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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission File No. 0-27338
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GT INTERACTIVE SOFTWARE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3689915
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
16 EAST 40TH STREET, NEW YORK, NY 10016
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value
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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 the 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. [_]
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The aggregate market value of the registrant's Common Stock, held by
non-affiliates of the registrant, based on the closing sale price of the Common
Stock on February 28, 1997 as reported on the Nasdaq National Market, was
$166,940,983.
As of February 28, 1997, there were 66,398,458 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement ("Proxy Statement")
for the 1997 Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.
Total Number of Pages ______
Index to Exhibits at Page _______
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GT INTERACTIVE SOFTWARE CORP.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 15
Item 3. Legal Proceedings............................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders ......................... 16
Item 4A. Executive Officers of the Registrant ........................................ 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ... 18
Item 6. Selected Financial Data ..................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 22
Item 8. Index to the Financial Statements and Supplementary Data..................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 29
Item 11. Executive Compensation ...................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 29
Item 13. Certain Relationships and Related Transactions............................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 30
Signatures ............................................................................. 33
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PART I
This annual report contains forward-looking statements regarding future events
or the future financial performance of the Company that involve certain risks
and uncertainties. Actual events or the actual future results of the Company may
differ materially from the results discussed in the forward-looking statements
due to various factors, including, but not limited to, those discussed in
"Factors Affecting Future Performance" below at pages 10 to 15.
ITEM 1. BUSINESS
GENERAL
GT Interactive Software Corp. (the "Company"), a Delaware corporation
incorporated in September 1992, creates, publishes and merchandises interactive
entertainment, edutainment and value-priced consumer software for a variety of
platforms on a world-wide basis. Similar to major film studios and record
companies, the Company employs a portfolio approach to achieve a broad base of
products across most major consumer software categories. The Company obtains new
software content by blending its internal software development capabilities with
the multi-title publishing relationships it has established with a variety of
independent software design groups and content providers. Recognizing that
software distribution capabilities attract software publishing content, the
Company has used its strong distribution foundation to build its current
position as a leader in the consumer software publishing business. According to
PC Data, in 1996 the Company achieved the industry's second highest market share
in number of units sold in the personal computer ("PC") software game category
and the industry's highest market share in number of units sold in the PC
software budget/value-priced category. The Company has experienced significant
growth in its published front-line titles, growing from 5 titles released in
1994 to 24 titles released in 1995 to 67 titles released in 1996.
The Company believes that it is currently the largest distributor of
consumer software to mass merchants in the United States. The Company is the
primary supplier of its own and third party consumer software to approximately
2,320 Wal-Mart stores and approximately 760 Target stores and supplies
value-priced software under specially designed programs to approximately 2,150
Kmart stores. In addition, the Company has established direct selling
relationships for its own published software with a variety of major retailers,
including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and Computer
City, among others.
In December 1995, following the Company's initial public offering, the
Company's Common Stock was listed on the Nasdaq National Market under the symbol
"GTIS". Unless the context otherwise provides, the "Company" or "GTIS" refers to
GT Interactive Software Corp. and its subsidiaries.
INDUSTRY BACKGROUND
The world-wide consumer software market has grown dramatically in recent
years, driven by the increasing installed base of multimedia PCs in the home,
the introduction of new dedicated game systems from Sony, Sega, Nintendo and
others, the proliferation of software titles, and the development of new and
expanding distribution channels. Recent improvements in computer technology have
presented an opportunity to fundamentally change the user's PC experience by
introducing an interactive element to audio and visual entertainment. Multimedia
PCs, generally configured with enhanced memory, high-resolution color monitors,
sound boards, stereo speakers and high-capacity CD-ROM drives, provide
interactive entertainment and learning environments that combine text, realistic
sound, advanced graphics and animation. Rapidly declining prices of
microprocessors and CD-ROM drives have made these computers more affordable.
The world-wide consumer software industry has also recently undergone a
number of profound changes with the introduction of new hardware platforms and
new technologies, such as on-line networks
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and the Internet. The "next generation" of game systems are based on 32- and
64-bit microprocessors that incorporate dedicated graphics chipsets. The Sony
PlayStation ("PlayStation") and Sega Saturn ("Saturn") hardware systems began
shipping in Japan in the last quarter of 1994 and in North America in 1995. The
Nintendo 64 ("N64") system began shipping in Japan in June 1996 and began
shipping in North America in 1996. Historically, sales of console software
titles have exceeded sales of PC titles in both units and dollars. In addition,
the proliferation of on-line networks and the Internet has created new
opportunities for the consumer software industry, including on-line game playing
by users in various locations, additional promotional techniques including
on-line distribution of shareware, and direct on-line marketing, sales and
distribution to end users.
Growth in the installed base of multimedia PCs and in other powerful and
functional platforms has created a mass market for consumer software products.
The development of a mass market for software products has been characterized by
the rise in importance of mass merchant software sales as a distribution
channel, increasing price pressure as well as competition for limited retail
shelf space to accommodate the abundance of new titles. This abundance has
resulted in the increased importance of brand name recognition in a hit driven
market. Faced with the challenges of marketing and distribution, many
independent software developers and content providers are pursuing relationships
with publishing companies with broader distribution capabilities, including
enhanced access to mass market retailers and greater merchandising, marketing
and promotional support. At the same time, retailers are faced with the
challenge of managing the increasing number of new titles with limited shelf
space. Another result of these market pressures is the trend in the industry
toward the consolidation of software companies and the diversification of
products offered by such companies.
The Company believes that success in the industry will be achieved by those
companies that are able to create significant brand name recognition or hits,
establish strong retail relationships and consistently offer a diversified
high-quality software portfolio providing significant sell-through opportunities
for retailers of all kinds.
BUSINESS STRATEGY
The Company's objective is to become one of the world's leading consumer
software companies. GTIS' initial business strategy was to establish a strong
distribution capability as a foundation to build its current position as a
leader in the consumer software publishing business.
The Company believes that significant growth opportunities exist in
international markets and across a variety of next generation hardware
platforms, including PlayStation, Saturn and N64, for which the Company is
creating software products. Key elements of its strategy are to:
Continue to expand and diversify the publishing business. The Company's
current strategy is to obtain new software content by blending its in-house
software development capabilities with the multi-title publishing relationships
it has established with independent software developers and content providers.
To that end, the Company completed several acquisitions of leading software
companies in 1995 and 1996 which have substantially increased its internal
development capabilities and its publishing base. The Company acquired Humongous
Entertainment, Inc. ("Humongous"), a premier developer and publisher of
award-winning children's software which has become the centerpiece of its
edutainment business. In addition, the Company acquired WizardWorks Group, Inc.
("WizardWorks"), a developer and publisher of value-priced software, and Candel
Inc., the parent company of FormGen, Inc. ("FormGen"), a publisher of
interactive PC shareware and software. These 1996 acquisitions supplemented the
Company's 1995 acquisition of Slash Corporation ("Slash"), a publisher,
purchaser, repackager and distributor of value-priced software. On an ongoing
basis, GTIS intends to evaluate potential acquisitions of or investments in
other software publishers or developers which it believes will complement or
enhance its existing business.
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With the acquisitions of Slash and WizardWorks, the Company has
significantly enhanced its presence in the value-priced software market.
WizardWorks' internal development capabilities have enabled the Company to
create original lines of value-priced software. The Company's value-priced
software marketing operations give the Company the flexibility to offer a
particular product at various price points in response to market pricing
pressures. This enables the Company to manage the entire life-cycle of its
published product from the initial release of the product through the final
closeout sale.
The Company intends to seek additional ways to deepen and broaden its
software product lines, including exploring new genres and platforms. Pursuant
to this goal, the Company's strategies include attracting and retaining top
developers and content providers, such as id Software Inc. ("id Software"),
Williams Entertainment Group ("Williams"), 3d Realms, Mercer Mayer, Stan and Jan
Berenstain and Scavenger, as well as developing its own titles. Similar to the
music industry, GTIS employs its own "A&R" (Artists & Repertoire) group whose
sole responsibilities are to identify, attract and retain independent software
developers.
Develop a leading position in the 32- and 64-bit game platforms. The
Company is leveraging its strength in the PC software market to build a leading
position in the emerging 32- and 64-bit game software market. To that end, the
Company has become an approved licensee of PlayStation and Saturn in North
America. Nintendo has approved the Company as a licensee of its products, and
they are in the process of finalizing a definitive agreement which will cover
N64 products. In addition, the Company has entered into multi-title
relationships with id Software, Williams, 3D Realms and other content providers
and software developers for the publishing of titles for use on these game
systems. As additional platforms that are suited to the Company's products
emerge, the Company intends to publish products that it believes will have the
greatest sales potential in the consumer software market.
Broaden its international presence. The Company believes that markets
outside the United States present significant growth opportunities. The Company
began to broaden its international sales efforts in late 1994 by establishing
relationships with software publishers and distributors in the largest
international markets. In January 1995, the Company established a publishing
operation in the United Kingdom with responsibility for European markets. That
operation was expanded in November 1996 when the Company acquired the business
of Warner Interactive Entertainment Europe ("Warner Interactive Europe"), a
subsidiary of Warner Music Group. In 1996, GTIS successfully launched Doom for
PlayStation in Europe and in Japan. In addition, the Company released Quake for
PCs in Europe, where it was the number one selling title upon its release.
In September 1995, the Company entered into joint venture agreements with
SOFTBANK Corporation ("SOFTBANK"), the leading distributor of PC software in
Japan, and Roadshow Entertainment PTY LTD ("Roadshow"), a leading entertainment
company in Australia, for the publishing and distribution of the Company's
products in Japan and Australia, respectively. It was pursuant to the SOFTBANK
arrangement that Doom was launched in Japan. The Company is aggressively seeking
new opportunities to form alliances with local publishers and distributors in
other foreign markets.
Develop new brands and leverage hit titles. The Company believes that, with
the proliferation of software titles and the competition for shelf space, brand
name recognition of its published products, whether created internally or by
third parties, is an important component of its success as a publisher. For
example, the Company has licensed titles from Mercer Mayer in order to
capitalize on the popularity of Mercer Mayer's multi-million selling The Little
Critter book series. In addition, the popularity of Doom has resulted in the
success of Doom-related products which have sold over 4.0 million copies.
Further, Humongous has built significant brand name recognition in the
edutainment area with its critically acclaimed software titles and identifiable
characters. The Company intends to further build its characters and other
properties to which the Company has exclusive rights through licensing and
merchandising across various media, including books, television and films.
Pursue the Internet and on-line network opportunities. The Internet and
on-line networks are an
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integral element of all GTIS marketing and promotional efforts. The Company
generates awareness through its Web site for its software titles prior to their
market debut. The wide acceptance of the Internet into consumers' homes has
created new opportunities for the consumer software industry. The Company
intends to further explore these opportunities, including on-line game playing
by users in various locations, additional promotional techniques including
on-line distribution of shareware, and direct on-line marketing, sales and
distribution to end users.
Maintain its leadership position as a distributor and merchandiser. GTIS
believes that it is the largest distributor of third party computer software to
mass merchants in the United States and intends to maintain its position in this
area. The Company believes that its distribution capabilities have served as a
foundation upon which it has built its current position as a leader in the
consumer software publishing business. The Company's proprietary
state-of-the-art distribution and point-of-sale replenishment system, as well as
its experienced management team, enable it to handle efficiently high sales
volumes, manage and replenish inventory on a store by store basis and assemble
for its customers regional and store by store data based on product
sell-through. GTIS intends to continue to invest in and upgrade that system and
seeks to explore innovative value-added programs to establish and strengthen
retail relationships.
There can be no assurance that the Company will successfully implement all
or any part of its strategy.
GTIS PUBLISHING
The Company publishes high quality consumer software, developed internally
or in collaboration with independent developers, which is available in various
formats for use on multiple platforms. Like major film studios and record
companies, GTIS employs a portfolio approach to achieve a broad base of products
across all major consumer software categories. The Company combines its internal
software development capabilities with relationships with a variety of
independent software design groups, such as id Software, a leading developer of
3-D action games (Quake, Final Doom, Doom II and Hexen); Williams, the home
entertainment division of leading arcade company WMS Industries (Mortal Kombat
3, NBA Hang Time and War Gods); 3D Realms, the creator of the best selling Duke
Nukem 3D; Scavenger, designers of Scorcher, Amok and Into the Shadows; and
Cybersites, creators of the popular Internet game, S.P.Q.R.
During 1996, the Company has consummated a number of strategic acquisitions
and investments that have significantly increased its internal development
capabilities and added to its expanding publishing base. In July 1996, the
Company acquired Humongous, a premier developer and publisher of original
interactive children's entertainment software. Humongous' award-winning software
line features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear and
Buzzy the Knowledge Bug. USA Today (December 26, 1995) listed Humongous as one
of "Six Firms Worth Watching in '96," and Fortune magazine (July 10, 1995) named
Humongous one of "25 Cool Companies." Humongous, which has become the
centerpiece of the Company's edutainment business, joins the Company's existing
popular children's titles, strengthening the Company's presence in the growing
children's software category.
The Company further increased its internal software development
capabilities in June 1996 when it acquired WizardWorks, a developer and
publisher of a wide variety of consumer software products. The WizardWorks
product line includes GameWizards, a series of gaming strategy, hint and tip
guides on CD-ROM that incorporate full-motion video game segments, cheat codes
and detailed maps. WizardWorks also offers the !Zone line of add-on levels that
complement the industry's most popular entertainment titles, including GTIS
titles such as Doom, Heretic, Hexen and Duke Nukem 3D. Through the CompuWorks
line, WizardWorks offers a line of home office productivity software that
includes such well-known titles as CompuWorks Publisher and CompuWorks Draw.
Also included in the acquisition of WizardWorks was MacSoft, a leading publisher
of entertainment, edutainment and productivity software for the Macintosh. GTIS
is consolidating all of its Macintosh offerings under the MacSoft brand,
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strengthening its position in this segment of the market.
In June 1996, the Company also acquired FormGen, a publisher of interactive
PC shareware and software. Foremost among FormGen's current titles is the
best-selling Duke Nukem 3D for PCs, published under license from 3D Realms.
Independent of its acquisition of FormGen, the Company has secured the rights to
publish Duke Nukem 3D world-wide directly from 3D Realms for all next generation
platforms.
In November 1996, the Company invested in convertible preferred stock of
Off World Entertainment, Inc. (also known as "OddWorld Inhabitants" or
"OddWorld"), which is convertible into 50% of the common equity. OddWorld's
principal developers have extensive experience in the ground-breaking
application of computer-generated images in film, commercials and theme park
rides. OddWorld is currently developing "StoryDwellings" -- a game series that
combines life-like character motion with intuitive controller interfaces inside
highly rendered backgrounds, bringing players into a rich, deeply developed
world that is more like a film than a game.
The Company has also pursued strategic relationships with independent
developers of software products. GTIS believes it has been successful in
identifying talented developers and establishing mutually beneficial
relationships with those developers. The Company's early publishing success was
based in large part on the Doom series of software titles. These products have
sold an aggregate of over 4.0 million copies since the introduction of the
series in 1994 and have been the Company's most popular titles. The Doom series,
which includes Doom II, Doom-related products, Heretic and Hexen, is licensed to
the Company from, and developed by, id Software. Another id Software title,
Quake, is currently being published by the Company in the U.S. and Europe.
The Company believes that its success with the Doom-related titles and its
software distribution capabilities have enabled it to attract and retain
additional quality independent software developers and content providers.
Consequently, the Company has experienced significant growth in its published
titles, growing from 5 front-line titles released in 1994 to 24 titles released
in 1995 to 67 titles released during 1996.
The Company has entered into several multi-title publishing contracts with
Williams, pursuant to which the Company has acquired the rights to publish
software products based on virtually all of Williams' coin-operated video games,
for use on a number of platforms world-wide, excluding Japan and North America.
The Company has acquired similar rights to games developed by Atari Games
Corporation ("Atari"), which was recently acquired by Williams.
GTIS is also leveraging its strength in the PC software market to build a
leading position in the emerging 32- and 64-bit video game software market. To
that end, the Company has become an approved licensee of PlayStation and Saturn
in North America. Nintendo has approved the Company as a licensee of its
products, and they are in the process of finalizing a definitive agreement which
will cover N64 products. In addition, the Company has entered into relationships
with id Software, Williams, 3D Realms and other content providers and software
developers for the publishing of next generation titles, such as Doom II, Quake,
Duke Nukem 3D and Mortal Kombat 3.
Edutainment
In July 1996, the Company acquired Humongous, a premier developer and
publisher of original interactive children's entertainment software. Humongous
software features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear
and Buzzy the Knowledge Bug. Humongous titles, such as Putt-Putt Saves The Zoo,
Freddi Fish and the Case of the Missing Kelp Seeds and Fatty Bear's Birthday
Surprise, have won dozens of awards in the past few years.
Humongous has become the centerpiece of the Company's edutainment business.
Current Humongous titles join GTIS' existing popular children's properties,
including those from award-winning
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children's author Mercer Mayer (Just Me and My Dad and Just Me and My Mom),
strengthening the Company's presence in the growing children's software
category. Among the edutainment software products to be published by the Company
are software titles based on the Berenstain Bears series, created by Stan and
Jan Berenstain.
Value-Priced Software
In addition to publishing front-line software, GTIS also creates, publishes
and distributes a variety of value-priced products. The Company believes that
the value-priced segment of the consumer software market affords a growth
opportunity as a result of the proliferation of software titles which cannot
find front-line shelf space and the demand by many PC owners for moderately
priced products. The Company's value-priced marketing operations give the
Company the flexibility to offer a particular product at various price points in
response to market pricing pressures. This enables the Company to manage the
entire life-cycle of its published product from the initial release of the
product through the final closeout sale.
In early 1995, the Company began to repackage and offer for distribution to
mass merchants five- and ten-pack boxes of value-priced software titles. These
generally include previously top-selling software titles whose popularity had
peaked at higher retail price points or titles that never realized substantial
popular recognition. The Company's acquisition in June 1995 of Slash, a leading
publisher, purchaser, repackager and distributor of value-priced software,
solidified the Company's presence in the value-priced market. Through its Slash
Division, the Company licenses catalog titles, purchases excess inventory
(primarily in the CD-ROM format) from major publishers and may repackage the
titles into compilation boxes, such as five-packs and ten-packs.
The Company further expanded its value-priced product line in June 1996,
when it acquired WizardWorks, a leading developer and publisher of value-priced
interactive entertainment, edutainment and productivity software. The
WizardWorks value-priced product line includes GameWizards, a series of gaming
strategy, hint and tip guides; the !Zone line of add-on level software that
complements the industry's most popular entertainment titles; and the CompuWorks
line of home office productivity software. The Company believes that the recent
consolidation of the Slash Division and WizardWorks into one distinct
value-priced division will serve to strengthen its position in the value-priced
market.
In 1995, the Company commenced supplying value-priced software under
specially designed fixture-based programs to Kmart and Wal-Mart. These programs
utilize sophisticated distribution and point of sale replenishment systems
similar to those already in use by the Company for front-line products.
International
In January 1995, the Company established a publishing operation in London,
England, with responsibility for European markets. The Company is currently
publishing, marketing and distributing its consumer software products in over 39
countries world-wide, including Quake which was the number one selling PC title
in Europe upon its release. The Company distributes its products direct to
retail merchants in most of the U.K., through a sub-distribution agreement with
Virgin Interactive Entertainment plc in French- and German-speaking countries
and through wholesalers in most of the rest of the European market.
The Company believes that the European market for 32- and 64-bit game
systems software represents a significant growth opportunity. In late 1995, the
Company successfully launched Doom for PlayStation in Europe and, in Spring
1996, in Japan. Through its strategic alliance with Williams, the Company has
acquired the exclusive right to publish and distribute, in most major markets
excluding North America and Japan, 32- and 64-bit software products based on
virtually all of Williams' coin-operated video games, as well as games developed
by Atari, which was recently acquired by
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Williams. These titles include NBA Hang Time, based on the popular arcade
basketball game, NHL Open Ice, an arcade-style hockey brawl, Robotron X, the
sequel to the arcade classic, Mortal Kombat Trilogy, based on the record-setting
martial arts arcade series, and Area 51, based on the popular arcade game.
In November 1996, the Company acquired the business of Warner Interactive
Europe, a European subsidiary of Warner Music Group. The acquisition established
direct GTIS operations in France and Germany, as well as Australia. As part of
the transaction, the Company also acquired an internal product development team
based in Manchester, England.
The Company has also entered into joint venture agreements with SOFTBANK,
the leading distributor of personal computer software in Japan, and Roadshow, a
leading entertainment company in Australia, under which the Company and each of
the other parties publish and distribute the Company's titles in Japan and
Australia, respectively. In October 1995, the Company and SOFTBANK further
strengthened their relationship through the purchase from the Company and
certain stockholders, by an affiliate of SOFTBANK, of an equity interest in the
Company. Additionally, in June 1996, the Company purchased a 9.9% interest in,
and entered into a multi-title publishing agreement with, Mirage, a U.K.
developer of entertainment software. The Company is aggressively seeking new
opportunities to form strategic alliances with local publishers and distributors
in other foreign markets.
THE GTIS MERCHANDISING AND DISTRIBUTION APPROACH
The Company believes that it is the only software publisher that sells
directly to substantially all of the major retailers of computer software in the
U.S. and that it is the largest distributor of computer software to mass
merchants in the U.S. GTIS sells its own published titles to specialty retailers
and distributes its own products, as well as those of other publishers, to
certain mass merchants. The Company is the primary supplier of its own and
third-party consumer software to approximately 2,320 Wal-Mart stores and
approximately 760 Target stores and supplies value-priced software under
specially designed fixture-based programs to approximately 2,150 Kmart stores.
In addition, the Company sells its own published products to a variety of major
retailers, including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and
Computer City, among others.
The Company believes that its merchandising and distribution capability is
an important element of its success and gives it a competitive advantage. The
Company's distribution approach is based on direct sales to a significant number
of specialty, multi-purpose and mass merchant retailers of computer software.
This approach includes shipment of software directly to individual stores or
warehouse locations for each of its retail accounts, in-store merchandising
programs for a variety of its retail accounts and value-added distribution
programs employing a proprietary point-of-sale inventory replenishment system
for certain of its mass merchant accounts.
GTIS initially designed its merchandising and distribution program in
collaboration with Wal-Mart. Under this program currently executed for certain
mass merchants, the Company typically manages substantially all of a store's
software inventory, by designing, supplying and restocking displays of software
according to a program plan devised in concert with the customer specifically
for each individual store. Drawing upon its regional and store specific data
base, the Company updates each store plan on a continual basis. This
store-specific program plan, together with the Company's proprietary
point-of-sale replenishment system, enables the Company to ensure that the mass
merchants' shelves will remain fully stocked with a tailored mix of titles
designed to maximize the sales volume per square foot of shelf space.
Utilizing its point-of-sale replenishment systems and electronic data
interchange (EDI) links with its largest mass merchant accounts, the Company is
able to efficiently handle high sales volumes to those customers, manage and
replenish inventory on a store-by-store basis and assemble for its customers
regional and store-by-store data based on product sell-through. The Company
utilizes state-of-the-art
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technology systems for order processing, inventory management, purchasing and
tracking of shipments thereby increasing the efficiency and accuracy of order
processing and payments and shortening order turnaround time. These systems
automatically track software orders from order processing to point-of-sale,
thereby enhancing customer satisfaction through prompt delivery of the desired
software titles.
Based on the strength of its current consumer software distribution
operation, GTIS has successfully attracted other publishers to utilize its mass
merchant distribution services for their products. Such products are generally
distributed by GTIS under the name of the publisher who is, in turn, responsible
for the publishing, packaging, marketing and customer support of such products.
GTIS believes that its program of distributing other publishers' products
leverages the Company's distribution capabilities and adds a source of revenue
that does not require additional product development expenditures. The Company's
agreements with other publishers typically provide for certain retail
distribution rights in designated territories for a specific period of time,
after which those rights are subject to negotiated renewal.
MARKETING
GTIS believes that marketing is critically important to the success of its
products. The Company employs a wide range of sophisticated marketing techniques
including (i) in-store promotions that utilize display towers and endcaps, (ii)
direct mailings, (iii) advertising in computer and general consumer publications
and (iv) on-line marketing to promote sales of its products. The Company
monitors and measures the effectiveness of its marketing strategies throughout
the product lifecycle.
The Internet is an integral element of GTIS' marketing efforts used, in
part, to generate awareness for its titles months prior to their market debut.
GTIS incorporates the Internet into its marketing programs through the creation
of product-dedicated mini-sites, on-line promotions and news group seedings.
To capitalize on the innovative nature of its products, the Company has
developed a public relations program that has resulted in coverage for the
Company by trade journals and also by well-recognized publications such as The
New York Times, Entertainment Weekly, Newsweek and USA Today. Among the
marketing strategies the Company utilizes is the creation of special press
events to coincide with the launch of a new product.
GTIS' marketing programs have continued to expand along with the Company's
publishing business. For example, to launch Just Me and My Mom, an interactive
storybook based on the popular Mercer Mayer book, GTIS unveiled a multi-tiered
marketing campaign which included cross-promotions with Family PC magazine and
Scholastic Software Clubs, the showcasing of the game at an EPCOT Center exhibit
and magazine subscriber invoice inserts, as well as game demos sent to
approximately 750,000 educators.
As of December 31, 1996, the Company's staff included 105 employees in
domestic sales and marketing and 84 employees in international marketing and
distribution. The Company expects to increase its sales and marketing staff to
provide greater penetration into the retail market and increased marketing
support for its products. The Company also uses independent field sales
representative organizations to assist in the sales of software products and
customer support.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company generally sells a significant portion of its published software
under licenses from independent developers and, in such cases, does not acquire
the copyrights for the underlying work. The Company relies primarily on a
combination of trademark, copyright, trade secret and other proprietary
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<PAGE> 11
rights laws, license agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights and the rights of
its developers. United States copyright law, international conventions and
international treaties, however, may not provide meaningful protection against
unauthorized duplication or infringement of the Company's software.
Policing unauthorized use of an easily duplicated and broadly disseminated
product such as computer software is very difficult. Software piracy is expected
to be a persistent problem for the software industry. These problems are
particularly acute in certain international markets such as South America, the
Middle East, the Pacific Rim and the Far East. If a significant amount of
unauthorized copying of the Company's products were to occur, the Company's
business, operating results and financial condition could be adversely affected.
Software developers and publishers are subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products.
There has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. Any such claims or litigation,
with or without merit, could be costly and a diversion of management's
attention, which could have a material adverse effect on the Company's business,
operating results and financial condition. Adverse determinations in such claims
or litigation could have a material adverse effect on the Company's business,
operating results and financial condition. The Company is presently in
litigation against Micro Star Software ("Micro Star"), the publisher of a
product entitled "Nuke It" comprised largely of additional levels of play for
Duke Nukem 3D which are created by game users and available over the Internet
("Player Created Levels"). The Company contends that the sale of Nuke It
infringes the copyright on Duke Nukem 3D (which the Company publishes under
license with the owner of 3D Realms) and violates the Lanham Act's trademark,
unfair competition and false advertising provisions. On September 26, 1996, the
Company obtained a preliminary injunction in federal court in San Diego,
California ordering the recall of all copies of Nuke It then in the stores,
based on the use of Duke Nukem 3D's protected expression on Nuke It's packaging
and in some copies of the Nuke It CD-ROM. The Court also held as a preliminary
matter that the Player Created Levels contained in Nuke It did not themselves
contain expression from the Duke Nukem 3D game in protectable form. Because the
Company believes that this holding is erroneous, it is pursuing an appeal to the
U.S. Court of Appeals for the Ninth Circuit, seeking an injunction halting the
sale of Nuke It and any subsequent Micro Star product containing additional
levels of play for Duke Nukem 3D. Micro Star has appealed the Court's decision
granting the injunction. The Company intends vigorously to pursue this
litigation to protect its intellectual property rights.
EMPLOYEES
As of December 31, 1996, GTIS had 967 employees, consisting of 105 in
domestic sales and marketing, 504 in distribution, 39 in manufacturing, 84 in
international marketing and distribution, 96 in publishing and product
development, 28 in information services, 9 in purchasing and 102 in
administration and finance. Of the 504 employees in distribution, 312 are
members of Local 734, L.I.U. of N.A., AFL-CIO (the "Union"). These employees,
who are located at the Company's distribution center in Edison, New Jersey, are
subject to a collective bargaining agreement the Company entered into with the
Union on May 12, 1995. The Company believes that its relations with its
employees are good.
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<PAGE> 12
FACTORS AFFECTING FUTURE PERFORMANCE
CUSTOMER CONCENTRATION AND CREDIT RISK
The Company is the primary supplier of software to Wal-Mart, including
titles published by the Company and products from other publishers. On a pro
forma basis, giving effect to the acquisition of Slash, sales to Wal-Mart
accounted for approximately 48% and 45% of the Company's net sales for 1995 and
1996, respectively. The Company's status as Wal-Mart's primary supplier is not
based upon any written agreement or understanding. Accordingly, such status
could be terminated at any time by Wal-Mart. In addition, Wal-Mart has
dedicated, and the Company currently anticipates that Wal-Mart will continue to
dedicate, the software department in a limited number of stores to other
software distributors on a test basis. There can be no assurance that Wal-Mart
will continue to use the Company as its primary supplier of consumer software,
or at all. The loss of Wal-Mart as a customer, a significant decrease in product
shipments to or an inability to collect receivables from Wal-Mart or any other
adverse change in the Company's relationship with Wal-Mart would have a material
adverse effect on the Company's business, operating results and financial
condition. In late March 1997, the Company and Wal-Mart reached an understanding
whereby Wal-Mart expects to begin testing direct purchasing of software from
three publishers (CUC International, Electronic Arts, and Lucas Arts
Entertainment) during the second half of 1997. Sales of products of these
publishers to Wal-Mart accounted for approximately $20 million of the Company's
net sales in 1996.
RISKS ASSOCIATED WITH ACQUISITIONS
In June 1995 the Company acquired Slash, in June 1996 the Company acquired
WizardWorks and FormGen, in July 1996 the Company acquired Humongous and in
November 1996 the Company acquired the business of Warner Interactive Europe.
The Company undertook these acquisitions to expand its publishing and
distribution capabilities with the assumption that the combined entity would be
better able to take advantage of market opportunities than if each of the
companies were operated individually. This synergy will depend in part on the
ability of the Company to retain in-house publishing staffs and third-party
relationships and to utilize distribution, sales and marketing capabilities. The
Company is in the process of integrating the acquired companies by consolidating
certain operations, offices and facilities, and combining administrative,
accounting, sales and marketing and distribution functions. The integration of
these acquired companies will involve, among other things, the opening of new
facilities or the expansion of existing facilities, the expansion of accounting
systems, controls and procedures, the increase in warehouse and distribution
capabilities, the closing of redundant facilities and the elimination of
duplicate personnel. The Company is in the early stages of integrating certain
of the acquired companies and there can be no assurance that the integration
will be completed without disrupting the Company's business. Should the Company
not be able to achieve such integration in a timely manner or in a coordinated
fashion, it could materially and adversely affect the Company's business,
operating results or financial condition.
The Company believes that its future growth will depend, in part, on its
ability to continue to identify, acquire and integrate companies which have
software development and publishing capabilities. While the Company reviews
acquisition opportunities in the ordinary course of its business, some of which
may be material and some of which are currently under investigation or
discussion, the Company presently has no commitments or understandings with
respect to any material acquisitions and there can be no assurance that the
Company will be successful in identifying and acquiring suitable acquisition
candidates or integrating the acquired businesses into the Company's operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced and may continue to experience significant
quarterly fluctuations in net sales and operating results due to a variety of
factors, including fluctuations in the mix of products
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<PAGE> 13
with varying profit margins sold by the Company, the size and timing of
acquisitions, the size and growth rate of the consumer software market, market
acceptance of the Company's products (including the Company's published and
third-party distributed titles) and those of its competitors, development and
promotional expenses relating to the introduction of new products or
enhancements of existing products, projected and actual changes in computing
platforms, the timing and success of product introductions by the Company and
its competitors, product returns, changes in pricing policies by the Company and
its competitors, the accuracy of retailers' forecasts of consumer demand, the
timing of orders from major customers, order cancellations and delays in
shipment. In addition, delays in the introduction of the Company's front-line
titles could result in material fluctuations of the Company's operating results.
The Company has experienced, and expects to experience in the future,
significant fluctuations in its quarterly net sales and operating results as a
result of such factors. In response to competitive pressures, the Company may
take certain pricing or marketing actions that could materially and adversely
affect the Company's business, operating results and financial condition.
Products are generally shipped as orders are received and, accordingly, the
Company operates with little backlog. The Company's expense levels are based, in
part, on its expectations regarding future sales and, as a result, operating
results would be disproportionately adversely affected by a decrease in sales or
a failure to meet the Company's sales expectations. Defective front-line
published products may result in higher customer support costs and product
returns. Further, the consumer software business is seasonal. Net sales are
typically significantly higher during the fourth calendar quarter, due primarily
to the increased demand for consumer software during the year-end holiday buying
season. Net sales in other quarters are generally lower and vary significantly.
Accordingly, the Company believes that period to period comparisons of operating
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. There can be no assurance that the Company
will achieve consistent profitability on a quarterly or annual basis. Due to all
of the foregoing factors, the Company's operating results in any quarter may be
below the expectations of public market analysts and investors. In such event,
the market price of the Company's Common Stock would likely be materially and
adversely affected. See "--Possible Volatility of Stock Price".
DEPENDENCE ON NEW PRODUCT AND PRODUCT ENHANCEMENT INTRODUCTIONS; PRODUCT DELAYS
The Company's continued success in the publishing business depends on the
timely introduction of successful new products or enhancements of existing
products to replace declining revenues from older products. Consumer preferences
for software products are difficult to predict, and few consumer software
products achieve sustained market acceptance. If revenues from new products or
enhancements were to fail to replace declining revenues from existing products,
the Company's business, operating results and financial condition could be
adversely affected. The process of developing software products such as those
offered by the Company is extremely complex and is expected to become more
complex and expensive in the future as new platforms and technologies are
addressed. A significant delay in the introduction of one or more new products
or enhancements could have a material adverse effect on the ultimate success of
such products and on the Company's business, operating results and financial
condition, particularly in view of the seasonality of the Company's business.
