execute such documents as may be
appropriate to facilitate the realization of such intended income Tax
treatment.
(c) The Lessor and the Lender each agree that, except to the
extent required by law, neither it nor any member of any affiliated group of
which it is or may become a member (whether or not consolidated or combined
returns are filed for such affiliated group for Federal, state or local income
Tax purposes) will at any time take any action, directly or indirectly, or file
any return or other document claiming, or asserting that it is entitled to the
income Tax benefits, deductions and/or credits which, pursuant to the intended
income Tax treatment set forth in Section 4.4 (a) hereof, would otherwise be
claimed or claimable by the Lessee, and that it and any such Affiliates will at
the expense of the Lessee file such returns, maintain such records, take such
actions, and execute such documents (as reasonably requested by the Lessee from
time to time) as may be appropriate to facilitate the realization of, and as
shall be consistent with, such intended income Tax treatment, other than
engaging in any contest of such treatment with any taxing authority, and if any
such filing, maintenance, action or execution requested by the Lessee would
result in any additional income Tax liability or expense payable by it or any
Affiliate, or could reasonably be expected to result in liability or expense
payable by it or any Affiliate, then the Lessee will provide an indemnity
against such income Tax liability or other liability satisfactory to the Lessor
or the Lender, as the case may be, in the Lessor's or the Lender's sole
opinion, as the case may be.
SECTION 5
COVENANTS OF THE LESSEE
SECTION 5.1 Qualification as to Corporate Status. The Lessee shall
remain a validly existing corporation organized under the laws of the State of
Texas or any other State of the United States of America and shall remain
qualified to do business in the State.
SECTION 5.2 Further Assurances. Upon the written request of the
Lessor or the Lender, the Lessee, at its own cost and expense, will cause all
financing statements (including precautionary financing statements), fixture
filings and other similar documents to be recorded or filed at such places and
times in such manner as may be necessary to preserve, protect and perfect the
interest of the Lessor and the Lender in the Leased Property as contemplated by
the Operative Documents.
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SECTION 5.3 Reporting.
(a)Financial Statements. The Lessee shall deliver or cause to
be delivered to the Lender:
(i) As soon as practicable, and in any event within
forty-five (45) days after the close of each of the first three
quarterly accounting periods in each Fiscal Year, the consolidated
condensed balance sheet of the Lessee and its Subsidiaries as at the
end of such quarterly period and the related consolidated condensed
statements of operations for such quarterly period and for the elapsed
portion of the current Fiscal Year ended with the last day of such
quarterly period, and setting forth comparative consolidated figures
for the related period in the prior Fiscal Year, which financial
statements shall be certified by a duly authorized officer of the
Lessee that they fairly present the consolidated financial condition
of the Lessee and its Subsidiaries as at the dates indicated, subject
to changes resulting from audit and normal year-end adjustments;
(ii) As soon as practicable, and in any event within one
hundred twenty (120) days after the end of each Fiscal Year,
consolidated balance sheets of the Lessee and its Subsidiaries as at
the end of such Fiscal Year and the related consolidated statements of
earnings, stockholders' equity and changes in cash-flows of the Lessee
and its Subsidiaries for such Fiscal Year, setting forth in
comparative form the consolidated figures for the Lessee and its
Subsidiaries for the previous Fiscal Year, all in reasonable detail
and accompanied by a report thereon of Price Waterhouse, L.L.P. or
other independent public accountants of recognized national standing
selected by the Lessee which report shall be unqualified as to the
scope of audit and as to the status of the Lessee and its Subsidiaries
as a going concern and shall state that such consolidated financial
statements present fairly the financial position of the Lessee and its
Subsidiaries as at the dates indicated and the results of their
operations and changes in their financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with
prior years (or, in the event of a change in accounting principles,
such accountants' concurrence with such change) and that the
examination by such accountants in connection with such consolidated
financial statements has been made in accordance with generally
accepted auditing standards;
(iii) Together with each delivery of any financial
statements pursuant to clauses (i) and (ii) of this subsection, an
officer's certificate of the Lessee, executed by a duly authorized
officer of the Lessee, stating that the signer has instituted
procedures for the review of the terms of this Participation Agreement
and the principal Operative Documents and the review in reasonable
detail of the transactions and conditions of the Lessee and its
Subsidiaries taken as a whole during the accounting period covered by
such financial statements, and that such review has not disclosed the
existence during or at the end of such accounting period, and that the
signer does not have knowledge of the existence as at the date of such
officer's certificate, of any condition or event which constitutes an
Event of Default, or, if any such condition or event existed or
exists,
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specifying the nature and period of existence thereof and what action
the Lessee has taken, is taking and proposes to take with respect
thereto and stating that, to the best of such officer's knowledge, the
financial statements delivered pursuant to clause (i) of this
subsection present fairly the financial position of the Lessee and its
Subsidiaries as at the dates indicated and the results of their
operations and changes in their financial position for the periods
indicated in conformity with GAAP consistently applied;
(iv) Promptly, and in any event within five (5) Business
Days after the Lessee obtains knowledge thereof, notice of (A) the
occurrence of any event which constitutes an Event of Default which
notice shall specify the nature thereof, the period of existence
thereof and what action the Lessee propose to take with respect
thereto and (B) any litigation or governmental proceedings pending
against the Lessee which the Lessee determines it will disclose in the
Lessee's reports filed on Forms 10-K or 10-Q with the SEC (notice
being due within five Business Days of such determination); and
(v) With reasonable promptness, such information with
respect to the financial condition of the Lessee or the Leased
Property as from time to time may be reasonably requested by the
Lender; provided, however, that the Lender shall keep such information
confidential, except in connection with enforcement or exercise of the
Lender's rights under this Participation Agreement or otherwise
available at law or in equity and provided, further, that the Lender
may disclose such information to the extent necessary to respond to
inquiries of bank regulatory authorities or to comply with legal
process or any other legal disclosure obligations, or to the extent
such information has been made publicly available by parties other
than the Lender.
(b) Other Reports. Promptly after the same are available
to it, the Lessee shall deliver to the Lessor copies of all regular and
periodic reports and other reports and filings (if any) made by the Lessee with
the SEC, and promptly upon transmission thereof, copies of all proxy
statements, financial statements, notices and reports as the Company shall send
to its shareholders.
SECTION 5.4 Financial Covenants of Lessee.
(a) The Lessee shall not permit Consolidated Tangible
Net Worth, as determined as of the last day of any fiscal quarter, to be less
than the sum of (i) $25,000,000 plus (ii) an amount equal to 30% of the sum of
Consolidated Net Income for each fiscal quarter from and including the fiscal
quarter in which the Closing Date occurred (provided that any net loss for any
fiscal quarter shall be excluded from such calculation).
(b) The Lessee shall not permit Consolidated Net Worth,
as determined as of the last day of any fiscal quarter, to be less than (i)
$45,000,000 plus (ii) an amount equal to 30% of the sum of Consolidated Net
Income for each fiscal quarter from and including the fiscal quarter in which
the Closing Date occurred (provided that any net loss for any fiscal quarter
shall be excluded from such calculation).
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(c) The Lessee shall not permit the Fixed Charge
Coverage Ratio for any period of four consecutive fiscal quarters to be less
than 1.50 to 1.00.
SECTION 6
TRANSFERS BY LESSOR AND LENDER
SECTION 6.1 Lessor Transfers. The Lessor shall not assign, convey,
encumber or otherwise transfer all or any portion of its right, title or
interest in, to or under the Leased Property or the Lease (except pursuant to
the Mortgage, the Assignment of Lease and Rents or pursuant to Article VI of
the Lease) or any of the Operative Documents without obtaining the prior
written consent of the Lender and the Lessee.
SECTION 6.2 Lender Transfers. The Lender shall not assign, convey or
otherwise transfer all or any portion of its right, title or interest in, to or
under any of the Operative Documents without the prior written consent of the
Lessee and the Lessor (such consent not to be unreasonably withheld); provided,
however, that without the prior written consent of or notice to the Lessor or
the Lessee, the Lender may sell participating interests in the Loan to such
banks and other financial institutions as the Lender shall, in its sole
discretion, determine.
SECTION 7
INDEMNIFICATION
SECTION 7.1 General Indemnification. The Lessee agrees, whether or
not any of the transactions contemplated hereby shall be consummated, to assume
liability for, and to indemnify, protect, defend, save and keep harmless each
Indemnitee, on an After-Tax Basis, from and against, any and all Claims by any
third-party that may be imposed on, incurred by or asserted against such
Indemnitee, whether or not such Indemnitee shall also be indemnified as to any
such Claim by any other Person (except to the extent such claim is covered by
the insurance required by the Lease) and in any way relating to or arising out
of:
(i) any of the Operative Documents or any of the
transactions contemplated thereby, and any amendment, modification or
waiver in respect thereof;
(ii) the Land or any part thereof or interest therein;
(iii) the purchase, design, construction, preparation,
installation, inspection, delivery, non- delivery, acceptance,
rejection, ownership, management, possession, operation, rental,
lease, sublease, repossession, maintenance, repair, alteration,
modification, addition or substitution, storage, transfer or title,
redelivery, use, financing, refinancing, disposition, operation,
condition, sale (including, without limitation, any sale pursuant to
the Lease), return or other disposition of all or any part or any
interest in the Leased Property or the imposition of any Lien (or
incurring of any liability to refund or pay over any amount as a
result of any Lien) thereon, including
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without limitation (A) Claims or penalties arising from any violation
of law or in tort (strict liability or otherwise), (B) latent or other
defects, whether or not discoverable, (C) any Claim based upon a
violation or alleged violation of the terms of any restriction,
easement, condition or covenant or other matter affecting title to the
Leased Property, (D) the making of any Alterations in violation of any
standards imposed by any insurance policies required to be maintained
by the Lessee pursuant to the Lease which are in effect at any time
with respect to the Leased Property or any part thereof, (E) any Claim
for patent, trademark or copyright infringement and (F) Claims arising
from any public improvements with respect to the Leased Property
resulting in any change or special assessments being levied against
the Leased Property or any Claim for utility "tap-in" fees;
(iv) the breach or alleged breach by the Lessee of any
representation or warranty made by it or deemed made by it in any
Operative Document or any certificate required to be delivered under
any Operative Document;
(v) the retaining or employment of any broker, finder or
financial advisor by the Lessee to act on its behalf in connection
with this Participation Agreement, or the authorization of any broker
or financial adviser retained or employed by any other Person who or
which acts on Lessee's behalf, or the incurring of any fees or
commissions to which the Lessor or the Lender might be subjected by
virtue of their entering into the transactions contemplated by this
Participation Agreement;
(vi) the existence of any Lien on or with respect to the
Leased Property, the Construction, any Basic Rent or Supplemental
Rent, including any Liens which arise out of the possession, use,
occupancy, construction, repair or rebuilding of or title to or
interest of any Person in the Leased Property or by reason of labor or
materials furnished or claimed to have been furnished to the Lessee or
any of its contractors or agents or by reason of the financing of any
personalty or equipment purchased or leased by the Lessee or
Alterations constructed by the Lessee, except in all cases the Liens
listed as items (i) and (ii) in the definition of Permitted Liens; or
(vii) any breach of any requirement, condition, restriction
or limitation in the Ground Lease;
provided, however, that the Lessee shall not be required to indemnify any
Indemnitee under this Section for (x) any Claim to the extent that such Claim
results from the willful misconduct or gross negligence of such Indemnitee
(provided that the exception set forth in this clause (x) shall not apply to
Lessor Indemnitees, which the Lessee shall, in any event, be obligated to
indemnify, except as provided in Section 18.12 of the Lease), (y) any Claim
resulting from Lessor Liens which the Lessor is responsible for discharging
under the Operative Documents or (z) any Claim which occurs or arises out of a
time when the Lessee was not an owner, lessee or otherwise using or in
possession of the Leased Property or any part thereof. It is expressly
understood and agreed that the indemnity provided for herein shall survive the
expiration or
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termination of and shall be separate and independent from any remedy under the
Lease or any other Operative Document.
SECTION 7.2 Environmental Indemnity. Without limitation of Section
7.1, the Lessee agrees to indemnify, hold harmless and defend each Indemnitee
from and against any and all Claims (including without limitation third party
Claims for personal injury or real or personal property damage), losses
(including but not limited to any loss of value of the Leased Property),
damages, liabilities, fines, penalties, charges, administrative and judicial
proceedings (including informal proceedings) and orders, judgments, remedial
action, requirements, enforcement actions of any kind, and all reasonable and
documented costs and expenses incurred in connection therewith (including but
not limited to reasonable and documented attorneys' and/or paralegals' fees and
expenses), including, but not limited to, all costs incurred in connection with
any investigation or monitoring of site conditions or any clean-up, remedial,
removal or restoration work by any federal, state or local government agency,
arising directly or indirectly, in whole or in part, out of:
(i) the presence on or under the Land of any Hazardous
Materials, or any releases or discharges of any Hazardous Materials
on, under, from or onto the Land;
(ii) any activity, including, without limitation,
construction, carried on or undertaken on or off the Land, and whether
by the Lessee, or any predecessor in title or any employees, agents,
contractors or subcontractors of the Lessee, or any predecessor in
title, or any other Persons (including such Indemnitee), in connection
with the handling, treatment, removal, storage, decontamination,
clean-up, transport or disposal of any Hazardous Materials that at any
time are located or present on or under or that at any time migrate,
flow, percolate, diffuse or in any way move onto or under the Land;
(iii) loss of or damage to any property or the environment
(including, without limitation, clean-up costs, response costs,
remediation and removal costs, cost of corrective action, costs of
financial assurance, fines and penalties and natural resource
damages), or death or injury to any Person, and all expenses
associated with the protection of wildlife, aquatic species,
vegetation, flora and fauna, and any mitigative action required by or
under Environmental Laws;
(iv) any claim concerning lack of compliance with
Environmental Laws, or any act or omission causing an environmental
condition that requires remediation or would allow any governmental
agency to record a lien or encumbrance on the land records; or
(v) any residual contamination on or under the Land, or
affecting any natural resources, and any contamination of any property
or natural resources arising in connection with the generation, use,
handling, storage, transport or disposal of any such Hazardous
Materials, and irrespective of whether any of such activities were or
will be undertaken in accordance with applicable laws, regulations,
codes and ordinances;
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in any case arising or occurring (y) prior to or during the Lease Term or (z)
at any time during which the Lessee or any Affiliate thereof owns any interest
in or otherwise occupies or possesses the Leased Property or any portion
thereof; provided, however, that the Lessee shall not be required to indemnify
any Indemnitee under this Section for any Claim to the extent that such Claim
results from the willful misconduct or gross negligence of such Indemnitee
(except that the exception set forth in the immediately preceding proviso shall
not apply to Lessor Indemnitees, which the Lessee shall, in any event, be
obligated to indemnify, except as provided in Section 18.12 of the Lease). It
is expressly understood and agreed that the indemnity provided for herein shall
survive the expiration or termination of and shall be separate and independent
from any remedy under the Lease or any other Operative Document.
SECTION 7.3 Proceedings in Respect of Claims. The obligations and
liabilities of the Lessee with respect to any Claims for which, if valid,
Lessee is obligated to provide indemnification pursuant to the provisions of
Section 7.1 and Section 7.2 ("Indemnified Claims"), shall be subject to the
following terms and conditions:
(a) Whenever an Indemnitee shall have received notice
that an Indemnified Claim has been asserted or threatened against such
Indemnitee, the Indemnitee shall promptly notify the Lessee of such Claim,
together with supporting facts and data within the possession or knowledge of
the Indemnitee related thereto, provided that the failure to deliver such
notice shall not relieve the Lessee of its indemnification obligations
hereunder except to the extent that such failure prejudices the Lessee. With
respect to any amount that the Lessee is requested by an Indemnitee to pay by
reason of Section 7.1 or 7.2, such Indemnitee shall, if so requested by the
Lessee and prior to any payment, submit such additional information to the
Lessee as the Lessee may reasonably request and which is in the possession of
such Indemnitee to substantiate properly the requested payment.
(b) Lessee shall defend, at its expense, such Indemnified
Claim with counsel of its choice reasonably satisfactory to the Indemnitee,
provided, however, that if an Event of Default has occurred and is continuing,
the Indemnitee shall have the right, upon notice to and at the expense of
Lessee, to undertake the defense of such Claim during the continuance of such
Event of Default. The Indemnitee shall promptly notify the Lessee of any
compromise or settlement proposal with respect to any such Claim and shall not
unreasonably refuse to accept any such proposal if the same is acceptable to
the Lessee. The Indemnitee may participate in a reasonable manner at its own
expense and with its own counsel in any proceeding conducted by the Lessee in
accordance with the foregoing. The Lessee shall not enter into any settlement
or other compromise with respect to any Claim which is entitled to be
indemnified under Section 7.1 or 7.2 without the prior written consent of the
Lender acting individually and on behalf of the affected Indemnitee (and Lessor
hereby irrevocably so authorizes Lender to grant such consent on behalf of
Lessor and the Lessor Indemnitees), which consent shall not be unreasonably
withheld. The Lessee and each Indemnitee are and shall be bound to cooperate
with each other in good faith in connection with the defense of any such
action, suit or proceeding in providing any information and bear witness or
give testimony which may be requested by counsel for any of such parties.
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(c) Unless an Event of Default shall have occurred and be
continuing, no Indemnitee shall enter into any settlement or other compromise
with respect to any Claim which is entitled to be indemnified under Section 7.1
or 7.2 without the prior written consent of the Lessee, which consent shall not
be unreasonably withheld (it being agreed that it will not be unreasonable for
the Lessee to withhold consent if such compromise or settlement adversely
affects a material right or property interest of the Lessee, including, without
limitation, Lessee's use, title or possession of the Leased Property), unless
such Indemnitee waives its right to be indemnified under Section 7.1 or 7.2
with respect to such Claim, provided that no Indemnitee shall enter into any
settlement which would adversely affect Lessee's use, title to or possession of
the Leased Property without Lessee's prior written consent.
(d) Upon payment in full of any Claim by the Lessee
pursuant to Section 7.1 or 7.2 to or on behalf of an Indemnitee, the Lessee,
without any further action, shall be subrogated to any and all claims that such
Indemnitee may have relating thereto (other than claims in respect of insurance
policies maintained by such Indemnitee at its own expense) including claims
(subject to the provisions of this Section 7 and Section 18.12 of the Lease)
against another Indemnitee and such Indemnitee shall execute such instruments
of assignment and conveyance, evidence of claims and payment and such other
documents, instruments and agreements as may be necessary to preserve any such
Claims and otherwise cooperate with the Lessee and give such further assurances
as are necessary or advisable to enable the Lessee vigorously to pursue such
Claims.
(e) Any amount payable to an Indemnitee pursuant to
Section 7.1 or 7.2 shall be paid to such Indemnitee promptly upon receipt of a
written demand therefor from such Indemnitee, accompanied by a written
statement describing in reasonable detail the basis for such indemnity and the
computation of the amount so payable, and if requested by the Lessee, such
determination shall be verified by a nationally recognized independent
accounting firm mutually acceptable to the Lessee and the Indemnitee at the
expense of the Lessee.
(f) If Lessee fails to assume the defense of an
Indemnified Claim within a reasonable time (and in any event not more than 30
days) after receipt of notice thereof from the Indemnitee, the Indemnitee will
(upon delivering notice to such effect to the Lessee) have the right to
undertake, at the Lessee's cost and expense, the defense, compromise or
settlement of such Claim on behalf of and for the account and risk of the
Lessee, subject to the right of the Lessee (provided no Event of Default shall
have occurred and remained outstanding) to assume the defense of such Claim at
any time prior to the settlement, compromise or final determination thereof,
and provided however, that the Indemnitee shall not enter into any such
compromise or settlement without the written consent of the Lessee, which shall
not be unreasonably withheld, as aforesaid, and provided further that no
Indemnitee shall enter into any such settlement which would adversely affect
Lessee's use, title to or possession of the Leased Property without Lessee's
prior written consent. In the event the Indemnitee assumes the defense of any
such Claim, the Indemnitee will cooperate with the Lessee in keeping the Lessee
reasonably informed of the progress of any such defense, compromise or
settlement.
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(g) Nothing contained in this Section 7.3 shall be deemed
to expand the obligation of the Lessee to defend or be responsible for
indemnification of the Indemnitees with respect to any Claim beyond the
specific indemnification obligations set forth in Sections 7.1, 7.2, 7.4, or
elsewhere in the Operative Documents.
SECTION 7.4 General Tax Indemnity.
(a) Except as otherwise provided in this Section, the
Lessee shall pay on an After-Tax Basis, and on written demand shall indemnify
and hold each Tax Indemnitee harmless from and against, any and all fees
(including, without limitation, documentation, recording, license and
registration fees), taxes (including, without limitation, income, gross
receipts, sales, rental, use, turnover, value-added, property, excise and stamp
taxes), levies, imposts, duties, charges, assessments or withholdings of any
nature whatsoever, together with any penalties, fines or interest thereon or
additions thereto (any of the foregoing being referred to herein as "Taxes" and
individually as a "Tax" (for the purposes of this Section, the definition of
"Taxes" excludes amounts imposed on, incurred by, or asserted against each Tax
Indemnitee as the result of any prohibited transaction, within the meaning of
Section 406 or 407 of ERISA or Section 4975(c) of the Code, arising out of the
transactions contemplated hereby or by any other Operative Document)) imposed
on or with respect to any Tax Indemnitee, the Lessee, the Leased Property or
any portion thereof or the Land, or any sublessee or user thereof, by the
United States or by any state or local government or other taxing authority in
the United States in connection with or in any way relating to (i) the
acquisition, financing, mortgaging, construction, preparation, installation,
inspection, delivery, non-delivery, acceptance, rejection, purchase, ownership,
possession, rental, lease, sublease, maintenance, repair, storage, transfer of
title, redelivery, use, operation, condition, sale, return or other application
or disposition of all or any part of the Leased Property or the imposition of
any Lien, other than a Lessor Lien (or incurrence of any liability to refund or
pay over any amount as a result of any Lien, other than a Lessor Lien) thereon,
(ii) Basic Rent or Supplemental Rent or the receipts or earnings arising from
or received with respect to the Leased Property or any part thereof, or any
interest therein or any applications or dispositions thereof, (iii) the Leased
Property, the Land or any part thereof or any interest therein, (iv) all or any
of the Operative Documents, any other documents contemplated thereby and any
amendments and supplements thereto and (v) otherwise with respect to or in
connection with the transactions contemplated by the Operative Documents.
(b) Section 7.4(a) shall not apply to:
(i) Taxes on, based on, or measured by or with
respect to, net income of the Lessor and the Lender (including,
without limitation, minimum Taxes, capital gains Taxes, Taxes on or
measured by items of tax preference or alternative minimum Taxes)
other than (A) any such Taxes that are, or are in the nature of,
sales, use, license, rental or property Taxes, (B) withholding Taxes
imposed by the United States or any state (1) on payments with
respect to the Note, to the extent imposed by reason of a change in
Applicable Law occurring after the Closing Date or (2) on Rent, to the
extent the net payment of Rent after deduction of such withholding
Taxes would be less than
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amounts currently payable with respect to the Note and (C) any
increase in any franchise taxes based on or otherwise measured by net
income, estate, inheritance, transfer, income tax or gross income or
gross receipts tax in lieu of net income over the term of the Lease,
net of any decrease in such taxes realized by such Tax Indemnitee, to
the extent that such tax increase or decrease would not have occurred
if on the Closing Date the Lessor had advanced funds to the Lessee in
the form of a loan secured by the Leased Property in an amount equal
to the Loan, with debt service for such loan equal to the portion of
the Basic Rent attributable to the Loan payable on each Rent Payment
Date and a principal balance at the maturity of such loan in an amount
equal to the Loan at the end of the Lease Term;
(ii) Taxes on, based on, or in the nature of or
measured by, Taxes on doing business, business privilege, capital,
capital stock, net worth, or mercantile license or similar taxes other
than (A) any increase in such Taxes imposed on such Tax Indemnitee by
any state, net of any decrease in such taxes realized by such Tax
Indemnitee, to the extent that such tax increase or decrease would not
have occurred if on the Closing Date the Lessor had advanced funds to
the Lessee in the form of a loan secured by the Leased Property in an
amount equal to the Loan, with debt service for such loan equal to the
portion of the Basic Rent attributable to the Loan payable on each
Rent Payment Date and a principal balance at the maturity of such loan
in an amount equal to the Loan at the end of the Lease Term or (B) any
Taxes that are or are in the nature of sales, use, rental, license or
property Taxes;
(iii) Taxes that result from any act, event or
omission, or are attributable to any period of time, that occurs after
the earliest of (A) the expiration of the Lease Term with respect to
the Leased Property and, if the Leased Property is required to be
returned to the Lessor in accordance with the Lease, such return and
(B) the discharge in full of the Lessee's obligations to pay the Lease
Balance, or any amount determined by reference thereto, with respect
to the Leased Property and all other amounts due under the Lease,
unless such Taxes relate to acts, events or matters occurring prior to
the earliest of such times or are imposed on or with respect to any
payments due under the Operative Documents after such expiration or
discharge;
(iv) Taxes imposed on a Tax Indemnitee that result
from any voluntary sale, assignment, transfer or other disposition by
such Tax Indemnitee or any related Tax Indemnitee of any interest in
the Leased Property or any part thereof, or any interest therein or
any interest or obligation arising under the Operative Documents
(including a sale of an interest in the Note) or from any sale,
assignment, transfer or other disposition of any interest in such Tax
Indemnitee or any related Tax Indemnitee, it being understood that
each of the following shall not be considered a voluntary sale: (A)
any substitution, replacement or removal of any of the property by the
Lessee shall not be treated as a voluntary action of any Tax
Indemnitee, (B) any sale or transfer resulting from the exercise by
the Lessee of any termination option, any purchase option or sale
option, (C) any sale or transfer while an Event of Default shall have
occurred and be
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continuing under the Lease and (D) any sale or transfer resulting from
the Lessor's exercise of remedies under the Lease;
(v) any Tax which is being contested in
accordance with the provisions of Section 7.4(c), during the pendency
of such contest;
(vi) any Tax that is imposed on a Tax Indemnitee
as a result of such Tax Indemnitee's gross negligence or willful
misconduct (other than gross negligence on the part of the Lessor and
the incorporators, stockholders, directors, officers, employees and
agents of the Lessor or gross negligence or willful misconduct imputed
to the Lessor or the Lender solely by reason of their respective
interests in the Leased Property);
(vii) any Tax that results from a Tax Indemnitee
engaging, with respect to the Leased Property, in transactions other
than those permitted by the Operative Documents; or
(viii) to the extent any interest, penalties or
additions to tax result in whole or in part from the failure of a Tax
Indemnitee to file a return that it is required to file in a proper
and timely manner, unless such failure (A) results from the
transactions contemplated by the Operative Documents in circumstances
where the Lessee did not give timely notice to Lessor (and the Lessor
otherwise had no actual knowledge) of such filing requirement that
would have permitted a proper and timely filing of such return or (B)
results from the failure of the Lessee to supply information necessary
for the proper and timely filing of such return that was not in the
possession of the Lessor.