The Company's contracts with hardware licensors, which are also some of the
Company's chief competitors, often grant significant control to the licensor
over the manufacturing of the Company's products. This fact could, in certain
circumstances, leave the Company unable to get its products manufactured and
shipped to customers. In most events, control of the manufacturing process by
hardware companies increases both the manufacturing lead times and the expense
to the Company over the lead times and costs that the Company can achieve
independently. In fiscal 1996, for example, the Company experienced delays in
the manufacturing of PlayStation products which caused delays in shipping those
products. The results of future periods may be affected by similar delays.
Finally, the Company's contracts with its hardware licensers often require the
Company to take significant risks in holding or prepaying for its inventory of
products. See "-- Reliance on Third-Party Software Developers; Reliance on Other
Publishers," "-- Fluctuations in Quarterly Operating Results; Seasonality," and
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<PAGE> 14
"Business -- GTIS Publishing."
RELIANCE ON THIRD-PARTY SOFTWARE DEVELOPERS; RELIANCE ON OTHER PUBLISHERS
Although the Company substantially increased, primarily through
acquisitions, its internal software development capabilities in 1996, a
significant portion of the Company's published products have been licensed from,
or developed by, the Company in collaboration with independent software
developers. Due primarily to the increased demand for consumer software
programs, the payment of advances and guaranteed royalties to independent
developers has increased and may continue to increase. As of December 31, 1996,
the Company had recorded approximately $69.2 million of royalty advances on its
balance sheet. There can be no assurance that the release of products associated
with such advances will not be delayed, which would delay the Company's ability
to receive revenue to offset such advances or royalties, or that the sales of
such products will be sufficient to cover the amount of such advances or royalty
prepayments. The Company's success depends in part on its continued ability to
obtain and renew product development agreements with independent software
developers. As independent developers are in high demand, there can be no
assurance that independent developers, including those which have developed
products for the Company in the past, will be available to develop products for
the Company in the future. For instance, the Company does not currently have any
contractual agreement with id Software pursuant to which the Company has control
over, or has been promised rights to, future products to be developed by id
Software; such rights are negotiated on a title-by-title basis. Many independent
developers have limited financial resources, which could expose the Company to
the risk that such developers may go out of business prior to completing a
project. In addition, because the Company's published products are often
developed with outside developers, the Company cannot always control the timing
of the introduction of its products. While the Company maintains production
liaisons with independent developers, there can be no assurance that new
products developed by third-party developers whose products are published by the
Company will be introduced on schedule or at all or within acceptable quality
guidelines or that they will achieve market acceptance. The Company's success is
also dependent in part on its ability to obtain content for its products from
external sources. There can be no assurance that the Company will be able to
obtain or renew product development agreements, or to obtain such content, on
favorable terms, or at all. Such agreements are terminable, in some cases
without notice, upon the occurrence of one or more of the following events:
those involving the bankruptcy or insolvency of either party to such agreements,
the cessation of operations by either of such parties or the material breach of
specified provisions of such agreements which breach is not cured within a
designated time frame. See "Business -- GTIS Publishing."
The Company also distributes products on behalf of other publishers. There
can be no assurance that the Company will obtain or renew any rights to
distribute such products. Failure to retain or obtain such rights could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- The GTIS Merchandising and Distribution
Approach" and "-- GTIS Publishing."
CHANGING PRODUCT PLATFORMS
The consumer software market is characterized by rapidly changing
technology, particularly with respect to product platforms. The Company must
continually anticipate the emergence of, and adapt its products to, popular
platforms for consumer software. When the Company chooses to publish or develop
a product for a new platform, it may be required to make a substantial
development investment one to two years in advance of shipments of products on
that platform. If the Company invests in the development of a product for a
platform that does not achieve significant market penetration, the Company's
planned revenues from that product will be adversely affected and it may not
recover its development investment. If the Company does not choose to publish or
co-develop for a platform that achieves significant market success, the
Company's revenue growth may also be adversely affected. See "Business --
Industry Background" and "-- GTIS Publishing."
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INTERNATIONAL SALES
The Company began to broaden its international sales efforts in late 1994
by establishing relationships with software publishers and distributors in
leading international markets. The Company expects that international sales will
account for a significant portion of its net sales in the future. International
sales are subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other barriers, fluctuating exchange rates, potential
political instability, difficulties installing and managing foreign operations
and difficulty in collection of accounts receivable. In addition, acceptance of
the Company's products in certain markets has required, and may in the future
require extensive, time-consuming and costly modifications to localize the
products for use in particular markets. Software piracy presents a particularly
acute problem in certain international markets such as South America, the Middle
East, the Pacific Rim and the Far East, and the laws of foreign jurisdictions
may not protect the Company's proprietary rights to the same extent as the laws
of the United States. There can be no assurance that these or other factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, operating results and financial
condition. See "Business -- GTIS Publishing" and "-- International."
COMPETITION
The market for consumer software products is highly competitive. Only a
small percentage of products introduced in the consumer software market achieve
any degree of sustained market acceptance. Competition is based primarily upon
price, access to retail shelf space, product enhancements, ability to operate on
popular platforms, availability of titles, new product introductions, marketing
support and distribution systems. Many of the companies with which the Company
currently competes or may compete in the future have comparable or greater
financial, technical, marketing, sales and customer support resources, larger
and more seasoned internal development teams, greater name recognition and a
larger customer base, than the Company. In addition, the Company believes that
large software companies, media companies and film studios are increasing their
focus on the interactive entertainment and edutainment software markets and, as
a result of their financial and other resources, name recognition and customer
base, may become significant competitors of the Company. Moreover, in a number
of geographic markets, certain of the titles offered by the Company, including
various hit titles, are offered on a limited number of platforms and compete
with the same titles offered by the Company's competitors on other platforms.
Current and future competitors with greater financial resources than the Company
may be able to carry larger inventories, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make higher offers or
guarantees to software developers and licensors than the Company. The market is
also extremely competitive with respect to access to third party developers and
content providers. This competition is based primarily on breadth of
distribution, development funding, reputation and royalty rates. To the extent
that competitors maintain or achieve greater title portfolio breadth, title
rights for popular platforms, or access to third party developers and content
providers, or price, shelf access, marketing support, distribution or other
selling advantages, the Company could be materially and adversely affected. In
addition, several competitors of the Company have recently sought to expand
their distribution capabilities. New hardware platforms and electronic delivery
systems may be introduced into the software market and potential new competitors
may enter the software development and distribution market, resulting in greater
competition for the Company. There can be no assurance that the Company will
have the resources required to respond effectively to market or technological
changes or to compete successfully with current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition. In addition, as
part of its value-added distribution program, the Company seeks to provide its
mass merchant customers with a wide variety of popular titles. Achieving such a
product mix requires the Company to supplement the distribution of its published
products with certain third party software products, including products
published by the Company's competitors. There can be no assurance that such
competitors will continue to provide such products to the Company for
distribution at
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<PAGE> 16
the Company's mass merchant customers. The failure to obtain software titles
developed or published by one or more of the Company's competitors, and not
being able to obtain these products from other distributors could have a
material adverse effect on the Company's relationships with such mass merchant
customers, which in turn would have a material adverse effect on the Company's
business, operating results and financial condition. In late March 1997, the
Company and Wal-Mart reached an understanding whereby Wal-Mart expects to begin
testing direct purchasing of software from three publishers during the second
half of 1997. See "-- Customer Concentration and Credit Risk".
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company depends to a significant extent upon
the continued performance and contribution of its senior management and on its
ability to continue to attract, motivate and retain highly qualified employees.
In particular, the Company is highly dependent on the management services of
Joseph J. Cayre, the Chairman of the Board of Directors, Ronald Chaimowitz, the
President and Chief Executive Officer of the Company and Charles F. Bond,
President of the Company's Slash Division. The loss of the services of any of
the Company's senior management could have a material adverse effect on the
Company's business, operating results and financial condition. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Specifically, the Company may experience increased costs in order to
attract and retain skilled employees. In addition, while the Company has entered
into employment agreements with Messrs. Chaimowitz and Bond, there can be no
assurance that such employees will not leave or compete with the Company. The
Company's failure to attract additional qualified employees or to retain the
services of key personnel could materially and adversely affect the Company's
business, operating results and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for the Common Stock have been, and may in the future be,
volatile. Market prices for the Company's Common Stock will be influenced by a
number of factors, including quarterly variations in the financial results of
the Company and its competitors, acquisitions, changes in earnings estimates by
analysts and conditions in the computer software industry, the overall economy
and the financial markets. These and other factors may adversely affect the
market price of the Common Stock. See "Market for Registrant's Common Equity and
Related Stockholder Matters".
PRODUCT RETURNS
The Company accepts product returns or provides markdowns or other credits
on varying terms in the event that the customer holds excess inventory of the
Company's products. Software products as complex as those published by the
Company may contain undetected errors when first introduced or when new versions
are released. It is the Company's practice to accept returns of defective or
damaged products at any time. At the time of product shipment, the Company
establishes a return reserve which covers expected future returns and, if
necessary, price protection, the Company's policies for stock balancing and
returns of defective or damaged products. This estimate of the potential for
future returns of products is based on historical return rates, seasonality of
sales, retailer inventories of the Company's products and other factors. The
Company has historically experienced, and reserved for, product returns at a
rate of approximately 30% of gross sales. Product returns that exceed the
Company's reserves, or loss of or delay in market acceptance of a new product as
a result of software failures or otherwise, could materially and adversely
affect the Company's business, operating results and financial condition.
Although the Company maintains reserves which it believes to be adequate with
respect to product returns and price reductions, there can be no assurance that
actual returns to the Company will not exceed the reserves established.
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<PAGE> 17
RAPID EXPANSION
The Company has experienced significant and rapid sales growth since it
commenced operations. There can be no assurance that the Company will be able to
maintain its present level of sales or continue to experience sales growth.
There can be no assurance that, if the Company continues to experience sales
growth, it can do so without adversely affecting its profitability.
The Company's ability to manage its growth effectively will require it to
continue to attract, train, motivate, manage and retain key employees and to
improve its operational, financial and management information systems. If the
Company's management becomes unable to manage growth effectively, the Company's
business, operating results and financial condition could be adversely affected.
See "Business- Business Strategy" and "Properties".
RISK OF CUSTOMER BUSINESS FAILURE
Sales are typically made on credit, with terms that vary depending upon the
customer and the nature of the product. The Company does not hold collateral to
secure payment. Retailers and distributors compete in a volatile industry and
are subject to the risk of business failure. For example, the Company currently
has an uninsured receivable in the amount of approximately $1.6 million from
Neostar, a retailer currently engaged in Chapter 11 bankruptcy proceedings. A
motion to convert the proceedings to Chapter 7 liquidation proceedings has been
made, but no decision in respect thereto has been made as of March 28, 1997. The
Company believes its existing reserves are adequate to cover its exposure with
respect to such receivable. Although the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, there can be no
assurance that such reserve is adequate or that additional payment defaults on
significant sales would not materially and adversely affect its business,
operating results and financial condition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company sells a significant portion of its published software under
licenses from independent developers and, in such cases, does not acquire the
copyrights for the underlying work. The Company relies primarily on a
combination of patent, trademark, copyright, trade secret and other proprietary
rights laws, license agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights and the rights of
its co-developers. Unauthorized copying occurs within the software industry, and
if a significant amount of unauthorized copying of the Company's published
products or products distributed by it were to occur, the Company's business,
operating results and financial condition could be materially and adversely
affected. Also, as the number of software products in the industry increases and
the functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. There can be
no assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. There has been
substantial litigation in the industry regarding copyright, trademark and other
intellectual property rights. Any such claims or litigation, with or without
merit, could be costly and cause a diversion of management's attention, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Intellectual Property and
Proprietary Rights" for the description of the Company's litigation against
Micro Star Software.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and development
facilities are located in approximately 18,000 square feet of space at 16 East
40th Street and approximately 13,000 square feet of space at 10 East 40th Street
in New York City. The leases on the facility located at 16 East 40th Street
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<PAGE> 18
will expire in December 2002, and the lease on the facility located at 10 East
40th Street will expire in June 1997. Due to the Company's significant and rapid
expansion, the Company has leased approximately 60,000 square feet of new office
space, which is currently being renovated, at 417 Fifth Avenue in New York City
under a lease expiring in 2007. The Company expects to move the operations
currently located at 16 East 40th Street and 10 East 40th Street to the new
office space in late 1997. Rent payments under this lease do not begin until
December 1997. The Company intends to either sublet or assign the leases for its
space at 16 East 40th Street, although there is no assurance that it will be
able to do so.
The Company also maintains a facility in London, England of approximately
6,000 square feet, from which it conducts its European operations, under a lease
that expires in the year 2020. The buildings which house the 16 East 40th Street
facility in New York City and the London facility are owned by 16 East 40th
Associates and Marylebone 248 Realty LLC, respectively, affiliates of Joseph J.
Cayre. The Company believes that the terms of the leases are no less favorable
to the Company than those it could obtain from independent third parties.
The Company maintains a 192,900 square-foot distribution center in Edison,
New Jersey under a lease that expires in July 1999. In Redwood, California, the
Company maintains 4,000 square-feet of office space under a lease that expires
in November 1998.
The Slash and WizardWorks businesses have been consolidated and are
occupying approximately 240,000 square feet of office, warehouse and
distribution space in the Minneapolis, Minnesota area under a lease that expires
in September 1999. The Company is actively trying to sublet its prior offices
and warehouse space (although there is no assurance that it will be able to do
so) which consists of 2,400 square feet of office space in Edina, Minnesota, a
34,400 square foot distribution center in Edina, Minnesota, a 79,900 square foot
distribution center in Edina, Minnesota, and 15,000 square feet of office space,
warehouse and distribution space in the Minneapolis area.
The Company also maintains offices in Scottsdale, Arizona and Woodinville,
Washington for each of its FormGen and Humongous subsidiaries, respectively. In
Scottsdale, the Company maintains 25,000 square-feet of office space under a
lease that expires in December 1998. In Woodinville, the Company maintains
25,000 square-feet of office and warehouse space under a lease that expires in
December 1997.
In addition, in connection with the Company's recent acquisition of the
business of Warner Interactive Europe, the Company has assumed the leases for
offices in Hamburg, Germany and Paris, France. Such leases will expire in March
1998 and December 2003, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings material to its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no items submitted to a vote of security holders during the
quarter ended December 31, 1996.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their respective ages as of March
28, 1997 and their positions held with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald Chaimowitz 49 President, Chief Executive Officer and Director
Jack J. Cayre 24 Executive Vice President and Director
Harry M. Rubin 44 Executive Vice President and General Manager -
International Division and Business Affairs
Andrew Gregor 48 Chief Financial Officer and Senior Vice
President, Finance and Administration
Chris Garske 41 Senior Vice President of Publishing
Richard Burns 42 Senior Vice President of Sales
Charles F. Bond 40 President, Slash Division
Frank Herman 63 Chairman and Managing Director, G.T. Interactive
Software (Europe) Limited
</TABLE>
Ronald Chaimowitz, a co-founder of the Company, has been President and
Chief Executive Officer of the Company since February 1995. From January 1994 to
January 1995, Mr. Chaimowitz served as Executive Vice President and General
Manager of the Company. From December 1990 to December 1992, Mr. Chaimowitz was
the President of Entertainment Consultants, a management consultant firm to the
entertainment industry. Prior thereto, Mr. Chaimowitz served as Executive Vice
President of GoodTimes Home Video Corp., a publisher and distributor of
pre-recorded video tapes.
Jack J. Cayre has been Executive Vice President and a Director of the
Company since its incorporation. From January 1993 to January 1995, Mr. Cayre
was Vice President of Licensing and Product Acquisition. From January 1990 to
August 1992, Mr. Cayre was the President of Double J Records, a privately-held
record company.
Harry M. Rubin has been Executive Vice President and General Manager --
International Division and Business Affairs of the Company since March 1995.
From June 1994 to August 1995, Mr. Rubin served as Chief Financial Officer of
the Company. From November 1993 to June 1994, Mr. Rubin was an independent
management consultant to several entertainment companies. From 1988 to November
1993, Mr. Rubin was the Vice President and General Manager of Home Video
Operations for the National Broadcasting Company, Inc.
Andrew Gregor has been Chief Financial Officer of the Company since August
1995. Prior to being appointed as Senior Vice President, Finance and
Administration, in April 1996, Mr. Gregor had been Vice President of Finance of
the Company since August 1995. From February 1992 to August 1995, Mr. Gregor
served as Vice President and Chief Financial Officer of Lillian Vernon Corp., a
consumer direct merchant. For more than five years prior thereto, Mr. Gregor was
Senior Vice President and Chief Financial Officer of McCrory Corp., a national
retailer.
Chris Garske has been Senior Vice President of Publishing since September
1995. From December 1991 to August 1995, Mr. Garske was employed by Sega of
America, a manufacturer of video game consoles and related products, where he
served in various capacities, including the group Vice President of Marketing.
From April 1991 to December 1991, Mr. Garske served as Brand Manager of Sierra
On-line, a consumer software publisher. Prior thereto, Mr. Garske served as
Director of Marketing for Activision, a consumer software publisher.
17
<PAGE> 20
Richard Burns has been Senior Vice President of Sales since December 1995.
From March to November 1995, Mr. Burns was Vice President and General Manager of
Mattel Media, Inc., a consumer software publisher. From October 1994 to March
1995, Mr. Burns was Vice President of Worldwide Sales of Rocket Science Games,
Inc., a startup consumer software company. From July 1991 to October 1994, Mr.
Burns served as Senior Vice President of Sales for Sega of America, Inc. Prior
thereto, Mr. Burns was Senior Zone Vice President of Sony Corporation of
America.
Charles F. Bond has been President of the Slash Division of the Company
since June 1995, when Slash Corporation was acquired by the Company. From May
1991 to June 1995, Mr. Bond was the President of Slash Corporation. Prior
thereto, Mr. Bond was Vice President -- Merchandising for Lieberman Enterprise,
a rack-jobber.
Frank Herman has been Chairman and Managing Director of G.T. Interactive
Software (Europe) Limited since May 1995. From April to October 1995, Mr. Herman
was also Chairman of Probe Software Ltd., a software development house. From
July 1991 to April 1995, Mr. Herman was Deputy Chairman and Managing Director of
Sega (Europe) Ltd. From August 1988 to July 1991, Mr. Herman served as Managing
Director of Virgin Mastertronic Ltd., an entertainment software publisher.
Each executive officer is elected annually by the Board of Directors of the
Company and serves at the pleasure of the Board.
18
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market. The
high and low sale prices for the Common Stock as reported by the Nasdaq National
Market for the periods since the Company's initial public offering in December
1995 are summarized below. These over-the-counter market quotations reflect
interdealer prices, without retail mark-ups, mark-downs, or commissions and may
not necessarily represent the actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1995
Fourth Quarter ( from December 14, 1995 ) $ 16 1/2 $ 12 1/4
1996
First Quarter $ 15 $ 8 7/8
Second Quarter $ 25 $ 10 5/8
Third Quarter $ 26 3/4 $ 16 3/4
Fourth Quarter $ 26 3/4 $ 6 5/8
</TABLE>
On February 28, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $7 7/8. As of February 28, 1997, there were
approximately 129 registered holders of record of the Common Stock.
The Company currently anticipates that it will retain all of its future
earnings for use in the expansion and operation of its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the payment of cash dividends may be limited by financing
agreements entered into by the Company in the future. Prior to March 1995, the
Company had elected to be treated as an S corporation for tax purposes. During
the two months ended February 28, 1995, the Company paid distributions of $6.0
million to its stockholders out of funds generated from operations. The Company
has not paid cash dividends on its Common Stock or other securities since its
conversion to a C corporation for Federal and New York state tax purposes on
March 1, 1995.
There were no issuances of unregistered securities by the Company during
the year ended December 31, 1996, except the issuance: (i) in May 1996, to Big
Tuna New Media, LLC, of warrants to purchase 250,000 shares of Common Stock at
an exercise price of $20.00 per share, in connection with a licensing
arrangement; (ii) in May 1996, to Apogee Software, Ltd., of warrants to purchase
250,000 shares of Common Stock at an exercise price of $19.125 per share, in
connection with a licensing arrangement; (iii) in June 1996, to the former
stockholders of WizardWorks of 2,350,000 shares of Common Stock, in connection
with the acquisition of WizardWorks; (iv) in June 1996, to the former
stockholders of Candel Inc. ("Candel"), of 1,032,777 shares of Common Stock, in
connection with the acquisition of Candel; (v) in July 1996, to the former
stockholders of Humongous of 3,458,375 shares of Common Stock, in connection
with the acquisition of Humongous; (vi) in August 1996, to Epic Megagames, Inc.,
of warrants to purchase 37,500 shares of Common Stock at an exercise price of
$20.00 per share, in connection with a licensing arrangement; and (vii) in
October 1996, to Midway Home Entertainment Inc., the assignee of the warrants
originally issued to WMS Industries Inc., an aggregate of 24,754 shares of
Common Stock, upon the exercise of such warrants. All of such issuances were
made in reliance upon Section 4(2) of the Securities Act of 1933, as amended.
19
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial information
of the Company which, for each of the three years in the period ended December
31, 1996, is derived from the restated audited consolidated financial statements
of the Company. Pro forma information is unaudited and reflects the acquisition
of Slash as if the acquisition had occurred as of January 1, 1995 and the income
tax provision that would have been provided had both the Company and Slash been
C corporations for the relevant periods. These tables should be read in
conjunction with the Company's Consolidated Financial Statements, including the
notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
PRO FORMA
1994 1995 1995(1) 1996
------------- --------------- ---------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 101,826 $ 234,461 $ 253,851 $ 365,490
Cost of goods sold 54,449 138,662 152,381 214,580
Selling and distribution expenses 16,104 41,740 43,661 74,396
General and administrative expenses 10,539 21,201 22,986 34,911
Merger and other costs -- -- -- 3,718
Amortization of goodwill -- 567 1,092 1,092
------------- --------------- ---------------- ----------------
Operating income 20,734 32,291 33,731 36,793
Interest and other income, net 41 795 840 3,974
------------- --------------- ---------------- ----------------
Income before income taxes 20,775 33,086 34,571 40,767
Provision for (benefit) from income
taxes:
Federal and state (historical) 2,427 14,002 14,002 15,628
Benefit from change in tax status(2) -- (3,520) (3,520) --
Pro forma adjustment to Federal and
state taxes (unaudited)(3) -- -- 5,461 --
------------- --------------- ---------------- ----------------
Total provision for income taxes 2,427 10,482 15,943 15,628
------------- --------------- ---------------- ----------------
Net income $ 18,348 $ 22,604 $ 18,628 $ 25,139
============= =============== ================ ================
Net income per share $ 0.38
Weighted average shares outstanding 66,391
Pro forma net income per share (unaudited) $ 0.30
Pro forma number of weighted average
shares outstanding (unaudited)(4) 61,082
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1996
---------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 93,694 $ 76,584
Working capital 105,748 113,652
Total assets 301,641 367,111
Stockholders' equity 126,040 152,138
</TABLE>
(1) Reflects the Company's acquisition of Slash as if the same had been
consummated on January 1, 1995 and the income tax provision that would have
been provided had both the Company and Slash been C corporations for the
relevant periods. (See Note 2 and Note 9 of the Notes to the Company's
Consolidated Financial Statements).
(2) The benefit from change in tax status occurred as a result of the
transition from an S corporation to a C corporation on March 1, 1995, which
allowed the Company to accrue certain tax benefits which would otherwise
have flowed to the stockholders of the S corporation. This benefit would
not have arisen for the year ended December 31, 1995 had the Company been a
C corporation beginning January 1, 1994.
(3) Reflects additional income tax provision that would have been provided had
both the Company and Slash been C corporations for the relevant periods.
(See Note 2 and Note 9 of the Notes to the Company's Consolidated Financial
Statements).
(4) Pro forma weighted average number of shares outstanding has been calculated
as if all stock issued in the twelve month period prior to the initial
public offering (including common stock equivalents such as options and
warrants) had been outstanding throughout the periods presented and
assuming the proceeds from such issuances (including the assumed exercise
prices of options and warrants) had been used to reacquire shares at the
initial public offering price at the beginning of the period.
20
<PAGE> 23
PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated statements of operations are
based on the historical consolidated statements of operations of the Company for
the year ended December 31, 1995 and the historical statements of operations of
Slash for the period ended June 22, 1995. The pro forma consolidated statements
of operations reflect the acquisition of Slash as if the same had been
consummated on January 1, 1995 and the income tax provision that would have been
provided had both the Company and Slash been C corporations for the relevant
periods.
The unaudited pro forma consolidated statements of operations are presented
for informational purposes only and are not necessarily indicative of what the
results of operations would have been had the events referred to above been
consummated as of January 1, 1995, nor are they necessarily indicative of the
Company's future results of operations.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
COMPANY SLASH (1) ADJUSTMENTS PRO FORMA
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 234,461 $ 21,525 $ (2,135)(2) $ 253,851
Cost of goods sold 138,662 15,700 (1,981)(2) 152,381
Selling and distribution expenses 41,740 1,921 -- 43,661
General and administrative expenses 21,201 1,785 -- 22,986
Amortization of goodwill 567 -- 525 (3) 1,092
--------- --------- --------- ---------
Operating income 32,291 2,119 (679) 33,731
Interest and other income, net 795 45 -- 840
--------- --------- --------- ---------
Income before income taxes 33,086 2,164 (679) 34,571
Provision for (benefit) from income taxes:
Federal and state (historical) 14,002 -- -- 14,002
Benefit from change in tax status (3,520) -- -- (3,520)
Pro forma adjustment to Federal and state
taxes (unaudited)(4) -- -- 5,461 (4) 5,461
--------- --------- --------- ---------
Total provision for income taxes 10,482 -- 5,461 15,943
--------- --------- --------- ---------
Net income $ 22,604 $ 2,164 $ (6,140) $ 18,628
========= ========= ========= =========
Pro forma net income per share (unaudited)(5) $ 0.30
Pro forma number of weighted average shares
outstanding (unaudited)(5) 61,082
</TABLE>
(1) Reflects the results of operations of Slash for the period to June 22,
1995. The results of Slash subsequent to June 22, 1995 are included in the
Company's results of operations.
(2) Reflects the elimination of intercompany sales between the Company and
Slash.
(3) Reflects amortization of goodwill, which has an estimated useful life of 20
years, arising from the acquisition of Slash to the extent not already
reflected in the Company's historical statements of operations.
(4) Reflects the additional income tax provision that would have been provided
had both the Company and Slash been C corporations for the relevant periods
(See Note 2 and Note 9 of the Notes to the Company's Consolidated Financial
Statements) resulting in an effective rate of 46.1% for the year ended
December 31, 1995 due to some of the acquired companies not being able to
utilize net operating losses.
(5) Pro forma weighted average number of shares outstanding has been calculated
as if all stock issued in the twelve month period prior to the initial
public offering (including common stock equivalents such as options and
warrants) had been outstanding throughout the periods presented and
assuming the proceeds from such issuances (including the assumed exercise
prices of options and warrants) had been used to reacquire shares at the
initial public offering price at the beginning of the period.
21
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company creates, publishes, merchandises and distributes interactive
entertainment, edutainment and value-priced consumer software for a variety of
platforms on a world-wide basis. Since it commenced operations in February 1993,
the Company has experienced rapid revenue growth and its product and customer
mix have changed substantially.
An important element of the Company's financial performance is its product
mix, which has varied over time as the Company has built its business. The
Company's product mix has been composed of two broad product categories:
published software and third-party software. Because each of these product
categories has different associated costs, the Company's margins have depended
and will depend, in part, on the percentage of net sales attributable to each
category. In addition, the Company's margins may vary significantly from quarter
to quarter depending on the timing of its new published product releases. To the
extent that mass merchants require greater proportions of third party software
products, some of which may yield lower margins, the Company's operating results
may be impacted accordingly.
Through February 28, 1995, the Company was an S corporation for Federal and
New York state income tax purposes. The income tax provision for the year ended
December 31, 1995 includes a deferred tax benefit of approximately $3.5 million
due to the Company's change in tax status.
On June 23, 1995, the Company acquired all of the outstanding stock of
Slash, a leading publisher, purchaser, repackager and distributor of
value-priced software in exchange for 2,793,600 (after giving effect to the
Company's initial public offering) newly issued shares of the Company's Common
Stock and a nominal amount of cash. Historically, Slash purchased excess
inventory from major publishers and sublicensed catalog titles. It sold these
products at lower price points or repackaged these and other products into
compilation boxes, such as five-packs and ten-packs, for volume sales primarily
to mass merchants. Slash's sales of purchased excess inventory have
traditionally occurred at lower margins than its sales of sublicensed catalog
products. The Company's value-priced software business primarily consists of
sublicensed catalog titles which are sold largely to mass merchant customers.
Slash's financial results have been included in the Company's Consolidated
Financial Statements on a purchase basis for the period since the acquisition.
On June 24, 1996, the Company acquired all of the outstanding stock of
WizardWorks, a leading developer and publisher of value-priced interactive
entertainment, edutainment and productivity software, in exchange for 2,350,000
newly issued shares of the Company's Common Stock. WizardWorks develops,
publishes and distributes consumer software for Windows, DOS and Macintosh
formats.
On June 28, 1996, the Company acquired all of the outstanding stock of
Candel Inc., the parent company of FormGen, a leading publisher of interactive
PC shareware and software in exchange for 1,032,777 newly issued shares of the
Company's Common Stock.
On July 9, 1996, the Company acquired all of the outstanding common stock
of Humongous, a premier developer and publisher of quality children's software,
in exchange for 3,458,375 newly issued shares of the Company's Common Stock.
WizardWorks, FormGen and Humongous (collectively the "Acquired Companies"),
have each been accounted for as a pooling of interests. Accordingly, the
Company's historical Financial Statements have been restated to include the
results of the Acquired Companies.
In November 1996, the Company acquired the business of Warner Interactive
Europe for
22
<PAGE> 25
approximately $6.3 million in cash, including acquisition costs. Warner's
financial results have been included in the Company's Consolidated Financial
Statements on a purchase basis for the period since the acquisition.
Sales are recorded net of expected future returns which historically have
been experienced and reserved for at approximately 30% of gross sales.
The consumer software industry is seasonal. Net sales are typically highest
during the fourth calendar quarter. This seasonality is primarily a result of
the increased demand for consumer software during the year-end holiday buying
season.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold 53.5 59.1 58.7
Selling and distribution expenses 15.8 17.8 20.3
General and administrative expenses 10.3 9.1 9.6
Merger and other costs -- -- 1.0
Amortization of goodwill -- 0.2 0.3
---- --- ---
Operating income 20.4 13.8 10.1
Interest and other income, net -- 0.3 1.1
---- --- ---
Income before income taxes 20.4 14.1 11.2
Provision for income taxes 2.4 4.5 4.3
---- --- ---
Net income 18.0 % 9.6 % 6.9 %
==== === ===
</TABLE>
1996 COMPARED TO 1995
Net sales for the year ended December 31, 1996 ("1996") increased
approximately $131.0 million or 56% as compared to the year ended December 31,
1995 ("1995"). In the third quarter of 1995, Microsoft(R) Windows(R) 95 was
introduced and distributed to certain retailers by the Company. This one time
event added net sales of approximately $15.2 million. Without these sales, net
sales would have increased 67%. This growth in net sales was primarily
attributable to the introduction of newly published titles such as Duke Nukem
3D, Quake, Area 51, Final Doom for the PlayStation, Heretic: Shadow of the
Serpent Rider, Bedlam, "9" and Just Me & My Dad, the continuing strong sales of
Doom and Doom-related products and increased royalty income. Additionally, the
expansion of the Company's value-priced line of software, an increase in the
shelf space available from its existing mass merchant customers, an increase in
the number of mass merchant stores supplied and serviced by the Company and an
increase in sales from its existing mass merchant shelf space contributed to the
growth in net sales. The purchase of Slash by the Company effective June 23,
1995 and the increase in the distribution of third party software also
contributed to the growth in net sales.
Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold for 1996 increased
approximately $75.9 million or 55% as compared to 1995. Cost of goods sold as a
percentage of net sales decreased to 58.7% in 1996 compared to 59.1% in
23
<PAGE> 26
1995. This decrease was primarily due to a change in product mix toward the
Company's higher margin published products, which increased to approximately
53.8% of net sales in 1996 as compared to approximately 50.7% in 1995.
Additionally, during the last half of 1995, the Company's sales of Microsoft(R)
Windows(R) 95 contributed to the increase in cost of goods sold as a percentage
of net sales for that year.
Selling and distribution expenses primarily include shipping expenses,
sales and distribution labor expenses, advertising and promotion expenses and
distribution facilities costs. These expenses increased approximately $32.7
million or 78% during 1996 compared to 1995. The increase was due in part to
additional advertising costs of approximately $9.6 million to support the growth
of the Company's published products and an increase in shipping costs of
approximately $4.8 million attributable to the overall increase in sales volume.
In addition, costs associated with the expansion of the Company's sales and
distribution staff and distribution center increased approximately $13.7 million
to support its growth. Selling and distribution expenses as a percentage of net
sales increased to 20.3% for 1996 compared to 17.8% for 1995.
General and administrative expenses primarily include personnel expenses,
facilities costs, professional expenses and other overhead charges. These
expenses for 1996 increased approximately $13.7 million or 65% as compared to
1995. The increase was due primarily to the expansion of the Company's
operations. General and administrative expenses as a percentage of net sales
increased to 9.6% from 9.1%.
Merger costs consist of legal, accounting and other professional fees
incurred by the Company to complete the acquisitions of the Acquired Companies
and for the Company's canceled second offering.
Amortization of goodwill increased by approximately $.5 million or 93%
during 1996 compared to 1995. This increase is attributable to the full year
impact of the June 1995 acquisition of Slash.