(c) If any claim shall be made against any Tax Indemnitee
or if any proceeding shall be commenced against any Tax Indemnitee (including a
written notice of such proceeding) for any Taxes as to which the Lessee may
have an indemnity obligation pursuant to this Section, or if any Tax Indemnitee
shall determine that any Taxes as to which the Lessee may have an indemnity
obligation pursuant to this Section may be payable, such Tax Indemnitee shall
promptly notify the Lessee. The Lessee shall be entitled, at its expense, to
participate in and to the extent that the Lessee desires to, assume and control
the defense thereof; provided, however, that the Lessee shall not be entitled
to assume and control the defense of any such action, suit or proceeding (but
the Tax Indemnitee shall then contest, at the sole cost and expense of the
Lessee, on behalf of the Lessee) if and to the extent that (A) an Event of
Default has occurred and is continuing, (B) such action, suit or proceeding
involves matters which are unrelated to the transactions contemplated by the
Operative Documents and if determined adversely could be materially detrimental
to the interests of such Tax Indemnitee notwithstanding indemnification by the
Lessee or (C) such action, suit or proceeding involves the federal or any state
income tax liability of the Tax Indemnitee. With respect to any contests
controlled by a Tax Indemnitee, (i) if such contest relates to the federal or
any state income tax liability of such Tax Indemnitee, such Tax Indemnitee
shall be required to conduct such contest only if the Lessee shall have
provided to such Tax Indemnitee an opinion of independent tax counsel selected
by the Lessee and reasonably satisfactory to the Tax Indemnitee stating that a
reasonable
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basis exists to contest such claim or (ii) in the case of an appeal of an
adverse determination of any contest relating to any Taxes, an opinion of such
counsel to the effect that such appeal is more likely than not to be
successful; provided, however, such Tax Indemnitee shall in no event be
required to appeal an adverse determination to the United States Supreme Court.
The Tax Indemnitee may participate in a reasonable manner at its own expense
and with its own counsel in any proceeding conducted by the Lessee in
accordance with the foregoing. Each Tax Indemnitee shall at the Lessee's
expense supply the Lessee with such information and documents reasonably
requested by the Lessee as are necessary or advisable for the Lessee to
participate in any action, suit or proceeding to the extent permitted by this
Section. Unless an Event of Default shall have occurred and be continuing, no
Tax Indemnitee shall enter into any settlement or other compromise with respect
to any Claim which is entitled to be indemnified under this Section without the
prior written consent of the Lessee, which consent shall not be unreasonably
withheld (it being agreed that it will not be unreasonable for Lessee to
withhold consent if such compromise or settlement would adversely affect
material rights or property interests of the Lessee, including, without
limitation, Lessee's use, title or possession of the Leased Property), unless
such Tax Indemnitee waives its right to be indemnified under this Section with
respect to such Claim, provided the settlement would not adversely affect
materials rights or property interests of the Lessee, including, without
limitation, Lessee's use, title or possession of the Leased Property.
Notwithstanding anything contained herein to the contrary, (i) a Tax Indemnitee
will not be required to contest (and the Lessee shall not be permitted to
contest) a Claim with respect to the imposition of any Tax if such Tax
Indemnitee shall waive its right to indemnification under this Section with
respect to such Claim (and any related Claim with respect to other taxable
years the contest of which is precluded as a result of such waiver) and (ii) no
Tax Indemnitee shall be required to contest any Claim if the subject matter
thereof shall be of a continuing nature and shall have previously been decided
adversely, unless there has been a change in law which in the opinion of the
Lessee's counsel creates substantial authority for the success of such contest.
Each Tax Indemnitee and the Lessee shall consult in good faith with each other
regarding the conduct of such contest controlled by either.
(d) If (i) a Tax Indemnitee shall obtain a credit or refund
of any Taxes paid by the Lessee pursuant to this Section or (ii) by reason of
the incurrence or imposition of any Tax for which a Tax Indemnitee is
indemnified hereunder or any payment made to or for the account of such Tax
Indemnitee by the Lessee pursuant to this Section, such Tax Indemnitee at any
time realizes a reduction in any Taxes for which the Lessee is not required to
indemnify such Tax Indemnitee pursuant to this Section, which reduction in
Taxes was not taken into account in computing such payment by the Lessee to or
for the account of such Tax Indemnitee, then such Tax Indemnitee shall promptly
pay to the Lessee the amount of such credit or refund, together with the amount
of any interest received by such Tax Indemnitee on account of such credit or
refund or an amount equal to such reduction in Taxes, as the case may be;
provided, however, that no such payment shall be made so long as an Event of
Default shall have occurred and be continuing; and provided, further, that the
amount payable to the Lessee by any Tax Indemnitee pursuant to this subsection
shall not at any time exceed the aggregate amount of all indemnity payments
made by the Lessee under this Section to such Tax Indemnitee and all related
Tax Indemnitees with respect to the Taxes which gave rise to a credit or refund
or with
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respect to the Tax which gave rise to a reduction in Taxes less the amount of
all prior payments made to the Lessee by such Tax Indemnitee and related Tax
Indemnitees under this Section. Each Tax Indemnitee agrees to act in good
faith to claim such refunds and other available Tax benefits, and take such
other actions as may be reasonable to minimize any payment due from the Lessee
pursuant to this Section and to maximize the amount of any Tax savings
available to it. The disallowance or reduction of any credit, refund or other
tax savings with respect to which a Tax Indemnitee has made a payment to the
Lessee under this subsection shall be treated as a Tax for which the Lessee is
obligated to indemnify such Tax Indemnitee hereunder.
(e) Any Tax indemnifiable under this Section shall be
paid directly when due to the applicable taxing authority if direct payment is
practicable and permitted. If direct payment to the applicable taxing
authority is not permitted or is otherwise not made, any amount payable to a
Tax Indemnitee pursuant to this Section shall be paid within thirty (30) days
after receipt of a written demand therefor from such Tax Indemnitee accompanied
by a written statement describing in reasonable detail the amount so payable,
but not before the date that the relevant Taxes are due. Any payments made
pursuant to this Section shall be made directly to the Tax Indemnitee entitled
thereto or the Lessee, as the case may be, in immediately available funds at
such bank or to such account as specified by the payee in written directions to
the payor, or, if no such direction shall have been given, by check of the
payor payable to the order of the payee by certified mail, postage prepaid at
its Address as set forth in this Participation Agreement. Upon the request of
any Tax Indemnitee with respect to a Tax that the Lessee is required to pay,
the Lessee shall furnish to such Tax Indemnitee the original or a certified
copy of a receipt for Lessee's payment of such Tax or such other evidence of
payment as is reasonably acceptable to such Tax Indemnitee.
(f) If the Lessee knows of any report, return or
statement required to be filed with respect to any Taxes that are subject to
indemnification under this Section, the Lessee shall, if the Lessee is
permitted by Applicable Law, timely file such report, return or statement (and,
to the extent permitted by law, show ownership of the Leased Property in the
Lessee except to the extent contrary to financial reporting requirements);
Provided, however, that if the Lessee is not permitted by Applicable Law or
does not have access to the information required to file any such report,
return or statement, the Lessee will promptly so notify the appropriate Tax
Indemnitee, in which case Tax Indemnitee will file such report. In any case in
which the Tax Indemnitee will file any such report, return or statement, Lessee
shall, upon written request of such Tax Indemnitee, provide such Tax Indemnitee
with such information as is reasonably available to the Lessee.
(g) At the Lessee's request, the amount of any indemnity
payment by the Lessee or any payment by a Tax Indemnitee to the Lessee pursuant
to this Section shall be verified and certified by an independent public
accounting firm selected by the Lessee and reasonably acceptable to the Tax
Indemnitee. Unless such verification shall disclose an error in Lessee's favor
of 5% or more, the costs of such verification shall be borne by the Lessee. In
no event shall the Lessee have the right to review the Tax Indemnitee's tax
returns or receive any other confidential information from the Tax Indemnitee
in connection with such verification.
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The Tax Indemnitee agrees to cooperate with the independent public accounting
firm performing the verification and to supply such firm with all information
reasonably necessary to permit it to accomplish such verification; provided,
however, that the information provided to such firm by such Tax Indemnitee
shall be for its confidential use. The parties agree that the sole
responsibility of the independent public accounting firm shall be to verify the
amount of a payment pursuant to this Participation Agreement and that matters
of interpretation of this Participation Agreement are not within the scope of
the independent accounting firm's responsibilities.
SECTION 7.5 Increased Costs, etc.
(a) Changes; Legal Restrictions. Subject to the
provisions of Section 8.12, in the event that after the date hereof (i) the
adoption of or any change in any law, treaty, rule, regulation, guideline or
determination of a court or Governmental Authority or any change in the
interpretation or application thereof by a court or Governmental Authority or
(ii) compliance by the Lender with any request or directive (whether or not
having the force of law) from any central bank or other Governmental Authority:
(A) does or will subject the Lender to any tax,
duty or other charge of any kind which the Lender determines
to be applicable to the Operative Documents or the Loan or
change the basis of taxation of payments to the Lender of
principal, interest, invested amount, yield, fees or any other
amount payable hereunder, except for taxes imposed on or
measured by the overall net income of the Lender; or
(B) does or will impose, modify, or hold
applicable, in the determination of the Lender, any reserve,
special deposit, liquidity ratio, compulsory loan, FDIC
insurance or similar requirement against assets held by, or
deposits or other liabilities in or for the account of,
advances or loans by, commitments made, or other credit
extended by, or any other acquisition of funds by, the Lender;
and the result of any of the foregoing is to increase the cost to the Lender of
making, renewing or maintaining the Loan or to reduce any amount receivable
thereunder and the Lender gives the Lessee notice of any of the foregoing and
the approximate amount of such cost increase within 120 days after the calendar
year in which such increased costs were incurred by the Lender, then, in any
such case, the Lessee shall promptly pay to the Lender on an After-Tax Basis,
within thirty (30) days after demand made in writing by the Lender to the
Lessee, such amount or amounts (based upon an allocation thereof by the Lender
to the financing transactions contemplated by the Operative Documents and
affected by this Section) as may be reasonably necessary to compensate the
Lender for any such additional cost incurred or reduced amount received. The
Lender shall deliver to the Lessee a written statement of the costs or
reductions claimed and the basis therefor, and the allocation made by the
Lender of such costs and reductions shall be conclusive, absent demonstrable
error.
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(b) Capital Adequacy. Subject to the provisions of Section 8.12,
if the Lender shall have determined that, after the date hereof, the adoption
of any applicable law, rule or regulation regarding capital adequacy, or any
change therein, or any change in the interpretation or administration thereof
by any Governmental Authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by the Lender with
any request or directive regarding capital adequacy (whether or not having the
force of law) of any such Governmental Authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on the
Lender's capital as a consequence of its obligations hereunder (including,
without limitation, the Loan) to a level below that which the Lender could have
achieved but for such adoption, change or compliance (taking into consideration
the Lender's policies with respect to capital adequacy), then from time to
time, within thirty (30) days after demand made in writing by the Lender to the
Lessee, the Lessee shall pay to the Lender such additional amount or amounts as
will compensate the Lender for such reduction. The Lender, upon determining in
good faith that any additional amounts will be payable pursuant to this
subsection, will give prompt written notice thereof to the Lessee which notice
shall show in reasonable detail the basis for calculation of such additional
amounts. Such notice shall be conclusive absent demonstrable error.
SECTION 7.6 End of Term Indemnity. In the event that at the end of the
Lease Term (i) the Lessor elects the option set forth in Section 15.6 of the
Lease and (ii) after the Lessor receives the sales proceeds from the Leased
Property under Section 15.6 or 15.7 of the Lease together with the Lessee's
payment of the Recourse Deficiency Amount, the Lessor shall not have received
the entire Lease Balance, then the Lessor or the Lender may obtain, at the
Lessee's sole cost and expense, an appraisal report from the Appraiser (or if
the Appraiser is not available, another appraiser reasonably satisfactory to
the Lessor or the Lender, as the case may be) in form and substance
satisfactory to the Lessor and the Lender to establish the reason for any
decline in value of the Leased Property from that anticipated for such date in
the appraisal delivered on the Closing Date. The Lessee shall promptly
reimburse the Lessor for the amount equal to such decline in value to the
extent that appraisal report delivered pursuant to the preceding sentence
concludes that such decline was due to (i) extraordinary use, failure to
maintain, to repair, to restore, to rebuild or to replace the Leased Property
in a manner consistent with reasonable preservation of its value, failure to
comply with all Applicable Laws, failure to use, workmanship, method of
installation or removal or maintenance, repair, rebuilding or replacement, or
any other cause or condition within the reasonable power of the Lessee to
control or effect resulting in the Improvements failing to constitute an
office/warehouse and/or light manufacturing facility (excepting in each case
ordinary wear and tear), (ii) any Alteration made to, or any rebuilding of, the
Leased Property or any part thereof by the Lessee, (iii) any restoration or
rebuilding carried out by the Lessee or any condemnation of any portion of the
Leased Property pursuant to Article XI of the Lease (after taking into account
any Award in respect thereof) or (iv) any use of the Leased Property or any
part thereof by the Lessee other than as permitted pursuant to Article VIII of
the Lease. The parties hereto acknowledge and agree that the obligation
imposed upon the Lessee under this Section arises from a higher standard of
maintenance of the Leased Property than that required under Article VII of the
Lease
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and is applicable whether or not the Lessee has failed to comply with any such
other obligations under the Operative Documents.
SECTION 7.7 Exculpation. The Lender has and shall have no
liability or obligation whatsoever or howsoever in connection with the
construction, completion or management of the Improvements, and has no
obligation except to make Loan Advances as provided in this Participation
Agreement and the Loan Agreement, and the Lender is not obligated to inspect
the Improvements; nor is the Lender liable and under no circumstances
whatsoever shall the Lender be or become liable for the performance or default
of any contractor or subcontractor, or for any failure to construct, complete,
protect or insure the Improvements, or any part thereof, or for the payment of
any cost or expense incurred in connection therewith, or for the performance or
non-performance of any obligation of the Lessor or the Lessee to the Lender or
to any other person, firm or entity without limitation; and nothing, including
without limitation, any disbursement of Loan Advances or acceptance of any
document or instrument, shall be construed as a representation or warranty,
express or implied, on the Lender's part. Further, the Lessee shall be solely
responsible for all aspects of the Lessee's business and conduct in connection
with the construction, completion and management of the Improvements including,
but not limited to:
(a) The quality and suitability of the Plans and
Specifications;
(b) Supervision of the work of Construction;
(c) The qualifications, financial condition and
performance of all architects, engineers,
contractors, subcontractors and material suppliers
and consultants;
(d) Conformance of the work of Construction and the
Improvements to the requirements of all Applicable
Laws and public and private restrictions and
requirements and to the requirements of this
Participation Agreement;
(e) The quality and suitability of all materials and
workmanship; and
(f) The accuracy of all requests for the disbursement of
Loan proceeds and the proper application of disbursed
Loan proceeds.
The Lender shall have no obligation to supervise, inspect or
inform the Lessee, the Lessor or any third party of any aspect of the work or
construction of the Improvements or any other matter referred to above. Any
inspection or review made by or on behalf of the Lender shall be made for the
purpose of determining whether or not the obligations of the Lessee under this
Participation Agreement are being properly discharged, and neither the Lessee,
the Lessor nor any third party shall be entitled to rely upon any such
inspection or review.
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The Lender owes no duty of care to the Lessee or the Lessor or
any third person to protect against or inform the Lessee, the Lessor or any
third person of the existence of negligent, faulty, inadequate or defective
design or construction of the Improvements.
SECTION 7.8 Role of Lender. Any term or condition hereof or
of any of the other Operative Documents to the contrary notwithstanding, the
Lender shall not have, and by its execution and acceptance of this
Participation Agreement hereby expressly disclaims, any obligation or
responsibility for the management, conduct or operation of the Improvements or
business and affairs of the Lessee and any term or condition hereof, or of any
of the other Operative Documents, permitting the Lender to disburse funds,
whether from the proceeds of the Loan or otherwise, or to take or refrain from
taking any action with respect to the Lessee or the Improvements shall be
deemed to be solely for the benefit of the Lender and may not be relied upon by
any other person. Further, the Lender shall not have, has not assumed and by
its execution and acceptance of this Participation Agreement hereby expressly
disclaims, any liability or responsibility for the payment or performance of
any indebtedness or obligation of the Lessee or the Lessor and no term or
condition hereof, or of any of the other Operative Documents, shall be
construed otherwise.
SECTION 7.9 Lender's Benefits. All conditions precedent to
the obligation of Lender to make any Loan Advance are imposed hereby solely for
the benefit of Lender. No party other than the Lessor may require
satisfaction of any such condition precedent. No other party (including the
Lessor) shall be entitled to assume that Lender will refuse to make any Loan
Advance in the absence of strict compliance with such conditions precedent. Any
requirement of this Participation Agreement and any requirement of the Loan
Agreement may be waived by Lender, in whole or in part, at any time. Any
requirement herein or in any other Operative Document of submission of evidence
to Lender of the existence or non-existence of a fact shall be deemed, also, to
be a requirement that the fact shall exist or not exist, as the case may be,
and without waiving any condition or obligation of the Lessee or the Lessor,
Lender may at all times independently establish to its satisfaction such
existence or non-existence.
SECTION 7.10 Lessor's Benefits. All conditions precedent to
the obligation of Lessor to make any Contribution Advance are imposed hereby
solely for the benefit of Lessor. No party other than the Lender may require
satisfaction of any such condition precedent. No other party (including the
Lender) shall be entitled to assume that Lessor will refuse to make any
Contribution Advance in the absence of strict compliance with such conditions
precedent. Any requirement of this Participation Agreement and any requirement
of the Loan Agreement may be waived by Lessor, in whole or in part, at any
time. Any requirement herein or in any other Operative Document of submission
of evidence to Lessor of the existence or non-existence of a fact shall be
deemed, also, to be a requirement that the fact shall exist or not exist, as
the case may be, and without waiving any condition or obligation of the Lessee
or the Lessor, Lender may at all times independently establish to its
satisfaction such existence or non-existence.
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<PAGE> 43
SECTION 8
MISCELLANEOUS
SECTION 8.1 Survival of Agreements. The indemnities of the
parties provided for in Section 7 of this Participation Agreement, shall
survive the termination or expiration of this Participation Agreement and any
of the other Operative Documents (including, without limitation, the
termination of the Lease pursuant to Section 15.7 thereof in connection with the
Lessee's payment of the Recourse Deficiency Amount), any disposition of any
interest of the Lessor, or the Lender in the Leased Property and shall be and
continue in effect notwithstanding any investigation made by any party hereto
or to any of the other Operative Documents and the fact that any such party may
waive compliance with any of the other terms, provisions or conditions of any
of the Operative Documents. The representations, warranties, covenants and
agreements of the parties provided for in the Operative Documents shall not be
merged into the Ground Lease or the Deed.
SECTION 8.2 Notices. Unless otherwise specified herein or in
an applicable Operative Document, it shall, for purposes of this Participation
Agreement and the other Operative Documents, be sufficient service or giving of
any notice, request, complaint, demand, instruction or other instrument or
document to any Person, if it is in writing to the Address set forth below.
Any notice given by telecopy or facsimile transmission shall be deemed given
when sent provided confirmed by regular U.S. mail. Any notice given by mail
shall be deemed to be given when sent by registered or certified mail, return
receipt requested. Any notice sent by any party hereto under the Operative
Documents shall also be sent to the other parties to this Participation
Agreement. The parties hereto may designate, by notice given to each of the
other parties, any further or different addresses than those set forth below to
which subsequent notices shall be sent. For purposes of the Operative
Documents (but subject to the preceding sentence), the Address of the Lessee,
the Lender and the Lessor is as follows:
(i) Lessee Eagle USA Airfreight, Inc.
3838 North Sam Houston Parkway East,
Suite 510
Houston, Texas 77032
Attention: Douglas A. Seckel
Facsimile No.: (713) 442-2534
Telephone No.: (713) 442-1188
(ii) Lender Bank One, Texas, N.A.
Bank One Center
7th Floor
910 Travis
Houston, Texas 77002
Attention: John Elam
Facsimile No.: (713) 751-6199
Telephone No.: (713) 751-3806
-40-
<PAGE> 44
(iii) Lessor Asset XI Holdings Company, L.L.C.
c/o JH Management Corporation
Room 520
One International Place
Boston, Massachusetts 02110
Attention: Tiffany Percival
Facsimile No.: (617) 951-7050
Telephone No.: (617) 951-7690
SECTION 8.3 Counterparts. This Participation Agreement may
be executed by the parties hereto in separate counterparts, each of which when
so executed and delivered shall be an original, but all such counterparts shall
together constitute but one and the same instrument.
SECTION 8.4 Amendments. No Operative Document nor any of the
terms thereof may be terminated, amended, supplemented, waived or modified with
respect to any party thereto except with the prior written consent of such
party thereto and, in all cases, the Lender and the Lessee. If and to the
extent that this Participation Agreement, the Loan Agreement, the Note, the
Lease, the Assignment of Lease and Rents or the Mortgage constitutes an
amendment, supplement, termination, waiver or other modification to any
Operative Document, each of the parties hereto, by its execution of this
Participation Agreement, shall be deemed to have given its written consent to
such amendment supplement, termination, waiver or other modification.
SECTION 8.5 Headings, Etc. The Table of Contents and
headings of the various Sections of this Participation Agreement are for
convenience of reference only and shall not modify, define, expand or limit any
of the terms or provisions hereof.
SECTION 8.6 Parties in Interest. Except as expressly
provided herein, none of the provisions of this Participation Agreement is
intended for the benefit of any Person except the parties hereto, their
successors and their permitted assigns.
SECTION 8.7 Governing Law. THIS PARTICIPATION AGREEMENT HAS
BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE.
SECTION 8.8 No Recourse. No recourse shall be had for any
claims under this Participation Agreement against any incorporator,
shareholder, officer, manager, member or director, past, present or future, of
Lessor or of any successor or of Lessor's constituent members or other
affiliates or of JH Management Corporation, or against JH Management
Corporation, either directly or through Lessor or any successor, whether by
virtue of any constitution, statute or rule of law or by the enforcement of any
assessment or penalty or
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<PAGE> 45
otherwise, all such liability being, by acceptance hereof and as part of the
consideration for the acceptance hereof, expressly waived and released.
SECTION 8.9 Expenses.
(a) Expenses of Lessor and Lender. The
reasonable fees, expenses and disbursements (including reasonable counsel fees)
of the Lessor and the Lender in connection with the Operative Documents
incurred from and after the Closing Date shall be paid by the Lessee as
Supplemental Rent upon demand therefor by the Lessor, provided that no such
fees shall be payable by Lessee unless specifically authorized by the Operative
Documents.
(b) Amendments Supplements and Appraisal. The
Lessee agrees to pay all reasonable and documented out-of-pocket costs and
expenses of the Lessor and the Lender in connection with the successful
amendment or supplementing of the Operative Documents and the documents and
instruments referred to therein (including, without limitation, the fees and
disbursements of counsel for the Lessor and the Lender).
SECTION 8.10 Severability. Any provision of this
Participation Agreement that is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
SECTION 8.11 Submission to Jurisdiction; Waivers. Each party
hereto hereby irrevocably and unconditionally (i) submits for itself and its
property in any legal action or proceeding relating to this Participation
Agreement or any other Operative Document, or for recognition and enforcement
of any judgment in respect thereof, to the non-exclusive general jurisdiction
of the courts of the State of Texas, the courts of the United States of America
for the District of Texas and appellate courts from any thereof, (ii) consents
that any such action or proceedings may be brought to such courts, and waives
any objection that it may now or hereafter have to the venue of any such action
or proceeding in any court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same, (iii) agrees that
service of process in any such action or proceeding may be effected by mailing
a copy thereof by registered or certified mail (or any substantially similar
form of mail), postage prepaid, to such party at its address set forth in
Section 8.2 or at such other address of which the other parties hereto shall
have been notified pursuant to Section 8.2 and (iv) agrees that nothing herein
shall affect the right to effect service of process in any other manner
permitted by law.
SECTION 8.12 Limitation on Interest. Any provision to the
contrary contained in this Participation Agreement or in any of the other
Operative Documents notwithstanding, it is expressly provided that in no case
or event shall the aggregate of (i) all interest payable by the Lessee or the
Lessor and (ii) the aggregate of any other amounts accrued or paid pursuant to
this Participation Agreement or any of the other Operative Documents, which
under applicable laws
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<PAGE> 46
are or may be deemed to constitute interest, ever exceed the maximum rate of
interest which could lawfully be contracted for, charged or received. In this
connection, it is expressly stipulated and agreed that it is the intent of the
Lessee, the Lessor and the Lender to contract in strict compliance with the
applicable usury laws of the State of Texas and of the United States (whichever
permit the higher rate of interest) from time to time in effect. In
furtherance thereof, none of the terms of this Participation Agreement or any
of the other Operative Documents shall ever be construed to create a contract
to pay, as consideration for the use, forbearance or detention of money,
interest at a rate in excess of the maximum contract interest rate permitted to
be contracted for, charged or received by the applicable laws of the United
States or the State of Texas (whichever permit the higher rate of interest).
The Lessee, the Lessor and the other parties now or hereafter becoming liable
for payment of any indebtedness under this Participation Agreement or any other
Operative Documents shall never be liable for interest in excess of the maximum
rate that may be lawfully contracted for or charged under the laws of the State
of Texas and of the United States (whichever permit the higher rate of
interest). If under any circumstances the aggregate amounts paid include
amounts which by law are deemed interest which would exceed the maximum amount
of interest which could lawfully have been contracted for, charged or received,
the parties stipulate that such amounts will be deemed to have been paid as a
result of an error on the part of the parties, and the party receiving such
excess payment shall promptly, upon discovery of such error or upon notice
thereof from the party making such payment, refund the amount of such excess or
at the Lender's option, credit such excess against any unpaid principal balance
owing. To the maximum extent permitted by applicable law, all amounts
contracted for, charged or received for the use, forbearance, or detention of
money shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of the Loan. The provisions of
this Section 8.12 shall control all of the Operative Documents.