Operating income for 1996 increased from approximately $32.3 million to
approximately $36.8 million, while operating margins decreased from 13.8% to
10.1%. Excluding merger costs, operating income and operating margins would have
been approximately $40.5 million and 11.1% for 1996.
Interest and other income, net increased approximately $3.2 million for
1996 as compared to 1995. This is primarily attributable to greater short-term
investments and cash balances.
The Company's provision for income taxes for 1996 includes the reversal of
a valuation allowance relating to a net operating loss carry-forward of one of
the Acquired Companies. Additionally, had the Company been a C corporation for
the entire year ended December 31, 1995, the Company's provision for income
taxes would have been approximately $15.1 million and 6.4% of net sales for the
period.
Net income and net income as a percentage of net sales, on a tax adjusted
basis, for 1996 increased from $18.0 million and 7.7% to $25.1 million and 6.9%.
Excluding merger costs, net income and net income as a percentage of net sales
would have been $28.9 million and 7.9% for 1996.
1995 COMPARED TO 1994
Net sales for 1995 increased approximately $132.6 million or 130% as
compared to the year ended December 31, 1994 ("1994"). This growth in net sales
was primarily attributable to an increase in the number of mass merchant stores
supplied and serviced by the Company, an increase in the shelf space available
to the Company from its existing mass merchant customers, an increase in sales
from its existing mass merchant shelf space, the purchase of Slash by the
Company effective June 23, 1995, which
24
<PAGE> 27
accounted for approximately $30.4 million of net sales, and the Company's sales
of Microsoft(R) Windows(R) 95, which accounted for approximately $15.2 million
in net sales. In addition, the introduction of newly published front-line
titles, such as Hexen, Mortal Kombat 3 and Ultimate Doom, the continuing strong
sales of other Doom products and the expansion of its value-priced line of
software contributed to the growth in net sales.
Cost of goods sold for 1995 increased approximately $84.2 million or 155%
as compared to 1994. Costs of goods sold as a percentage of net sales for 1995
increased to 59.1% from 53.5% for 1994. The percentage increase in cost of goods
sold was primarily due to a change in product mix driven by increased demand
from mass merchants for third-party software products which yielded the Company
lower margins. Additionally, the Company's sales of Microsoft(R) Windows(R) 95
during the last half of 1995 and, less significantly, certain product lines of
Slash contributed to the increase in cost of goods sold. Excluding Microsoft(R)
Windows(R) 95 and the acquisition of Slash, cost of goods sold as a percentage
of net sales would have been approximately 53.8%. The percentage increase was
partially offset by increased sales of the Company's higher margin published
front-line and value-priced products.
Selling and distribution expenses increased approximately $25.6 million or
159% during 1995 as compared to 1994. The increase was due to the Company's
increased sales volume, additional advertising costs of approximately $11.7
million to support the Company's published products and costs associated with
the expansion of sales and distribution staff and distribution center of
approximately $1.2 million, to support the Company's growth. Selling and
distribution expenses as a percentage of net sales increased to 17.8% for 1995
as compared to 15.8% for 1994.
General and administrative expenses increased approximately $10.7 million
or 101% as compared to 1994. The increase was due primarily to costs of
approximately $6.6 million associated with additional personnel required to
support the expansion of the Company's operations, costs of approximately $1.0
million associated with new facilities (including depreciation) to accommodate
the increase in personnel, approximately $1.5 million in professional fees, and
other expenses related to the expansion of the Company's operations. General and
administrative expenses as a percentage of net sales for 1995 decreased to 9.1%
from 10.3% for 1994.
25
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Resources used to finance significant expenditures for the three years
ended December 31, 1996 are reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Resources used:
Royalty advances $ (5.4) $(23.6) $(33.3)
Inventories, net (9.7) (30.5) (10.5)
Purchase of investments -- -- (9.8)
Receivables, net (39.2) (36.0) (8.9)
Purchase of Warner Interactive Europe -- -- (6.3)
Purchase of property and equipment (1.3) (5.3) (5.7)
Repayment of notes -- (10.5) --
Distributions to shareholders (28.4) (6.0) --
Other, net -- (11.0) (0.6)
------ ------ ------
(84.0) (122.9) (75.1)
------ ------ ------
Financed by:
Net income 18.3 22.6 25.1
Payables and accrued liabilities 56.5 86.9 37.1
Issuance of stock and warrants and exercise of stock
options 5.2 93.0 0.7
Proceeds from issuance of note 6.0 -- --
Other, net 0.3 -- --
------ ------ ------
86.3 202.5 62.9
------ ------ ------
Cash and cash equivalents balance - increase (decrease) $ 2.3 $ 79.6 $(12.2)
====== ====== ======
</TABLE>
As of December 31, 1996, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments of approximately
$76.6 million. Cash and cash equivalents decreased for the twelve months ended
December 31, 1996 by approximately $12.2 million. The primary source of cash
during 1996 was net income of $25.1 million and an increase in payables and
accrued liabilities, which includes accounts payable, royalties payable, income
taxes payable and accrued liabilities, of $37.1 million. These internally
generated funds were used to fund royalty advances of $33.3 million, investments
of $9.8 million, purchase of Warner of $6.3 million and property and equipment
of $5.7 million. Financing of inventory and receivables were also a use of cash
of approximately $10.5 million and $8.9 million, respectively. Inventory and
receivables balances increased reflecting higher calendar fourth quarter sales
and their replenishment. Additionally, inventory increased to fund anticipated
sales growth. Royalty advances of $69.2 million as of December 31, 1996
represent advances to approximately 135 developers for various products expected
to be developed throughout the next several years. Such advances are amortized
to cost of goods sold on a per unit basis as licensed products are sold in
accordance with the individual agreements. Working capital at December 31, 1996
was $113.7 million compared to $105.7 at December 31, 1995.
On January 21, 1997, the Company entered into a revolving credit agreement
(the "Credit Agreement") with banks expiring on December 31, 1998. The Credit
Agreement provides for a maximum of $40 million for borrowings and letters of
credit. The borrowings under the Credit Agreement bear interest at either the
banks' reference rate (which is generally equivalent to the published prime
rate) or the LIBOR rate plus 1 1/4%. The Company pays a commitment fee of 1/4%
based on the unused portion of the line. The Credit Agreement requires
maintenance of certain financial ratios and net income levels.
As of December 31, 1996, the Company had an outstanding standby letter of
credit amounting to
26
<PAGE> 29
approximately $1.7 million.
The Company expects continued volatility in the use of cash due to varying
seasonable and quarterly working capital needs to finance its growing publishing
and distribution business.
The Company believes that existing cash, cash equivalents and short-term
investments, together with cash expected to be generated from operations and
cash available through the Agreement, will be sufficient to fund the Company's
anticipated operations for the next twelve months.
27
<PAGE> 30
ITEM 8. INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, and notes thereto, and the Financial
Statement Schedule of the Company, are presented on pages F-1 through F-21
hereof as set forth below:
<TABLE>
<CAPTION>
Page
<S> <C>
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996 F-5
Notes to the Consolidated Financial Statements F-6 to F-20
FINANCIAL STATEMENT SCHEDULE
For the Three Years Ended December 31, 1996
Schedule II -- Valuation and Qualifying Accounts F-21
</TABLE>
The Combined Financial Statements, and notes thereto, of
Wizardworks Group, set forth on pages F-20 through F-29 in the Prospectus
included in the Company's Registration Statement on Form S-1 (Registration
No. 333-14441) at effectiveness, are incorporated by reference herein. The
report of Ernst & Young LLP with respect to such financial statements is
included in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the Company's last two fiscal years, there have been no changes in
the independent accountants nor disagreements with such accountants as to
accounting and financial disclosures of the type required to be disclosed in
this Item 9.
28
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the directors of the Company required by this
Item 10 is incorporated herein by reference to the section entitled "Election of
Directors" in the Company's Proxy Statement. The information regarding executive
officers of the Company required by this Item 10 is included in Item 4A hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the section entitled "Executive Compensation" in the Company's
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the section entitled "Certain Relationships and Related
Transactions" in the Company's Proxy Statement.
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FROM 8-K
(A) (1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Item 8 hereof.
Report of Ernst & Young LLP:
Report of Independent Auditors
Board of Directors and Shareholders
WizardWorks Group
Armstrong-Olson, Inc.
Promotional Software Group, Inc.
SVI,LLC
We have audited the combined balance sheets of WizardWare Group, Inc. (d.b.a.
WizardWorks), Armstrong-Olson, Inc., Promotional Software Group, Inc. and SVI,
LLC (hereafter referred to as WizardWorks Group or the Company) as of March 31,
1996 and 1995, and the related combined statements of income and retained
earnings and cash flows for each of the three years in the period ended March
31, 1996 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of WizardWorks Group at
March 31, 1996 and 1995, and the combined results of their operations and their
cash flows for each of the three years in the period ended March 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
May 10, 1996
(A) (3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 (1) Agreement and Plan of Reorganization by and among the Registrant, GT Acquisition
Sub, Inc., WizardWorks Group, Inc. and the Stockholders of WizardWorks Group, Inc.,
dated June 24, 1996.
2.2 (1) Escrow Agreement by and among the Registrant, Paul D. Rinde, as the Stockholder
Representative of WizardWorks Group, Inc., and Republic National Bank of New York,
as Escrow Agent, dated June 24, 1996.
3.1 (2) Amended and Restated Certificate of Incorporation.
3.2 (3) Amended and Restated By-laws (as amended on October 31, 1996).
4.1 (4) Specimen form of stock certificate for Common Stock.
10.1 (3) The 1995 Stock Incentive Plan (as amended on October 31, 1996).
10.2 (4) Services Agreement between the Registrant and GoodTimes Home Video Corp., dated as
of January 1, 1995.
10.3 (4) 4.5% Subordinated Secured Promissory Note, due February 28, 1996.
10.4 (4) Employment Agreement between the Registrant and Ronald Chaimowitz.
10.5 (4) Employment Agreement between the Registrant and Charles F. Bond.
10.6 (4) Non-Competition Agreement between the Registrant and Charles F. Bond.
10.7 (4) Employment Agreement between the Registrant and Harry M. Rubin.
10.8 (4) Employment Agreement between the Registrant and Harry Steck.
10.9 (4) Employment Agreement between the Registrant and Chris Garske.
10.10 (4) GTIS Master Option and License Agreement between the Registrant and the Williams
Entertainment Group, dated December 28, 1994, and the Amendment to such agreement,
dated March 31, 1995.
10.11 (4) GTIS Master Option and License Agreement (Home Video Games) between the Registrant
and the Williams Entertainment Group, dated March 31, 1995.
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.12 (4) Agreement between the Registrant and SOFTBANK Corporation, dated October 9, 1995.
10.13 (4) Agreement between the Registrant and Roadshow PTY LTD, dated October 3, 1995.
10.14 (4) Agreement and Plan of Reorganization by and between Charles F. Bond, Slash
Corporation and the Registrant, dated June 22, 1995.
10.15 (4) Lease Agreements between the Registrant and 16 East 40th Associates.
10.16 (4) Sub-lease Agreement between the Registrant and Michael Stevens Ltd., dated
February 22, 1995.
10.17 (4) Lease Agreement between GT Interactive Software (Europe) Limited and Marylebone 248
Realty LLC, dated May 2, 1995.
10.18 (4) Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre,
Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the Registrant.
10.19 (4) Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley
Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the
Registrant.
10.20 (4) Agreement by and between the Registrant and REPS.
10.21 (5) Second Amendment to GTIS Master Option and License Agreement between the Registrant
and Williams Entertainment Group, dated March 27, 1996.
10.22 (5) Amendment to GTIS Master Option and License Agreement (Home Video Games) between the
Registrant and Williams Entertainment Group, dated March 27, 1996.
10.23 (5) Master Option and License Agreement for Atari PC Games between the Registrant and
WMS Industries Inc., dated March 27, 1996.
10.24 (5) Master Option and License Agreement for Atari Home Video Games between the
Registrant and WMS Industries Inc., dated March 27, 1996.
10.25 (5) Employment Agreement between the Registrant and Andrew Gregor.
10.26 (3) 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor.
10.27 (3) 6.15% Promissory Note, due August 31, 1998, of Chris Garske.
10.28 (6) Lease Agreement between the Registrant and Plymouth 2200, LLP, dated September 6,
1996.
10.29 Agreement of Lease, dated as of December 12, 1996, by and between the Registrant and
F.S. Realty Corp.
10.30 Amendment to Stockholders Agreement, dated as of December 18, 1995, by and among
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the trusts parties
thereto and the Registrant.
10.31 Credit Agreement, dated as of January 21, 1997, by and
among the Registrant, the banks parties thereto and
Republic National Bank of New York, as Agent.
11.1 Computation of Pro Forma Earnings Per Share.
11.2 Computation of Earnings Per Share.
21.1 The Registrant's Subsidiaries.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
- --------------
(1) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Current Report on Form 8-K filed
on July 9, 1996.
(2) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Registration Statement on Form S-1
filed October 18, 1996, and all amendments thereto (Registration No.
333-14441).
(4) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Registration Statement on Form S-1
filed October 20, 1995, and all amendments thereto (Registration No.
33-98448).
(5) Incorporated herein by reference to an exhibit filed as part of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
(6) Incorporated herein by reference to an exhibit filed as part of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
(B) REPORTS ON FORM 8-K
A report on Form 8-K, dated November 5, 1996, was filed with the Securities
and Exchange Commission on November 6, 1996 announcing the Company's decision
not to proceed with its proposed follow-on public offering.
32
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GT Interactive Software Corp.
By: /s/ Ronald Chaimowitz
-----------------------------------
Name: Ronald Chaimowitz
Title: President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons, on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Joseph J. Cayre Chairman of the Board March 28, 1997
- --------------------
Joseph J. Cayre
/s/ Andrew Gregor Senior Vice President, Finance March 28, 1997
- ------------------ and Administration, and Chief
Andrew Gregor Financial Officer (Principal
Financial and Accounting Officer)
/s/ Ronald Chaimowitz President, Chief Executive Officer March 28, 1997
- ---------------------- and Director
Ronald Chaimowitz
/s/ Jack J. Cayre Executive Vice President, Director March 28, 1997
- ------------------
Jack J. Cayre
/s/ Kenneth Cayre Director March 28, 1997
- ------------------
Kenneth Cayre
/s/ Stanley Cayre Director March 28, 1997
- ------------------
Stanley Cayre
/s/ Steven A. Denning Director March 28, 1997
- ----------------------
Steven A. Denning
/s/ William E. Ford Director March 28, 1997
- --------------------
William E. Ford
/s/ Jordan A. Levy Director March 28, 1997
- -------------------
Jordan A. Levy
/s/ Alvin N. Teller Director March 28, 1997
- -------------------
Alvin N. Teller
</TABLE>
33
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GT Interactive Software Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of GT
Interactive Software Corp. (a Delaware corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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 did not audit the
1995 and 1994 financial statements of WizardWorks Group, a company acquired
during 1996 in a transaction accounted for as a pooling of interests, as
discussed in Note 1. Such statements are included in the consolidated financial
statements of GT Interactive Software Corp. and Subsidiaries and reflect total
assets and total net sales of 3.3% and 6.6% in 1995, respectively, and total net
sales of 9.4% in 1994, of the related consolidated totals. The 1995 and 1994
financial statements of WizardWorks Group were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for WizardWorks Group, is based solely upon the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of GT Interactive Software Corp. and Subsidiaries as of
December 31, 1996 and 1995 and the results of their operations and cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements and supplementary data is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, based on our audits and the report of other auditors, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 7, 1997
F-1
<PAGE> 37
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 84,069 $ 71,867
Short-term investments 9,625 4,717
Receivables, net 84,810 95,941
Inventories, net 49,145 60,457
Royalty advances 29,577 69,202
Deferred income taxes 14,014 15,283
Prepaid expenses and other current assets 1,996 6,510
--------- ---------
Total current assets 273,236 323,977
Property and equipment, net 6,087 10,082
Investments -- 9,829
Goodwill, net 21,286 21,003
Other assets 1,032 2,220
--------- ---------
Total assets $ 301,641 $ 367,111
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 87,518 $ 107,842
Accrued liabilities 45,306 52,812
Royalties payable 23,509 33,378
Deferred income 4,091 4,783
Income taxes payable 4,696 9,575
Current portion of long-term liabilities 1,413 1,334
Due to related party 955 601
--------- ---------
Total current liabilities 167,488 210,325
Other long-term liabilities 8,113 4,648
--------- ---------
Total liabilities 175,601 214,973
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par, 150,000,000 shares authorized,
66,391,318 shares issued and outstanding 661 664
Cumulative translation adjustment (28) 813
Additional paid-in capital 117,919 118,220
Retained earnings 7,488 32,441
--------- ---------
Total stockholders' equity 126,040 152,138
--------- ---------
Total liabilities and stockholders' equity $ 301,641 $ 367,111
========= =========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-2
<PAGE> 38
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales ($0,$0, and $3,488 to a related party
for the periods presented, respectively) $101,826 $234,461 $365,490
Cost of goods sold ($717, $3,558,
and $7,516 to a related party for the periods
presented, respectively) 54,449 138,662 214,580
Selling and distribution expenses
($7,234, $3,129, and $3,577 to a
related party for the periods presented,
respectively) 16,104 41,740 74,396
General and administrative expenses
($2,284, $654, and $931 to a related
party for the periods presented,
respectively) 10,539 21,201 34,911
Merger and other costs -- -- 3,718
Amortization of goodwill -- 567 1,092
-------- -------- --------
Operating income 20,734 32,291 36,793
Interest and other income, net 41 795 3,974
-------- -------- --------
Income before income taxes 20,775 33,086 40,767
Provision for income taxes 2,427 10,482 15,628
-------- -------- --------
Net income $ 18,348 $ 22,604 $ 25,139
======== ======== ========
Pro forma adjustment to income tax provision
(unaudited) 7,098 4,616
-------- --------
Pro forma net income (unaudited) $ 11,250 $ 17,988
======== ========
Net income per share $ 0.38
Weighted average shares outstanding 66,391
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-3
<PAGE> 39
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 18,348 $ 22,604 $ 25,139
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 289 1,494 3,202
Deferred income taxes (1,133) (11,660) (1,269)
Deferred income 596 11,090 (3,754)
Changes in operating assets and liabilities:
Receivables, net (39,241) (35,983) (8,880)
Inventories, net (9,675) (30,473) (10,481)
Royalty advances (5,436) (23,590) (33,293)
Due to related party, net 1,546 (591) (354)
Prepaid expenses and other current assets 134 (832) (1,316)
Accounts payable 25,590 49,821 16,480
Accrued liabilities 17,748 23,630 7,507
Royalties payable 10,842 11,219 6,720
Income taxes payable 2,313 2,246 6,382
Other (161) (798) (1,907)
-------- -------- --------
Net cash provided by operating activities 21,760 18,177 4,176
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of investments -- -- (9,829)
Purchases of property and equipment (1,303) (5,275) (5,703)
Purchases (sales) of short-term investments, net -- (9,625) 4,908
Purchase of Slash Corporation, net of cash
acquired of approximately $516 -- 218 --
Purchase of Warner Interactive Entertainment Europe
net of cash acquired of approximately $7 -- -- (6,297)
-------- -------- --------
Net cash used in investing activities (1,303) (14,682) (16,921)
-------- -------- --------
FINANCING ACTIVITIES:
Repurchase of warrants -- -- (1,935)
Proceeds from exercise of stock options -- -- 636
Issuance of common stock -- 77,935 100
Long-term liabilities (980) (417) 901
Issuance of preferred stock and warrants 5,182 15,017 --
Proceeds from issuance of note to a related party 6,000 -- --
Repayment of notes -- (10,471) --
Distributions to stockholders (28,390) (6,000) --
-------- -------- --------
Net cash provided by (used in) financing activities (18,188) 76,064 (298)
-------- -------- --------
Effect of exchange rates on cash and cash equivalents 24 14 841
Net increase (decrease) in cash and cash equivalents 2,293 79,573 (12,202)
Cash and cash equivalents - beginning of year 2,203 4,496 84,069
-------- -------- --------
Cash and cash equivalents - end of year $ 4,496 $ 84,069 $ 71,867
======== ======== ========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-4
<PAGE> 40
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Cumulative Additional Retained
Common Translation Paid-in Earnings
Stock Adjustment Capital (Deficit) Total
----------------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ -- $ (18) $ 380 $ 886 $ 1,248
Proceeds from sale of
preferred stock -- -- 5,182 -- 5,182
Net income -- -- -- 18,348 18,348
Distributions -- -- (41) (28,350) (28,391)
Currency translation
adjustment -- (24) -- -- (24)
--------- --------- --------- --------- ---------
Balance December 31, 1994 -- (42) 5,521 (9,116) (3,637)
Increase in par value of stock 468 -- (468) -- --
Issuance of stock in
connection with the
acquisition of Slash
Corporation 28 -- 19,972 -- 20,000
Proceeds from sales of
preferred stock and
warrants -- -- 15,017 -- 15,017
Proceeds from sales of
common stock in
private placement 4 -- 7,647 -- 7,651
Net proceeds from initial
public offering 55 -- 70,229 -- 70,284
Conversion of preferred
stock to common
stock immediately prior to
the initial public offering 106 -- (106) -- --
Exercise of stock options -- -- 107 -- 107
Net income -- -- -- 22,604 22,604
Distributions -- -- -- (6,000) (6,000)
Currency translation
adjustment -- 14 -- -- 14
--------- --------- --------- --------- ---------
Balance, December 31, 1995 661 (28) 117,919 7,488 126,040
Exercise of stock options 2 -- 634 -- 636
Tax benefit relating to
exercise of stock options -- -- 1,503 -- 1,503
Issuance of stock 1 -- 99 -- 100
Repurchase of warrants -- -- (1,935) -- (1,935)
Net income -- -- -- 25,139 25,139
Currency translation
adjustment -- 841 -- -- 841
Unrealized loss on securities -- -- -- (186) (186)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 $ 664 $ 813 $ 118,220 $ 32,441 $ 152,138
========= ========= ========= ========= =========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
F-5
<PAGE> 41
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
GT Interactive Software Corp., a Delaware corporation, and its subsidiaries
(the "Company") is a leading developer, publisher, merchandiser and distributor
of consumer software. The Company derives its revenues primarily from the sale
of its published, licensed and purchased products to mass merchants, specialty
software stores, computer superstores and distributors located throughout North
America and also in selected international locations. The Company was
incorporated in September 1992 and commenced operations in February 1993.
Restatements
In 1996, the Company acquired all of the outstanding common stock of
WizardWorks Group, Inc. ("WizardWorks"), all of the outstanding common stock of
Candel Inc., the parent company of FormGen, Inc. ("FormGen"), and all of the
outstanding common stock of Humongous Entertainment, Inc. ("Humongous").
WizardWorks, FormGen and Humongous (collectively, the "Acquired Companies")
have been accounted for as pooling of interests and accordingly are included in
the Company's Consolidated Financial Statements as if the acquisitions had
occurred as of the beginning of all periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of GT
Interactive Software Corp. and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated.
Revenue Recognition
Revenue is recognized upon shipment of merchandise to customers. At the
time the revenue is recognized, a reserve is provided for expected future
returns net of the related cost of such items. The net reserve is included in
accrued liabilities.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and highly liquid,
short-term investments with original maturities of three months or less at the
date acquired.
Inventories
Inventories are stated at the lower of cost (based upon the first-in,
first-out method) or market. Allowances are established (and reassessed
quarterly) to reduce the recorded cost of obsolete inventory and slow moving
inventory to its net realizable value.
F-6
<PAGE> 42
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Royalty Advances
Royalty advances represent the unamortized elements of prepayments to third
party licensors of software products for the right to manufacture and/or
distribute their products under various licensing agreements. Such advances are
amortized to cost of goods sold on a per unit basis as licensed products are
sold in accordance with the individual agreements. Future realization of royalty
advances is assessed quarterly by management and charged to expense if it is not
likely that the amounts will be recovered through sales of the related product.
Goodwill
Goodwill is amortized using the straight-line method over a 20 year life.
Management reassesses quarterly the appropriateness of both the carrying value
and remaining life of goodwill, principally based on forecasts of future
undiscounted cash flows of businesses acquired.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the related assets.
Income Taxes
The Company recognizes income taxes in accordance with the liability
method. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Through February 28, 1995 the Company was an S corporation for Federal and
New York state income tax purposes. On March 1, 1995, the Company became a C
corporation for Federal and New York state income taxes. Unaudited pro forma
adjustments to the income tax provision represent the additional tax provision
the Company would have recorded had it been a C corporation for Federal and New
York state income tax purposes during the relevant periods.
Fair Values of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximates fair
value due to the short term nature of such items.
Research and Development Costs
Research and development costs related to the designing, developing and
testing of new software products are charged to expense as incurred. Research
and development expense for the years ended December 31, 1994, 1995 and 1996
amounted to $117, $520 and $342, respectively.
F-7
<PAGE> 43
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1994, 1995 and 1996 amounted to $2,675, $14,387 and
$23,987, respectively.
Foreign Currency Translation
The Company's foreign subsidiaries maintain their accounting records in
their local currency. The currencies are then converted to United States dollars
and the effect of the foreign currency translation is reflected as a component
of stockholders' equity.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to classifications used in the current period.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares are shares issuable upon the exercise of stock
options and warrants, net of shares assumed to have been purchased using the
treasury stock method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2-ACQUISITION OF SLASH CORPORATION
On June 23, 1995, the Company acquired Slash Corporation ("Slash"), for a
total purchase price of approximately $20,299. The acquisition was accounted for
as a purchase and, accordingly, the accompanying consolidated financial
statements include the results of operations of Slash as of the date of
acquisition. The excess cost over fair value of assets acquired of approximately
$21,853 is being amortized on a straight-line basis over twenty years. The fair
value of acquired assets and assumed liabilities is as follows as of the
acquisition date:
F-8
<PAGE> 44
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 2-ACQUISITION OF SLASH CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Purchase price:
Cash paid $ 299
Common stock issued 20,000
--------
Total purchase price $ 20,299
========
Allocated as follows:
Current assets $ 11,437
Other assets 132
Current liabilities (13,123)
Cost in excess of net assets acquired 21,853
--------
$ 20,299
========
</TABLE>
The following unaudited pro forma summary represents the consolidated
results of operations of the Company as though the acquisition had been made as
of January 1, 1995:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Net sales $253,851
Operating income 33,731
Net income 18,628
Pro forma net income per share 0.30
Pro forma weighted average shares outstanding 61,082
</TABLE>
The primary pro forma adjustments for the year ended December 31, 1995 are
the additional taxes that would have been provided had Slash been a C
corporation for the relevant periods of approximately $845, the elimination of
sales between the Company and Slash of approximately $2,135 and the recording of
the amortization of goodwill of approximately $525.
In association with the filing of the Company's 1995 income tax return, the
Company adjusted the estimated deferred tax asset recorded on Slash relating to
the differences in the financial statement and tax basis of the assets and
liabilities acquired to the actual amounts. This resulted in an increase in
goodwill amounting to approximately $810.
F-9
<PAGE> 45
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 3 - ACQUISITION OF THE BUSINESS OF WARNER INTERACTIVE ENTERTAINMENT EUROPE
In November 1996, the Company purchased 100% of the business of Warner
Interactive Entertainment Europe, which consisted of Warner Interactive
Entertainment Limited, Bramblewold Computers Limited, Warner Interactive France
S.A. and Warner Interactive Entertainment Germany GmbH, for approximately $6,300
in cash. Immediately subsequent to the acquisition, the Company renamed three of
the four companies to: Renegade Interactive Entertainment Limited, GT
Interactive Software France S.A. and GT Interactive Entertainment Germany GmbH.
This acquisition has been accounted for as a purchase and accordingly the
operating results of the acquired companies have been included in the Company's
Consolidated Financial Statements as of the date of the acquisition.
Management has not yet finalized the allocation of the purchase price to
the net assets acquired and does not believe this will have a material impact on
the Company's Consolidated Financial Statements.
NOTE 4 - RECEIVABLES, NET
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Trade accounts receivable $ 86,518 $ 98,995
Royalties receivable 136 1,015
-------- --------
86,654 100,010
Less: allowance for doubtful accounts 1,844 4,069
-------- --------
$ 84,810 $ 95,941
======== ========
</TABLE>
NOTE 5 - INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Finished goods $ 45,078 $ 58,464
Raw materials 4,067 1,993
-------- --------
$ 49,145 $ 60,457
======== ========
</TABLE>
F-10
<PAGE> 46
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 6 - INVESTMENTS
In 1996, the Company purchased for approximately $2,507 in cash a 9.9%
investment in, and entered into a multi-titled publishing agreement with Mirage,
a U.K. developer of entertainment software.
In 1996, the Company invested approximately $7,122 in convertible preferred
stock of Off World Entertainment, Inc., a developer of entertainment software,
which is convertible into 50% of the common equity.
NOTE 7 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Computer equipment $ 1,990 $ 4,704
Furniture and fixtures 2,059 4,726
Machinery and equipment 2,312 3,232
Leasehold improvements 1,212 1,463
------- -------
7,573 14,125
Less: accumulated depreciation 1,486 4,043
------- -------
$ 6,087 $10,082
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
amounted to approximately $289, $1,065 and $2,110, respectively.
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Sales return reserve $37,567 $37,367
Other 7,739 15,445
------- -------
$45,306 $52,812
======= =======
</TABLE>
F-11
<PAGE> 47
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 9 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current $ 181 $ 16,199 $ 20,474
Deferred 452 (5,607) (9,286)
-------- -------- --------
633 10,592 11,188
-------- -------- --------
State and local:
Current 2,689 3,773 4,376
Deferred (955) (812) (1,737)
-------- -------- --------
1,734 2,961 2,639
-------- -------- --------
Foreign
Current 60 449 1,801
-------- -------- --------
Provision for income taxes 2,427 14,002 15,628
-------- -------- --------
Benefit arising from change in tax status -- (3,520) --
-------- -------- --------
$ 2,427 $ 10,482 $ 15,628
======== ======== ========
Pro forma adjustment to income taxes (unaudited) 7,098 4,616
-------- --------
Pro forma provision for income taxes (unaudited) $ 9,525 $ 15,098
======== ========
</TABLE>
On March 1, 1995, the Company became a C corporation for Federal and New
York state income tax purposes. As a result, the C corporation assumed the tax
basis of the assets and liabilities of the former S corporation, which differed
from the financial statement basis of those items. Accordingly, the Company
recorded a deferred tax asset as of March 1, 1995 of approximately $3,520, which
primarily relates to the sales return reserve and inventory valuation.
F-12
<PAGE> 48
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 9 - INCOME TAXES (CONTINUED)
The reconciliation of the income tax provision computed at the Federal
statutory rate to the reported unaudited pro forma provision for income taxes is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Provision computed at Federal statutory rate $ 11,580 $ 14,268
Increase (decrease) in provision resulting from:
State and local taxes, net of Federal tax benefit 2,647 2,683
Reversal of deferred tax asset valuation allowance -- (1,306)
Non-deductible merger costs -- 1,158
Foreign tax benefit (150) (36)
Other, net 1,021 (1,139)
-------- --------
Pro forma provision for income taxes (unaudited) $ 15,098
========
Provision for income taxes $ 15,628
========
Effective income tax rate 46% 38%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets and liabilities as of December 31, 1995 and 1996
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory valuation $ 5,342 $ 6,154
Deferred income 4,425 3,851
Sales return reserve 2,037 2,196
Tax loss carryforwards 1,255 1,255
Other 2,278 1,934
-------- --------
15,337 15,390
-------- --------
Deferred tax liabilities:
Depreciation (17) (107)
-------- --------
(17) (107)
-------- --------
Valuation allowance (1,306) --
-------- --------
Net deferred tax asset $ 14,014 $ 15,283
======== ========
</TABLE>
As of December 31, 1996, one of the Company's subsidiaries had a net
operating loss carryforward of approximately $2,915 for tax purposes expiring in
the years 2007 through 2011.
F-13
<PAGE> 49
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 10 - STOCKHOLDERS' EQUITY
Capital Stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
------- -------
<S> <C> <C>
Preferred Stock:
Par value per share $ .01 $ .01
Shares authorized 5,000 5,000
Shares issued -- --
Common Stock:
Par value per share $ .01 $ .01
Shares authorized 150,000 150,000
Shares issued 66,146 66,391
</TABLE>
On July 31, 1995, the Company established par value at $.01 on all classes
of its stock. Concurrently, the Company effected a four thousand for one split
of its then existing Class A and Class B Common Stock together with an increase
in the number of authorized shares.
On February 28, 1995, the Company's stockholders sold 10.5% of their then
outstanding shares in the Company to an investor (the "Investor"). The Company
issued warrants to the Investor for the right to purchase an aggregate of 2,520
shares of Common Stock at an exercise price of $4.17 per share.
Additionally, the Company received a $15,000 loan from the Investor. This
loan was repaid upon the consummation of the initial public offering and bore
interest at 4.5% per annum. In conjunction with such loan the Company issued
warrants to the Investor representing the right to purchase an aggregate of 504
shares of Common Stock at an exercise price of $4.17 per share. Under certain
circumstances, the Company has the right to redeem the warrants for a nominal
amount.
The Company received $15 in connection with the issuance of the
aforementioned warrants.
On June 30, 1995, the Investor paid the Company $15,000 for five hundred
twenty five shares of Series A Convertible Preferred Stock, which was converted
into 2,520 shares of Common Stock immediately prior to the consummation of the
Company's initial public offering. Additionally, the Investor surrendered its
warrants to purchase an aggregate of 2,520 shares of Class A and Class B Common
Stock.
In connection with the acquisition of Slash on June 23, 1995, the Company
issued approximately 2,794 shares of its Common Stock.
In October 1995, the Company sold approximately $7,650 of Common Stock to
another investor.
F-14
<PAGE> 50
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1996, the Company had outstanding warrants to
content-providers to purchase an aggregate of approximately 956 shares of Common
Stock at exercise prices (ranging from $9.47 to the initial public offering
price) not less than the fair market value at the date of issue. None of the
outstanding warrants vested prior to May 1996; vesting subsequent to such date
is dependent upon the achievement of sales levels of certain products, the
rights to which were granted to the Company. On July 19, 1996, the Company
repurchased approximately 211 of these warrants amounting to $1,936.