Section 8.13 Waiver of Consumer Rights. Each of the parties
hereto does hereby represent and warrant with and to each of the other parties
hereto that (a) it is not in a significantly disparate bargaining position, (b)
it is represented by legal counsel in seeking or acquiring goods or services
and such legal counsel was not directly nor indirectly identified, suggested or
selected by another party hereto, (c) it has knowledge and experience in
financial and business matters that enable it to evaluate the merits and risks
of a transaction, including the transaction evidenced by the Operative
Documents, and (d) the Operative Documents are not a result of any disparity in
bargaining position among the Lessee, the Lessor and the Lender and were
negotiated on an arms-length basis and represent the bargained-for agreement of
parties. EACH PARTY WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE
PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS & COMMERCE
CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER
CONSULTATION WITH AN ATTORNEY OF ITS OWN SELECTION, IT VOLUNTARILY CONSENTS TO
THIS WAIVER.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have caused this Participation
Agreement to be executed by their respective duly authorized officers as of the
day and year first above written.
EAGLE USA AIRFREIGHT, INC., as Lessee
By: /s/ DOUGLAS A. SECKEL
-------------------------------
Name: Douglas A. Seckel
Title: Chief Financial Officer
ASSET XI HOLDINGS COMPANY, L.L.C.,
as Lessor
By Asset Holdings Corporation I, a
Delaware corporation, its managing
member
By: /s/ TIFFANY PERCIVAL
---------------------------------
Name: Tiffany Percival
Title: Vice President
BANK ONE, TEXAS, N.A., as Lender
By: /s/ JOHN E. ELAM, JR.
---------------------------------
Name: John E. Elam, Jr.
Title: Vice President
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<PAGE> 48
APPENDIX I
Filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996 and incorporated by reference herein.
<PAGE> 1
EXHIBIT 10.10C
- --------------------------------------------------------------------------------
LOAN AGREEMENT
Dated as of January 10, 1997
between
ASSET XI HOLDINGS COMPANY, L.L.C.,
as Lessor and Borrower
and
BANK ONE, TEXAS, N.A.,
as Lender
--------------------------------------------------
Lease Financing
for Eagle USA Airfreight, Inc.
Corporate Headquarters and Warehouse Facility
Harris County, Texas
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
(Loan Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS; INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2 AMOUNT AND TERMS OF COMMITMENT; REPAYMENT AND PREPAYMENT OF LOAN . . . . . . . . . . . . . . . . . . 1
SECTION 2.1 Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2.2 Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2.3 Scheduled Principal Repayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.4 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.5 Interest on Overdue Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.6 Discretion of Lenders as to Manner of Funding . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3 RECEIPT, DISTRIBUTION AND APPLICATION OF CERTAIN PAYMENTS IN RESPECT OF LEASE AND LEASED
PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.1 Distribution and Application of Rent Payments. . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.2 Distribution and Application of Purchase Payment. . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.3 Distribution and Application of Lessee Payment
of Recourse Deficiency Amount Upon Exercise of
Remarketing Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.4 Distribution and Application of Remarketing Proceeds of Leased Property. . . . . . . . . . 7
SECTION 3.5 Distribution and Application of Payments Received When an Event of Default Exists or
Has Ceased to Exist Following Rejection of the Lease. . . . . . . . . . . . . . . . . . . . 8
SECTION 3.6 Distribution of Other Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3.7 Reinvestment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4 THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4.1 Covenant of Lessor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4.2 Lessor Obligations Nonrecourse; Payment from Certain Lease Obligations and Certain
Proceeds of Leased Property Only . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.3 Exercise of Remedies Under Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5 LOAN EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5.1 Loan Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5.2 Loan Event of Default; Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 6 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 6.1 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.3 No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.4 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.6 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.7 Survival and Termination of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6.8 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.10 No Recourse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.11 Limitation on Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.12 Waiver of Consumer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
APPENDIX I Definitions and Interpretation
APPENDIX II Form of Note
APPENDIX III Schedule of Loan Payments
</TABLE>
(ii)
<PAGE> 4
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of January 10, 1997, is between ASSET XI
HOLDINGS COMPANY, L.L.C., a Massachusetts limited liability company, as Lessor
and Borrower, and BANK ONE, TEXAS, N.A., a national banking association, as
Lender.
PRELIMINARY STATEMENT
In accordance with the terms and provisions of this Loan Agreement,
the Participation Agreement, the Lease and the other Operative Documents, (i)
the Lessor has acquired a leasehold interest in the Land and leased the Land to
the Lessee, (ii) the Lessee has agreed to construct the Improvements on the
Land for the Lessor and to lease the Improvements from the Lessor as part of
the Leased Property under the Lease, (iii) the Lessor now wishes to obtain, and
the Lender is willing to provide, funding in the amount of up to $7,600,000 for
the acquisition of the Land and the construction of the Improvements.
NOW, THEREFORE, in consideration of the mutual agreements contained in
this Loan Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1 DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and
not defined herein shall have the meanings assigned thereto in Appendix I
hereto for all purposes hereof and the rules of interpretation set forth in
Appendix I hereto shall apply to this Loan Agreement.
SECTION 2 AMOUNT AND TERMS OF COMMITMENT; REPAYMENT AND
PREPAYMENT OF LOAN
SECTION 2.1 Commitment. Subject to the terms and conditions hereof
and of the Participation Agreement, the Lender agrees to make available to the
Lessor a term loan to the Lessor (the "Loan") in an amount not to exceed the
Loan Commitment in order to finance costs of the acquisition of an interest in
the Land, the construction of the Improvements and the Development Costs as
provided in Section 2.6 of the Participation Agreement. As provided in Section
2.2 of the Participation Agreement, the Lender shall from time to time make
Loan Advances to the Lessee acting on behalf of the Lessor, either pursuant to
a Funding Requisition substantially in the form attached to the Participation
Agreement as Appendix II or, in the case of interest due on the Loan on each
Loan Payment Date to and including the Completion Date, pursuant to the
procedure provided in Section 2.2(c) of the Participation Agreement.
SECTION 2.2 Note. The Loan shall be evidenced by the promissory note
of the Lessor (the "Note"), substantially in the form of Appendix II with
appropriate insertions, duly executed by the Lessor, payable to the order of
the Lender. The Note shall be dated the Closing Date
<PAGE> 5
and delivered to the Lender in accordance with Section 3.1 of the Participation
Agreement. The Note, and Loan Advances made from time to time in respect
thereof, shall (i) be stated to mature on the Lease Termination Date, (ii) bear
interest on the unpaid principal amount thereof from time to time outstanding
at the interest rates determined as provided, and payable as specified, in
Section 2.4 and (iii) be payable as to principal as provided in Section 2.3.
Upon the occurrence of an Event of Default under clause (g) of Article XIII of
the Lease, or upon an Acceleration as described in Section 15.3 of the Lease,
the Note shall automatically become due and payable in full.
SECTION 2.3 Scheduled Principal Repayment. On the nineteenth (19th)
Loan Payment Date and on each Loan Payment Date thereafter, the Lessor shall
make payments on account of the principal balance of the Loan in the amount of
the principal installments set forth in Appendix III attached hereto, provided,
however, that if such Loan Payment Date is not also the last day of an Interest
Period (i.e. with respect to an Interest Period having a duration longer than
one month), the Lender shall deposit such funds in the Reinvestment Account and
hold such funds for application in reduction of the principal balance of the
Loan on the last day of the then-current Interest Period. Pursuant to the
Lease, the Lessee is obligated to pay Scheduled Rent in respect of such
principal as the same becomes due under this Loan Agreement. The Lender shall
apply such amounts as determined in Section 3.1 hereof. Lender shall maintain
Appendix III attached hereto and the schedule of principal installments payable
on each Loan Payment Date set forth thereon is subject to revision by the
parties hereto in the circumstances and according to the guidelines for
adjustments to Appendix III of the Lease set forth in Section 4.1 thereof.
Except in connection with an early payment or acceleration of Basic Rent or the
Lease Termination Date under the Lease due to (i) an Event of Default under the
Lease, (ii) an Acceleration, (iii) the Lessee's exercise of the Purchase
Option, (iv) the Lessee's exercise of the Remarketing Option, or (v) the
receipt of amounts under the Lease in respect of a Casualty or a Condemnation,
the Lessor shall have no option or right, without the prior consent of the
Lender, to prepay the Loan whether in whole or in part.
SECTION 2.4 Interest.
(a) Loan Advances. Except as otherwise provided with respect to
Loan Advances made in relation to interest due and payable on the Note pursuant
to Section 2.2 (c) of the Participation Agreement, each Loan Advance shall be
made in the form of a LIBOR Rate Loan, unless (i) the Lessee shall make an
election pursuant to a Funding Requisition for the Loan Advance to be in the
form of a Base Rate Loan, (ii) the Funding Date requested therein shall be a
date other than the first day of an Interest Period, or (iii) the Lender shall
have given notice of the occurrence of the circumstances described in Section
2.4 (f)(i) or Section 2.4 (f)(iii) hereof, in any of which cases such Loan
Advance will be in the form of a Base Rate Loan. The aggregate unpaid
principal amount of the Base Rate Loans and the LIBOR Rate Loans at any one
time outstanding shall not exceed the Loan Commitment.
Each Loan Advance shall be made pursuant to a Funding Requisition
executed and delivered by Lessee to Lender pursuant to Section 2.2 of the
Participation Agreement, which
- 2 -
<PAGE> 6
Funding Requisition shall specify (a) the total amount of the Loan Advance (b)
the Funding Date of the Loan Advance, and (c) if applicable, whether the Lessee
elects that the Loan Advance is to be a Base Rate Loan.
(b) Interest. Subject to the provisions of Section 6.11 hereof,
the Lessor shall pay interest (computed, to the extent such computation would
not result in interest in excess of that which is permitted by Applicable Law,
using the actual number of days elapsed and a 360-day year) on the unpaid
principal amount of each Loan Advance from the Funding Date of each such Loan
Advance, at the following rates per annum, not exceeding in either case the
highest rate permitted by Applicable Law:
(i) Base Rate Loans. With respect to each Base Rate
Loan, a rate per annum equal at all times to the Base Rate in effect
from time to time, payable monthly on each Loan Payment Date; and
(ii) LIBOR Rate Loans. With respect to each LIBOR Rate
Loan, a rate per annum (the "Applicable LIBOR Rate") (A) during each
Interest Period commencing prior to the Completion Date, equal to the
Interim LIBOR Rate and (B) during each Interest Period commencing on
and after the Completion Date, equal to the sum of the Adjusted LIBOR
Rate for such Interest Period plus 1.45% per annum, payable monthly on
each Loan Payment Date.
(c) Conversion and Continuation of Loans. Five Business Days
prior to the beginning of each Interest Period, the Lessee may request that the
Lender determine the Adjusted LIBOR Rate applicable to such Interest Period and
the Lender shall notify the Lessee of such Adjusted LIBOR Rate. Each LIBOR
Rate Loan shall automatically be continued for another Interest Period of the
same duration, unless the Lessee shall elect to convert all or any part thereof
to a Base Rate Loan by written notice to the Lender given on any day which is
at least three Business Days before the beginning of the next succeeding
Interest Period. Except to the extent that the Base Rate applies as a result
of any circumstance described in Section 2.4 (f) hereof, the Lessee may elect
to convert any Base Rate Loan to a LIBOR Rate Loan, (i) if a LIBOR Rate Loan
shall be outstanding at the time of such election, effective on the first day
of the next succeeding Interest Period, or (ii) if no LIBOR Rate Loan shall be
outstanding at the time of such election, effective on any date at least three
but not more than five Business Days after such election. Prior to the
Completion Date, unless the Lessee shall notify the Lender to the contrary and
except in the event that the Base Rate applies as a result of any circumstance
described in Section 2.4 (f) hereof, each Base Rate Loan shall be automatically
converted to a LIBOR Rate Loan on the next Loan Payment Date. The Lessee may
elect at the end of any Interest Period with respect thereto to convert a LIBOR
Rate Loan into a Base Rate Loan. Notwithstanding the foregoing, (i) there
shall be only one Interest Period applicable at any time for all Loan Advances
outstanding hereunder as LIBOR Rate Loans, (ii) the first such Interest Period
shall commence on the Funding Date of the first LIBOR Rate Loan borrowed
hereunder and (iii) any Loan Advances thereafter requested as or converted to
LIBOR Rate Loans may only be so requested or converted effective on the first
day of the subsequent Interest Period. Effective as
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of the Completion Date, all of the Loan Advances shall be deemed consolidated
and continued as a single Loan, which (unless the Lessee shall otherwise elect
a conversion to a Base Rate Loan, and except in the event that the Base Rate
applies a result of any of the circumstances set forth in Section 2.4 (f)
below) shall be a LIBOR Rate Loan having an Interest Period commencing on the
Completion Date and having a duration of one, two, three or six months, as the
Lessee may select. Each such election and selection made under this Section
2.4 (c) shall be made by giving the Lender at least three Business Days' prior
irrevocable written notice thereof, which notice shall specify (1) in the case
of a conversion to, or a continuation of, a LIBOR Rate Loan, the Interest
Period therefor, (2) in the case of a conversion, the date of conversion (which
date shall in any event be a Business Day), and (3) in the case of a conversion
or continuation prior to the Completion Date affecting less than 100% of the
principal amount of a Loan Advance, the amounts of such Loan Advance which are
to be LIBOR Rate Loans and Base Rate Loans, respectively. If, at any time
prior to the date a conversion to, or continuation of, a LIBOR Rate Loan is
effective, the Lessee has received notice that any of the circumstances
described in Sections 2.4(f)(i) or (iii) exist, the right of the Lessee to
convert all or a portion of Base Rate Loans to LIBOR Rate Loans or to continue
LIBOR Rate Loans for an additional Interest Period shall be suspended until the
Lessee receives notice that the circumstances causing such suspension no longer
exist.
(d) Interest Period Determination. Notwithstanding the foregoing
provisions of this Section 2.4:
(i) The Lessee may not select any Interest Period which ends
after the Scheduled Termination Date;
(ii) whenever the last day of any Interest Period would
otherwise occur on a day other than a Business Day, the last day of
such Interest Period shall be extended to occur on the next succeeding
Business Day, provided, however, that if such extension would cause the
last day of such Interest Period to occur in the next following
calendar month, the last day of such Interest Period shall occur on the
next preceding Business Day; and
(iii) After the Completion Date, if the Lessee shall fail to
notify the Lender of its election of the duration of an Interest Period
within the time period required under the terms of Section 2.4(c), then
(subject to the provisions of Section 2.4(f) below) the subsequent
Interest Period will automatically, on the last day of the then
existing Interest Period therefor, be continued as an Interest Period
having a duration of one month.
(e) Appointment of Agents for Interest Rate Elections. The Lessee
may, from time to time, and at any time upon notice to the Lender, appoint one
or more agents for the limited purpose of making interest rate and Interest
Period elections under this Section 2.4 below. The acts of such agent(s) shall
be binding upon the Lessee unless and until such time as the Lessee shall
notify the Lender that any such agent no longer has the authority to act on
behalf of the Lessee. Unless and until the Lessee notifies the Lender
otherwise, each of Douglas Seckel and
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Judith Robertson, acting alone, is hereby authorized by the Lessee to act as
the Lessee's agent in accordance with this Section 2.4.
(f) Interest Rate Protection.
(i) Suspension of LIBOR Rate Loans. If, with respect to
any Interest Period, the Lender notifies the Lessee that the Applicable
LIBOR Rate for such Interest Period will not adequately reflect the
cost to the Lender of maintaining the Loan or any Loan Advance subject
to such Interest Period, the obligation of the Lender to continue the
Loan for an additional Interest Period shall be suspended until the
Lender shall notify the Lessee that the circumstances causing such
suspension no longer exist, and during the period of suspension the
principal amount of the Loan shall bear interest at the Base Rate as in
effect from time to time, payable monthly in advance on each Loan
Payment Date during the period of suspension.
(ii) Increased Costs. Subject to the provisions of
Section 6.11 hereof, if, due to either (A) the introduction of or any
change (including any change by way of imposition or increase of
reserve requirements) in or in the interpretation of any law or
regulation or (B) the compliance with any guideline or request from any
central bank or other governmental authority (whether or not having the
force of law), there shall be any increase in the cost to the Lender of
agreeing to make or making, funding or maintaining the Loan or any Loan
Advance at the Applicable LIBOR Rate for any Interest Period, then the
Lessee shall from time to time, upon demand by the Lender, pay to the
Lender additional amounts sufficient to compensate the Lender for such
increased cost. A certificate in reasonable detail as to the amount of
such increased cost, submitted to the Lessee by the Lender, shall be
conclusive and binding for all purposes, absent manifest error.
(iii) Illegality. Notwithstanding any other provision of
this Loan Agreement, if the Lender shall notify the Lessee that the
introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or any central bank or other governmental
authority asserts that it is unlawful, for the Lender to perform its
obligations hereunder to make, or any Loan Advance at the Applicable
LIBOR Rate for any Interest Period or to fund or maintain, the Loan or
any Loan Advance at the Applicable LIBOR Rate for any Interest Period
(A) the obligation of the Lender to continue the Loan, or any Loan
Advance, for an additional Interest Period shall be suspended until the
Lender shall notify the Lessee that the circumstances causing such
suspension no longer exist and (B) during the period of suspension, the
Loan, or such Loan Advances, as the case may be, then outstanding shall
be automatically converted to bear interest at a rate per annum equal
to the Base Rate then and thereafter in effect from time to time,
payable on the last day of each month during which the Base Rate
applies.
(iv) Indemnification for Breakage Costs. If (a) any
payment of principal of the Loan or any Loan Advance is made other than
on a Loan Payment Date that is also the
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last day of an Interest Period relating to such Loan or Loan Advance,
as a result of (i) a payment or conversion pursuant to Section
2.4(f)(iii), above, (ii) a prepayment of the Loan in whole or in part
for any reason, or (iii) for any other reason, or (b) the Lessor shall
fail to create, borrow or effect a Loan Advance on the Funding Date
specified in a Funding Requisition, then the Lessor shall, upon demand
by the Lender, pay Breakage Costs to the Lender.
SECTION 2.5 Interest on Overdue Amounts. If all or a portion of
the principal amount of or interest on the Loan shall not be paid when due
(whether at the stated maturity, by acceleration or otherwise), such overdue
amount shall, without limiting the rights of the Lender under Section 5, bear
interest at the Overdue Rate, but not exceeding the highest rate permitted by
Applicable Law, in each case from the date of nonpayment until paid in full (as
well after as before judgment).
SECTION 2.6 Discretion of Lender as to Manner of Funding.
Notwithstanding any provision of this Loan Agreement to the contrary, the
Lender shall be entitled to fund and maintain its funding of all or any part of
the Loan in any manner it sees fit, subject in all respects to Applicable Law,
it being understood however, that for the purposes of this Loan Agreement all
determinations hereunder shall be made as if the Lender had actually funded and
maintained each Loan Advance to which the Applicable LIBOR Rate applies during
each Interest Period applicable thereto through the purchase of deposits having
a maturity corresponding to such Interest Period and bearing an interest rate
equal to the Applicable LIBOR Rate for such Interest Period.
SECTION 3 RECEIPT, DISTRIBUTION AND APPLICATION OF CERTAIN
PAYMENTS IN RESPECT OF LEASE AND LEASED PROPERTY
SECTION 3.1 Distribution and Application of Rent Payments.
(a) Basic Rent. Each payment of Basic Rent (and any payment of
interest on overdue installments of Basic Rent) received by the Lender shall be
applied first, to the amounts of accrued and unpaid interest (including,
overdue interest) on the Loan, second, to principal of the Loan then due, and
third, an amount equal to all accrued and unpaid Contribution Return then due
shall be paid to the order of Lessor.
(b) Supplemental Rent. Each payment of Supplemental Rent received
by the Lender shall be paid to or upon the order of the Person owed the same.
SECTION 3.2 Distribution and Application of Purchase Payment.
The payment by the Lessee of:
(i) the purchase price for a consummated sale of the
Leased Property received by the Lender in connection with the Lessee's
exercise of the Purchase Option under Section 15.1 of the Lease, or
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(ii) the Lessee's compliance with its obligation to
purchase the Leased Property in accordance with Section 15.2 of the
Lease, or
(iii) the Lease Balance in accordance with Section 11.1 or
Section 11.2 of the Lease,
shall be applied by the Lender first to the accrued and unpaid interest on the
Loan, second to Breakage Costs, if any, third to the outstanding principal of
the Loan and fourth, an amount equal to the sum of all accrued and unpaid
Contribution Return and the outstanding balance of the Contribution shall be
paid to the order of Lessor.
SECTION 3.3 Distribution and Application of Lessee Payment of Recourse
Deficiency Amount Upon Exercise of Remarketing Option. The payment by the
Lessee of the Recourse Deficiency Amount to the Lender on the Lease Termination
Date, in accordance with Section 15.6 or 15.7 of the Lease upon the Lessee's
exercise of the Remarketing Option, shall be applied by the Lender first to the
accrued and unpaid interest on, second to Breakage Costs, if any, third to the
outstanding principal of, the Loan, and fourth, the remaining balance, if any,
shall be paid to the order of Lessor on account of all accrued and unpaid
Contribution Return and the outstanding balance of the Contribution.
SECTION 3.4 Distribution and Application of Remarketing Proceeds of
Leased Property. Any payments received by the Lessor as proceeds from the sale
of the Leased Property sold pursuant to the Lessee's exercise of the
Remarketing Option pursuant to Section 15.6 or 15.7 of the Lease, shall be
distributed by the Lessor as promptly as possible (it being understood that any
such payment received by the Lessor on a timely basis and in accordance with
the provisions of the Lease shall be distributed on the date received in the
funds so received) in the following order of priority:
first, to the Lender for application to the accrued and unpaid
interest on the Loan;
second, to Breakage Costs, if any;
third, to the outstanding principal of the Loan;
fourth, to the Lessor in an amount equal to the sum of (i) all
Facility Rent due and unpaid under the Lease as of and prorated to the
date of payment, plus (ii) the outstanding balance of the Contribution,
plus (iii) any unpaid Supplemental Rent or unpaid portion of the Lease
Balance; and
fifth, (i) if sold by the Lessee pursuant to Section 15.6 of
the Lease, to the Lessee, the excess of such proceeds of sale, if any,
and (ii) otherwise, to the Lessor.
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SECTION 3.5 Distribution and Application of Payments Received When an
Event of Default Exists or Has Ceased to Exist Following Rejection of the
Lease.
(a) Proceeds of Leased Property. Any payments received by the
Lessor or the Lender when an Event of Default exists (or has ceased to exist by
reason of a rejection of the Lease in a proceeding with respect to the Lessee
described in Article XIII(g) of the Lease), as either or both:
(i) proceeds from the sale of any or all of the Leased
Property sold pursuant to the exercise of the Lessor's remedies
pursuant to Article XIV of the Lease; or
(ii) proceeds of any amounts from any insurer or any
Governmental Authority in connection with an Event of Loss;
shall, if received by Lessor, be paid to the Lender as promptly as possible,
and shall be distributed or applied in the following order of priority prior to
the Release Date:
first, to the Lender for any amounts expended by it in
connection with the Leased Property or the Operative Documents and not
previously reimbursed to it;
second, to the Lender for application to the accrued and
unpaid interest on, Breakage Costs, if any, and the outstanding
principal of, the Loan;
third, to the Lessor in an amount equal to the sum of (i) all
Facility Rent due and unpaid under the Lease as of and prorated to the
date of payment, plus (ii) the outstanding balance of the Contribution,
plus (iii) any unpaid Supplemental Rent or unpaid portion of the Lease
Balance; and
fourth, to the Person or Persons legally entitled thereto, the
excess, if any; and
on and after the Release Date such amounts shall be paid over to the Lessor and
shall be distributed by the Lessor first, to the Lessor for application to any
unpaid amounts owing to the Lessor under the Operative Documents, and second,
to the Person or Persons legally entitled thereto, the excess, if any.
(b) Proceeds of Recoveries from Lessee. Any payments received by
the Lender when an Event of Default exists (or has ceased to exist by reason of
a rejection of the Lease in a proceeding with respect to the Lessee described
in Article XIII(g) of the Lease), from the Lessee as a payment in accordance
with the Lease, shall be paid to the Lender as promptly as possible, and shall
then be applied by the Lender as promptly as possible in the order of priority
set forth in subsection (a) of this Section.
SECTION 3.6 Distribution of Other Payments. All payments under
Section 7.6 of the Participation Agreement shall be made first, to the Lender
until the principal of, Breakage Costs,
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if any, and interest on the Loan has been paid in full, and second, to Lessor
who shall be entitled to retain all such remaining amounts. Except as
otherwise provided in this Section, any payment received by the Lessor which is
to be paid to the Lender pursuant hereto or for which provision as to the
application thereof is made in an Operative Document but not elsewhere in this
Section shall, if received by Lessor, be paid forthwith to the Lender and when
received shall be distributed forthwith by the Lender to the Person and for the
purpose for which such payment was made in accordance with the terms of such
Operative Document.
SECTION 3.7 Reinvestment Account. If on any date the Lender or
the Lessor shall receive any amount in respect of (a) any Qualified Payment, or
(b) payments of principal in accordance with Appendix III on a Loan Payment
Date which is not the last day of an Interest Period, then in any such case,
the Lender or the Lessor, as the case may be, shall be required to pay such
amount received (i) if no Event of Default shall have occurred and remain
outstanding, to the Reinvestment Account (as hereinafter defined) to pay the
principal balance of the Loan on the next Loan Payment Date which is also the
last day of an Interest Period or (ii) if an Event of Default shall have
occurred and remain outstanding, to apply and allocate the proceeds respecting
this Section 3.7 in accordance with Section 3.5 hereof. Moneys received by the
Lender in respect of amounts described in clauses (a) or (b) above shall be
deposited into a separate account which the Lender shall establish in the name
of the Lessor for the benefit of the Lender and the Lessee (the "Reinvestment
Account"). Pending application as herein provided, such funds shall be
invested in Permitted Investments as directed by the Lessee. Interest earned on
the moneys held in the Reinvestment Account shall be for the account of the
Lessee and shall be paid to the Lender and deposited in the Reinvestment
Account. Funds held in the Reinvestment Account shall be applied, to the
partial payment of the Note on the next succeeding Loan Payment Date which is
the end of an Interest Period.