On June 24, 1996, the Company acquired all of the outstanding common stock
of WizardWorks in exchange for 2,350 shares of the Company's common stock.
On June 28, 1996, the Company acquired all of the outstanding common stock
of FormGen in exchange for approximately 1,033 shares of the Company's common
stock.
On July 9, 1996, the Company acquired all of the outstanding common stock
of Humongous in exchange for approximately 3,458 shares of the Company's common
stock.
NOTE 11 - STOCK OPTIONS
The Company has a stock option plan (the "Plan") which began in 1995. The
Company accounts for this Plan under APB Opinion No. 25, under which no
compensation cost has been recognized.
In connection with the acquisition of Humongous, the Company converted
options outstanding under Humongous' stock option plan to options under the
Company's plan. No additional shares will be granted under Humongous' stock
option plan.
Had compensation cost for these plans been determined consistent
with FASB Statement No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C> <C>
Net income: As reported $ 22,604 $ 25,139
Pro forma 21,701 21,872
Net income per share: As reported $ -- $ 0.38
Pro forma $ -- $ 0.33
</TABLE>
Under the Plan, options may be granted to purchase shares of the Company's
common stock at no less than the fair market value at the date of the grant,
vest over a period of four or five years and are exercisable for a period of ten
years from the grant date.
F-15
<PAGE> 51
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 11 - STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's Plan at December 31, 1995 and 1996
and changes during the years then ended is as follows (conversion of Humongous'
stock options have been treated as though they were granted in 1995).
<TABLE>
<CAPTION>
1995 1996
------------------------------- ---------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 4,865 $ 10.22
Granted 4,873 10.20 916 15.35
Exercised (8) .12 (218) 2.92
Forfeited -- -- (105) 14.08
Expired -- -- -- --
--------------- -----------------
Outstanding at end of year 4,865 10.22 5,458 11.30
--------------- -----------------
Exercisable at end of year 311 .05 1,041 9.28
Weighted average fair value
of options granted $ 5.27 $ 7.66
</TABLE>
2,220 of the 5,458 options outstanding at December 31, 1996 have exercise
prices between $.04 and $12.38 per share, a weighted average exercise price of
$6.03 and a weighted average remaining contractual life of approximately eight
years. Approximately 639 of these options are exercisable. The remaining 3,238
options outstanding at December 31, 1996 have exercise prices between $14 and
$23.50, with a weighted average exercise price of $14.91 and a weighted average
remaining contractual life of approximately nine years. Approximately 402 of
these options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividends will be paid for the
entire term of the option, expected volatility of 57.9% for both years,
risk-free interest rates averaging 5.15% for both years and expected lives of
five years in 1995 and four years in 1996, respectively.
NOTE 12 - RELATED PARTY TRANSACTIONS
During 1996, the Company sold approximately $3,488 of software to a related
party, GoodTimes Home Video Corporation ("GoodTimes") at fair market value. At
December 31, 1996, the Company had a receivable from GoodTimes for this
merchandise amounting to approximately $3,343.
During 1994, the Company had an agreement with GoodTimes, whereby GoodTimes
and affiliated companies provided certain management, accounting, selling and
distribution services. The amount charged to operations for these services was
$10,235 in 1994. This fee was based on a percentage of gross sales plus a fixed
amount. The amount due for 1994 included $6,000 which was unpaid as of December
31, 1994. This amount was paid in January 1995.
F-16
<PAGE> 52
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
On January 1, 1995, the Company entered into a one year services agreement
with GoodTimes. The services agreement was intended to facilitate the Company's
establishment of fully independent systems and administration during 1995. The
services agreement provided for a fee based on specific services performed and
was terminable by the Company at any time upon written notice. The total amount
charged to operations for services provided by GoodTimes and affiliated
companies for the year ended December 31, 1995 amounted to approximately $7,341.
As of December 31, 1995, there were no services being provided to the Company
under the services agreement, however, GoodTimes is providing manufacturing
services under a separate manufacturing agreement. The total amount charged to
operations for manufacturing services for the year ended December 31, 1996
amounted to $7,516.
In servicing its mass merchant accounts, the Company uses field
representatives supplied by REPS, a company owned by three directors of the
Company. REPS provides such services to the Company as well as to third parties.
The Company has an agreement with REPS pursuant to which REPS will supply such
services, at its cost, through December 31, 1997. Prior to entering into the
REPS Agreement, REPS' services were provided to the Company as part of the
services agreement with GoodTimes. The total amount charged to operations for
these services amounted to approximately $3,025 for the year ended December 31,
1996.
The Company frequently hires Taughannock Aviation Corp. ("Taughannock") and
Eastway Aircraft Services Inc. ("Eastway") to provide business travel services
for its officers and employees. Taughannock leases one plane from JT Aviation
Corp. ("JTAC"), a company owned by Joseph J. Cayre, Chairman of the Board of
Directors of the Company, and one plane from KCS Aviation Corp., a company owned
by Kenneth Cayre, a Director of the Company. Eastway leases two planes from
JTAC. Neither Taughannock nor Eastway is owned in whole or in part by any member
of the Cayre family.
Taughannock and Eastway provide air travel to the Company at an hourly rate
and on an as needed and as available basis. During the years ended December 31,
1995 and 1996 the Company's aggregate air travel fees paid to Taughannock were
approximately $357 and $219, respectively. The Company made no payments to
Eastway during the year ended December 31, 1995. During the year ended December
31, 1996, the Company paid approximately $226 to Eastway. There were no payments
to Eastway or Taughannock during the year ended December 31, 1994.
The Company believes that the amounts charged by related parties materially
approximate those amounts which would have been incurred from non-affiliates.
On December 30, 1994, the Company extended a loan to Ronald Chaimowitz,
President of the Company, in the principal amount of $209. Such loan bore
interest at the rate of 4.5% per annum and has been repaid.
On August 31, 1996, the Company extended a loan to Andrew Gregor, Chief
Financial Officer of the Company, in the principal amount of $250. Such loan
bears interest at the rate of 6.15% per annum and becomes due and payable on
August 31, 1998.
On August 31, 1996, the Company extended a loan to Chris Garske, a Senior
Vice President of the Company, in the principal amount of $200. Such loan bears
interest at a rate of 6.15% per annum and becomes due and payable on August 31,
1998.
F-17
<PAGE> 53
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has extended loans to the former stockholders of FormGen and a
former employee of the Company in the aggregate amount of $2,245. Such loans
bear interest at rates ranging from 6% to 8.25% per annum and become due and
payable on dates ranging from January 8, 1997 to December 1, 1997.
The Company has entered into agreements with Upgrade Corporation of America
(doing business as SOFTBANK Services Group) ("Upgrade") pursuant to which
Upgrade (i) provides toll-free customer support for some of the Company's
published products and (ii) takes direct customer orders and provides
fulfillment services for the Company, in each case on a per service basis. The
agreement relating to customer support service expired on December 17, 1996 and
the agreement providing for the fulfillment service expires on August 2, 1997.
Both agreements provide for automatic renewal on a month to month basis upon
expiration unless terminated by either party. As of December 31, 1996, the
Company has charged to operations approximately $164 in fees to Upgrade. Jordan
A. Levy, a Director of the Company, is the President and the Co-Chief Executive
Officer of Upgrade.
See Notes 10 and 13 for information concerning other related party
transactions.
NOTE 13 - LEASES
The Company leases its executive and administrative offices from a related
party, and its distribution center, under leases that are accounted for as
operating leases. These leases have expiration dates ranging from 2002 through
2020. Future minimum annual rental payments and receipts under the leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 3,350
1998 3,773
1999 3,180
2000 2,211
2001 2,240
Thereafter 13,129
-------
$27,883
=======
</TABLE>
Total rent expense charged to operations for the years ended December 31,
1994, 1995 and 1996 amounted to approximately $444, $1,824 and $3,207,
respectively. Of the total rent expense charged to operations, approximately
$100, $751 and $1,037 was paid to the Company's related party during the years
ended December 31, 1994, 1995 and 1996, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company had an outstanding standby letter of credit at December 31,
1995 and 1996 amounting to approximately $26,700 and $1,667, respectively. The
letter of credit outstanding at December 31, 1995 was secured by certain assets
of the Company.
F-18
<PAGE> 54
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 15 - ROYALTY ADVANCES
The Company has committed to pay advance royalty payments under certain
royalty agreements. These obligations are not guaranteed and are dependent, in
part, on the delivery of the contracted services by the licensor. Future advance
royalty payments due under these royalty agreements are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 49,003
1998 6,287
1999 --
2000 --
2001 5,000
Thereafter --
-------
$60,290
=======
</TABLE>
NOTE 16 - CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be affected
by changes in economic or other industry conditions and may, accordingly, impact
the Company's overall credit risk. Although the Company generally does not
require collateral, the Company performs ongoing credit evaluations of its
customers and reserves for potential losses are maintained.
The Company had sales constituting 61%, 52% and 45% of net sales to a
single customer in the years ended December 31, 1994, 1995 and 1996,
respectively.
Accounts receivable due from this significant customer aggregated 48% and
22% of accounts receivable at December 31, 1995 and 1996, respectively.
The Company continually monitors its positions with, and the credit quality
of, the financial institutions with which the Company conducts business. Cash
and cash equivalents and short-term investments consist of cash on hand and
investments in state and local government bonds.
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Issuance of common stock in connection with
the acquisition of Slash Corporation $ -- $20,000 $ --
Cash paid for income taxes 1,416 19,169 9,783
Cash paid for interest 31 669 685
</TABLE>
F-19
<PAGE> 55
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the year ended December 31, 1995
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 34,894 $ 31,752 $ 63,755 $104,060
Operating income 5,668 2,954 6,529 17,140
Net income 6,931 1,682 3,757 10,234
Net income per share $ 0.16
Weighted average shares
outstanding 62,786
</TABLE>
Summarized quarterly financial data for the year ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 70,757 $ 73,526 $ 86,192 $135,015
Operating income 7,211 5,999 12,187 11,396
Net income 4,392 3,502 8,730 8,515
Net income per share $ 0.07 $ 0.05 $ 0.13 $ 0.13
Weighted average shares
outstanding 66,145 66,145 69,217 66,391
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
On January 21, 1997, the Company entered into a Revolving Credit Agreement
(the "Agreement") with banks expiring on December 31, 1998. The Agreement
provides for a maximum of $40,000 for borrowings and letters of credit. The
borrowings under this agreement bear interest at either the banks reference rate
(which is generally equivalent to the published prime rate) or the LIBOR rate
plus 1 1/4%. The Company pays a commitment fee of 1/4% based on the unused
portion of the line. The Agreement requires maintenance of certain financial
ratios and net income levels.
On January 13, 1997, the Company acquired all of the outstanding capital
stock of Premier Promotion Limited, the parent company of One Stop Direct
Limited, a leading European value software publisher, for approximately $400 in
cash.
F-20
<PAGE> 56
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance- Charged to Balance-
Beginning of Costs and End of
Description Year Expenses Deductions Year
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Years ended:
December 31, 1996 $ 1,844 $ 2,225 $ -- $ 4,069
========== ========== ========== ==========
December 31, 1995 $ 235 $ 1,609 $ -- $ 1,844
========== ========== ========== ==========
December 31, 1994 $ 30 $ 205 $ -- $ 235
========== ========== ========== ==========
Reserve for obsolescence:
Years ended:
December 31, 1996 $ 7,066 $ -- $ (985) $ 6,081
========== ========== ========== ==========
December 31, 1995 $ 1,561 $ 5,505 $ -- $ 7,066
========== ========== ========== ==========
December 31, 1994 $ 315 $ 1,246 $ -- $ 1,561
========== ========== ========== ==========
</TABLE>
F-21
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit No. Description Number
- ----------- ----------- ------
<S> <C> <C>
2.1 (1) Agreement and Plan of Reorganization by and among the Registrant,
GT Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders of
WizardWorks Group, Inc. dated June 24, 1996.
2.2 (1) Escrow Agreement by and among the Registrant, Paul D. Rinde, as the
Stockholder Representative of WizardWorks Group, Inc., and
Republic National Bank of New York, as Escrow Agent, dated
June 24, 1996.
3.1 (2) Amended and Restated Certificate of Incorporation.
3.2 (3) Amended and Restated By-laws (as amended on October 31, 1996).
4.1 (4) Specimen form of stock certificate for Common Stock.
10.1 (3) The 1995 Stock Incentive Plan (as amended on October 31, 1996).
10.2 (4) Services Agreement between the Registrant and GoodTimes Home Video Corp.,
dated as of January 1, 1995.
10.3 (4) 4.5% Subordinated Secured Promissory Note, due February 28, 1996.
10.4 (4) Employment Agreement between the Registrant and Ronald Chaimowitz.
10.5 (4) Employment Agreement between the Registrant and Charles F. Bond.
10.6 (4) Non-Competition Agreement between the Registrant and Charles F. Bond.
10.7 (4) Employment Agreement between the Registrant and Harry M. Rubin.
10.8 (4) Employment Agreement between the Registrant and Harry Steck.
10.9 (4) Employment Agreement between the Registrant and Chris Garske.
10.10 (4) GTIS Master Option and License Agreement between the Registrant and the
Williams Entertainment Group, dated December 28, 1994, and the Amendment
to such agreement, dated March 31, 1995.
10.11 (4) GTIS Master Option and License Agreement (Home Video Games) between the
Registrant and the Williams Entertainment Group, dated March 31, 1995.
10.12 (4) Agreement between the Registrant and SOFTBANK Corporation, dated
October 9, 1995.
10.13 (4) Agreement between the Registrant and Roadshow PTY LTD, dated October 3,
1995.
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
Page
Exhibit No. Description Number
- ----------- ----------- ------
<S> <C> <C>
10.14 (4) Agreement and Plan of Reorganization by and between Charles F. Bond,
Slash Corporation and the Registrant, dated June 22, 1995.
10.15 (4) Lease Agreements between the Registrant and 16 East 40th Associates.
10.16 (4) Sub-lease Agreement between the Registrant and Michael Stevens Ltd.,
dated February 22, 1995.
10.17 (4) Lease Agreement between GT Interactive Software (Europe) Limited and
Marylebone 248 Realty LLC, dated May 2, 1995.
10.18 (4) Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre,
Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached
thereto and the Registrant.
10.19 (4) Registration Rights Agreement by and among Joseph J. Cayre, Kenneth
Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I
attached thereto and the Registrant.
10.20 (4) Agreement by and between the Registrant and REPS.
10.21 (5) Second Amendment to GTIS Master Option and License Agreement between the
Registrant and Williams Entertainment Group, dated March 27, 1996.
10.22 (5) Amendment to GTIS Master Option and License Agreement (Home Video Games)
between the Registrant and Williams Entertainment Group, dated March 27,
1996.
10.23 (5) Master Option and License Agreement for Atari PC Games between the
Registrant and WMS Industries Inc., dated March 27, 1996.
10.24 (5) Master Option and License Agreement for Atari Home Video Games between
the Registrant and WMS Industries Inc., dated March 27, 1996.
10.25 (5) Employment Agreement between the Registrant and Andrew Gregor.
10.26 (3) 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor.
10.27 (3) 6.15% Promissory Note, due August 31, 1998, of Chris Garske.
10.28 (6) Lease Agreement between the Registrant and Plymouth 2200, LLP, dated
September 6, 1996.
10.29 Agreement of Lease, dated as of December 12, 1996, by and between the
Registrant and F.S. Realty Corp.
10.30 Amendment to Stockholders Agreement, dated as of December 18, 1995, by
and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre,
the trusts parties thereto and the Registrant.
10.31 Credit Agreement, dated as of January 21, 1997, by and among the
Registrant, the banks parties thereto and Republic National Bank of New
York, as Agent.
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
Page
Exhibit No. Description Number
- ----------- ----------- ------
<S> <C> <C>
11.1 Computation of Pro Forma Earnings Per Share.
11.2 Computation of Earnings Per Share.
21.1 The Registrant's Subsidiaries.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
- -----------
(1) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Current Report on Form 8-K filed
on July 9, 1996.
(2) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Registration Statement on Form S-1
filed October 18, 1996, and all amendments thereto (Registration No.
333-14441).
(4) Incorporated herein by reference to the exhibit with the corresponding
number filed as part of the Registrant's Registration Statement on Form S-1
filed October 20, 1995, and all amendments thereto (Registration No.
33-98448).
(5) Incorporated herein by reference to an exhibit filed as part of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
(6) Incorporated herein by reference to an exhibit filed as part of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
<PAGE> 1
AGREEMENT OF LEASE
BETWEEN
F.S. REALTY CORPORATION
LANDLORD
AND
GT INTERACTIVE SOFTWARE CORP.
TENANT
PREMISES:
417 FIFTH AVENUE
7TH AND 8TH FLOORS
NEW YORK, NEW YORK 10016
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<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE 1 PREMISES; RENT........................................ 5
ARTICLE 2 CONDITION OF PREMISES................................. 7
ARTICLE 3 ARBITRATION........................................... 8
ARTICLE 4 REAL ESTATE TAX ESCALATION............................ 10
ARTICLE 5 USE................................................... 12
ARTICLE 6 ALTERATIONS AND INSTALLATIONS......................... 14
ARTICLE 7 REPAIRS............................................... 17
ARTICLE 8 REQUIREMENTS OF LAW................................... 19
ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY............. 21
ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE......................... 24
ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC............... 26
ARTICLE 12 ELECTRICITY........................................... 31
ARTICLE 13 ADJACENT EXCAVATION - SHORING......................... 33
ARTICLE 14 CONDEMNATION.......................................... 34
ARTICLE 15 ACCESS TO PREMISES; CHANGES........................... 35
ARTICLE 16 CONDITIONS OF LIMITATION.............................. 37
ARTICLE 17 RE-ENTRY BY LANDLORD; INJUNCTION...................... 38
ARTICLE 18 DAMAGES............................................... 39
ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S
OBLIGATIONS........................................... 41
ARTICLE 20 QUIET ENJOYMENT....................................... 41
ARTICLE 21 SERVICES AND EQUIPMENT................................ 41
ARTICLE 22 HAZARDOUS MATERIALS................................... 45
ARTICLE 23 INVALIDITY OF ANY PROVISION........................... 46
ARTICLE 24 BROKERAGE............................................. 46
ARTICLE 25 SUBORDINATION......................................... 47
ARTICLE 26 CERTIFICATE OF TENANT/LANDLORD........................ 49
ARTICLE 27 LEGAL PROCEEDINGS AND WAIVER OF JURY TRIAL............ 50
ARTICLE 28 SURRENDER OF PREMISES................................. 50
ARTICLE 29 RULES AND REGULATIONS................................. 51
ARTICLE 30 CONSENTS AND APPROVALS................................ 51
ARTICLE 31 NOTICES............................................... 51
ARTICLE 32 NO WAIVER............................................. 52
ARTICLE 33 INABILITY TO PERFORM.................................. 53
ARTICLE 34 ENTIRE AGREEMENT; NO REPRESENTATIONS;
NO ORAL MODIFICATION.................................. 54
ARTICLE 35 SECURITY.............................................. 54
ARTICLE 36 INTENTIONALLY OMITTED................................. 56
ARTICLE 37 NON-LIABILITY AND INDEMNIFICATION..................... 56
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<PAGE> 3
ARTICLE 38 INTENTIONALLY OMITTED................................. 57
ARTICLE 39 RIGHT OF FIRST OFFER.................................. 57
ARTICLE 40 MISCELLANEOUS......................................... 58
ARTICLE 41 ROOF SPACE............................................ 59
ARTICLE 42 OPTION................................................ 61
SCHEDULES
1 - Floor Plan for 7th and 8th floors 2 - Cleaning
Specifications-Intentionally Omitted 3 - Form of Estoppel
Letter 4 - Rules and Regulations 5 - Construction Rules and
Regulations 6 - Crosshatch of Roof Premises
EXHIBITS
A - Work Letter
B- Assignment and Assumption Agreement
C - Nondisturbance Agreement
-iii-
<PAGE> 4
AGREEMENT OF LEASE dated as of December 12, 1996, by and between F.S.
REALTY CORP, a New York Corporation, with its office at c/o Prince Management
Corp., 57-18 Flushing Avenue, Maspeth, New York 11378 (hereinafter referred to
as "Landlord") and, GT INTERACTIVE SOFTWARE CORP., a Delaware Corporation with
an office at 16 East 40th Street, New York, New York 10016 (hereinafter referred
to as "Tenant").
REFERENCE PAGE
LEASE DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the
following words and phrases whenever used in this Lease shall have the meanings
set forth in this Reference Page.
"Alteration" shall mean any and every structural addition,
construction, improvement, installation or modification of or to the Premises
which affects building services outside the Premises including, but not limited
to, electrical, plumbing, heating, ventilating and air-conditioning services.
"Base Taxes" shall mean the Taxes (as hereinafter defined) for the
twenty four-month period commencing July 1, 1996 and ending June 30, 1998
divided by two.
"Brokers" shall mean S.L. Green Real Estate and Jenel Management Corp.
"Building" shall mean the building known as 417 Fifth Avenue, New York,
New York 10016.
"Business Days" shall mean all days excluding Sundays and all days
observed by the federal, state or local governments as legal holidays as well as
all other days recognized as holidays under applicable union contracts.
"Business Hours" shall mean the hours between 8:00 a.m. and 6:00 p.m.
on Business Days except that on Saturdays Business Hours shall mean the hours
between 8:00 a.m. and 1:00 p.m.
"Commencement Date" shall mean the date that the Landlord delivers
possession of the Premises to Tenant.
"Construction Rules and Regulations" shall mean those certain rules and
regulations issued by Landlord with respect to the performance of any
construction at the Premises annexed hereto and incorporated herein as Schedule
5.
"Consumer Price Index" or the "CPI-U" shall mean the Consumer Price
Index for All Urban Consumers of the United States Department of Labor's Bureau
of Labor
-1-
<PAGE> 5
Statistics in effect for New York, Northeastern N.J. (1984=100) and generally
published at the time the computation is to be made. If the CPI-U is no longer
published, then another price index, generally recognized as authoritative,
shall be substituted by mutual agreement of Landlord and Tenant. In the event
the parties are unable to so agree, the matter shall be submitted to binding
arbitration according to the rules of the American Arbitration Association.
During any period while the determination of such a dispute is pending, Tenant
shall continue to pay the sum previously in effect; provided, however, that the
adjusted sum as finally determined shall be retroactive from the prescribed date
and any deficiency owed by Tenant shall be paid promptly upon a final
determination of the dispute.
"Expiration Date" shall mean the tenth anniversary of the Commencement
Date as the same may be extended.
"Fair Market Rental Value" shall mean the fair market rental value of
the Premises six months prior to the end of the Initial Term (as hereinafter
defined) with respect to Option 1 (as hereinafter defined) and six months prior
to the end of Option 1 with respect to Option 2 (as hereinafter defined)
respectively. In the event that Landlord and Tenant are unable to agree on the
Fair Market Rental Value of the Premises five months prior to the end of the
Initial Term for Option 1 or five months prior to the end of Option 1 with
respect to Option 2, then the same shall be determined by binding arbitration in
accordance with Article 3 of this Lease. The arbitrator shall make his/her
respective determination based upon the following assumptions and directions,
and the arbitrator shall be so instructed and bound with respect thereto:
(i) The Premises is available in the then rental market for comparable
tenant space in comparable buildings in the City of New York;
(ii) Neither Landlord nor Tenant is under a compulsion to rent;
(iii) The Premises is to be rented as a whole to a single tenant for
general office use for a term of five (5) years, taking into consideration such
market factors and other lease provisions as may then customarily be in effect
and applicable to the rental of such space in that location;
(iv) The Premises shall be rented in an "as is," condition equal to the
condition of the Premises as it exists six months prior to the end of the Term
with respect to Option 1 and equal to the condition of the Premises as it exists
six months prior to the end of Option 1 with respect to Option 2;
(v) Landlord is not paying a brokerage commission to lease the Premises
for either Option 1 or Option 2;
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<PAGE> 6
(vi) Landlord is not making any improvements or alterations to the
Premises for either Option 1 or Option 2; and
(vii) Landlord is not giving Tenant any period of free rent for Option
1 or Option 2.
"Fixed Annual Rent," "Fixed Rent" or "fixed annual rent" shall mean One
Million Two-Hundred Thousand Dollars ($1,200,000.00) per annum for the period
from the first anniversary of the Commencement Date through the second
anniversary of the Commencement Date. Provided Tenant is not otherwise in
default of the terms and conditions of this Lease, beyond applicable notice and
grace periods, Fixed Annual Rent shall be abated for the period from the
Commencement Date through the first anniversary of the Commencement Date (all
additional rent (as hereinafter defined) shall remain due and payable).
Thereafter, Fixed Annual Rent shall be adjusted on each anniversary of the
Commencement Date beginning on the second anniversary of the Commencement Date
through the tenth anniversary of the Commencement Date by multiplying the
immediately preceding year's Fixed Annual Rent by a fraction, the numerator of
which shall be the Consumer Price Index (as defined herein) in effect on the
anniversary of the Commencement Date for the year in which Fixed Annual Rent is
being adjusted and the denominator of which shall be the Consumer Price Index in
effect on the immediately preceding anniversary of the Commencement Date, which
escalation shall not exceed three (3) percent per annum. The increases in the
Fixed Annual Rent set forth herein shall always be calculated upon, and added
to, the prior year's Fixed Annual Rent.
"Initial Term" shall mean a period of ten (10) years beginning on the
Commencement Date.
"Interest Rate" shall mean a fluctuating rate of interest per annum
equal to the lesser of (a) 2% above the prime commercial lending rate of
interest announced from time to time by The Chase Manhattan Bank, National
Association (or any successor institution, or, if said bank and its successors
are no longer in existence, any other member bank of The New York Clearing House
Association selected by Landlord), at its principal office in New York City, in
effect from time to time or (b) the maximum applicable legal rate of interest,
if any.
"Landlord" shall mean only the owner, or the mortgagee in possession,
of the Land (as hereinafter defined) and Building (and the owner of a lease of
the Building or of the Land and Building), so that in the event of any transfer
of title to the Land and Building or said lease, or in the event of a lease of
the Building, or of the Land and Building, upon notification to Tenant of such
transfer or lease the said transferor Landlord shall be and hereby is entirely
freed and relieved of future covenants, obligations and liabilities of Landlord
hereunder. It shall be deemed and construed as a covenant running with the land
without further agreement between the parties or
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<PAGE> 7
their successors in interest, or between the parties and the transferee of title
to the Land and Building or said lease, or the said lessee of the Building, or
of the Land and Building, that the transferee or the lessee has assumed and
agreed to carry out any and all such covenants, obligations and liabilities of
Landlord hereunder from and after the date of such transfer.
"Legal Requirement(s)" shall mean (i) any laws, statutes, ordinances
(including building codes and zoning regulations and ordinances and the
Americans with Disabilities Act of 1990) and the orders, rules, regulations,
directives and requirements of all federal, state, county, city, municipal and
borough departments, bureaus, boards (including the New York Board of Fire
Underwriters), agencies, offices, commissions and subdivisions thereof, or of
any official thereof, or of any other governmental public or quasi-public
authority, whether now or hereafter in force, which may be applicable to the
Land, the Building or the Premises or any part thereof, or the sidewalks, curbs
or areas adjacent thereto, and (ii) all requirements, obligations and conditions
of all instruments of record on the date of this Lease.
"Lien" shall mean any and every lien of any kind whatsoever for the
furnishing (or alleged furnishing) of (or on account of) labor, materials,
services, facilities or any other things whatsoever.
"Premises" shall mean the entire seventh (7th) and eighth (8th) floors
of the Building and the Roof Premises (as defined in Article 41 hereof) as shown
hatched on the floor plan annexed hereto as Schedules 1 and 6 respectively.
"Permitted Use" shall mean executive and general offices including
kitchen facilities, employee cafeteria, executive dining room, employee snack
bar concession, product display room, telemarketing operation and for similar
uses excluding any and all manufacturing and retail sales to the public but for
no other purposes whatsoever.
"Security Deposit" shall have the meaning set forth in Article 35
hereof.
"Tenant's Proportionate Share" shall mean 18.2%. The Tenant's
Proportionate Share shall decrease in the proportion to the additional space
built on top of the roof of the Building and the adjustment of the Tenant's
Proportionate Share shall become effective upon the sale or rental of the
additional space.
"Term" shall mean the Initial Term as the same may be extended by
Option 1 and Option 2. Notwithstanding anything in this Lease to the contrary,
(a) provided (i) Tenant is not otherwise in default of this Lease beyond all
applicable notice and cure periods and (ii) Tenant provides Landlord with
written notice no later than six months prior to the end of the Initial Term of
its exercise of this option, Tenant is entitled to extend this Lease for an
additional five years ("Option 1") beginning on the day after the expiration of
the Initial Term and ending on the fifth anniversary of the day after
-4-
<PAGE> 8
the expiration of the Initial Term at a Fixed Annual Rent which is ninety
percent (90%) of the Fair Market Rental Value (as such term is defined herein);
and (b) provided (i) Tenant is not otherwise in default of this Lease beyond all
applicable notice and cure periods and (ii) Tenant provides Landlord with
written notice no later than six months prior to the end of the term of Option 1
of its exercise of this option, Tenant is entitled to extend this Lease for an
additional five years ("Option 2") beginning on the day after the expiration of
the term of Option 1 and ending on the fifth anniversary of the day after the
expiration of the term of Option 1 at a Fixed Annual Rent which is ninety
percent (90%) of the Fair Market Rental Value (as such term is defined herein).
The Reference Pages information is incorporated into and made a part of
the within Lease. In the event of any conflict between any Reference Pages
information and the Lease, the Lease shall control.
W I T N E S S E T H:
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, trustees, successors and
assigns, hereby covenant as follows:
ARTICLE 1.
PREMISES: RENT
1.(a) Landlord hereby leases to Tenant, and Tenant hereby hires from
Landlord, the Premises for the Initial Term to commence on the Commencement Date
and to end at 11:59 p.m. on the Expiration Date or until such term shall sooner
cease and terminate or be extended as herein provided. In the event that the
Commencement Date does not occur on or before the six-month anniversary after
the date this Lease is executed by Landlord, Tenant may elect to terminate this
Lease, by first providing Landlord with a thirty (30) day written notice of
Tenant's election to terminate this Lease, and if such situation shall continue
and shall not be remedied by Landlord within such thirty (30) days, then the
Term shall expire at the expiration of such thirty (30) days, and the estate
hereby granted shall terminate with the same effect as if that day were the end
of the Term (provided that Tenant, its agents, servants or employees are not
responsible for the Commencement Date not occurring).
1.(b) (i) From and after the Commencement Date, Tenant shall pay to
Landlord the Electrical Charge and after the first anniversary of the
Commencement Date, Tenant shall pay to Landlord the fixed annual rent at the
fixed annual rental rate set forth in the Reference Page, which shall be payable
in equal monthly installments
-5-
<PAGE> 9
in advance on the first day of each and every calendar month during the Term.
The first monthly installment of fixed annual rent due on the first anniversary
of the Commencement Date shall be payable by Tenant upon the execution of this
Lease and shall be applied to the first full installment of Fixed Annual Rent
due hereunder. Should the Commencement Date fall on any day other than the first
day of a month, the fixed annual rent due on the first day of the first
anniversary of the Commencement Date shall be pro-rated on a per diem basis, and
Tenant shall pay the amount for such partial month on the Commencement Date.
Should the last day of the Term fall on any day other than the last day of a
month, then the fixed annual rent for such partial period shall be pro-rated on
a per diem basis.
(ii) Any sum other than fixed annual rent payable hereunder
(hereinafter called "additional rent") shall be deemed additional rent, and
together with fixed annual rent shall be included in the term "rent" and shall,
unless otherwise stated, be due within seven days after demand. Fixed annual
rent and additional rent shall be paid in lawful money of the United States by
good and sufficient check (subject to collection) drawn to Landlord's order or
as Landlord may direct. Said checks shall be sent to Landlord at its address as
hereinabove set forth, or to such other party or parties and/or at such other
address(es) as Landlord shall designate by notice to Tenant.
(iii) Tenant shall pay the fixed annual rent promptly when due
without notice or demand and additional rent when billed therefor and without
offset, credit, abatement, deduction, counterclaim, set off for any reason
whatsoever, except such deduction as may be expressly set forth herein.
1.(c) If any of the fixed annual rent or additional rent payable under
the terms and provisions of this Lease shall be or become uncollectible, reduced
or required to be refunded because of any Legal Requirements, Tenant shall enter
into such agreement(s) and take such other steps as Landlord may reasonably
request and as legally may be permissible to permit Landlord to collect the
maximum rents that, from time to time during the continuance of such legal rent
restriction, legally may be permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal rent
restriction, (a) the rents shall become and thereafter shall be payable in
accordance with the amounts reserved herein for the periods following such
termination and (b) Tenant shall pay to Landlord, to the maximum extent legally
permissible, an amount equal to (i) the rents that would have been paid pursuant
to this Lease but for such legal rent restriction less (ii) the rents paid by
Tenant during the period such legal rent restriction was in effect.
1.(d) No payment by Tenant or receipt or acceptance by Landlord of a
lesser amount than the correct fixed annual rent or additional rent shall be
deemed to be other than a payment on account, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment be deemed
an accord and
-6-
<PAGE> 10
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance or pursue any other remedy provided in
this Lease or at law.
1.(e) In order to compensate Landlord for the expenses involved in
handling delinquent payments, Tenant shall pay, as additional rent, a late
charge of four (4%) percent of the amount of any installment of fixed annual
rent or payment of additional rent remaining unpaid on the tenth day after
written notice to Tenant. Nothing herein contained shall excuse Tenant from
paying all rent or any other sum due under this Lease on the dates when same are
due hereunder.
1.(f) Landlord shall have the same rights and remedies (including,
without limitation, the right to commence a summary proceeding) for a default in
the payment of additional rent as for a default in the payment of fixed annual
rent notwithstanding the fact that Tenant may not then also be in default in the
payment of fixed annual rent.
ARTICLE 2.