SECTION 4 THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE
SECTION 4.1 Covenant of Lessor. So long as the Loan remains
outstanding and unpaid or any other amount is owing to Lender hereunder or
under the other Operative Documents, the Lessor will promptly pay all amounts
payable by it under this Loan Agreement and the Note in accordance with the
terms hereof and thereof and shall duly perform each of its obligations under
this Loan Agreement and the Note. The Lessor agrees to provide to the Lender a
copy of each estoppel certificate that the Lessor proposes to deliver pursuant
to Section 18.13 of the Lease at least five (5) days prior to such delivery and
to make any corrections thereto reasonably requested by the Lender prior to
such delivery. The Lessor shall keep the Leased Property free and clear of all
Lessor Liens. The Lessor shall not reject any sale of the Leased Property
pursuant to Section 15.6 of the Lease unless the Loan has not been paid in full
or the Lender consents to such rejection. In the event that the Lender directs
the Lessor to reject any sale of the Leased Property pursuant to Section 15.6
of the Lease, the Lessor agrees to take such action as Lender reasonably
requests to effect a sale or other disposition of the Leased Property. If a
Loan Event of Default under Section 5.1(e) hereof occurs, the Lessor will not
reject the Lease but shall assign the same to the Lender and the Lender agrees
to assume the Lessor's obligations thereunder.
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<PAGE> 13
SECTION 4.2 Lessor Obligations Nonrecourse; Payment from Certain
Lease Obligations and Certain Proceeds of Leased Property Only. All payments
to be made by the Lessor in respect of the Loan, the Note and this Loan
Agreement shall be made only from certain payments received under the Lease and
certain proceeds of the Leased Property and only to the extent that the Lessor
or the Lender shall have received sufficient payments from such sources to make
payments in respect of the Loan in accordance with Section 3. The Lender
agrees that it will look solely to such sources of payments to the extent
available for distribution to the Lender as herein provided and that neither
the Lessor nor any of its members or other Affiliates, or JH Management
Corporation, or any of their respective incorporators, stockholders, directors,
employees, officers or agents, shall be personally liable to the Lender for any
amount payable hereunder or under the Note. Nothing in this Loan Agreement,
the Note or any other Operative Document shall be construed as creating any
liability (other than for willful misconduct) of the Lessor individually to pay
any sum or to perform any covenant, either express or implied, in this Loan
Agreement, the Note or any other Operative Document (all such liability, if
any, being expressly waived by the Lender). The Lender, on behalf of itself
and its successors and assigns, agrees in the case of any liability of the
Lessor hereunder or under any of the Operative Documents (except for such
liability attributable to its willful misconduct) that it will look solely to
those certain payments received under the Lease and those certain proceeds of
the Leased Property; provided, however, that the Lessor in its individual
capacity (but not the Lessor, its members or other Affiliates, or JH Management
Corporation, or any of their respective incorporators, stockholders, directors,
employees, officers and agents) shall in any event be liable with respect to
(i) the removal of Lessor's Liens or liabilities involving its willful
misconduct or (ii) failure to turn over payments the Lessor has received in
accordance with Section 3; and provided, further that the foregoing exculpation
of the Lessor shall not be deemed to be exculpations of the Lessee or any other
Person.
SECTION 4.3 Exercise of Remedies Under Lease.
(a) Event of Default. With respect to any Event of Default as to
which notice thereof by the Lessor to the Lessee is a requirement to cause such
Event of Default to become an Event of Default, the Lessor may at any time in
its discretion give such notice; provided, however, that the Lessor agrees to
give such notice to the Lessee promptly upon receipt of a written request by
the Lender.
(b) Acceleration of Lease Balance. When an Event of Default
exists, the Lessor, upon the direction of the Lender, shall exercise remedies
under Article XIV of the Lease to demand payment in full of the Lease Balance
by the Lessee (an "Acceleration"). Following an Acceleration, the Lessor shall
consult with the Lender regarding actions to be taken in response to such Event
of Default. The Lessor shall not, without the prior written consent of Lender,
and shall (subject to the provisions of this Section), if so directed by the
Lender, do any of the following: commence eviction or foreclosure proceedings,
or file a lawsuit against the Lessee under the Lease, or sell the Leased
Property, or exercise other remedies against the Lessee under the Operative
Documents in respect of such Event of Default; provided, however, that any
payments received by the Lessor shall be distributed in accordance with Section
3.
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<PAGE> 14
Notwithstanding any such consent, direction or approval by the Lender of any
such action or omission, the Lessor shall have no obligation to follow such
direction if the same would, in the Lessor's reasonable judgment, require the
Lessor to expend its own funds or expose the Lessor to liability, expense, loss
or damages unless and until the Lender advances to the Lessor an amount or
offers the Lessor an indemnity in an amount, in either case, which is
sufficient, in Lessor's reasonable judgment, to cover such liability, expense,
loss or damage. Notwithstanding the foregoing, on and after the Release Date,
the Lender shall have no rights to the Leased Property or any proceeds thereof,
the Lender shall have no rights to direct or give consent to any actions with
respect to the Leased Property and the proceeds thereof, the Lessor shall have
absolute discretion as to the exercise of remedies with respect to the Leased
Property, and the proceeds thereof, including, without limitation, any
foreclosure or sale of the Leased Property, and the Lessor shall have no
liability to the Lender with respect to the Lessor's actions or failure to take
any action with respect to the Leased Property.
SECTION 5 LOAN EVENTS OF DEFAULT; REMEDIES
SECTION 5.1 Loan Events of Default. Each of the following events
shall constitute a Loan Event of Default (whether any such event shall be
voluntary or involuntary or come about or be effected by operation of law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any Governmental Authority) and each such Loan
Event of Default shall continue so long as, but only as long as, it shall not
have been remedied:
(a) The Lessor shall fail to distribute in accordance
with the provisions of Section 3 any amount received by the Lessor
pursuant to the Lease or the Participation Agreement within three (3)
Business Days of receipt thereof if and to the extent that the Lender
is entitled to such amount or a portion thereof;
(b) The Lessor shall fail to pay to the Lender, within
two (2) Business Days of the Lessor's receipt thereof, any amount which
the Lessee is required, pursuant to the Operative Documents, to pay to
the Lender but erroneously pays to the Lessor;
(c) The default by Lessor in the making of any payment in
respect of the Loan, the Note or this Loan Agreement for 5 days after
receipt by Lessor of written notice thereof from the Lender;
(d) The default by the Lessor in the performance of any
other covenant or condition herein or in any other Operative Document
to which the Lessor is a party, which failure shall continue unremedied
for 10 days after receipt by the Lessor of written notice thereof from
the Lender;
(e) Any representation or warranty of the Lessor
contained in any Operative Document or in any certificate required to
be delivered thereunder shall prove to have
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been incorrect in a material respect when made and shall not have been
cured within 10 days of receipt by the Lessor of written notice thereof
from the Lender; or
(f) The Lessor shall become bankrupt or make an
assignment for the benefit of creditors or consent to the appointment
of a trustee or receiver; or a trustee or a receiver shall be appointed
for the Lessor or for substantially all of its respective property
without its consent and shall not be dismissed or stayed within a
period of 30 days; or bankruptcy, reorganization or insolvency
proceedings shall be instituted by or against the Lessor and, if
instituted against the Lessor, shall not be dismissed or stayed for a
period of 30 days.
SECTION 5.2 Loan Event of Default; Remedies.
(a) Upon the occurrence of a Loan Event of Default hereunder, (i)
if such event is a Loan Event of Default specified in clause (f) of Section 5.1
with respect to the Lessor, automatically, and without the necessity of any
notice or declaration by or to the Lender, or the Lessor, the outstanding
principal of, and accrued interest on, the Loan shall be immediately due and
payable and (ii) if such event is any other Loan Event of Default, the Lender
may, by notice of default to the Lessor, declare the outstanding principal of,
and accrued interest on, the Loan to be immediately due and payable, whereupon
the outstanding principal of, and accrued interest on, the Loan shall become
and be immediately due and payable.
(b) When a Loan Event of Default exists, the Lender may exercise
any or all of the rights and powers and pursue any and all of the remedies
available to it hereunder, under the Note, the Mortgage, and the Assignment of
Lease and Rents and shall have and may exercise any and all rights and remedies
available under the UCC or any other provision of law or in equity. When a
Loan Event of Default exists, the Lender may have the right to exercise all
rights of the Lessor under the Lease pursuant to the terms and in the manner
provided for in the Mortgage and the Assignment of Lease and Rents.
(c) Except as expressly provided above, no remedy under this
Section is intended to be exclusive, but each shall be cumulative and in
addition to any other remedy provided under this Section or under the other
Operative Documents or otherwise available at law or in equity. The exercise
by the Lender of any one or more of such remedies shall not preclude the
simultaneous or later exercise of any other remedy or remedies. No express or
implied waiver by the Lender of any Loan Event of Default shall in any way be,
or be construed to be, a waiver of any future or subsequent Loan Event of
Default. The failure or delay of the Lender in exercising any rights granted
it hereunder or under any of the other Operative Documents upon any occurrence
of any of the contingencies set forth herein shall not constitute a waiver of
any such right upon the continuation or recurrence of any such contingencies or
similar contingencies and any single or partial exercise of any particular
right by the Lender shall not exhaust the same or constitute a waiver of any
other right provided herein or in any of the other Operative Documents.
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SECTION 6 MISCELLANEOUS
SECTION 6.1 Amendments and Waivers. Neither this Loan Agreement, the
Note nor any terms hereof or thereof may be amended, supplemented or modified
except in accordance with the provisions of Section 8.4 of the Participation
Agreement.
SECTION 6.2 Notices. Unless otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be given in accordance with Section 8.2 of the Participation
Agreement.
SECTION 6.3 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Lender, any right, remedy, power
or privilege hereunder, shall operate as a waiver thereof nor shall any single
or partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege. The rights, remedies, powers and privileges herein
provided are cumulative and not exclusive of any rights, remedies, powers and
privileges provided by law.
SECTION 6.4 Successors and Assigns. This Loan Agreement shall be
binding upon and inure to the benefit of the Lessor, the Lender and their
respective successors and permitted assigns.
SECTION 6.5 Counterparts. This Loan Agreement may be executed in any
number of counterparts as may be convenient or necessary, and it shall not be
necessary that the signatures of all parties hereto or thereto be contained on
any one counterpart hereof or thereof. Additionally, the parties hereto agree
that for purposes of facilitating the execution of this Loan Agreement, (a) the
signature pages taken from separate individually executed counterparts of this
Loan Agreement may be combined to form multiple fully executed counterparts and
(b) a facsimile transmission shall be deemed to be an original signature. All
executed counterparts of this Loan Agreement shall be deemed to be originals,
but all such counterparts taken together or collectively, as the case may be,
shall constitute one and the same agreement.
SECTION 6.6 Governing Law. THIS LOAN AGREEMENT AND THE NOTE AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS LOAN AGREEMENT AND THE NOTE
SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW
OF THE STATE OF TEXAS.
SECTION 6.7 Survival and Termination of Agreement. All covenants,
agreements, representations and warranties made herein and in any certificate,
document or statement delivered pursuant hereto or in connection herewith shall
survive the execution and delivery of this Loan Agreement and the Note and
shall continue in full force and effect so long as the Note or any amount
payable to Lender under or in connection with this Loan Agreement or the Note
is unpaid, at which time this Loan Agreement shall terminate.
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SECTION 6.8 Entire Agreement. This Loan Agreement sets forth the
entire agreement of the parties hereto with respect to its subject matter, and
supersedes all previous understandings, written or oral, with respect thereto.
SECTION 6.9 Severability. Any provision of this Loan Agreement or of
the Note which is prohibited, unenforceable or not authorized in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition, unenforceability or non-authorization without invalidating
the remaining provisions hereof or thereof or affecting the validity,
enforceability or legality of any such provision in any other jurisdiction.
SECTION 6.10 No Recourse. Except as provided in Section 4.2 hereof,
no recourse shall be had for any claims under this Loan Agreement against any
incorporator, shareholder, officer, or director, past, present or future, of
the Lessor or of any successor corporation, or against JH Management
Corporation, either directly or through the Lessor or any successor
corporation, whether by virtue of any constitution, statute or rule of law or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by acceptance hereof and as part of the consideration for the
acceptance hereof, expressly waived and released.
SECTION 6.11 Limitation on Interest. Any provision to the contrary
contained in this Loan Agreement or in any of the other Operative Documents
notwithstanding, it is expressly provided that in no case or event shall the
aggregate of (i) all interest payable by the Lessee or the Lessor and (ii) the
aggregate of any other amounts accrued or paid pursuant to this Loan Agreement
or any of the other Operative Documents, which under applicable laws are or may
be deemed to constitute interest, ever exceed the maximum rate of interest
which could lawfully be contracted for, charged or received. In this
connection, it is expressly stipulated and agreed that it is the intent of the
Lessee, the Lessor and the Lender to contract in strict compliance with the
applicable usury laws of the State and of the United States (whichever permit
the higher rate of interest) from time to time in effect. In furtherance
thereof, none of the terms of this Loan Agreement or any of the other Operative
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the maximum contract interest rate permitted to be contracted for, charged or
received by the applicable laws of the United States or the State (whichever
permit the higher rate of interest). The Lessee, the Lessor and any other
parties now or hereafter becoming liable for payment of any indebtedness under
this Loan or any other Operative Documents shall never be liable for interest
in excess of the maximum rate that may be lawfully contracted for or charged
under the laws of the State and of the United States (whichever permit the
higher rate of interest). If under any circumstances the aggregate amounts
paid include amounts which by law are deemed interest which would exceed the
maximum amount of interest which could lawfully have been contracted for,
charged or received, the parties stipulate that such amounts will be deemed to
have been paid as a result of an error on the part of the parties, and the
party receiving such excess payment shall promptly, upon discovery of such
error or upon notice thereof from the party making such payment, refund the
amount of such excess or at the Lender's option, credit such excess against any
unpaid principal balance owing. To the maximum extent permitted by applicable
law, all amounts contracted for, charged or received
- 14 -
<PAGE> 18
for the use, forbearance, or detention of money shall, to the extent permitted
by applicable law, be amortized, prorated, allocated and spread throughout the
full term of the Loan. The provisions of this Section shall control all of the
Operative Documents.