CONDITION OF PREMISES
2.(a) Tenant is fully familiar with the condition of the Premises and
hereby accepts possession of the Premises in their current "as is" condition
except for latent defects other than asbestos.
2.(b) Tenant acknowledges that the Building including the Premises, is
sprinklered and that the bathrooms in the Premises will be delivered to Tenant
in their current "as-is" condition.
2.(c) Landlord shall not be required to perform any work in the
Premises except that Landlord shall, at its sole cost and expense, remove all
asbestos from the Premises of which Tenant informs Landlord in writing, prior to
the completion of Tenant's Initial Work (as hereinafter defined). Landlord shall
not be responsible for removing any asbestos from the Premises of which Tenant
fails to inform Landlord in writing prior to completion of Tenant's Initial Work
and Landlord shall not be responsible for removing any floor or ceiling tiles
containing asbestos. Landlord shall perform all such asbestos removal work: (i)
promptly after being notified of the existence of any such asbestos by Tenant in
writing; (ii) in a manner so as not to interfere with, or delay, Tenant's
Initial Work; and (iii) in compliance with all Legal Requirements. In the event
that Landlord shall fail to perform any such asbestos removal work in accordance
with all of the terms and conditions of the immediately preceding sentence and
Landlord does not remedy any such failure within ten (10) days following written
notice from Tenant, then Tenant, following an additional (10) day written notice
to Landlord, shall have the right to perform any such asbestos
-7-
<PAGE> 11
removal work on behalf of Landlord and may offset Tenant's reasonable cost
therefor against the next installments of fixed annual rent due under this
Lease. Prior to Tenant's completion of Tenant's Initial Work, Landlord shall
deliver to Tenant a letter from the asbestos removal company indicating that the
asbestos that Tenant informed Landlord of in writing was removed from the
Premises. Notwithstanding anything to the contrary contained herein, any
asbestos which may be discovered in the Premises following the completion of
Tenant's Initial Work, shall be promptly removed by Landlord, (provided Tenant
informs Landlord in writing of the asbestos to be removed), in accordance with
all Legal Requirements and in a manner so as not to interfere with Tenant's use
of the Premises. Tenant shall reimburse Landlord for one half of all of
Landlord's actual costs in connection with such removal. Landlord and Tenant
acknowledge that the removal of asbestos from the Premises by Landlord may occur
simultaneously with the performance of Tenant's Initial Work and Landlord and
Tenant agree to cooperate in good faith, with the other party so as not to
interfere with the performance of each other's work.
2.(d) All work performed by Tenant in accordance with the provisions of
this Lease shall require the installation of new materials at least comparable
to the quality now present in the Building and shall be performed in accordance
with the terms and conditions of this Lease and the Construction Rules and
Regulations.
2.(e) Landlord shall make available to Tenant, the amount of Landlord's
Contribution (as such term is defined in the Work Letter annexed hereto as
Exhibit A and made a part hereof) subject to, and in accordance with, the terms
of such Work Letter.
ARTICLE 3.
ARBITRATION
3.(a) In any case in which it is specifically provided by the terms of
this Lease that a matter shall be determined by arbitration, such arbitration
shall be conducted by a single arbitrator pursuant to applicable statutes of the
State of New York at the time in effect and, to the extent permitted by said
statutes, in the manner specified in this Article 3 and, to the extent not
inconsistent with said statutes and this Article 3, in accordance with the
Commercial Arbitration Rules for expedited arbitration at the time in effect of
the American Arbitration Association; provided that the arbitrator selected
hereunder shall be a person of recognized competence who is unaffiliated with
either party to this Lease (either by direct or indirect relationship or
significant business relationship) and shall have at least ten (10) years'
experience as a commercial real estate broker or appraiser in the City of New
York. The arbitrator shall be chosen by the American Arbitration Association in
accordance with the Commercial Arbitration Rules for expedited arbitration.
-8-
<PAGE> 12
3.(b) The party desiring such arbitration shall give written notice to
that effect to the other party and, in such notice, shall specify the nature of
the dispute to be arbitrated. Each of Tenant and Landlord shall submit (a
"Submission") stating its position (including all relevant figures and amounts,
as appropriate) in such dispute to the arbitrator, in writing, within seven (7)
days of the selection of the arbitrator and such arbitrator shall determine such
matter as promptly as possible; provided that:
(i) The arbitrator shall have the right only to interpret and apply
the terms of this Lease, and may not change any such terms or deprive any party
to this Lease of any right or remedy expressly or impliedly provided in this
Lease. Landlord and Tenant each shall be entitled to present evidence and
arguments to the arbitrator; and
(ii) The arbitrator shall select either Tenant's or Landlord's
Submission (without modification) as its decision, which decision shall be final
and binding in accordance with the provisions of the laws of the State of New
York. The arbitrator shall give written notice of its determination to Landlord
and Tenant and shall furnish to each a signed copy of such determination.
3. (c) The fees and expenses of the arbitrator shall be borne equally
by Landlord and Tenant.
3. (d) In the event of the failure, refusal or inability of the
arbitrator to act, a new arbitrator shall be appointed in his/her stead, which
appointment shall be made in the same manner as hereinbefore provided for the
appointment of the arbitrator so failing, refusing or unable to act, or to
continue to act.
3.(e) During any period of arbitration under this Article 3, neither
Landlord nor Tenant shall be deemed to be in default with respect to the
performance of any covenant, duty or obligation relating to such matter, and any
grace period or permitted delay in such performance otherwise provided for in
this Lease shall be automatically extended by such period of arbitration.
However, notwithstanding the foregoing in the event that Fair Market Rental
Value for Option 1 or Option 2 is being determined by arbitration, Tenant agrees
to pay during the period of arbitration, the Fixed Annual Rent chargeable and in
effect on the Expiration Date with respect to Option 1, and on the last day of
Option 1 with respect to Option 2, without prejudice to any of its rights until
there has been a determination of the arbitration. After such determination of
the arbitrator the Fixed Annual Rent shall be adjusted in accordance with the
arbitrator's decision and Tenant shall be credited for any overpayment or
debited for the additional Fixed Annual Rent due and owing.
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<PAGE> 13
ARTICLE 4.
REAL ESTATE TAX ESCALATION
4.(a) For the purposes of this Article 4, the following definitions
shall apply:
(i) The term "Taxes" shall mean all real estate taxes,
assessments, sewer and water rents, governmental levies, municipal taxes, county
taxes or any other governmental charge, general or special, ordinary or
extraordinary, unforeseen as well as foreseen, of any kind or nature whatsoever
(excluding metered charges) that are or may be assessed, levied or imposed upon
all or any part of the land (hereinafter referred to as the "Land") on which the
Building is situated, the Building and the sidewalks, vaults (excluding vaults
used by tenants), arcades, plazas, alleys or streets in front of or adjacent
thereto, including any tax, excise or fee payable as a result of the Building
being situated in a business improvement district, including any tax, excise or
fee measured by or payable with respect to any rent levied against Landlord
and/or the Land and/or the Building as though this was the only property of the
Landlord, under the laws of the United States, the State of New York, or any
political subdivision thereof, or by the City of New York, or any political
subdivision thereof but excluding any income, franchise, corporate, estate,
inheritance, succession, capital stock, transfer or mortgage recording tax
levied on Landlord. If, due to a future change in the method of taxation or in
the taxing authority, a new or additional real estate tax, or a franchise,
income, transit, profit or other tax or governmental imposition, however
designated, shall be levied against Landlord, and/or the Land and/or the
Building, and/or the sidewalks, arcades, plazas,--alleys or streets in front of
or adjacent thereto, in substitution in whole or in part for any tax which would
constitute "Taxes," or in lieu of additional Taxes, such tax or imposition shall
be deemed for the purposes hereof to be included within the term "Taxes."
(ii) The term "Tax Year" shall mean each period of twelve
months, commencing on the first day of July of each such period, in which occurs
any part of the Term or such other period of twelve months occurring during the
Term as hereafter may be duly adopted as the fiscal year for real estate tax
purposes of the City of New York.
(iii) The term "Escalation Statement" shall mean a statement
setting forth the amount payable by Tenant for a specified Tax Year pursuant to
this Article 4 as reasonably estimated by Landlord (not to exceed 105% of
Tenant's Tax Payment (as hereinafter defined) for the preceding Tax Year) and a
copy of all relevant tax bills.
4.(b) (i) Tenant shall pay as additional rent for the Tax Year
beginning on July 1, 1998 and each Tax Year thereafter a sum (hereinafter
referred to as "Tenant's Tax Payment") equal to Tenant's Proportionate Share of
the amount by which the Taxes for such Tax Year exceed the Base Taxes. Tenant's
Tax Payment for each Tax
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Year shall be due and payable in advance in monthly installments on the first
day of each month during each Tax Year, initially based upon the Escalation
Statement furnished prior to the commencement of such Tax Year, until such time
as the amount of the Taxes for such Tax Year shall be determined by the City of
New York, at which point, such monthly installments shall be adjusted based on
the actual amount of the Taxes for such Tax Year. Tenant shall, within thirty
(30) days thereafter, pay to Landlord an amount equal to the amount of any
underpayment of Tenant's Tax Payment with respect to any Tax Year and, in the
event of an overpayment, Tenant may credit against subsequent payments of fixed
annual rent and additional rent the amount of Tenant's overpayment. If there
shall be any increase in Taxes for any Tax Year, whether during or after such
Tax Year, Landlord shall furnish a revised Escalation Statement for such Tax
Year, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid
substantially in the same manner as provided in the preceding sentence. If
during the Term, Taxes are required to be paid to the appropriate taxing
authorities in full or in monthly, quarterly, semiannually or other
installments, on any other date or dates than as presently required, then at
Landlord's option, Tenant's Tax Payments shall be correspondingly accelerated or
revised so that said Tenant's Tax Payments are due at least 30 days prior to the
date payments are due to the taxing authorities. The benefit of any discount for
any early payment or prepayment of Taxes shall accrue solely to the benefit of
Landlord and such discount shall not be subtracted from Taxes. Landlord shall
provide Tenant with a copy of the tax invoices upon which the Tenant's Tax
Payment is based. Tenant shall not pay any portion of late charges or interest
on late Tax Payments.
(ii) If the real estate tax fiscal year of The City of New
York shall be changed during the Term, any Taxes for such fiscal year, a part of
which is included within a particular Tax Year and a part of which is not so
included, shall be apportioned on the basis of the number of days in such fiscal
year included in the particular Tax Year for the purpose of making the
computations under this Section 4.(b).
(iii) If the Taxes for any Tax Year for which Tenant shall
have paid additional rent pursuant to this Article shall be adjusted, corrected
or reduced whether as the result of protest of any tentative assessment, or by
means of agreement, or as the result of legal proceedings, the additional rent
becoming due for said Tax Year pursuant to this Article shall be determined on
the basis of said corrected, adjusted or reduced Taxes. If Tenant shall have
paid any additional rent pursuant to this Article for such Tax Year prior to any
said adjustment, Landlord shall credit or refund to Tenant any excess amount
thus paid as reflected by said adjusted Taxes, less Tenant's Proportionate Share
of any cost, expense or fees, not to exceed thirty three percent (33%) of the
Tax reduction (including experts' and attorneys' fees but excluding Landlord's
actual out-of-pocket costs of administration and coordination) incurred by
Landlord in obtaining said tax adjustment. If said tax adjustment shall occur
prior to Tenant's payment of any said Taxes due hereunder as additional rent,
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Tenant shall pay, as additional rent, Tenant's Proportionate Share of any cost,
expenses or fees (including experts' and attorneys' fees but excluding
Landlord's costs of administration and coordination) incurred by Landlord in
obtaining said tax adjustment.
4.(c) In the event that the date of the expiration or other termination
of this Lease shall be a day other than the last day of a Tax Year, then, in
applying the provisions of this Article 4 with respect to any Tax Year in which
such event shall have occurred, appropriate adjustments shall be made to reflect
the occurrence of such event on the basis of the portion of such Tax Year that
shall have elapsed prior to the date of such expiration or termination in the
case of the Expiration Date or other termination.
4.(d) In no event shall the fixed annual rent be reduced by operation
of this Article 4. Except as provided in Section 4(e) hereof, the rights and
obligations of Landlord and Tenant under the provisions of this Article 4 with
respect to any additional rent shall survive the expiration or other termination
of this Lease.
4.(e) Landlord's failure to render an Escalation Statement with respect
to any Tax Year shall not prejudice Landlord's right thereafter to render an
Escalation Statement with respect thereto or with respect to any subsequent Tax
Year so long as the Escalation Statement is rendered within one (1) year of the
preceding Tax Year. For example, Landlord may render an Escalation Statement for
the 1998/1999 Tax Year through and including June 30, 2000. Subject to the
previous sentence, payments shall be made pursuant to this Article 4
notwithstanding the fact that an Escalation Statement is furnished to Tenant
after the expiration of the Term.
4.(f) Landlord shall deliver to Tenant within a reasonable time upon
its receipt, a statement containing a copy of the City's tax bill for the
applicable Tax Year ("Statement") which shall be conclusive and binding upon
Tenant unless within 60 days after receipt of such Statement, Tenant shall
notify Landlord in writing that it disputes the correctness of Tenant's Tax
Payment for such Tax Year, specifying the particular respects in which such
Statement is claimed to be incorrect. Pending the determination of such dispute,
Tenant shall pay additional rent in accordance with the relevant Escalation
Statement, without prejudice to Tenant's position.
ARTICLES 5.
USE
5.(a) The Premises may only be used by Tenant for the Permitted Use and
for no other purpose whatsoever.
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5.(b) Tenant shall not use or permit the use of the Premises or any
part thereof in any way that would violate any of the covenants, agreements,
terms, provisions and conditions of this Lease or for any unlawful purposes or
in any unlawful manner. Tenant shall not suffer or permit the Premises or any
part thereof to be used in any manner or anything to be done therein or anything
to be brought into or kept therein that shall in any way impair or interfere
with (a) the character, reputation or appearance of the Building as a high
quality office building, (b) any of the Building services, (c) the proper and
economic heating, cleaning, air-conditioning, ventilating or other servicing of
the Building or the Premises, or (d) the use of any of the other areas of the
Building by, or occasional discomfort, inconvenience or annoyance to any of the
other tenants or occupants of the Building. Tenant shall not install any
electrical or other equipment of any kind that causes any such impairment,
interference, discomfort, inconvenience or annoyance.
5.(c) If any governmental license or permit (other than a Certificate
of Occupancy for the Building or any other license or permit required of all
tenants occupying space for executive and general office use in the Borough of
Manhattan) shall be required for the proper and lawful conduct of Tenant's
business in the Premises or any part thereof or for Tenant's occupancy of the
Premises, Tenant at its expense shall procure, maintain and comply with the
terms and conditions of such license or permit and, promptly after request,
submit the same to Landlord for inspection.
5.(d) Tenant acknowledges and agrees that the value of the Premises and
the reputation of the Landlord will be seriously injured if the Premises are
used for any obscene or pornographic purposes or any sort of commercial sex
establishment. Tenant agrees that it will not bring or permit any obscene or
pornographic material on the Premises, however, Tenant may receive obscene
software for its review only and shall not permit or conduct any pornographic,
nude, or semi-nude live performances on the Premises, nor permit use of the
Premises for nude modeling, rap sessions, or as a so-called rubber goods shop,
or as a sex club of any sort, or as a "massage parlor." Tenant agrees further
that it will not permit any of these uses by any sublessee of the Premises or
assignee of this Lease. This Section 5(d) shall directly bind any successors in
interest to Tenant. Tenant agrees that if at any time it violates any of the
provisions of this Section 5(d), such violation shall be deemed a breach of a
substantial obligation of the terms of this Lease and objectionable conduct.
Pornographic material is defined for purposes of this Section 5(d) as any
written or pictorial matter with prurient appeal or any objects or instrument
that are primarily concerned with lewd or prurient sexual activity. For the
purposes of this Section 5.(d) the term "obscene material" shall have the
meaning as set forth in New York State Penal Law Section 235.00.
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ARTICLE 6.
ALTERATIONS AND INSTALLATIONS
6.(a) Tenant shall make no Alterations in or to the Premises without
Landlord's prior written consent (including, without limitation, any work in
connection with the Tenant's initial occupancy of the Premises) which approval
shall not be unreasonably withheld, conditioned or delayed. Every Alteration
shall be done at Tenant's sole cost and expense and in the case of Tenant's
Initial Work, shall be performed in accordance with the Work Letter annexed
hereto as Exhibit A and incorporated herein. Tenant shall notify Landlord in
writing of every addition, construction, improvement, installation or
modification of or to the Premises which requires filings with any state or
municipal agency, including, but not limited to the New York City Department of
Buildings and Landlord shall cooperate in processing and signing Tenant's
filings to perform such alterations.
6.(b) Every Alteration in or to the Premises shall be performed in
accordance with and shall conform to the Contractor Rules and Regulations
incorporated herein in Schedule 5 and the provisions of this Lease and shall be
effected solely in accordance with plans and specifications first approved in
writing by Landlord. Such plans and specifications shall be prepared at Tenant's
sole cost and expense by a professional registered architect and shall be
complete, finished detailed architectural drawings and specifications for the
Alteration. Landlord will not unreasonably withhold, condition or delay its
consent to any Alterations, the plans therefor or the contractors who are to
perform same.
6.(c) With respect to every Alteration:
(i) All work shall be done in a good and worker like manner
and shall not interfere with the operation of the Building or impose any
additional expense upon Landlord in the construction, maintenance, repair or
operation of the Building.
(ii) Tenant will inform Landlord in writing of the names of
any contractor or subcontractor Tenant proposes to use in the Premises at least
ten days prior to the beginning of work by such contractor or subcontractor. Any
contractor employed by Tenant (and all subcontractors) shall agree to employ
only such labor as will not result in jurisdictional disputes or strikes or
cause disharmony with other workers employed at the Building. Upon the happening
of any such dispute, strike or disharmony, Tenant shall immediately upon notice
from Landlord discontinue the labor giving rise thereto. In the event Tenant
fails to do so, Landlord, in addition to any rights available to it under this
Lease and pursuant to law, shall have the right to seek an injunction with or
without notice.
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(iii) Except with respect to Tenant's Initial Work, Tenant
shall pay its contractors or subcontractors, in a timely fashion and perform the
work shown on Tenant's approved plans and specifications subject to reasonable
retainage. Within a reasonable time, not to exceed 30 days, after completion of
the Alteration, Tenant shall furnish Landlord with reasonable evidence that
payment has been made for the Alteration together with a waiver of lien by
Tenant's contractor in the amount of such payment.
(iv) Tenant shall cause the Alteration to be made in
compliance with Legal Requirements. Tenant shall furnish to Landlord copies of
all governmental permits and authorizations that may be required in connection
with any Alteration. All such governmental permits and authorizations shall be
obtained by Tenant at its sole cost and expense and Tenant shall pay the cost of
filing Tenant's plans and specifications with the appropriate governmental
authorities.
(v) Tenant shall perform any Alterations so that they: (i) are
of good quality; (ii) are free and clear of Liens; (iii) substantially conform
to the plans and specifications as approved by Landlord; and (iv) be fit for the
intended use and purpose. In the event that the Alterations do not comply with
provisions (i) through (iv) of this subparagraph, Tenant shall commence to cure
such nonconforming work within five (5) days after written notice from Landlord.
(vi) Tenant shall keep the Building and the Premises free and
clear of all Liens for any work or material claimed to have been furnished to
Tenant or to the Premises on Tenant's behalf, and all work to be performed by
Tenant shall be done in a manner that will not unreasonably interfere with or
disturb other tenants or occupants of the Building.
(vii) During the progress of the work to be done by Tenant,
said work shall be subject to reasonable inspection by representatives of
Landlord who shall be permitted access and the opportunity to inspect, at all
reasonable times on reasonable notice, but this provision shall not in any way
whatsoever create any obligation on Landlord to conduct any such inspection.
(viii) Except with respect to Tenant's Initial Work as defined
in the Work Letter annexed hereto and incorporated herein, with respect to any
Alteration costing more than $100,000.00, Tenant agrees to pay Landlord, as
additional rent, within ten days of demand, an amount equal to Landlord's out of
pocket expenses in connection with the Alteration (not to exceed $1,000.00) in
question for the review of Tenant's plans and specifications.
(ix) Prior to commencement of any Alteration, Tenant's Initial
Work, or any subsequent structural work, Tenant shall furnish to Landlord
original certificates
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of insurance naming Landlord and its designated managers and agents as
additional insureds as their respective interests may appear and evidencing the
existence of:
o Workers' compensation insurance covering all persons
employed for such work; and
o Commercial general liability (including contractual
liability) and property damage insurance, with coverage of at least $5,000,000
per occurrence for bodily or personal injury (including death) and $1,000,000 in
respect of property damage.
Such insurance shall be maintained at all times during the performance of the
work and shall not be cancelable except on 30 days' prior written notice to
Landlord.
(x) Upon completion of each Alteration, Tenant shall remove,
at its sole cost and expense, all debris from the Premises and clean the same.
(xi) Upon completion of each Alteration for which plans are
prepared, Tenant shall deliver "marked" or "as-built" plans for such Alteration
to Landlord at Tenant's sole cost and expense.
6.(d) Landlord shall not be responsible for any labor or materials
furnished to Tenant, or for delays of any kind experienced by Tenant's
contractors unless such delay is caused by Landlord. No Lien for any labor,
materials, or other services or things furnished to Tenant shall attach to or
affect Landlord's estate or interest in the Premises, the Land and/or the
Building. Tenant agrees to discharge, at Tenant's expense (whether by payment,
bonding, or otherwise) every Lien filed against the Premises, the Land and/or
the Building for work claimed to have been done for or materials claimed to have
been furnished to Tenant, within 30 days after receiving notice of the same.
Tenant shall require that all contractors and subcontractors engaged in
connection with Tenant's Alterations indemnify and hold Landlord harmless
against any and all claims for injury to persons or damage to property by reason
of such contractor's or subcontractor's use of the Premises or performance of
the work, including any claims, fines and penalties imposed due to a failure to
comply with Laws.
6.(e) Notice is hereby given that Landlord shall not be liable for any
labor or materials furnished or to be furnished to Tenant upon credit, and that
no mechanic's or other Lien for any such labor or materials shall attach to or
affect the reversion or other estate or interest of Landlord in and to the
Premises.
6.(f) All Alterations, additions, paneling, partitions, doors, railings
and like installations installed in the Premises at any time, either by Tenant
or by Landlord or others on Tenant's behalf and whether installed or purchased
at Landlord's or
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Tenant's expense (collectively, the "Leasehold Improvements") shall become the
property of Landlord upon the expiration or earlier termination of this Lease.
The Leasehold Improvements shall remain upon, and shall be surrendered with, the
Premises.
6.(g) If any alterations, installations, additions, improvements or
other property that Tenant shall be obligated to remove are not removed on or
prior to the expiration of the Term, Landlord shall have the right to remove
such property and to dispose of the same without accountability to Tenant and at
the sole cost and expense of Tenant. In case of any damage to the Premises or
the Building resulting from the removal of the property by Tenant, Tenant shall
repair such damage or, in default thereof, shall reimburse Landlord for
Landlord's actual out of pocket cost in repairing such damage. Tenant's
obligations under this Section 6.(g) shall survive the expiration or other
termination of this Lease.
6.(h) Tenant shall keep records of Tenant's Alterations, installations,
additions and improvements costing in excess of $5,000.00, and of the component
(category) cost thereof. Tenant shall, within 45 days after demand by Landlord,
furnish to Landlord copies of such records and cost if Landlord shall require
same in connection with any proceeding to reduce the assessed valuation of the
Building, or in connection with any proceeding instituted pursuant to Article 14
hereof.
ARTICLE 7.
REPAIRS
7.(a) (i) Tenant shall, at its sole cost and expense, take good care of
the Premises and the fixtures and appurtenances therein (including, without
limitation, bathroom and plumbing fixtures and appurtenances) and make all
repairs thereto as and when needed to preserve them in good working order and
condition and maintain the Premises in a condition consistent with offices in
comparable office buildings. Landlord, at its sole cost and expense, shall
promptly replace all broken glass of the exterior windows in the Premises.
Tenant shall be responsible for all repairs, maintenance and replacement of wall
and floor coverings in the Premises and for the repair and maintenance of all
sanitary and electrical fixtures (excluding the Class E System) and equipment
therein. Subject to the provisions of Sections 9(h)(i) and 9(h)(iii) hereof, all
damage or injury to the Premises and to its fixtures, appurtenances and
equipment or to the Building or to its fixtures, appurtenances and equipment
caused by or which arises out of (i) Tenant moving property in or out of the
Building, or (ii) the installation or removal of furniture, fixtures or other
property by Tenant, or (iii) the performance by Tenant or existence of any
Alterations or repairs in the Premises or (iv) the installation, use or
operation of Tenant's property in the Premises or (v) negligence, wilful or
improper conduct on the part of Tenant, its servants,
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employees, agents, visitors, or licensees, shall be repaired, restored or
replaced promptly at Tenant's sole cost and expense to the reasonable
satisfaction of Landlord. However, if by reason of (1) strike, (2) labor
troubles, (3) governmental preemption in connection with a national emergency,
(4) any rule, order or regulation of any governmental agency, or (5) conditions
of supply or demand which are affected by war or other national, state or
municipal emergency (each, a "Force Majeure Event"), Tenant shall not be able to
fulfill its obligations under this Lease, this Lease and Tenant's obligation to
pay fixed annual rent and additional rent hereunder, shall not otherwise be
affected, impaired or excused, but Tenant shall not be deemed in default in the
performance of any obligations under this Lease, provided, that as soon as
Tenant shall learn of the happening of any Force Majeure Event, Tenant shall
promptly notify Landlord of same, and, if ascertainable, its estimated duration,
and Tenant will proceed promptly and diligently with the fulfillment of its
obligations as soon as reasonably possible. Any repairs required to be made by
Tenant to the mechanical, electrical, plumbing, sanitary, heating, ventilating,
Building's air-conditioning, fire safety or other systems of the Building shall
be performed only by contractor(s) who are reasonably acceptable and approved by
Landlord. All repairs, restorations and replacements made by Tenant shall be in
quality and class equal to the original work or installations currently in the
Building. If Tenant fails to make such repairs, restoration or replacements
within thirty (30) days after notice and demand, subject to any necessary
extension as a result of a Force Majeure Event, same may be made by Landlord at
the expense of Tenant and such expense shall be collectible as additional rent
and shall be paid by Tenant within ten (10) days after rendition of a bill
therefor.
(ii) Except as otherwise provided for herein, the exterior
walls of the Building, elevators and elevator shafts, and other Building shafts,
and conduits which extend to any floor above or below the Premises, and the
portions of any window sills outside the windows, and the windows are not part
of the Premises and Landlord reserves all rights to such parts of the Building.
7.(b) Tenant shall not place a load upon any floor of the Premises
exceeding the floor load per square foot area that such floor was designed to
carry and that is allowed by law. If Tenant shall desire a floor load in excess
of that which such floor was designed to carry and which is allowed by law,
Tenant shall submit plans and specifications for such floor load to Landlord for
Landlord's review and approval which shall not be unreasonably withheld,
conditioned or delayed. In determining whether to grant its consent Landlord
shall consider whether the work necessary to increase such floor load (i)
adversely affects the structure of the Building, (ii) interferes with the amount
or availability of any space adjoining alongside, above or below the Premises,
(iii) will interfere with the occupancy of other tenants in the Building and
(iv) may be accomplished without disturbing the load bearing columns, walls or
configuration of the Building.
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7.(c) Business machines and mechanical equipment used by Tenant that
cause vibration, noise, cold or heat that may be transmitted to the Building
structure or to any leased space to such a degree as to be reasonably
objectionable to Landlord or to any other tenant in the Building shall be placed
and maintained by Tenant at its expense in settings of cork, rubber or spring
type vibration eliminators sufficient to absorb and prevent such vibration or
noise, or prevent transmission of such cold or heat.
7.(d) Except as otherwise specifically provided in this Lease, there
shall be no allowance to Tenant for a diminution of rental value and no
liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from the making of any repairs, alterations,
additions or improvements in or to any portion of the Building or the Premises
or in or to fixtures, appurtenances or equipment thereof. Landlord shall
exercise reasonable diligence so as to minimize any interference with Tenant's
business operations, but shall not be required to perform the same on an
overtime or premium pay basis unless the inconvenience or annoyance to Tenant's
business materially interferes with Tenant's business operations.
7.(e) Tenant will not clean, nor require, permit, suffer or allow any
window in the Premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable Legal Requirement.
7.(f) Landlord shall maintain and repair the exterior and structural
portions of the Building including the structural portions of the Premises and
shall maintain and repair the public portions of the Building's interior and the
Building's plumbing, fire safety, electrical, heating and ventilating systems
serving the Premises.
ARTICLE 8.
REQUIREMENTS OF LAW
8.(a) If Tenant receives any notice of any violation of any Legal
Requirement, Tenant shall give prompt written notice thereof to Landlord. Tenant
shall comply with all Legal Requirements which shall impose any violation, order
or duty upon Landlord or Tenant with respect to the Premises (including, without
limitation, the performance of any alterations under the Americans with
Disabilities Act of 1990) or the use or occupation thereof (in which event
Tenant shall effect such compliance at its sole cost and expense) provided,
however, that the need for compliance with any such Legal Requirement directly
arises out of Tenant's particular manner of use of the Premises and is not a
Legal Requirement of general application. Landlord shall be responsible, at its
own cost and expense, for compliance with all other Legal Requirements. If, as a
result of any act by Tenant in violation of this Lease, any Legal Requirement is
violated, Tenant, at its sole cost and expense, shall cause any such violation
to be promptly cured. The foregoing shall include any structural alterations
necessary to
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effect such a cure provided the act or omission by Tenant in violation of this
Lease is attributable to Tenant's use or occupancy of the Premises.
8.(b) (i) Without limiting the generality of Section 8.(a), if any
Legal Requirement shall require (i) the inspection of Building systems or any
Tenant improvement to ascertain the amount of chlorofluorocarbons ("CFCs"),
including freon, that Tenant improvements are emitting or leaking into the
atmosphere, (ii) additional maintenance of any Tenant improvements relating to
the presence of CFCs, or (iii) any Tenant improvement to reduce or eliminate the
emission or presence of CFCs, then Tenant shall pay upon written demand,
Tenant's Proportionate Share of the cost of such compliance by Landlord or
Tenant shall, at Tenant's sole cost and expense, promptly make such conversion,
change, alteration, modification or replacement of Tenant's improvements as may
be necessary or required in the Premises.
(ii) Without limiting the generality of Section 8.(a), Tenant,
at its sole cost and expense, shall comply with all Legal Requirements regarding
the collection, sorting, separation and recycling of its waste products,
garbage, refuse and trash. Tenant shall sort and separate such waste products,
garbage, refuse and trash into such categories as is provided by any Legal
Requirements. Each separately sorted category of waste products, garbage, refuse
and trash shall be placed in separate receptacles reasonably supplied by and
approved by Landlord. Such separate receptacles may, at Landlord's option, be
removed from the Premises in accordance with a collection schedule prescribed by
any Legal Requirements. Landlord reserves the right to refuse to collect or
accept from Tenant any waste products, garbage, refuse or trash that is not
separated and sorted as required by any Legal Requirement, and to require Tenant
to arrange for such collection at Tenant's sole cost and expense, utilizing a
contractor satisfactory to Landlord. In the event Landlord receives any monetary
benefit from the disposal or recycling of Tenant's garbage, refuse and trash,
Tenant shall receive a credit, after Landlord deducts its reasonable actual
expenses, in the amount of Tenant's Proportionate Share of such amount, to its
fixed annual rental payment in the month after Landlord receives such monetary
benefit.
8.(c) Notwithstanding the provisions of Sections 8.(a) and 8.(b)
hereof, Tenant, at its own cost and expense, in its name and/or (whenever
necessary) Landlord's name, may contest, in any manner permitted by law
(including appeals to a court or governmental department or authority having
jurisdiction in the matter), the validity or the enforcement of any governmental
act, regulation or directive with which Tenant is required to comply pursuant to
this Lease, and may defer compliance therewith during the course of such
contest, provided that (a) such non-compliance shall not subject Landlord to
criminal prosecution or subject the Land and/or Building to Lien or sale, (b)
such non-compliance shall not be in violation of any fee mortgage or of any
ground or underlying lease or any mortgage thereon and (c) Tenant shall
prosecute such contest promptly and diligently to its conclusion.
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8.(d) Landlord, without expense or liability to it, shall cooperate
with Tenant and execute any documents or pleadings required for such purpose,
provided that Landlord shall be reasonably satisfied that the facts set forth in
any such documents or pleadings are accurate.
ARTICLE 9.
INSURANCE. LOSS. REIMBURSEMENT AND LIABILITY
9.(a) Tenant shall not do, permit or suffer to be done any act or thing
upon the Premises that would invalidate or be in conflict with New York standard
fire and property damage insurance policies covering the Building, and fixtures
and property therein, or that would increase the rate of insurance applicable to
the Building to an amount higher than it otherwise would be; and Tenant shall
not do nor shall Tenant permit to be done any act or thing upon the Premises
that shall or might subject Landlord to any liability or responsibility for
injury to any person or persons or to property by reason of any business or
operation being carried on within the Premises.
9.(b) If, as a result of any act or omission by Tenant or violation of
this Lease, after applicable notice, grace and cure periods, the rate of any
insurance applicable to the Building shall be increased to an amount higher than
it otherwise would be, Tenant shall reimburse Landlord and provide copies of all
insurance bills for all increases of Landlord's insurance premiums so caused
provided that Landlord provides to Tenant copies of Landlord's insurance bills
evidencing any such increase; such reimbursement to be additional rent payable
upon the first day of the month following any outlay by Landlord for such
increased insurance premiums. In any action or proceeding wherein Landlord and
Tenant are parties, a schedule or "make-up" of rates for the Building or
Premises issued by the body making insurance rates for the Premises, shall be
presumptive evidence of the facts therein stated and of the several items and
charges in the insurance rate then applicable to the Premises.