SECTION 6.12 Waiver of Consumer Rights. The Lessor and the Lender do
each hereby represent and warrant to one another that (a) it is not in a
significantly disparate bargaining position, (b) it is represented by legal
counsel in seeking or acquiring goods or services and such legal counsel was
not directly nor indirectly identified, suggested or selected by the other, (c)
it has knowledge and experience in financial and business matters that enable
it to evaluate the merits and risks of a transaction, including the transaction
evidenced by the Operative Documents, and (d) the Operative Documents are not a
result of any disparity in bargaining position among the Lessee, the Lessor and
the Lender and were negotiated on an arms-length basis and represent the
bargained-for agreement of parties. THE LESSOR AND THE LENDER EACH WAIVES ITS
RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES-CONSUMER PROTECTION ACT, SECTION
17.41 ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL
RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF ITS OWN
SELECTION, THE LESSOR AND THE LENDER EACH VOLUNTARILY CONSENTS TO THIS WAIVER.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
- 15 -
<PAGE> 19
IN WITNESS THEREOF, the parties hereto have caused this Loan Agreement
to be executed by their duly authorized officers as of the day and year first
above written.
ASSET XI HOLDINGS COMPANY, L.L.C.,
as Lessor and Borrower
by Asset Holdings Corporation I,
a Delaware corporation,
its managing member
By: /s/ TIFFANY PERCIVAL
---------------------------------------
Name: Tiffany Percival
Title: Vice President
BANK ONE, TEXAS, N.A., as Lender
By: /s/ JOHN E. ELAM, JR.
---------------------------------------
Name: John E. Elam, Jr.
Title: Vice President
- 16 -
<PAGE> 20
APPENDIX I
Filed with Exhibit 10 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996 and incorporated by reference herein.
<PAGE> 21
APPENDIX II
PROMISSORY NOTE
$7,600,000 January ___, 1997
FOR VALUE RECEIVED, the undersigned ASSET XI HOLDINGS COMPANY, L.L.C.,
a Massachusetts limited liability company, as Lessor (the "Lessor") under that
certain Loan Agreement, dated as of January 10, 1997 (the "Loan Agreement"),
between the Lessor and Bank One, Texas, N.A. (the "Lender"), promises to pay to
the order of the Lender at its address located at Bank One Center, 910 Travis,
7th Floor, Houston, Texas 77002 or such other address as the Lender shall
hereafter designate in writing to the Lessor, the aggregate unpaid principal
amount of all Loan Advances made by the Lender to, or for the benefit of, the
Lessor, as recorded in the records of the Lender (and such recordation shall
constitute prima facie evidence of the information so recorded; provided,
however, that the failure to make any such recordation shall not in any way
affect the Lessor's obligation to repay this Note). The principal amount of
this Note shall be payable in installments on each Loan Payment Date from and
after the nineteenth (19th) Loan Payment Date in accordance with Schedule III
of the Loan Agreement and, in any event, on or prior to the Lease Termination
Date as provided in the Loan Agreement.
The Lessor further promises to pay interest (computed, to the extent
such computation would not result in interest in excess of that which is
permitted by Applicable Law, using the actual number of days elapsed and a
360-day year), on each Loan Payment Date, on the unpaid principal amount of
this Note from time to time outstanding, payable as provided in the Loan
Agreement, at the interest rates determined in accordance with the provisions
of Section 2.4 of the Loan Agreement and to pay interest on amounts not paid
when due under this Note at the Overdue Rate, not exceeding the highest rate
permitted by Applicable Law. All payments of principal of and interest on this
Note shall be payable in lawful currency of the United States of America at the
office of the Lender as provided above or such other address as the Lender
shall have designated to the Lessor, in immediately available funds.
All parties hereto, whether as makers, endorsers, or otherwise,
severally waive presentment for payment, demand, protest, and notice of
dishonor, notice of the existence, creation or nonpayment of all or any of the
Loan Advances and all other notices whatsoever.
ALL PAYMENTS TO BE MADE BY THE LESSOR IN RESPECT OF THE LOAN AND THIS
NOTE SHALL BE MADE ONLY FROM CERTAIN PAYMENTS RECEIVED UNDER THE LEASE AND
PROCEEDS OF THE LEASED PROPERTY AND ONLY TO THE EXTENT THAT THE LESSOR SHALL
HAVE RECEIVED SUFFICIENT PAYMENTS FROM SUCH SOURCES TO MAKE PAYMENTS IN RESPECT
OF THE LOAN IN ACCORDANCE WITH AND SUBJECT TO THE PRIORITIES SET FORTH IN
SECTION 3 OF THE LOAN AGREEMENT. THE LENDER BY ITS ACCEPTANCE HEREOF AGREES
THAT IT WILL LOOK SOLELY TO SUCH SOURCES OF PAYMENT TO THE EXTENT AVAILABLE FOR
DISTRIBUTION TO THE LENDER AS PROVIDED IN THE LOAN AGREEMENT AND THAT NEITHER
THE LESSOR NOR ANY OF ITS CONSTITUENT MEMBERS OR AFFILIATES, NOR JH MANAGEMENT
CORPORATION, NOR THEIR INCORPORATORS, STOCKHOLDERS, DIRECTORS, OFFICERS,
MEMBERS, MANAGERS, EMPLOYEES OR AGENTS
<PAGE> 22
SHALL BE PERSONALLY LIABLE TO THE LENDER FOR ANY AMOUNT PAYABLE HEREUNDER OR
UNDER THE LOAN AGREEMENT. NOTHING IN THIS NOTE, THE LOAN AGREEMENT OR ANY
OTHER OPERATIVE DOCUMENT SHALL BE CONSTRUED AS CREATING ANY LIABILITY (OTHER
THAN FOR WILLFUL MISCONDUCT) OF THE LESSOR INDIVIDUALLY TO PAY ANY SUM OR TO
PERFORM ANY COVENANT, EITHER EXPRESS OR IMPLIED, IN THIS NOTE, THE LOAN
AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT (ALL SUCH LIABILITY, IF ANY, BEING
EXPRESSLY WAIVED BY THE LENDER BY ITS ACCEPTANCE HEREOF) AND THAT THE LENDER
AND EACH OTHER HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF, ON BEHALF OF
ITSELF AND ITS SUCCESSORS AND ASSIGNS, AGREES IN THE CASE OF ANY LIABILITY OF
THE LESSOR HEREUNDER OR THEREUNDER (EXCEPT FOR SUCH LIABILITY ATTRIBUTABLE TO
LESSOR'S WILLFUL MISCONDUCT) THAT IT WILL LOOK SOLELY TO THOSE CERTAIN PAYMENTS
RECEIVED UNDER THE LEASE AND THOSE CERTAIN PROCEEDS OF THE LEASED PROPERTY AS
PROVIDED IN SECTION 3 OF THE LOAN AGREEMENT; PROVIDED, HOWEVER, THAT THE LESSOR
IN ITS INDIVIDUAL CAPACITY (BUT NOT THE LESSOR'S INCORPORATORS, STOCKHOLDERS,
DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS) SHALL IN ANY EVENT BE LIABLE WITH
RESPECT TO (i) THE REMOVAL OF LESSOR LIENS RESULTING FROM CLAIMS AGAINST OR ACTS
OR BREACHES BY THE LESSOR IN EACH CASE IN ITS INDIVIDUAL CAPACITY AND INVOLVING
ITS WILLFUL MISCONDUCT OR (ii) FAILURE TO TURN OVER PAYMENTS THE LESSOR HAS
RECEIVED IN ACCORDANCE WITH SECTION 3 OF THE LOAN AGREEMENT; AND PROVIDED,
FURTHER, THAT THE FOREGOING EXCULPATION OF THE LESSOR SHALL NOT BE DEEMED TO BE
EXCULPATIONS OF THE LESSEE OR ANY OTHER PERSON.
Any provision to the contrary contained in this Note or in any of the
other Operative Documents notwithstanding, it is expressly provided that in no
case or event shall the aggregate of (i) all Interest payable by the Lessor and
(ii) the aggregate of any other amounts accrued or paid pursuant to this Note
or any of the other Operative Documents, which under applicable laws are or may
be deemed to constitute interest, ever exceed the maximum rate of interest
which could lawfully be contracted for, charged or received. In this
connection, it is expressly stipulated and agreed that it is the intent of the
Lessor and the Lender to contract in strict compliance with the applicable
usury laws of the State and of the United States (whichever permit the higher
rate of interest) from time to time in effect. In furtherance thereof, none of
the terms of this Note or any of the other Operative Documents shall ever be
construed to create a contract to pay, as consideration for the use,
forbearance or detention of money, interest at a rate in excess of the maximum
contract interest rate permitted to be contracted for, charged or received by
the applicable laws of the United States or the State (whichever permit the
higher rate of interest). The Lessor and any other parties now or hereafter
becoming liable for payment of any indebtedness under this Note or any other
Operative Documents shall never be liable for interest in excess of the maximum
rate that may be lawfully contracted for or charged under the laws of the State
and of the United States (whichever permit the higher rate of interest). If
under any circumstances the aggregate amounts paid include amounts which by law
are deemed interest which would exceed the maximum amount of interest which
could lawfully have been contracted for, charged or received, the parties
stipulate that such amounts will be deemed to have been paid as a result of an
error on the part of the parties, and the party receiving such excess payment
shall promptly, upon discovery of such error or upon notice thereof from the
party making such payment, refund the amount of such excess or at the Lender's
option, credit such excess against any unpaid principal balance owing. To the
maximum extent permitted by applicable law, all amounts contracted for, charged
or received for the use, forbearance, or
- 2 -
<PAGE> 23
detention of money shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of this
Note.
This Note shall be governed by and construed in accordance with the
laws of the State of Texas, without regard to conflicts of law principles.
Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Loan Agreement.
ASSET XI HOLDINGS COMPANY, L.L.C.,
as Lessor
by Asset Holdings Corporation I, its
Managing Member
By:
-----------------------------------------
Name: Tiffany Percival
Title: Vice President
- 3 -
<PAGE> 1
EXHIBIT 11.1
EAGLE USA AIRFREIGHT, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended
September 30,
1997 1996
-------- ----------
<S> <C> <C>
Net income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,798 $ 11,481
Shares used in computing net income per share (2):
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . 17,792 16,234
Incremental shares attributed to outstanding options (3) . . . . . . . . . . . 890 939
Shares issued to James R. Crane for acquisition of subsidiaries . . . . . . . . 82
Shares for distributions paid from net proceeds of the initial public
offering (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
----------- ------------
Total shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,682 17,521
Net income per share (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.66
=========== ============
</TABLE>
- ------------
(1) Net income for fiscal 1996 includes a pro forma charge of $945 which
represents the estimated federal income taxes that would have been
reported had Eagle USA been a C Corporation prior to December 4, 1995.
(2) On July 8, 1996, the Board of Directors authorized a two-for-one stock
split, effected in the form of a stock dividend, payable on August 1, 1996
to shareholders of record on July 24, 1996. References to number of
shares outstanding have been retroactively restated to reflect the split.
(3) Calculated assuming exercise of options for 2,110 and 2,193 shares of
common stock, respectively, with prices ranging from $1.25 to $35.13 per
share based upon the average estimated market price of $26.67 and $14.60
for the year, respectively. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, common equivalent
shares issued during the 12-month period prior to an initial public
offering at prices substantially below the public offering price are
presumed to have been issued in contemplation of the initial public
offering and have been included in the calculation as if they were
outstanding since the beginning of the period presented (using the
treasury stock method and the public offering price).
(4) Calculated for 1996 by dividing the sum of the Special Distribution Notes
($8,209) and S Corporation retained earnings ($2,701) earned from October
1, 1995 to December 4, 1995 which were distributed to S Corporation
shareholders and paid from the net proceeds of the offering by the net
proceeds price per share from the offering of $15.03 (pre-split) and
weighted based upon the days the Notes were outstanding during the first
quarter of 1996.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Subsidiary: Jurisdiction of Organization
<S> <C>
Eagle Freight Services, Inc. Texas
Eagle Freight Services, Inc. California
Eagle USA Transportation Services, Inc. Texas
Eagle Maritime Services, Inc. Texas
</TABLE>
[Certain subsidiaries not in the aggregate constituting a significant
subsidiary are omitted pursuant to Regulation S-K 601(21)(ii).]
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-4452) of Eagle USA Airfreight, Inc. of our
report dated November 21, 1997 appearing on page F-2 of this Annual Report on
Form 10-K.
PRICE WATERHOUSE
December 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EAGLE USA AIRFREIGHT, INC. FOR THE
YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS INCLUDED IN FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 25,107
<SECURITIES> 2,679
<RECEIVABLES> 55,228
<ALLOWANCES> 566
<INVENTORY> 0
<CURRENT-ASSETS> 87,005
<PP&E> 18,663
<DEPRECIATION> 4,573
<TOTAL-ASSETS> 106,871
<CURRENT-LIABILITIES> 26,367
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 80,486
<TOTAL-LIABILITY-AND-EQUITY> 106,871
<SALES> 291,767
<TOTAL-REVENUES> 291,767
<CGS> 163,616
<TOTAL-COSTS> 163,616
<OTHER-EXPENSES> 102,452
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,392
<INCOME-TAX> 10,594
<INCOME-CONTINUING> 16,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,798
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0
</TABLE>