9.(c) Landlord or its agents shall not be liable for any injury or
damage to persons or property (including, but not limited to, loss of profits
and injury to business) resulting from fire, explosion, falling plaster, steam,
gas, electricity, water, rain or snow or leaks from any part of the Building, or
from the pipes, appliances or plumbing works or from the roof, street or
subsurface or from any other place or by dampness or by any other cause of any
nature, unless any of the foregoing shall be caused by or due to the negligence
or willful misconduct of Landlord, its agents, servants, contractors or
employees.
9.(d) Landlord shall not be liable for any damage which Tenant may
sustain, if at any time any window of the Premises is broken, due to Tenant's
arbitrary or negligent acts nor shall Landlord be liable for any damage which
Tenant may sustain,
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if at any time any window of the Premises is broken, or temporarily darkened
unless same is due to Landlord's arbitrary or negligent acts. For purposes
hereof, "temporarily" shall mean five (5) days or less.
9.(e) Subject to the provisions of Section 8.(c) hereof, where
applicable, Tenant shall have the right, at Tenant's own cost and expense, to
participate in the defense of any action or proceeding brought against Landlord,
and in negotiations for settlement thereof if, pursuant to this Section 9.(e),
Tenant could have any liability in connection therewith.
9.(f) Tenant shall give Landlord notice in case of fire, discovery of
asbestos or accidents in the Premises promptly after Tenant becomes aware of
such event.
9.(g) Landlord's officers, directors and members (and, in case Landlord
shall be a joint venture, partnership, tenancy-in-common, association or other
form of joint ownership, the members of any such joint venture, partnership,
tenancy-in-common, association or other form of joint ownership) shall have
absolutely no personal liability with respect to any provision of this Lease or
any obligation or liability arising therefrom. Tenant shall look solely to
Landlord's estate and interest in the Land and Building, and the lease of the
Building or of the Land and Building, the Premises and insurance proceeds for
the satisfaction of any right or remedy of Tenant for the collection of a
judgment (or other judicial process) requiring the payment of money by Landlord.
No other property or assets of Landlord or any agent, officer, director or
member shall be subject to levy, execution, attachment, or other enforcement
procedure for the satisfaction of Tenant's remedies under or with respect to
this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use
and occupancy of the Premises, or any other liability of Landlord to Tenant.
However, nothing contained in this Section shall be construed to permit Tenant
to offset against rents due a successor landlord a judgment (or other judicial
process) requiring the payment of money by reason of any default of a prior
landlord. Notwithstanding anything herein to the contrary, Tenant's officers,
shareholders, directors and members shall have no personal liability with
respect to any provisions of this Lease.
9.(h) (i) Landlord shall obtain all-risk insurance for the Building in
amount equal to the replacement cost thereof, including the replacement cost of
Tenant's leasehold improvements but, excluding Tenant's furniture, furnishings
and other removable personal property and fixtures. Such policies shall include
appropriate clauses pursuant to which the insurance companies (i) waive all
right of subrogation against Tenant with respect to losses payable under such
policies and (ii) agree that such policies shall not be invalidated should the
insured waive in writing prior to a loss any or all right of recovery against
any party for losses covered by such policies.
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(ii) Tenant shall obtain all-risk insurance in an amount equal
to the full replacement cost of Tenant's furniture, furnishings and other
removable personal property and all fixtures to the extent that the same has
been paid for by Landlord's Contribution (as defined in the Work Letter). Tenant
shall include in any property insurance policy or policies appropriate clauses
pursuant to which the insurance company or companies (i) waive the right of
subrogation against Landlord and/or any tenant of space in the Building with
respect to losses payable under such policy or policies and/or (ii) agree that
such policy or policies shall not be invalidated should the insured waive in
writing prior to a loss any or all right of recovery against any party for
losses covered by such policy or policies.
(iii) Provided that Landlord's right of full recovery under
its policy or policies aforesaid is not adversely affected or prejudiced
thereby, Landlord hereby waives any and all right of recovery that it might
otherwise have against Tenant, its servants, agents and employees, for loss or
damage occurring to the Building and the fixtures, appurtenances and equipment
therein, to the extent of the net proceeds of insurance actually received by
Landlord as a result of such loss or damage, notwithstanding that such loss or
damage may result from the negligence or fault of Tenant, its servants, agents
or employees. Provided that Tenant's right of full recovery under its aforesaid
policy or policies is not adversely affected or prejudiced thereby, Tenant
hereby waives any and all right of recovery which it might otherwise have
against Landlord, its servants, and employees, and against every other tenant in
the Building who shall have executed a similar waiver as set forth in this
Section 9.(h)(iii) for loss or damage to, Tenant's furniture, furnishings,
fixtures and other property removable by Tenant under the provisions hereof to
the extent of the net proceeds of insurance actually received by Tenant as a
result of such loss or damage, notwithstanding that such loss or damage may
result from the negligence or fault of Landlord, its servants, agents or
employees, or such other tenant and the servants, agents or employees thereof.
(iv) In the event that Tenant does not obtain the all-risk
property insurance provided for in Section 9(h)(ii) above, Tenant waives any and
all claims against Landlord for loss or damage to all such furniture,
furnishings and other removable personal property and fixtures. Notwithstanding
that such loss or damage may result from the negligence or fault of Tenant, its
servants, agents or employees, Tenant agrees to indemnify and hold Landlord
harmless against any and all claims for loss or damage to Tenant's furniture,
furnishings and other removable personal property and fixtures.
9.(i) (i) Tenant shall provide on or before the Commencement Date and
shall keep in force during the Term hereof for the benefit of Landlord and
Tenant a commercial general liability insurance policy (including contractual
liability) arising out of the use of the Premises or any appurtenances thereto
or occasioned by any occurrence on or about the Premises or any appurtenances
thereto. Such policy shall
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be not less than the amount of $5,000,000 per occurrence for bodily or personal
injury (including death) and in the amount of $1,000,000 in respect of property
damage.
(ii) All insurance required by this Lease shall be evidenced
by valid and enforceable policies issued by companies (i) licensed to do
business in the State of New York and (ii) having a financial size category of
not less than VII and with general policy holders rating of not less than "B+"
as rated by "Best's" insurance reports. All liability insurance policies
maintained by Tenant shall name Landlord and its designated managers and agents
as additional insureds. The insurance required by this Article may be carried
under a blanket policy covering the Premises and other locations of Tenant, if
any. Prior to the time such insurance is first required to be carried by Tenant
and thereafter, at least 15 days prior to the effective date of any such policy,
Tenant shall deliver to Landlord either a duplicate original of the aforesaid
policies or a certificate(s) evidencing such insurance. Said certificate(s)
shall contain an endorsement that such insurance may not be canceled except upon
30 days' written notice to Landlord.
ARTICLE 10.
DAMAGE BY FIRE OR OTHER CAUSE
10.(a) If the Premises or any part thereof shall be damaged by fire or
other casualty Tenant shall give immediate notice thereof to Landlord and this
Lease shall continue in full force and effect except as hereinafter set forth.
10.(b) (i) If the Premises are partially damaged or rendered partially
untenantable by fire or other casualty, the damage thereto shall be repaired,
including restoration of the leasehold improvements by and at the expense of
Landlord and the fixed annual rent and the additional rent payable under
Articles 1 and 4 shall be paid for the portion of the Premises affected to the
time of the casualty and Tenant shall resume such payment in accordance with the
provisions of Article 10(b)(iv).
(ii) If the Premises are totally or substantially damaged or
are rendered wholly or substantially untenantable by fire or other casualty, the
damage thereto shall be repaired, including restoration of the leasehold
improvements by and at the expense of Landlord and the fixed annual rent and the
additional rent payable under Articles 1 and 4 shall be paid to the time of the
casualty and Tenant shall resume such payment in accordance with the provisions
of Article 10(b)(iv).
(iii) If the Building shall be so damaged that Landlord shall
decide to demolish it or if at least 50% of the floor area of the Premises is
damaged or
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destroyed during the last eighteen (18) months of the Initial Term, or, if the
Term is extended by Tenant, then, during the last eighteen (18) months of Option
1 or Option 2, as the case may be, then, in any such events, Landlord may elect
to terminate this Lease by written notice to Tenant. Such notice shall be given
by Landlord within sixty (60) days after such fire or casualty specifying a date
for the expiration of the Lease, which date shall not be more than thirty (30)
days after the giving of such notice, and upon the expiration date specified in
such notice the Term shall expire as fully and completely as if such date were
the date set forth above for the termination of this Lease and Tenant shall
forthwith quit, surrender and vacate the Premises without prejudice, however, to
Landlord's rights and remedies against Tenant under the Lease provisions in
effect prior to such termination. Any rent owing shall be paid up to such date
(subject to abatement as provided in subparagraphs 10.(b)(i) and (ii) above) and
any payments of rent made by Tenant that were on account of any period
subsequent to such date shall be promptly returned to Tenant. Landlord shall
make the required repairs and restoration, in accordance with subparagraphs
10.(b)(i) and 10.(b)(ii) with all reasonable expedition during Business Days and
Business Hours, subject to delays due to adjustment of insurance claims, labor
troubles and causes beyond Landlord's control. Notwithstanding anything to the
contrary set forth herein, if at least thirty-three percent (33%) of the floor
area of the Premises is damaged and: (a) in the opinion of an independent
architect selected by Landlord (which Landlord shall select within fourteen (14)
days of any such casualty), and reasonably acceptable to Tenant, the Premises
cannot be substantially restored within twelve (12) months after the date of
such casualty, Tenant may, within fifteen (15) days following such
determination, terminate this Lease, by notice to Landlord and if Tenant timely
exercises such option, this Lease shall ipso facto terminate and come to an end
as of the date that is thirty (30) days after such event as fully and completely
as if such date were the date set forth herein for the expiration of this Lease
and Tenant shall forthwith quit, surrender and vacate the Premises, without
prejudice however, to Landlord's rights and remedies against Tenant under the
provisions in effect prior to such termination; or (b) if restoration of the
Premises is not substantially completed within twelve (12) months from the date
of any such casualty, Tenant may terminate this Lease, by first providing
Landlord with a thirty (30) day written notice to cure, and if such situation
shall continue and shall not be remedied by Landlord within thirty (30) days,
then Tenant may give to Landlord a notice of intention to end the Term at the
expiration of fifteen (15) days from the date of the service of such notice of
intention and upon the expiration of said fifteen (15) days this Lease and the
Term and estate hereby granted, shall terminate with the same effect as if that
day were the end of the Term. If less than 33% of the floor area of the Premises
is damaged and if Landlord does not substantially restore the Premises within
twelve (12) months of such casualty, Tenant may at its option, restore the
Premises, at its own cost and expense, and receive an abatement of the
installments of fixed annual rent in an amount equal to the actual cost of the
repairs together with interest at the Interest Rate until such time as Landlord
reimburses Tenant for such costs.
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(iv) After any such casualty, Tenant shall cooperate with Landlord's
restoration of the Premises by removing from the Premises as promptly as
reasonably possible, all of Tenant's salvageable inventory and movable
equipment, furniture and other property. Tenant's liability for rent shall
resume sixty (60) days after written notice from Landlord that the Premises is
substantially ready for Tenant's occupancy, and in fact, the Premises is
substantially ready for Tenant's occupancy.
10.(c) No damages, compensation or claim shall be payable by Landlord
for inconvenience, loss of business or annoyance arising from any repair or
restoration of any portion of the Premises or of the Building pursuant to this
Article 10.
10.(d) Landlord will not carry separate insurance of any kind on
Tenant's property, furniture, furnishings and other removable personal property
and fixtures alterations, installations or additions (excluding Tenant's
leasehold improvements) made to the Premises, and, except as provided by law or
by reason of its breach of any of its obligations hereunder, shall not be
obligated to repair any damage thereto or replace the same.
10.(e) The provisions of this Article 10 shall be considered an express
agreement governing any cause of damage or destruction of the Premises by fire
or other casualty, and Section 227-a the Real Property Law of the State of New
York, providing for such a contingency in the absence of an express agreement,
and any other law of like import, now or hereafter in force, shall have no
application in such case.
ARTICLE 11.
ASSIGNMENT. MORTGAGING. SUBLETTING. ETC.
11.(a) Except as otherwise provided for herein, Tenant shall not by
operation of law or otherwise (a) assign or otherwise transfer this Lease or the
Term and estate hereby granted, (b) sublet the Premises or any part thereof or
allow the same to be used or occupied by others, (c) mortgage, pledge or
encumber this Lease or the Premises or any part thereof in any manner by reason
of any act or omission on the part of Tenant or (d) advertise, or authorize a
broker to advertise, for a subtenant or assignee, the price for any portion of
the Premises. For purposes of this Article 11, (i) the transfer of a majority of
the issued and outstanding capital stock of any corporate tenant, or of a
corporate subtenant, or the transfer of a majority of the total interest in any
partnership tenant or subtenant, or the transfer of control in any limited
partnership tenant or subtenant, however accomplished, whether in a single
transaction or in a series of related or unrelated transactions, shall be deemed
an assignment of this Lease, or of such sublease, as the case may be, (ii) an
agreement by any other person or entity, directly or indirectly, to assume
Tenant's obligations under this Lease shall be deemed an assignment, (iii) any
person or legal
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representative of Tenant, to whom Tenant's interest under this Lease passes by
operation of law, or otherwise, shall be bound by the provisions of this Article
11, and (iv) a modification, amendment or extension of a sublease shall be
deemed a sublease.
11. (b) Notwithstanding anything to the contrary contained herein, any
transaction: (i) with a corporation into, or with which, Tenant is merged or
consolidated; or (ii) with an entity to which all, or substantially all, of
Tenant's assets are transferred; or (iii) with an entity that controls, or is
controlled by Tenant or is under common control with Tenant; or (vi) involving
the sale or transfer of the stock of Tenant over a nationally recognized public
stock exchange; shall not be deemed to be an assignment for purposes of this
Lease and shall not require Landlord's prior consent, except that with respect
to any transaction pursuant to which Tenant is merged or consolidated with
another entity, the same shall not require Landlord's consent provided that: (i)
if such merger or consolidation occurs during the first five (5) years of the
Term the entity resulting from such merger or consolidation shall have a net
worth of at least One Hundred Million Dollars ($100,000,000.00); and (ii) if
such merger or consolidation occurs after the first five (5) years of the Term,
the entity resulting from such merger or consolidation shall have a net worth of
at least Forty Million Dollars ($40,000,000.00). In the event that the net worth
of Tenant following any such merger or consolidation occurring during the first
five (5) years of the Term is less than One Hundred Million Dollars
($100,000,000.00), Landlord's prior consent shall not be required for any such
merger or consolidation provided that Tenant delivers to Landlord a letter of
credit, in the amount of One Million Three Hundred Thirty Three Thousand
Dollars, to be held by Landlord as additional security in accordance with the
provision of Article 35 hereof. Such letter of credit may be reduced by Tenant
to Six Hundred Sixty Seven Thousand Dollars following the fifth anniversary of
the Commencement Date. In the event that the net worth of Tenant following any
merger or consolidation occurring after the first five (5) years of the Term is
less than Forty Million Dollars ($40,000,000.00), Landlord's prior consent for
such merger or consolidation shall not be required, provided that Tenant
delivers to Landlord a letter of credit, in the amount of Six Hundred Sixty
Seven Thousand Dollars to be held by Landlord as additional security in
accordance with the provisions of Articles 35 hereof. Nothing in this Section
11(b) shall permit Tenant or any successor to use or occupy the Premises for any
purpose other than the purposes stated in Article 5 hereof.
11.(c) Any assignment or transfer, whether made with Landlord's consent
as required by Section 11(a) or without Landlord's consent pursuant to this
Article shall be made only if, and shall not be effective until, the assignee
shall execute, acknowledge and deliver to Landlord a recordable agreement, in
the form annexed hereto as Exhibit B. Tenant covenants that, notwithstanding any
assignment or transfer, whether or not in violation of the provisions of this
Lease, and notwithstanding the acceptance of rent by Landlord from an assignee
or transferee or any other party, Tenant shall remain fully and primarily liable
for the payment of the
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rent due and to become due under this Lease and for the performance of all of
the covenants, agreements, terms, provisions and conditions of this Lease on the
part of Tenant to be performed or observed.
11.(d) The liability of Tenant, and the due performance by Tenant of
the obligations on its part to be performed under this Lease, shall not be
discharged, released or impaired in any respect by an agreement or stipulation
made by Landlord or any grantee or assignee of Landlord, by way of mortgage, or
otherwise, extending the time of, or modifying any of the obligations contained
in this Lease, or by any waiver or failure of Landlord to enforce any of the
obligations on Tenant's part to be performed under this Lease, and Tenant shall
continue to be liable hereunder. If any such agreement or modification operates
to increase the obligations of a tenant under this Lease, the liability under
this Section 11.(d) of Tenant named in this Lease or any of its successors in
interest (unless such party shall have expressly consented in writing to such
agreement or modification) shall continue to be no greater than if such
agreement or modification had not been made.
11.(e) Landlord shall not withhold or delay its consent unreasonably to
an assignment of this Lease or a subletting of the whole or a part of the
Premises so long as:
(i) Tenant shall furnish Landlord with the name and business
address of the proposed subtenant or assignee, information with respect to the
nature and character of the proposed subtenant's or assignee's business, or
activities and such references and current financial information with respect to
net worth, credit and financial responsibility as are reasonably requested by
Landlord;
(ii) the proposed subtenant or assignee is a reputable party
whose financial net worth, credit and financial responsibility is, considering
the responsibilities involved, reasonably satisfactory to Landlord, and with
respect to any proposed assignment, such assignment complies with those
requirements set forth paragraph 11.(c);
(iii) the nature and character of the proposed subtenant or
assignee, its business or activities and intended use of the Premises is, in
Landlord's reasonable judgment, in keeping with the standards of the Building
and the floor or floors on which the Premises are located;
(iv) in the event that there is comparable space available to
be leased in the Building, the proposed subtenant or assignee is not then an
occupant of any part of the Building or a party who dealt with Landlord or
Landlord's agent (directly or through a broker) with respect to space in the
Building during the six months immediately preceding Tenant's request for
Landlord's consent;
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(v) all costs incurred with respect to providing reasonably
appropriate means of ingress and egress from the sublet space or to separate the
sublet space from the remainder of the Premises shall, subject to the provisions
of Article 6 with respect to alterations, installations, additions or
improvements, be borne by Tenant;
(vi) each sublease shall state specifically that (i) it is
subject to all of the terms, covenants, agreements, provisions and conditions of
this Lease, (ii) the subtenant or assignee, as the case may be, will not have
the right to a further assignment thereof or sublease or assignment thereunder,
or to allow the Premises to be used by others, except in accordance with the
terms of this Article, (iii) a consent by Landlord thereto shall not be deemed
or construed to modify, amend or affect the terms and provisions of this Lease,
or Tenant's obligations hereunder, which shall continue to apply to the premises
involved, and the occupants thereof, as if the sublease or assignment had not
been made, (iv) if Tenant defaults in the payment of any rent, beyond any
applicable notice and grace period, Landlord is authorized to collect any rents
due or accruing from any assignee, subtenant or other occupant of the Premises
and to apply the net amounts collected to the fixed annual rent and additional
rent reserved herein and (v) the receipt by Landlord of any amounts from an
assignee or subtenant, or other occupant of any part of the Premises shall not
be deemed or construed as releasing Tenant from Tenant's obligations hereunder
or the acceptance of that party as a direct tenant;
(vii) Tenant, shall have paid Landlord any reasonable costs
incurred by Landlord to review the requested consent including, without
limitation, any reasonable attorney's fees incurred by Landlord not to exceed
$2,500.00;
(viii) Tenant shall have complied with the provisions in
Section 11(f) with respect to any sublease;
(ix) the proposed subtenant or assignee is not (i) an
employment or recruitment agency; (ii) a school, college, university or
educational institution whether or not for profit; (iii) a government or any
subdivision or agency thereof; (iv) engaged in the business of providing office
space and facilities to sublessees or licensees; or (v) using the Premises for
manufacturing or retail sales to the public; or (vi) a public stenographer or
typist, barber shop, beauty shop, beauty parlor or shop, telephone or telegraph
agency, telephone or secretarial service, messenger service, commercial document
reproduction or offset printing service or public vending machine service;
(x) in the case of a subletting of a portion of the Premises,
the portion so sublet shall be regular in shape and suitable for normal renting
purposes; and
(xi) the nature of the occupancy of the proposed assignee or
subtenant will not cause an excessive density of employees or traffic or make
excessive demands on the Building's services or facilities.
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11.(f) All subleases for which Landlord's consent is required shall be
in a form reasonably satisfactory to Landlord's counsel and approved in writing
at least two weeks prior to the commencement date of the sublease term on all
the terms contained in this Lease, except that said sublease shall provide as
follows:
(i) The sublease shall provide that in the case of a
subletting of a portion of the Premises subtenant shall erect a demising wall as
is necessary to separate the subleased premises from the remainder of the
Premises and to provide access thereto; and
(ii) Such sublease shall negate expressly any intention that
any estate created by or under such sublease be merged with any other estate
held by either of the parties thereto.
11.(g) If Landlord shall give its consent to any assignment of this
Lease or to any sublease, Tenant, in consideration therefor, shall pay the
following to Landlord, as additional rent:
o in the case of an assignment, an amount equal to thirty
percent (30%) of all sums and other consideration paid to Tenant by the assignee
for or by reason of such assignment (including, but not limited to, sums paid
for the sale or rental of Tenant's fixtures, leasehold improvements, equipment,
furniture, furnishings or other personal property) less, in the case of a sale
thereof, an amount equal to the then net unamortized or undepreciated cost
thereof to Tenant determined on the basis of Tenant's federal income tax returns
except that, with respect to Tenant's fixtures and leasehold improvements,
depreciation shall be computed on a straight-line basis over the Term, without
regard to any renewal options); and
o in the case of a sublease, thirty percent (30%) of any
rents, additional charges and other consideration payable under the sublease to
Tenant by the subtenant in excess of the fixed annual rent and additional rent
accruing during the term of the sublease in respect of the subleased space (at
the rate per square foot payable by Tenant hereunder)(including, but not limited
to, sums paid for the sale or rental of Tenant's fixtures, leasehold
improvements, equipment, furniture or other personal property, less, in the case
of the sale thereof, an amount equal to the then net unamortized or
undepreciated cost thereof to Tenant determined on the basis of Tenant's federal
income tax returns except that, with respect to Tenant's Fixtures and leasehold
improvements, depreciation shall be computed on a straight line basis over the
Term, without regard to any renewal options).
The sums payable under this Section 11(g) shall be paid to Landlord as and when
paid by the assignee or subtenant to Tenant.
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11.(h) Notwithstanding anything in this Lease to the contrary, Tenant
shall be permitted to sublet, on no more than three occasions, up to
Twenty-Thousand (20,000) square feet of the Premises, in aggregate, without
first obtaining Landlord's prior written consent so long as Tenant provides
Landlord with (at least two weeks prior to its commencement date) a copy of the
sublease and erects a demising wall in accordance with Section 11.(f)(i).
11.(i) Tenant shall have the right, without obtaining Landlord's prior
written consent, to sublet all, or any part, of the Premises, to any affiliate
or related entity of Tenant for purposes hereof; "affiliate" or "related entity"
shall mean any entity in which Tenant owns more than fifty (50%) of the
interests or any entity which owns more than fifty percent (50%) of the
interests in Tenant.
11.(j) Tenant shall have the right, without obtaining Landlord's prior
written consent, to sublet all, or any part, of the Premises, to any affiliate
or related entity of Tenant. For purposes hereof, "affiliated or related entity"
shall mean any entity in which Tenant owns more than fifty (50%) of the
interests or any entity which owns more than fifty (50%) percent of the
interests in Tenant.
11.(k) Landlord shall have no liability for brokerage commissions
incurred with respect to any assignment of this Lease or any subletting of all
or any part of the Premises by or on behalf of Tenant. Tenant shall pay, and
shall indemnify and hold Landlord harmless from and against, any and all cost,
expense (including, without limitation, reasonable attorneys' fees, costs and
disbursements) and liability in connection with any compensation, commissions or
charges claimed by any broker or agent with respect to any such assignment or
subletting.
11.(k) The listing of any name other than that of Tenant, whether on
the doors of the Premises or the Building directory, or otherwise, shall not
operate to vest any right or interest in this Lease or in the Premises in the
person or entity therein named, nor shall it be deemed to be the consent of
Landlord to any assignment or transfer of this Lease or to any sublease of the
Premises or to the use or occupancy thereof by others.
ARTICLE 12.
ELECTRICITY
12.(a) For the purposes of this Article, the term "Electric Rate" shall
mean the prevailing rate Service Classification SC-9 (or successor service
classification rate), and not the time of day rate schedule (if any), including
all surcharges, taxes, fuel costs and adjustments, taxes regularly passed on to
consumers by the public utility, and other sums payable in respect thereof.
12.(b) (i) Landlord shall, upon request of Tenant, furnish and install
all replacement lighting tubes, lamps, bulbs and ballasts required in the
Premises, and Tenant shall pay to Landlord or its designated contractor upon
demand the then established charges therefor of Landlord or its designated
contractor, as the case may be. Landlord shall not be liable in any way to
Tenant for any failure or defect in the supply or character of electric energy
furnished to the Premises by reason of any requirement, act or omission of the
public utility serving the Building or for any other reason not attributable to
Landlord. Tenant shall pay for the cost of electricity consumed by any
supplemental air-conditioning equipment only servicing the Premises irrespective
of whether any such equipment is located in the Premises or in any other portion
of the Building. The term "air-conditioning equipment" as used herein shall be
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deemed to include, without limitation, all components and auxiliary equipment
used in connection with air-conditioning equipment servicing the Premises.
12.(c) Landlord will furnish 576 amps, 3 phase, 4 wire, 120/208 volts
of electric energy per floor distributed amongst four panel locations per floor
( exclusive of the Building's heating, ventilating and air-conditioning system)
to Tenant through presently existing electric facilities for Tenant's reasonable
use of its lighting, and other electrical fixtures, appliances and equipment.
12.(d) Tenant's use of electric energy in the Premises shall not at any
time, in the reasonable judgment of Landlord cause or result in any impairment
or interference with Building systems, annoyance or inconvenience to other
tenants or the overloading of the risers or feeders serving the Building.
12.(e) If any tax is imposed upon Landlord's receipts from the sale or
resale of electrical energy service to Tenant by any Federal, state or municipal
authority, Tenant covenants and agrees that, where permitted by law, Tenant's
pro rata share of such taxes based on Tenant's actual electrical usage shall be
passed on, and included in the bill of, and paid by, Tenant to Landlord. All
sums due and payable to Landlord or its contractor, consultant or designee under
this Article 12 shall be payable as additional rent. If all or part of the
amounts payable by Tenant under this Article 12 for electrical energy becomes
uncollectible or reduced or refundable by virtue of any law, order or
regulation, the parties agree that, at Landlord's option, in lieu of electrical
submetering or direct metering, and in consideration of Tenant's use of the
Building's electrical distribution system and receipt of redistributed
electricity and payment by Landlord of the consultant's fees and other
distribution expenses, the fixed annual rent payable under this Lease shall be
increased by an amount equal to the actual cost to Landlord of Tenant's usage,
subject to Tenant's right to dispute such charge in accordance with Section
12(i) hereof.
12.(f) Landlord reserves the right to discontinue furnishing electrical
energy to Tenant in the Premises at any time upon not less than 120 days' notice
to Tenant. If Landlord exercises such right, this Lease shall continue in full
force and effect and shall be unaffected thereby, except that from and after the
effective date of such termination Landlord shall not be obligated to furnish
electric energy to Tenant. If Landlord so discontinues furnishing electric
energy to Tenant, Tenant shall arrange to obtain electric energy directly from
the public utility company furnishing electric energy to the Building. Such
electric energy may be furnished to Tenant by means of the then existing
building system feeders, risers and wiring to the extent that the same are, in
Landlord's reasonable judgment, available, suitable and safe for such purpose.
All meters and additional panel boards, feeders, risers, wiring and other
conductors and equipment whatsoever, which may be required to obtain electric
energy directly from such public utility company whether currently available for
Tenant's use or
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requiring Landlord's installation shall be furnished and installed by Landlord
at Landlord's sole cost and expense.
12.(g) (i) Notwithstanding anything to the contrary contained in this
Article, Tenant, at any time during the Term on not less than 30 days' prior
written notice to Landlord, may purchase electricity directly from Consolidated
Edison or any other supplier of electric energy. If Tenant shall elect to
purchase electricity directly from Consolidated Edison or any other supplier of
electric energy, then all meters and additional panel boards, feeders, risers,
wiring and other conductors and equipment whatsoever, which may be required to
obtain electric energy directly from such public utility company, shall be
furnished and installed by Tenant at Tenant's sole cost and expense (but with
Landlord's reasonable cooperation).
(ii) If and so long as Landlord provides electricity to the
Premises on a submetering basis:
o Tenant covenants and agrees to purchase the same from
Landlord or Landlord's designated agent at the Electric Rate plus an overhead
charge ("Overhead Charge") equal to four percent (4%) (collectively "Electrical
Charge") excluding the 4% Overhead Charge on any sales taxes, representing the
Landlord's administrative costs.
12.(h) INTENTIONALLY OMITTED
12.(i) In the event Landlord or Tenant shall dispute any findings under
this Article, either party may, within 1 year of receiving notice of such
findings, dispute the findings by serving a notice in accordance with Article 31
hereof on the other party. The right to dispute such findings shall be deemed
waived unless such a notice is served in accordance with this Lease within the 1
year period. In the case where a notice is timely served in accordance with
Article 31 hereof the dispute shall be resolved by arbitration in accordance
with Article 3 of this Lease.
ARTICLE 13.
ADJACENT EXCAVATION -- SHORING
13.(a) If an excavation or other substructure work shall be made upon
land adjacent to the Building, or shall be authorized to be made, Tenant shall
afford to the person causing or authorized to cause such excavation, license to
enter upon the Premises for the purpose of doing such work as shall be necessary
to preserve the wall of the Building of which the Premises form a part from
injury or damage and to support the same by proper foundations.
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ARTICLE 14.
CONDEMNATION
14.(a) In the event that the whole of the Premises lawfully shall be
condemned or taken in any manner for any public or quasi-public use, this Lease
and the Term and estate hereby granted shall cease and terminate as of the date
of vesting of title, as if that were the Expiration Date, and the fixed annual
rent and the additional rent payable pursuant to Articles 1 and 4 of this Lease
shall be apportioned as of such date.
14.(b) In the event that only a part of the Premises shall be so
condemned or taken, then, unless a greater part of the Premises is no longer
useful, effective as of the date of vesting of title, the fixed annual rent and
the additional rent payable pursuant to Articles 1 and 4 hereof shall be abated
in an amount thereof apportioned according to the area of the Premises so
condemned or taken. In the event that such condemnation or taking shall be of a
substantial part of the Premises or materially affects Tenant's use of the
Premises or of a substantial part of the means of access thereto, including use
of the semi-exclusive entrance on 37th Street, Tenant, at Tenant's option, by
delivery of notice in writing to Landlord within 30 days following the date on
which Tenant shall have received notice of vesting of title, may terminate this
Lease and the Term and estate hereby granted as of the date of vesting of title,
if neither Landlord nor Tenant elects to terminate this Lease, as aforesaid,
this Lease shall be and shall remain unaffected by such condemnation or taking,
except that the fixed annual rent and the additional rent payable pursuant to
Articles 1 and 4 shall be abated to the extent hereinbefore provided in this
Article 14. In the event that only a part of the Premises shall be so condemned
or taken and this Lease and the Term and estate hereby granted with respect to
the remaining portion of the Premises are not terminated as hereinbefore
provided, Landlord, with reasonable diligence and at its expense, will restore
the remaining portion of the Premises as nearly as practicable to the same
condition as it was in prior to such condemnation or taking.
14.(c) In the event of any condemnation or taking hereinbefore
mentioned of all or a part of the Building, Landlord shall be entitled to
receive the entire award in the condemnation proceeding, including any award
made for the value of the estate vested by this Lease in Tenant, and Tenant
hereby expressly assigns to Landlord any and all right, title and interest of
Tenant now or hereafter arising in or to any such award or any part thereof, and
Tenant shall be entitled to receive no part of such award. Tenant shall be
entitled to make a separate claim for the value of its trade fixtures actually
taken and for moving expenses.
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14.(d) If the temporary use or occupancy of all or any part of the
Premises shall be taken by condemnation or in any other manner for any public or
quasi-public use or purpose during the Term, Tenant shall be entitled, except as
hereinafter set forth, to receive that portion of the award or payment for such
taking which represents compensation for the use and occupancy of the Premises,
for the taking of Tenant's property and for moving expenses, and Landlord shall
be entitled to receive that portion which represents reimbursement for the cost
of restoration of the Premises. This Lease shall be and remain unaffected by
such taking and Tenant shall continue to be responsible for all of its
obligations hereunder insofar as such obligations are not affected by such
taking and shall continue to pay in full the fixed annual rent and additional
rent due. If the period of temporary use or occupancy shall extend beyond the
Expiration Date, that part of the award which represents compensation for the
use and occupancy of the Premises (or a part thereof) shall be given to Tenant
so that Tenant shall receive so much thereof as represents the period up to and
including the Expiration Date.
14.(e) In the event of any taking of less than the whole of the
Building that does not result in a termination of this Lease, or in the event of
a taking for a temporary use or occupancy of all or any part of the Premises
that does not result in a termination of this Lease, Landlord, at its expense,
and whether or not any award or awards shall be sufficient for the purpose,
shall proceed with reasonable diligence to repair, alter and restore the
remaining parts of the Building and the Premises to substantially their former
condition to the extent that the same may be feasible and so as to constitute a
tenantable Building and Premises.
14.(f) In the event that any part of the Premises shall be taken to
effect compliance with any law or requirement of public authority other than in
the manner hereinabove provided in this Article 14, then, (a) if such compliance
is the obligation of Tenant under this Lease, Tenant shall not be entitled to
any diminution or abatement of rent or other compensation from Landlord
therefor, but (b) if such compliance is the obligation of Landlord under this
Lease, the fixed annual rent payable under Article 1 shall be reduced and
additional rent payable under Articles 1 and 4 shall be adjusted in the same
manner as is provided in Section 14(a) according to the reduction in rentable
area of the Premises resulting from such taking.
ARTICLE 15.
ACCESS TO PREMISES; CHANGES
15.(a) Tenant shall permit Landlord (i) to erect, use and maintain
pipes, ducts and conduits in and through the Premises, provided the same are
installed and concealed behind walls and ceilings of the Premises or in an
innocuous manner or in such manner as shall not unreasonably impair Tenant's use
of the Premises, and (ii) to use any air-conditioning rooms, telephone equipment
rooms, heating, ventilating,
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air-conditioning, electrical and mechanical facilities and service closets
(collectively, the "Building Equipment") in the Premises in a manner so as not
to unreasonably impair Tenant's use of such rooms and facilities. Landlord or
its agents or designees shall have the right: (i) to enter the Premises, at
reasonable times on reasonable notice during Business Hours on Business Days, to
examine such pipes, ducts, conduits and Building Equipment or to make any
repairs or alterations in a reasonable manner that Landlord may deem necessary
or reasonably desirable for the Building or that Landlord shall be required to
or shall have the right to make by the provisions of this Lease or any other
lease in the Building, and (ii) to take all material into and upon the Premises
that may be required for the repairs or alterations above mentioned as the same
is required for such purpose, without the same constituting an eviction of
Tenant in whole or in part, and the rent reserved shall in no way abate while
said repairs or alterations are being made by reason of loss or interruption of
the business of Tenant because of the prosecution of any such work; provided,
however, that Landlord shall exercise reasonable diligence to minimize any
disturbance to Tenant but nothing contained herein shall be deemed to require
Landlord to perform the same on an overtime or premium pay basis unless the
inconvenience or annoyance to Tenant's business materially interferes with
Tenant's business operations.
15.(b) Landlord reserves the right, without the same constituting an
eviction and without incurring liability to Tenant therefor, to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators (except for the semi-exclusive elevator(s) and Building
entrance located on 37th street designated for Tenant's use as set forth in
Article 21 of this Lease), stairways, toilets and other public parts of the
Building; provided, however, that: (i) Tenant shall continue to have access to
the Building; and (ii) Landlord does not interfere with Tenant's use of the
semi-exclusive entrance to the Building on 37th Street or Tenant's exclusive use
of one of two existing elevators in the Building on 37th Street. Landlord shall
use reasonable efforts not to have any floors of the Premises designated as fire
"re-entry" floors.
15.(c) Landlord may, during the last year of the term hereof, on
reasonable prior notice to Tenant, exhibit the Premises to prospective tenants;
provided, however, that in the event of a default, after applicable notice and
grace periods, by Tenant hereunder, Landlord may exhibit the Premises to
prospective tenants at reasonable times on reasonable notice. Landlord shall
also have the right to enter the Premises at reasonable times on reasonable
notice for the purpose of exhibiting them to prospective purchasers or lessees
of the entire Building or to prospective mortgagees or to prospective assignees
of any such mortgages or to the holder of any mortgage on the Landlord's
interest in the property, its agents or designees.
15.(d) If Tenant shall not be present personally to open and to permit
an entry into the Premises at any time when for any reason an entry therein
urgently shall be necessary in case of fire or other emergency, Landlord or
Landlord's agents may enter
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the same forcibly without rendering Landlord or such agents liable therefor (if
during such entry Landlord or Landlord's agents shall accord reasonable care to
Tenant's property) and without in any manner affecting the obligations and
covenants of this Lease.
ARTICLE 16.
CONDITIONS OF LIMITATION
16.(a) This Lease and the Term and estate hereby granted are subject to
the limitation that whenever Tenant shall be unable to pay its debts generally
as they become due, or shall make an assignment of the property of Tenant for
the benefit of creditors, or shall consent to, or acquiesce in, the appointment
of a liquidator, receiver, trustee, or other custodian of itself or the whole or
any part of its properties or assets, or shall commence a voluntary case for
relief under the United States Bankruptcy Code or file a petition or take
advantage of any bankruptcy or insolvency act or applicable law of like import,
or whenever an involuntary case under the United States Bankruptcy Code shall be
commenced against Tenant or if a petition shall be filed against it seeking
similar relief under any bankruptcy or insolvency or other applicable law of
like import, or whenever a receiver, liquidator, trustee, or other custodian of
Tenant or of or for substantially all of the property of Tenant shall be
appointed without Tenant's consent or acquiescence, then, (a) at any time after
receipt of notice of the occurrence of any such event, or (b) if such event
occurs without the acquiescence of Tenant, at any time after the event continues
for 120 days, Landlord may give Tenant a notice of intention to end the Term at
the expiration of five days from the date of service of such notice of
intention, and upon the expiration of said five day period, this Lease and the
Term and estate hereby granted, whether or not the Term shall theretofore have
commenced, shall terminate with the same effect as if that day were the
Expiration Date, but Tenant shall remain liable for damages as provided in
Article 18.
16.(b) This Lease and the Term and estate hereby
granted are subject to further limitation as follows:
(i) whenever Tenant shall do or permit anything to be done,
whether by action or inaction, contrary to any of Tenant's obligations
hereunder, other than the failure to pay fixed annual rent or additional rent,
and if such situation shall continue and shall not be remedied by Tenant within
twenty (20) days (within ten (10) days, in the case of Tenant's failure (A) to
keep in force insurance throughout the Term and furnish any certificate of
insurance required under Article 6 or 9 or (B) to furnish any instrument
required under Article 25 or 26), after Landlord shall have given to Tenant a
notice specifying the same or in the case of a happening or default that cannot
with due diligence be cured within a period of twenty (20) days and the
continuation of
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which for the period required for cure will not subject Landlord to the risk of
criminal liability (as more particularly described in Article 8 hereof) or
termination of any superior lease or foreclosure of any superior mortgage, if
Tenant shall not, (i) within said 20 day period advise Landlord of Tenant's
intention duly to institute all steps necessary to remedy such situation, (ii)
duly institute within said 20 day period, and thereafter diligently and
continuously prosecute to completion all steps necessary to remedy the same and
(iii) complete such remedy within such time after the date of the giving of said
notice by Landlord as shall reasonably be necessary, or
(ii) whenever any event shall occur or any contingency shall
arise whereby this Lease or the estate hereby granted or the unexpired balance
of the Term hereof, by operation of law or otherwise, would devolve upon or pass
to any person, firm or corporation other than Tenant, except as expressly
permitted by Article 11 and the same shall not be remedied within five (5) days
after written notice by Landlord in accordance with Article 31 hereof, or
(iii) whenever Tenant shall abandon the Premises or vacate
the Premises without paying the Fixed Annual Rent and the same shall not be
remedied within five (5) days after written notice by Landlord in accordance
with Article 31 hereof, or
(iv) whenever Tenant shall default in the due keeping,
observing or performance of any covenant, agreement, provision or condition of
Article 5 hereof on the part of Tenant to be kept, observed or performed and
such default shall continue and shall not be remedied by Tenant within 72 hours
after Landlord shall have given to Tenant a notice specifying the same,
then in any of said cases set forth in the foregoing subsections (i)-(iv)
Landlord may give to Tenant a notice of intention to end the Term of this Lease
at the expiration of seven days from the date of the service of such notice of
intention, and upon the expiration of said seven days this Lease and the Term
and estate hereby granted, whether or not the Term shall theretofore have
commenced, shall terminate with the same effect as if that day were the end of
the Term, but Tenant shall remain liable for damages as provided in Article 18.
ARTICLE 17.
RE-ENTRY BY LANDLORD; INJUNCTION
17.(a) If Tenant shall default in the payment of any installment of
fixed annual rent, or of any additional rent, on any date that the same becomes
due, and such default shall continue uncured for ten days after notice and
demand, or if this Lease shall expire as in Article 16 provided, Landlord or
Landlord's agents and employees immediately or at any time thereafter may
re-enter the Premises, or any part thereof, either by summary dispossess
proceedings or by any suitable action or proceeding at
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law, without being liable to indictment, prosecution or damages therefor, to the
end that Landlord may have, hold and enjoy the Premises again as and of its
first estate and interest therein. The word re-enter, as herein used, is not
restricted to its technical legal meaning. In the event of any termination of
this Lease under the provisions of Article 16 or if Landlord shall re-enter the
Premises under the provisions of this Article 17 or in the event of the
termination of this Lease, or of re-entry, by or under any summary dispossess or
other proceeding or action or any provision of law by reason of default
hereunder on the part of Tenant, (a) Tenant thereupon shall pay to Landlord the
fixed annual rent and additional rent payable by Tenant to Landlord up to the
time of such termination of this Lease, or of such recovery of possession of the
Premises by Landlord, as the case may be, and (b) Tenant also shall pay to
Landlord damages as provided in Article 18.
17.(b) In the event of a breach or threatened breach by Landlord or
Tenant of any of its obligations under this Lease, Landlord and Tenant shall
have the right of injunction. The special remedies to which Landlord and Tenant
may resort hereunder are cumulative and are not intended to be exclusive of any
other remedies or means of redress to which Landlord and Tenant lawfully may be
entitled at any time and Landlord and Tenant may invoke any remedy allowed at
law or in equity as if specific remedies were not provided for herein.
17.(c) If this Lease shall terminate under the provisions of Article
16, or if Landlord shall re-enter the Premises under the provisions of this
Article 17, or in the event of the termination of this Lease, or of re-entry, by
or under any summary dispossess or other proceeding or action or any provision
of law by reason of default hereunder on the part of Tenant, Landlord shall be
entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as
advance rent, security or otherwise, but such moneys shall be credited by
Landlord against any fixed annual rent or additional rent due from Tenant at the
time of such termination or re-entry or, at Landlord's option against any
damages payable by Tenant under Article 18 or pursuant to law.
17.(d) Tenant expressly waives any and all rights of redemption granted
by or under any present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in the event of Landlord obtaining possession of
the Premises, by reason of the violation by Tenant of any of the covenants and
conditions of this Lease or otherwise.
ARTICLE 18.
DAMAGES
18.(a) If this Lease is terminated under the provisions of Article 16,
or if Landlord shall re-enter the Premises under the provisions of Article 17,
or in the event of the termination of this Lease, or of re-entry, by or under
any summary dispossess
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or other proceeding or action or any provision of law by reason of default
hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the
election of Landlord, either
(i) a sum which at the time of such termination of this
Lease or at the time of any such re-entry by Landlord, as the case may be,
represents the then value of the excess, if any, of
(1) the aggregate of the fixed annual rent and the
additional rent payable hereunder that would have been
payable by Tenant (conclusively presuming the additional
rent to be the same as was payable for the year immediately
preceding such termination except that additional rent on
account of increases in Taxes shall be presumed to increase
at the average of the rates of increase thereof previously
experienced by Landlord during the period (not to exceed 3
years) prior to such termination) for the period commencing
with such earlier termination of this Lease or the date of
any such re-entry, as the case may be, and ending with the
Expiration Date, had this Lease not so terminated or had
Landlord not so reentered the Premises, over
(2) the aggregate rental value of the Premises for the
same period (each sum in subparagraphs (1) and (2) being
first discounted to present value at the rate then being
paid by new ten year U.S. Treasury Bonds); or
(ii) sums equal to the aggregate of the fixed annual rent
and the additional rent (as above presumed) payable hereunder that would have
been payable by Tenant had this Lease not so terminated, or had Landlord not so
reentered the Premises, payable upon the due dates therefor specified herein
following such termination or such re-entry and until the Expiration Date,
provided, however, that if Landlord shall re-let the Premises during said
period, Landlord shall credit Tenant with the net rents received by Landlord
from such re-letting, such net rents to be determined by first deducting from
the gross rents as and when received by Landlord from such reletting, the
expenses incurred or paid by Landlord in terminating this Lease or in reentering
the Premises and in securing possession thereof, as well as the expenses of
reletting, including altering and preparing the Premises for new tenants,
brokers' commissions, attorneys' fees and disbursements, and all other expenses
properly chargeable against the Premises and the rental thereof; it being
understood that any such re-letting may be for a period shorter or longer than
the remaining Term and that Landlord may grant concessions and free rent; but in
no event shall Tenant be entitled to receive any excess of such net rents over
the sums payable by Tenant to Landlord hereunder, or shall Tenant be entitled in
any suit for the collection of damages pursuant to this subsection to a credit
in respect of any net rents from a re- letting, except to the extent that such
net rents actually are received by Landlord. If
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the Premises or any part thereof should be re-let in combination with other
space, then proper apportionment on a square foot basis shall be made of the
rent received from such re-letting and of the expenses of re-letting. Landlord
in no event shall be liable in any way whatsoever for failure to re-let the
Premises nor shall such failure affect Tenant's liability for damages.
18.(b) If the Premises or any part thereof shall be re-let by Landlord
for the unexpired portion of the Term, or any part thereof, before presentation
of proof of such damages to any court, commission or tribunal, the amount of
rent reserved upon such re-letting, prima facie, shall be the fair and
reasonable rental value for the Premises, or part thereof, so re-let during the
term of the re-letting.
18.(c) Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the Term would have expired if it had not been
so terminated under the provisions of Article 16, or under any provision of law,
or had Landlord not reentered the Premises.
ARTICLE 19.
LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any Article of this Lease beyond all applicable
grace and cure periods after notice, (a) Landlord may, but shall not be
obligated to, remedy such default for the account of Tenant, immediately and
without notice in case of emergency, or in any other case only provided that
Tenant shall fail to remedy such default with all reasonable dispatch after
Landlord shall have notified Tenant in writing of such default and the
applicable grace period for curing such default shall have expired; and (b) if
Landlord makes any expenditures or incurs any obligations for the payment of
money in connection with such default (including, but not limited to, reasonable
attorneys' fees in instituting, prosecuting or defending any action or
proceeding), such sums paid or obligations incurred shall be deemed to be
additional rent hereunder and shall be paid by Tenant to Landlord within fifteen
days after rendition of a bill to Tenant therefor together with interest at the
Interest Rate.
ARTICLE 20.
QUIET ENJOYMENT
Landlord covenants and agrees that, subject to the terms, obligations
and provisions of this Lease, if, and so long as, Tenant keeps and performs each
and every
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covenant, agreement, term, provision and condition herein contained on the part
or on behalf of Tenant to be kept or performed, then Tenant may peaceably and
quietly enjoy the Premises and Tenant's rights under this Lease shall not be cut
off or ended before the expiration of the Term of this Lease.
ARTICLE 21.
SERVICES AND EQUIPMENT
21.(a) Landlord shall throughout the Term, provided that Tenant is not
in default of any of the terms or conditions of this lease, beyond applicable
notice and grace periods:
(i) provide Tenant with a separate and semi-exclusive
entrance to the Building on 37th Street together with only the other tenants at
the Building for which the 37th street entrance is its sole means of egress. One
of the two existing elevators located in the 37th Street lobby shall be used for
the sole and exclusive use of Tenant. The second elevator shall be made
available to all tenants at the Building for which the 37th street entrance is
its sole means of egress. The elevator facilities (excluding the 5th Avenue
entrance which will be made available during Business Hours on Business Days),
will be provided to Tenant 24 Hours per day, 7 days per week. Landlord has
advised Tenant that the three elevators servicing the Fifth Avenue entrance to
the Building may be upgraded and refurbished.
(ii) maintain and keep in good order and repair the heating
and building- wide air-conditioning systems that serve the Premises. Landlord
shall provide heat during Business Hours on Business Days and air-conditioning
supplied by the Building's system (and not by any supplemental system servicing
the Premises) during Business Hours on Business Days, maintaining interior
conditions of 72(degree) - 77(degree) in the cooling season and
66(degree)-74(degree) in the heating season and will provide fresh air in a
quantity not less than .14 (14/100) cubic feet per minute per square foot of
floor area provided that in any given room or area of the Premises the occupancy
does not exceed one (1) person for each 100 square feet. Landlord shall have no
responsibility or liability for the ventilating conditions and/or temperature of
the Premises during the hours or days Landlord is not required to furnish heat
or air conditioning pursuant to this Article. Tenant shall cause all of the
windows in the Premises to be kept closed and shall keep entirely unobstructed
all the vents, intakes, outlets and grilles whenever the air-conditioning or
heating system is in operation and shall comply with and observe all reasonable
regulations and requirements prescribed by Landlord for the proper functioning
of the heating, ventilating and air-conditioning systems. Notwithstanding
anything in this Lease to the contrary, Tenant shall be solely responsible for
all maintenance costs of the supplemental air-conditioning system presently
servicing the Premises. Nothing contained herein shall be deemed to require
Landlord to furnish at Landlord's expense such electric energy as is required to
operate the supplemental air-
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conditioning and ventilating systems serving the Premises. Subject to the
provisions of Article 12 hereof all such electric energy shall be furnished by
Landlord to Tenant at Tenant's cost and expense except for electric energy for
the building-wide air-conditioning systems which Landlord shall furnish at
Landlord's cost. If Tenant shall require air conditioning at times when Landlord
is not required to furnish same, Tenant shall give Landlord notice, by noon of
the same day, of such requirement and, if same is furnished by Landlord, Tenant
shall pay on demand Landlord's reasonable charges not to exceed $90.00 per hour
for the entire Premises, as additional rent for air-conditioning Monday through
Friday after 6:00 P.M., Saturdays after 1:00 P.M. and Sundays all day which
overtime charge may be increased by Landlord in direct proportion to Landlord's
costs increase therefor. If Tenant shall require heating at times when Landlord
is not required to furnish same, Tenant shall give Landlord notice, by noon of
the same day, of such requirement and, if same is furnished by Landlord, Tenant
shall pay on demand Landlord's reasonable charges not to exceed $90.00 per hour
for the entire Premises as additional rent for heating Monday through Friday
after 6:00 P.M., Saturdays after 1:00 P.M. and Sundays all day, which overtime
charge may be increased by Landlord in direct proportion to Landlord's costs
increase therefor. In the event another Tenant in the Building advises Landlord
that it requires overtime heating or air-conditioning service from Landlord and
Tenant subsequently requests overtime heating or air-conditioning service,
Landlord shall not charge Tenant for such overtime service so long as Landlord
receives full compensation for such overtime service.
(iii) Tenant shall maintain the Premises in a neat and clean
manner. Tenant shall provide, at its sole cost and expense, all cleaning
supplies and materials as Tenant deems necessary, Landlord shall have no
obligation to provide any cleaning services whatsoever or furnish any cleaning
supplies or materials to the Premises, except that Landlord shall be responsible
for the carting and disposal of all of Tenant's refuse and rubbish. In
consideration thereof, the Fixed Annual Rent due hereunder shall be decreased
("Decrease") by Seventy-Eight Thousand Dollars ($78,000.00) per annum from the
date Tenant takes physical occupancy of the Premises through the day immediately
preceding the second anniversary of the Commencement Date, which Decrease shall
be increased on each anniversary of the Commencement Date by multiplying the
Decrease for the immediately preceding year by a fraction, the numerator of
which shall be the CPI in effect on the immediately preceding anniversary of the
Commencement Date and the denominator of which shall be the CPI in effect on
such anniversary of the Commencement Date. The amount of the Decrease, for each
year of the Term, (including the first year of the Term) shall be credited, in
equal monthly installments, against the next installments of fixed annual rent
payable hereunder. For example, if Tenant takes physical occupancy of the
Premises on March 1, 1997 and the Commencement Date of this Lease is December 1,
1996, the total Decrease for the period through the date preceding the second
anniversary of the Commencement Date would be equal to $136,500.00 ($78,000.00 /
12 =$6,500.00 x 21 months) which will be credited against fixed annual rent from
the
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first anniversary of the Commencement Date through the second anniversary of the
Commencement Date in equal monthly installments of $11,375.00.
(iv) Furnish hot and cold water for lavatory, drinking,
plant watering and office cleaning purposes. If Tenant uses or consumes water
for any other purposes in unusual quantities, Landlord may install a meter or
meters or other means to measure Tenant's water consumption, and Tenant shall
reimburse Landlord for the cost of the meter or meters and the installation
thereof, and shall pay for the maintenance of said meter equipment and/or shall
pay Landlord's costs of other means of measuring such water consumption by
Tenant. Tenant shall reimburse Landlord for the cost of all water consumed in
unusual quantities, including sewer rents, as measured by said meter or meters
or as otherwise measured, and the cost to heat such water.
21.(b) Landlord reserves the right, without any liability whatsoever
and without abatement of fixed annual rent or additional rent, to stop the
heating, air-conditioning, elevator, plumbing, sanitary, electric and other
systems when necessary by reason of accident or emergency or for repairs,
alterations, replacements or improvements, provided that except in case of
emergency, Landlord will notify Tenant in advance, if possible, of any such
stoppage and, if ascertainable, its estimated duration, and will proceed
diligently with the work necessary to resume such service as promptly as
possible and in a manner so as to minimize interference with Tenant's use and
enjoyment of the Premises. Landlord shall not be liable in any way to Tenant for
any failure of the heating, air-conditioning, elevator, plumbing, sanitary,
electric and other systems by reason of any failure or defect in the supply or
character of electric energy furnished to the Building or the Premises by the
public utility serving the Building.
21.(c) Landlord, at Tenant's request, shall maintain listings on the
Building directory of the names of Tenant, permitted assignees or subtenants,
and the names of any of Tenant's officers and employees, provided, however, that
the aggregate number of names so listed shall not exceed sixty-seven (67). The
reasonable charge of Landlord for any changes in such listings requested by
Tenant shall be paid by Tenant to Landlord on demand.
21.(d) Landlord shall not be required to furnish any other services,
except as otherwise provided in this Lease. However, Landlord agrees to provide
Tenant, throughout the Term, services similar to those of comparable buildings
in the borough of Manhattan.
21. (e) Landlord upon reasonable notice from Tenant, shall provide
Tenant with access to building risers, shafts and conduits for the purpose of
running cabling or wiring in connection with Tenant's installation of a
communication system.
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21. (f) Landlord shall maintain the sprinkler system servicing the
Premises. However, Landlord shall not be obligated to repair the sprinkler
system servicing the Premises if damage to the sprinkler system is due to
Tenant's negligence or wilful conduct.
ARTICLE 22.
HAZARDOUS MATERIALS
22.(a) Tenant shall not, without the prior written consent of Landlord,
cause or knowingly permit, any Hazardous Material (hereinafter defined) to be
brought or remain upon, kept or used in or about the Premises or the Building.
As used in this Lease, "Hazardous Material(s)" shall mean any hazardous, toxic
or radioactive substance, material, matter or waste which is or becomes
regulated by any federal, state or local law, rule regulation, code, ordinance
or any other governmental restriction or requirement. However, "Hazardous
Materials" shall not include asbestos or substances which are used in the
ordinary course of a business similar to Tenant's as permitted pursuant to
Article 5 of this Lease, provided, however, that such substances are used,
handled, transported or stored in strict compliance with any applicable Legal
Requirement. If such substances are not so used, handled, transported or stored
then they shall be deemed "Hazardous Materials" for purposes of this Lease.
Should Landlord consent in writing to Tenant bringing, using or storing any
Hazardous Material in or upon the Premises or the Building, Tenant shall
strictly obey and adhere to any and all Legal Requirements which in any way
regulates, governs or impacts Tenant's possession, use, storage or disposal of
said Hazardous Material. Upon Landlord's written request, prior to the
Commencement Date of this Lease, and on January 1 of each year thereafter,
Tenant shall disclose in writing to Landlord the names and amounts of all
Hazardous Material which Tenant is then currently or is intending to bring, use,
or store in or upon the Premises or the Building, or which Tenant has in the
past brought, used or stored in or upon the Premises or the Building.
22.(b) In addition to, and in no way limiting Landlord's duties and
obligations as set forth in this Lease, should Tenant breach any of its
respective duties and obligations as set forth in this Article or if the
presence of any Hazardous Material in or upon the Premises or the Building that
Tenant causes or knowingly permits to brought upon, used, remained upon or kept
at the Premises (excluding those Hazardous Materials that were present in the
Premises prior to Tenant's occupancy and those Hazardous Materials brought upon
the Premises by Landlord after Tenant's occupancy) results in contamination of
the Premises, the Building, any land or the Building, the atmosphere, or any
water or waterway (including groundwater), or if contamination of the Premises,
or the Building by any Hazardous Material otherwise occurs for which Tenant is
otherwise legally liable to Landlord for damage resulting
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therefrom, Tenant shall indemnify, save harmless, and, at Landlord's option and
with attorneys approved in writing by Landlord (which approval shall not be
unreasonably withheld or delayed), defend Landlord, its agents, employees,
partners, officers, directors, and mortgagees, if any, from any and all claims,
demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings,
actions, causes of action, and losses of any and every kind and nature,
including, without limitation, diminution in value of the Premises or the
Building, damages for the loss or restriction on use of the rentable or usable
space or of any amenity of the Premises or the Building, damages arising from
any adverse impact on marketing space in the Building, and sums paid in
settlement of claims and for reasonable attorneys' fees, consultant fees and
expert fees, which may arise during or after the Lease Term or any extension
thereof as a result of such contamination. This includes, without limitation,
reasonable costs and expenses incurred in connection with any investigation of
site conditions or any cleanup, remedial, removal or restoration work required
by any federal, state or local governmental agency or political subdivision
because of Hazardous Material present on or about the Premises (excluding those
Hazardous Materials that were present in the Premises prior to Tenant's
occupancy and those Hazardous Materials brought upon the Premises by Landlord
after Tenant's occupancy, that Tenant causes or permits knowingly to be brought
upon, used, remained upon or kept at the Premises) or because of the presence of
Hazardous Material anywhere else which came or otherwise emanated from Tenant or
the Premises (excluding those Hazardous Materials that were present in the
Premises prior to Tenant's occupancy and those Hazardous Materials brought upon
the Premises by Landlord after Tenant's occupancy, that Tenant causes or permits
knowingly to be brought upon, used, remained upon or kept at the Premises).
Without limiting the foregoing, if the presence of any Hazardous Material on or
about the Premises, or the Building caused or permitted by Tenant results in any
contamination of the Premises or the Building, Tenant shall, at its sole
expense, promptly take all actions as are necessary to return the Premises and
the Building to the condition existing prior to the introduction or any such
Hazardous Material to the Premises and the Building; provided, however, that
Landlord's approval of such actions shall first be obtained.
ARTICLE 23.
INVALIDITY OF ANY PROVISION
If any term, covenant, condition or provision of this Lease or the
application thereof to any circumstance or to any person, firm or corporation
shall be invalid or unenforceable to any extent, the remaining terms, covenants,
conditions and provisions of this Lease or the application thereof to any
circumstances or to any person, firm or corporation other than those as to which
any term, covenant, condition or provision is held invalid or unenforceable,
shall not be affected thereby and each
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remaining term, covenant, condition and provision of this Lease shall be valid
and shall be enforceable to the fullest extent permitted by law.
ARTICLE 24.
BROKERAGE
Tenant covenants, represents and warrants that Tenant has had no
dealings or negotiations with any broker or agent other than the Brokers in
connection with the consummation of this Lease, and Landlord covenants,
represents and warrants that Landlord has had no dealings or negotiations with
any broker or agent other than the Brokers in connection with the consummation
of this Lease. Tenant and Landlord covenant and agree to pay, hold harmless and
indemnify each other from and against any and all cost, expense (including
reasonable attorneys' fees) and liability in connection with any compensation,
commissions or charges claimed by any broker or agent, claiming to have dealt
with it, other than the Brokers, with respect to this Lease or the negotiation
thereof. Landlord agrees to pay S.L. Green Real Estate in connection with the
consummation of this Lease and Tenant agrees to pay Jenel Management Corp. in
connection with the consummation of this Lease a commission in accordance with
the terms of separate brokerage agreements between Landlord and S.L. Green Real
Estate and Tenant and Jenel Management Corp. respectively. Landlord shall not
bear any responsibility whatsoever for the payment of Jenel Management Corp.'s
brokerage commission and Tenant shall not bear any responsibility whatsoever for
the payment of S.L. Green Real Estate's brokerage commission. The provisions of
this Article shall survive the expiration or sooner termination of this Lease.
ARTICLE 25.
SUBORDINATION
25.(a) Subject to the provisions of Section 25(e) hereof, this Lease is
and shall be subject and subordinate to all present and future ground or
underlying leases and to all mortgages, options, and building loan agreements
that may now or hereafter affect such leases or the real property of which the
Premises are a part and to all renewals, modifications, consolidations,
replacements and extensions of any such ground or underlying leases, options,
building loan agreements and mortgages. The provisions of this Section 25(a)
shall be self-operative and no further instrument of subordination shall be
required. In confirmation of such subordination, Tenant shall execute and
deliver promptly at its own cost and expense any instrument, in recordable form
if required, that Landlord, the lessor of the ground or underlying lease or the
holder of any such mortgage or any of their respective successors in interest
may reasonably request to evidence such subordination.
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25.(b) In the event of a termination of any ground or underlying lease,
or if the interests of Landlord under this Lease are transferred by reason of,
or assigned in lieu of, foreclosure or other proceedings for enforcement of any
mortgage, or if the holder of any mortgage acquires a lease in substitution
therefor, then Tenant under this Lease, at the option to be exercised in writing
by the lessor under such ground or underlying lease or such mortgagee or
purchaser, assignee or lessee, as the case may be, either (a) will attorn to it
and will perform for its benefit all the terms, covenants and conditions of this
Lease on Tenant's part to be performed with the same force and effect as if said
lessor, such mortgagee or purchaser, assignee or lessee, were the landlord
originally named in this Lease, or (b) will enter into a new lease with said
lessor or such mortgagee or purchaser, assignee or lessee, as landlord, for the
remaining Term and otherwise on the same terms and conditions and with the same
options, if any, then remaining. The foregoing provisions of clause (a) of this
Section 25(b) shall enure to the benefit of such lessor, mortgagee, purchaser,
assignee or lessee, shall be self-operative upon the exercise of such option,
and no further instrument shall be required to give effect to said provisions.
Tenant, however, upon demand of any such lessor, mortgagee, purchaser, assignee
or lessee, shall execute, from time to time, instruments in confirmation of the
foregoing provisions of this Section 25(b) reasonably satisfactory to any such
lessor, mortgagee, purchaser, assignee or lessee, acknowledging such attornment
and setting forth the terms and conditions of its tenancy.
25.(c) Anything herein contained to the contrary notwithstanding, under
no circumstances shall any lessor under any ground lease or mortgagee or
purchaser, assignee or lessee, as the case may be, whether or not it shall have
succeeded to the interests of the landlord under this Lease, be:
(i) liable for any act, omission or default of any prior
landlord or for the return of any security deposit or part thereof not actually
received by such lessor, mortgagee, purchaser, assignee, or lessee, as the case
may be; or
(ii) subject to any offsets, claims or defenses that Tenant
might have against any prior landlord: or
(iii)bound by any rent or additional rent that Tenant might
have paid to any prior landlord for more than one month in advance or for more
than three months in advance where such rent payments are payable at intervals
of more than one month (other than payments for Tenant's Tax Payment which shall
be paid in accordance with the terms and conditions of Article 4 of this Lease);
or
(iv) bound by any modification, amendment or abridgment of
this Lease, or any cancellation or surrender of the same, made without its prior
written approval.
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25.(d) If, in connection with the financing of the Land and/or the
Building, the holder or prospective holder of any mortgage shall request
reasonable modifications in this Lease as a condition of approval thereof,
Tenant will not unreasonably withhold, delay or defer making such modifications.
25.(e) As a condition to this lease being subordinate to any future
mortgage or ground lease, anything herein contained to the contrary
notwithstanding, Landlord shall provide Tenant with a non-disturbance agreement,
in the form annexed hereto as Exhibit C, in recordable form executed by all such
future mortgagees or ground lessors .
ARTICLE 26.
CERTIFICATE OF TENANT/LANDLORD
26.(a) Landlord or Tenant, without charge, at any time and from time to
time, within ten days after request by the party requesting it, shall deliver a
written instrument to Landlord or Tenant or any other person, firm or
corporation specified by Landlord or Tenant, duly executed and acknowledged,
certifying
(i) that this Lease is unmodified and in full force and
effect or, if there has been any modification, that the same is in full force
and effect as modified and stating any such modification, that there is no
existing basis to cancel or terminate this Lease, and to the best of Tenant's
knowledge, Landlord is not in default thereunder and if requested by Tenant, to
the best of Landlord's knowledge, Tenant is not in default thereunder;
(ii) whether the Term has commenced and rent become payable
under this Lease, and whether Tenant is in possession of all of the Premises
except for such portions of the Premises that have been sublet or being held for
sublet pursuant to the provisions of this Lease;
(iii)whether or not there are then existing any defenses or
offsets that are not claims under paragraph (v) of this Section 26.(a) against
the enforcement of any of the agreements, terms, covenants, or conditions of
this Lease and any modification thereof upon the part of Tenant to be performed
or complied with, and, if so, specifying the same;
(iv) the amount of the fixed annual rent payable under this
Lease and the dates to which the fixed annual rent and additional rent and other
charges hereunder have been paid;
(v) whether or not Tenant has made any claim against
Landlord under this Lease and, if so, the nature and the dollar amount, if any,
of such claim.
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26.(b) Tenant agrees that, except for the first month's rent hereunder,
it will pay no rent under this Lease more than one month in advance of its due
date. In the event of any act or omission by Landlord, Tenant will not exercise
any right to terminate this Lease or to remedy the default and deduct the cost
thereof from rent due hereunder until Tenant shall have given written notice of
such act or omission to the ground lessor and to the holder of any mortgage on
the fee or the ground lease who shall have furnished such lessor's or holder's
last address to Tenant and until a reasonable period for remedying such act or
omission shall have elapsed following the giving of such notices, during which
time such lessor or holder shall have the right, but shall not be obligated, to
remedy or cause to be remedied such act or omission. Tenant shall not exercise
any right pursuant to this Section 26(b) if the holder of any mortgage or such
aforesaid lessor commences to cure such aforesaid act or omission within a
reasonable time and diligently prosecutes such cure thereafter.
26.(c) At Landlord's or Tenant's request, the other party shall deliver
promptly to the requesting party and to the holder of any mortgage on the fee or
ground lease and the lessor under any ground or underlying lease, after the
occurrence of the Commencement Date, a letter signed by Tenant or Landlord and
acknowledged, in substantially the form annexed hereto as Schedule 3.
ARTICLE 27.
LEGAL PROCEEDINGS AND
WAIVER OF JURY TRIAL
27.(a) Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other on any matters whatsoever arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises, and/or any other claims (except claims for personal injury or property
damage), and any emergency statutory or any other statutory remedy. If Landlord
commences any summary proceeding, Tenant shall not interpose and hereby waives
the right to interpose any counterclaim of whatever nature or description in any
such proceeding.
ARTICLE 28.
SURRENDER OF PREMISES
28.(a) Upon the expiration or other termination of the Term, Tenant
shall quit and surrender the Premises to Landlord, broom clean, in good order
and condition, ordinary wear and tear and damage by fire, the elements or other
casualty excepted, and Tenant shall remove all of its moveable property as
herein provided. Tenant's
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obligation to observe or perform the covenants in this Article 28 shall survive
the expiration or other termination of the Term.
28.(b) If possession of the Premises is not surrendered to Landlord
within 24 hours after the date of the expiration or sooner termination of the
Term then, notwithstanding anything to the contrary contained in this Lease,
Tenant shall pay to Landlord for each month and the pro rata portion of any
month during which Tenant holds over in the Premises after the expiration or
sooner termination of the Term of this Lease, rent at the greater of (a) a rate
equal to one and a half times the aggregate of that portion of the fixed annual
rent and additional rent that was payable under this Lease for the last month of
the Initial Term or the last month of Option 1 or Option 2, if exercised, or (b)
the then market rent for the Premises; provided, however, that in no event shall
Landlord be entitled to receive an amount in excess of the maximum amount
permitted by Legal Requirements. Nothing herein contained shall be deemed to
permit Tenant to retain possession of the Premises after the expiration or
sooner termination of the Term. The provisions of this Section 28.(b) shall
survive the expiration or other termination of the Term.
ARTICLE 29.
RULES AND REGULATIONS
29.(a) Tenant and Tenant's servants, employees and agents shall observe
faithfully and comply strictly with the Rules and Regulations set forth in
Schedule 4 annexed hereto and made part hereof entitled "Rules and Regulations"
and such other and further reasonable Rules and Regulations as Landlord or
Landlord's agents may adopt from time to time. In the event of any conflict or
inconsistency between the provisions of this Lease and of any of the Rules and
Regulations as originally or as hereafter adopted, the provisions of this Lease
shall control. Reasonable written notice of any additional Rules and Regulations
shall be given to Tenant. Landlord shall not enforce the Rules and Regulations
against Tenant in a discriminatory manner.
29.(b) Nothing in this Lease contained shall be construed to impose
upon Landlord any duty or obligation to enforce the Rules and Regulations or the
terms, covenants or conditions in any other lease, against any other tenant of
the Building, and Landlord shall not be liable to Tenant for violation of the
same by any other tenant, its servants, employees, agents, visitors or
licensees.
ARTICLE 30.
CONSENTS AND APPROVALS
30.(a) Wherever in this Lease Landlord's consent or approval is
required, if Landlord shall delay or refuse such consent or approval, Tenant in
no event shall be
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entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any
claim, for money damages (nor shall Tenant claim any money damages by way of
set-off, counterclaim or defense) based upon any claim or assertion by Tenant
that Landlord unreasonably withheld or unreasonably delayed its consent or
approval. Tenant's sole remedies, except as otherwise set forth in this Lease,
shall be: (i) an action or proceeding to enforce any such provision, or (ii)
arbitration as set forth in Article 3 herein, in each such instance for specific
performance, injunction or declaratory judgment.
ARTICLE 31.
NOTICES
Any notice, demand, consent, approval, disapproval, or statement
(collectively, "Notices") from Landlord to Tenant or from Tenant to Landlord
shall be in writing and shall be deemed duly given (a) if mailed by registered
or certified mail, postage prepaid, return receipt requested, (b) if delivered
by recognized national overnight delivery service with receipt acknowledged, or
(c) only in the case of Notices that are Escalation Statements or bills for
rent, if mailed by first class mail, postage prepaid, to the address(es) for
Notices set forth in this Article 31. Notices to Tenant shall be sent to Tenant
at the Premises with a copy of default notices only to Kramer Levin Naftalis &
Frankel attention: Larry Loeb, Esq. Notices to Landlord shall be sent (i) to the
address of Landlord set forth on page 1 of this Lease or (ii) to such other
address as Landlord shall have last designated by notice in writing to Tenant,
with a copy of default notices only to Belkin Burden Wenig & Goldman, LLP
attention: Daniel T. Altman, Esq. Notice shall be deemed given on the third
business day after depositing same in an official depository of the United
States Postal Service, Return Receipt Requested (or successor organization) or,
if given by overnight delivery, upon delivery to Landlord or Tenant, as the case
may be.
ARTICLE 32.
NO WAIVER
No agreement to accept a surrender of this Lease shall be valid unless
in writing signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys to the Premises prior to the termination
of this Lease. The delivery of keys to any employee of Landlord or of Landlord's
agent shall not operate as a termination of this Lease or a surrender of the
Premises. If Tenant at any time desires to have Landlord sublet the Premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive said
keys for such purpose without releasing Tenant from any of the obligations under
this Lease. The failure of Landlord to seek redress for violation of, or to
insist upon the strict performance of, any covenant or condition of this Lease
or any of the Rules and Regulations set forth
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herein, or hereafter adopted by Landlord, shall not prevent a subsequent act,
which would have originally constituted a violation, from having all the force
and effect of an original violation. The receipt by Landlord of rent with
knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach. The failure of Landlord to enforce any of the Rules and
Regulations set forth herein, or hereafter adopted, against Tenant and/or any
other tenant in the Building shall not be deemed a waiver of any such Rules and
Regulations. No provision of this Lease shall be deemed to have been waived by
Landlord, unless such waiver be in writing signed by Landlord. No payment by
Tenant or receipt by Landlord of a lesser amount than the monthly rent herein
stipulated shall be deemed to be other than on the account of the earliest
stipulated rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment of rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.
ARTICLE 33.
INABILITY TO PERFORM
If, for any reason within Landlord's control, Tenant is not
provided with: (i) electricity in accordance with Article 12 hereof; or (ii)
heating and air-conditioning in accordance with Article 21 hereof; or (iii)
elevator service; or (iv) water; and such condition is not remedied within three
(3) business days following notice to Landlord of any such event, Tenant's
obligation to pay fixed annual rent and additional rent hereunder shall
proportionately abate in relation to the rentable square footage of the portion
of the Premises Tenant is unable to reasonably use and which Tenant in fact does
not use and has vacated, provided that Tenant shall not be entitled to any such
abatement if the rentable square footage of the portion of the Premises affected
by such condition is less than 1,200 rentable square feet. However, if it is
finally determined by a court of competent jurisdiction that Tenant has
unreasonably withheld payment of fixed annual rent and additional rent and that
Tenant was able to reasonably use the Premises so affected, Tenant, for the
purposes of this Article 33 only, shall reimburse Landlord, on demand, for all
costs and expenses, including reasonable legal fees, incurred by Landlord as a
result of Tenant withholding any such fixed annual rent and additional rent.
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ARTICLE 34.
ENTIRE AGREEMENT;
NO REPRESENTATIONS; NO ORAL MODIFICATION
34.(a) This Lease and the Schedules attached hereto set forth all of
the covenants, promises, assurances, agreements, representations, conditions,
warranties, statements and understandings (collectively, the "Representations")
between Landlord and Tenant concerning the Premises and the Building, and there
are no Representations, either oral or written, between Landlord and Tenant
other than those set forth in this Lease.
34.(b) This Lease supersedes and revokes all previous negotiations,
arrangements, letters of intent, offers to lease, lease proposals, brochures,
Representations, and information conveyed, whether oral or in writing, between
Landlord and Tenant or their respective representatives or any other person
purporting to represent Landlord or Tenant. Landlord and Tenant acknowledge that
they have not been induced to enter into this Lease by any representations not
set forth in this Lease, they have not relied on any such representation, no
such representations shall be used in the interpretation or construction of the
Lease, and Landlord and Tenant shall have no liability for any consequences
arising as a result of any such representations.
34.(c) Except as otherwise provided in this Lease, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless in writing and signed by the party against whom
enforcement of the alteration, amendment, change or addition is sought.
ARTICLE 35.
SECURITY
35.(a) Simultaneous with the execution of this Lease, Tenant shall
deliver to Landlord a clean, unconditional, irrevocable standby Letter of Credit
(the "LC") having a one (1) year term, automatically renewable through and
including the third anniversary after the Commencement Date, naming Landlord as
beneficiary, in a form and substance reasonably satisfactory to Landlord,
initially in an amount equal to One Million Six Hundred and Sixty-Six Thousand
Six Hundred Sixty-Six Dollars and Sixty- Six cents ($1,666,666.66) as and for
the security deposit (the "Security Deposit") for the faithful performance and
observance by Tenant of the terms, provisions, covenants and conditions of this
Lease including the terms and conditions of the Work
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Letter annexed as Exhibit A. Provided that Tenant is not in default in respect
of any of the terms, provisions, covenants and conditions of this Lease beyond
applicable notice and grace periods, including, but not limited to, the
provisions of the Work Letter annexed as Exhibit A, the LC may be replaced by
Tenant with an amendment reducing the amount of LC to Six Hundred and Sixty-Six
Thousand Six Hundred Sixty- Six Dollars and Sixty-Six cents ($666,666.66) on the
second anniversary after the Commencement Date. Landlord shall return the LC to
Tenant on the third anniversary after the Commencement Date. If Tenant defaults
in respect of any of the terms, provisions, covenants and conditions of this
Lease beyond applicable notice and grace periods, including, but not limited to,
the payment of fixed annual rent and additional rent, Landlord may use, apply or
retain the whole or any part of the Security Deposit to the extent required for
the payment of any fixed annual rent and additional rent or any other sum as to
which Tenant is in default or for any sum that Tenant is obligated to pay
Landlord or that Landlord may expend or may be required to expend by reason of
Tenant's default in respect of any of the terms, provisions, covenants and
conditions of this Lease beyond any applicable notice and grace period,
including but not limited to any damages payable by Tenant pursuant to Article
18 hereof. To the extent that Landlord, during the Term, so uses, applies, or
retains all or any part of the Security Deposit, Tenant, on demand, shall pay to
Landlord as additional rent a sum sufficient to restore the Security Deposit to
the amount then required to be deposited. If Tenant shall comply fully and
faithfully with all of the terms, provisions, covenants and conditions of this
Lease, the Security Deposit shall be returned to Tenant within a reasonable
number of days after the date fixed as the end of the Lease (not to exceed 14
days) and after delivery of entire possession of the Premises to Landlord.
35.(b) In the event of a sale of the Land and the Building or the
leasing or transfer of the Building, Landlord shall transfer the Security
Deposit to the vendee or lessee or transferee and Landlord thereupon shall be
released by Tenant from all liability for the return of such Security Deposit.
Tenant shall look solely to the new landlord for the return of the Security
Deposit. The provisions hereof shall apply to every transfer or assignment made
of the Security Deposit to a new landlord.
35.(c) Tenant covenants that it will not assign, transfer or encumber
or attempt to assign, transfer or encumber the money deposited as the Security
Deposit under this Lease (except in connection with an assignment of this Lease
in accordance with the terms hereof) and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, transfer,
encumbrance, attempted assignment, transfer or attempted encumbrance. In the
event that any bankruptcy, insolvency, reorganization or other debtor-creditor
proceedings shall be instituted by or against Tenant, its successors or assigns,
or any guarantor of Tenant hereunder, the Security Deposit shall be deemed to be
applied to the payment of the fixed annual rent and for additional rent due
Landlord for periods prior to the institution of such proceedings and the
balance, if any, may be retained by Landlord in partial satisfaction of
Landlord's damages.
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35.(d) Landlord shall deposit a cash Security Deposit into an
interest-bearing account at a banking organization selected by Landlord. All
interest and/or dividends, if any, accruing on the Security Deposit, less a 1%
per annum charge for administrative expense, shall be added to, held and
included within the term Security Deposit and, provided that Tenant is not in
default in the performance of the terms, provisions, covenants and conditions of
this Lease beyond any applicable notice and grace, shall accrue to the account
of Tenant and paid to Tenant on a quarterly basis. Landlord shall not be
required to credit Tenant with any interest for any period during which Landlord
does not receive interest on the Security Deposit.
ARTICLE 36.
INTENTIONALLY OMITTED
ARTICLE 37.
NON-LIABILITY INDEMNIFICATION
37.(a) No partner, member, director, officer, agent, servant or
employee of Landlord shall be liable to Tenant for any loss, injury, damage,
except to the extent the same are caused by or result from the negligence of
Landlord, its agents, partners, members, directors, officers, agents, servants
or employees. Further, neither Landlord nor Tenant, nor any respective partner,
member, director, officer, agent, servant or employee of Landlord or Tenant
shall be liable (a) for any damage caused by other tenants or persons in, upon
or about the Building or caused by the operations in construction of any
private, public or quasi-public work; or (b) even if negligent, for
consequential damages in any action relating to this Lease.
37.(b) Except as otherwise provided for in this Lease, including, the
provisions of Sections 9(h)(i), 9(h)(iii) and 37(a) hereof, Tenant shall
indemnify and hold harmless Landlord and all lessors under underlying leases,
of, and mortgagees under mortgages affecting, the Land and/or the Building and
its and their respective partners, members, directors, officers, agents and
employees from and against any and all claims arising from or in connection with
(a) the use or occupation of the Premises by Tenant or anyone in the Premises
with Tenant's permission, or the conduct or management of the Premises or of any
business therein, or any work or thing whatsoever done (other than by Landlord,
its agents, servants or employees), or any condition created in the Premises
during the Term or during the period of time, if any, prior to the Commencement
Date, that Tenant may have been given access to the Premises; (b) any act,
omission or negligence of Tenant or any of its sublessees or licensees or its or
their partners, members, directors, officers, agents, employees or contractors;
(c) any accident, injury or damage whatsoever (except to the extent caused by
the negligence of Landlord, its agents, servants or employees) occurring in, at
or upon the Premises; and (d) any breach or default by Tenant in the full and
prompt payment and
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performance of Tenant's obligations under this Lease. Tenant's indemnity shall
include the payment to Landlord of all reasonable costs, expenses and
liabilities incurred in or in connection with each such claim or action or
proceeding brought thereon, including without limitation, all reasonable
attorneys' fees, costs and expenses. In case any action or proceeding shall be
brought against Landlord and/or any such lessor or mortgagee and/or its or their
partners, directors, officers, agents and/or employees by reason of such claim,
Tenant, upon notice from Landlord or such lessor or mortgagee (as the case may
be), shall resist and defend such action or proceeding (by Tenant's counsel,
Kramer Levin, Naftalis & Frankel or Tenant's assigned insurance counsel).
ARTICLE 38.
INTENTIONALLY OMITTED
ARTICLE 39.
RIGHT OF FIRST OFFER
Each time that the entire sixth (6th), ninth (9th) or tenth (10th)
floors or any portion of such floors ("Contiguous Space") becomes vacant and
available to lease in the Building, Landlord shall promptly give notice
("Notice") to Tenant in accordance with Article 31 of this Lease, that
Contiguous Space is available. The Notice shall include the location of the
Contiguous Space, the approximate square footage, the term for which the
Landlord would lease the Contiguous Space to Tenant and such other business
terms (the "Terms") as Landlord deems relevant including, without limitation,
the fair market rent per square foot of the Contiguous Space and the proposed
fair market escalations. If the Contiguous Space is less than Five Thousand
square feet, within thirty (30) days after the giving of such Notice, Tenant may
elect to lease the Contiguous Space, by notifying Landlord ("Acceptance Notice")
that the Terms contained in the Notice are acceptable. If the Contiguous Space
is more than Five Thousand square feet, within forty-five (45) days after the
giving of such Notice, Tenant may elect to lease the Contiguous Space, by
notifying Landlord in an Acceptance Notice that the Terms contained in the
Notice are acceptable. In the event that Tenant wishes to lease the Contiguous
Space contained in the Notice, but Landlord and Tenant cannot agree on the Terms
for the Contiguous Space, Tenant shall notify Landlord, within the above stated
time frames (within 30 days for less than 5000 sq. ft. and within 45 days for
5000 sq. ft. and over) that it wishes to lease the Contiguous Space but it
disputes that the Terms contained in the Notice are the fair market terms for
the Contiguous Space. The right to dispute the Terms contained in the Notice
shall be deemed waived unless the Acceptance Notice is served in accordance with
this Article. In the case where an Acceptance Notice is timely served in
accordance with this Article, the dispute as to the Terms of the Premises, shall
be resolved by binding arbitration in accordance with Article 3 of this
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Lease. In determining each of the Terms for the Contiguous Space, the arbitrator
shall make his/her decision based upon what the fair market value would be for
the Contiguous Space at the time the Notice is sent to Tenant. In connection
with such arbitration, Landlord shall submit a Submission to the arbitrator in
accordance with Article 3 containing the Terms in its Notice. However,
notwithstanding the foregoing, Tenant agrees to pay during the period of
arbitration the Fixed Annual Rent in effect for the immediately preceding year
without prejudice to any of Landlord's or Tenant's rights until there has been a
determination of the arbitration.
ARTICLE 40.
MISCELLANEOUS
40.(a) Irrespective of the place of execution or performance, this
Lease shall be governed and construed in accordance with the laws of the State
of New York.
40.(b) This Lease shall be construed without regard to any presumption
or other rule requiring construction against the party causing this Lease to be
drafted.
40.(c) Intentionally Omitted.
40.(d) All terms and words used in this Lease, regardless of the number
or gender in which they are used, shall be deemed to include any other number
and other gender as the context may require.
40.(e) Time shall be of the essence with respect to the exercise of any
option granted under this Lease.
40.(f) Except as otherwise provided in this Lease, whenever the payment
of interest is required to be made by Tenant to Landlord by the terms hereof it
shall be at the Interest Rate.
40.(g) In the event that Tenant is in arrears in the payment of fixed
annual rent or additional rent hereunder, Tenant waives Tenant's right, if any,
to designate the items against which any payments made by Tenant are to be
credited, and Tenant agrees that Landlord may apply any payments made by Tenant
to any items it sees fit, irrespective of and notwithstanding any designation or
request by Tenant as to the items against which any such payments shall be
credited.
40.(h) The submission of this document for examination does not
constitute an option or an offer to lease space in the Building. This Lease
shall have no binding effect on the parties unless executed by Landlord and
Tenant and a fully executed copy is delivered to Landlord and Tenant.
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40.(i) The captions are inserted only as a matter of convenience and
for reference, and in no way define, limit or describe the scope of this Lease
or the intent of any provision hereof.
40.(j) Landlord, upon reasonable notice to Tenant, shall have the full
right at any time to name and change the name of the Building and to change the
designated address of the Building. The Building may be named after any person,
firm, or otherwise, whether or not such name is, or resembles, the name of a
tenant of the Building (except that the building shall not be named for one of
Tenant's direct competitors). The cost or expense associated with changing
Tenant's address, not to exceed $5,000.00, shall be borne by Landlord.
40.(k) Tenant shall be permitted to install signage in the Premises so
long as such signage complies with the terms and conditions of this Lease and
has been approved in advance by Landlord, which approval shall not be
unreasonably withheld or delayed. Under no circumstances shall any signage in
the Premises (and visible outside of the Premises) be illuminated (including,
without limitation, a "light box" or any sign with neon). Signs and canopies are
permitted at the exclusive entrance, lobby and elevator of the Building and are
to be installed at Tenant's expense, subject to Landlord's prior written
approval which approval shall not be unreasonably withheld or delayed. Tenant
may use the name of an affiliate or division of Tenant on entrance, lobby and
elevator of Building, subject to Landlord's prior written approval which
approval shall not be unreasonably withheld or delayed. In addition, Tenant, at
its sole cost and expense, shall be permitted, subject to Article 6 of this
Lease, to make Alterations or improvements to the semi-exclusive lobby of the
Building located at the 37th Street entrance to the Building.
40.(l) This Lease may be executed in several counterparts each of which
shall be deemed an original, and such counterparts shall constitute but one and
the same instrument.
ARTICLE 41
ROOF SPACE
41. (a) Landlord hereby leases to Tenant, without charge, one hundred
(100) square feet of space on the rooftop of the Building as shown on Schedule 6
annexed hereto and made a part hereof (the "Roof Premises"). Tenant may elect to
relocate the Roof Premises at its sole cost and expenses so long as it does not
interfere with the penthouse tenant's use and occupancy of its premises and the
Building systems.
(b) Tenant shall use the Roof Premises for the installation, operation
and maintenance of telecommunication equipment, associated antenna, base
stations, dishes, switches, power supplies, batteries and accessories (the
"Installation"). The
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<PAGE> 63
Installation or other property attached to or otherwise brought onto the Roof
Premises shall at all times remain Tenant's personal property and are not
considered fixtures. Tenant, at its sole cost and expense, shall be responsible
for obtaining electrical service for the Roof Premises from the utility company
servicing the Building and shall pay for such electricity, on a submetered
basis, in accordance with the provisions of Article 12 of this Lease. Tenant
shall be responsible, at its own cost and expense, to install and maintain any
submeters necessary for the metering of the electric consumption of the
Installation. Landlord, at Tenant's sole cost and expense, shall make available
to Tenant the panel boards, feeders, conduits and risers in the Building as may
be necessary in order to bring electric energy to the Roof Premises.
(c) The placement of the Installation on the Roof Premises shall be
deemed to be an Alteration and shall be subject to the provisions of Article 6
hereof and to any other applicable provisions of this Lease. Landlord agrees to
cooperate with Tenant, at Tenant's expense, in making application for, and
obtaining, any local, state, and federal licenses, permits and any other
approvals which may be required to allow Tenant to use the Roof Premises. Tenant
shall employ due diligence to obtain said approvals within a timely manner.
(d) Landlord agrees to provide Tenant, Tenant's employees and
authorized agents, at reasonable times and on reasonable notice (which may be
oral), access to the Roof Premises.
(e) The Installation may be removed by Tenant at any time during the
Term, and, in such event, Tenant shall be responsible, at its sole cost and
expense, to repair any damage to the Roof Premises resulting from Tenant's
removal of the Installation. Furthermore, Tenant shall repair any damage to the
Roof Premises caused by Tenant during the Term, ordinary wear and tear and
damage from the elements excepted, and said obligation shall survive the
expiration or sooner termination of the Lease.
(f) In the event that Landlord elects, in its sole discretion, to
construct additional floors to the Building above the Roof Premises, Landlord
shall provide Tenant with comparable space on the new roof of the Building (the
"New Roof Premises") promptly following the completion of any such addition and
Tenant may, at its sole cost and expense, move the Installation to the New Roof
Premises. Landlord shall not be responsible or liable in any manner whatsoever,
for any costs, damages, abatements and/or set-offs due to an interruption in the
use and occupancy of the Roof Premises during such construction period.
(g) Tenant agrees not to cause any unreasonable interference to the
telecommunication operation of Landlord or any other tenants in the Building.
Tenant shall operate the Installation in compliance with all applicable Federal
Communications Commission (FCC) regulations.
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<PAGE> 64
(h) Notwithstanding any provision in this Lease to the contrary, Tenant
may not sublet or assign any portion of the Roof Premises (except in connection
with an assignment of this Lease in accordance with the terms hereof) without
the prior written consent of Landlord, which consent may be withheld by Landlord
in its sole discretion.
ARTICLE 42
OPTION
42. (a) Tenant shall have the right, exercisable by sending written
notice (the "Notice") to Landlord on or before January 26, 1997, time being of
the essence, to lease the entire ninth (9th) floor of the Building effective on
the date (the "Effective Date") set forth in the Notice, which Effective Date
shall not be later than five (5) business days following the date of the Notice.
In the event that Tenant timely sends the Notice to Landlord, the ninth (9th)
floor of the Building shall be, and be deemed to be, a part of the Premises
subject to all of the terms and conditions of this Lease, except that from and
after the Effective Date:
(i) The phrase "One Million Two Hundred Thousand Dollars
($1,200,000.00)" in the definition of "Fixed Annual Rent" contained on page 3 of
this Lease shall be replaced with "One Million Eight Hundred Thousand Dollars
($1,800,000.00);
(ii) "Tenant's Proportionate Share" shall mean 27.3%;
(iia) The following changes shall be made to Article 11(b)
of this Lease: the phrase "One Hundred Million Dollars ($100,000,000.00)" on the
twelfth and seventeenth lines shall be replaced with "One Hundred Twenty-Five
Million Dollars ($125,000,000.00)," the number "Forty Million Dollars
($40,000,000.00)" on the fifteenth and twenty-fifth lines shall be replaced with
"Fifty Million Dollars ($50,000,000.00)," the number "One Million Three Hundred
Thirty Three Thousand Dollars ($1,333,000.00)," on the nineteenth line shall be
replaced with "Two Million Dollars ($2,000,000.00)," the number "Sixty Hundred
Sixty Seven Thousand Dollars ($667,000.00)" on lines twenty-two and twenty seven
shall be replaced with "One Million Dollars ($1,000,000.00)."
(iii) The following changes shall be made to paragraph
21(a)(iii) of this Lease: the phrase "Seventy-Eight Thousand Dollars
($78,000.00)" on the seventh (7th) line thereof shall be replaced with "One
Hundred Seventeen-Thousand Dollars ($117,000.00)," the number "$136,500.00" on
the twentieth (20th) line thereof shall be replaced with "$204,750.00" the
number "$78,000.00" on the twentieth (20th) line thereof shall be replaced with
"$117,000.00", the number "$6,500.00" on the twenty-first (21st) line thereof
shall be replaced with "$9,725.00" and the number
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<PAGE> 65
"$11,375.00" on the twenty-third (23rd) line thereof shall be replaced with
"$17,062.50";
(iv) The number "sixty-seven" (67) on the fourth (4th) line
of paragraph 21(c) of this Lease shall be replaced with "one hundred (100)";
(v) The following changes shall be made to Article 35 of
this Lease: the phrase "One Million Six Hundred and Sixty-Six Thousand Six
Hundred Sixty-Six and 66/100 Dollars ($1,666,666.66)" beginning on the fifth
(5th) line thereof shall be replaced with "Two Million Five Hundred Thousand
Dollars ($2,500,000.00", the phrase "Six Hundred and Sixty-Six Thousand Six
Hundred Sixty Six and 66/100 Dollars ($666,666.66)" beginning on the thirteenth
(13th) line thereof shall be replaced with "One Million Dollars
($1,000,000.00)";
(vi) the phrase "ninth" (9th) on the first (1st) line of Article 39 of
this Lease shall be deleted in its entirety; and
(vii) the following changes shall be made to Exhibit A of this Lease:
the number "$2,700,000.00" on the third (3rd) line of paragraph 4A shall be
replaced with "$4,050,000.00," the phrase "Two Hundred and Seventy Thousand
Dollars ($270,000.00)" beginning on the seventh (7th) line of such paragraph 4A
shall be replaced with "Four Hundred Five Thousand Dollars ($405,000.00)," the
number "$2,550,000.00" on the tenth (10th) line of such paragraph 4A shall be
replaced with "$3,900,000.00," the phrase "Eight Hundred Thousand Dollars
($800,000.00)" on the fifth (5th) line of paragraph 4C thereof shall be replaced
with "One Million Two Hundred Thousand Dollars ($1,200,000.00)," the number
"$1,900,000.00" on the first (1st) line of the second (2nd) paragraph of such
paragraph 4C shall be replaced with "$2,850,000.00" and the number "$800,000.00"
on the fourth (4th) line of the second (2nd) paragraph of such Exhibit A shall
be replaced with "$1,200,000.00."
(b) On or before the Effective Date:
(i) Tenant shall deliver to Landlord an amendment to the LC
required to be delivered by Tenant pursuant to the provisions of Article 35 of
this Lease increasing the amount thereof to $2,500,000.00; and (ii) Landlord
shall deliver to Tenant: (x) an amendment to the LC required to be delivered by
Landlord pursuant to the provisions of Exhibit A of this Lease increasing the
amount thereof to $1,200,000.00; and (y) a check, in the amount of $8,333.33,
representing the payment to Tenant for Tenant's installation of submeters on the
ninth (9th) floor of the Building.
(c) In the event that Tenant does not timely send the
Notice, Tenant's right to exercise its option pursuant to this Article 42 shall
be of no further force and effect. Nothing contained herein shall limit Tenant's
rights with respect to the sixth (6th), ninth (9th) and tenth (10th) floors of
the Building pursuant to the terms of Article 39 of this Lease.
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<PAGE> 66
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
LANDLORD:
F.S. Realty Corp.
By: /s/ Joseph Chetrit
-------------------------------------
Name: Joseph Chetrit
Title:
TENANT:
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Joseph Cayre
-------------------------------------
Name: Joseph Cayre
Title: Chairman of the Board
-63-
<PAGE> 1
EXHIBIT 10.30
AMENDMENT TO STOCKHOLDERS AGREEMENT
AMENDMENT TO STOCKHOLDERS AGREEMENT, dated as of December 16, 1996 (the
"Amendment"), amending the STOCKHOLDERS AGREEMENT, dated as of December 18, 1995
(the "Agreement"), by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre,
Jack J. Cayre, the trusts listed on Schedule I to the Agreement (collectively,
the "Trusts") and GT Interactive Software Corp. (the "Company").
WHEREAS, the parties to the Agreement wish to make certain amendments to
the Agreement;
NOW, THEREFORE, for good and valuable consideration, the adequacy of which
is hereby acknowledged, the undersigned hereby amend Section 2.1 of the
Agreement as follows:
2.1 Limitation on Transfer. No Stockholder shall sell, give, assign,
hypothecate, pledge, encumber, grant a security interest in or otherwise
dispose of (whether by operation of law or otherwise) (each a "transfer")
any Shares or any right, title or interest therein or thereto, except in
accordance with the provisions of this Agreement; provided, however, a
Stockholder may hypothecate, pledge, encumber or grant a security interest,
the foreclosure of which shall be deemed an Involuntary Transfer subject to
Section 3.6 of this Agreement, in any Shares to a bank or other financial
institution. Any attempt to transfer any Shares or any rights hereunder in
violation of the preceding sentence shall be null and void ab initio and
the Company shall not register any such transfer. Anything in this
Agreement to the contrary notwithstanding, the limitations on transfer in
this Section 2.1 shall not apply to (i) any transfer of Shares by gift made
by any Stockholder to any bona fide charitable organization (including a
foundation of which the donor and/or its family members are trustees), (ii)
any sale of Shares through a widely distributed underwritten Public
Offering, or (iii) any sale of Shares made in compliance with Rule 144
under the Securities Act.
In all other respects, the terms of the Agreement remain unchanged.
All capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Agreement.
This Amendment may be executed in one or more counterparts, each of which
shall be deemed an original, and all of which taken together shall constitute
one and the same instrument.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers or trustees as of the date
hereof.
GT Interactive Software Corp.
By /s/ RONALD CHAIMOWITZ
----------------------------------------------
Name: Ronald Chaimowitz
Title: President, Chief Executive Officer and
Director
Joseph J. Cayre
/s/ JOSEPH J. CAYRE
------------------------------------------------
Kenneth Cayre
/s/ KENNETH CAYRE
------------------------------------------------
Stanley Cayre
/s/ STANLEY CAYRE
------------------------------------------------
Jack J. Cayre
/s/ JACK J. CAYRE
------------------------------------------------
-2-
<PAGE> 3
FOR THE TRUSTS:
Michael Cayre Irrevocable Grantor Trust
/s/ TRINA CAYRE
------------------------------------------------
By: Trina Cayre, Trustee
Steven Cayre Irrevocable Grantor Trust
/s/ TRINA CAYRE
------------------------------------------------
By: Trina Cayre, Trustee
Daniel Cayre Irrevocable Grantor Trust
/s/ TRINA CAYRE
------------------------------------------------
By: Trina Cayre, Trustee
Grace E. Cayre Irrevocable Grantor Trust
/s/ TRINA CAYRE
------------------------------------------------
By: Trina Cayre, Trustee
-3-
<PAGE> 4
Jack S. Cayre Irrevocable Grantor Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
Amin Cayre Irrevocable Grantor Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
David Cayre Irrevocable Grantor Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
Robert Cayre Irrevocable Grantor Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
Grace S. Cayre Irrevocable Grantor Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
-4-
<PAGE> 5
Jack Kennedy Cayre Irrevocable Grantor Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
Nathan Cayre Irrevocable Grantor Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
Michelle Cayre Irrevocable Grantor Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
Grace K. Cayre Irrevocable Grantor Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
Raquel Cayre Irrevocable Grantor Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
-5-
<PAGE> 6
Joseph J. Cayre Grantor Retained Annuity Trust
/s/ TRINA CAYRE
------------------------------------------------
By: Trina Cayre, Trustee
Jack J. Cayre Grantor Retained Annuity Trust
/s/ JOSEPH CAYRE
------------------------------------------------
By: Joseph Cayre, Trustee
Stanley Cayre Grantor Retained Annuity Trust
/s/ FRIEDA CAYRE
------------------------------------------------
By: Frieda Cayre, Trustee
Kenneth Cayre Grantor Retained Annuity Trust
/s/ LILLIAN CAYRE
------------------------------------------------
By: Lillian Cayre, Trustee
-6-
<PAGE> 1
EXHIBIT 10.31
$40,000,000
CREDIT AGREEMENT
dated as of
January 21, 1997
among
GT Interactive Software Corp.
The Banks Listed Herein,
The Letter of Credit Issuing Bank Named Herein
and
Republic National Bank of New York
as Agent
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PAGE
ARTICLE 1 DEFINITION.............................................................................................1
SECTION 1.01. Definitions...............................................................................1
SECTION 1.02. Accounting Terms and Determinations.......................................................10
ARTICLE 2 The Credits...........................................................................................10
SECTION 2.01. Commitments to Lend......................................................................10
SECTION 2.02. Method of Borrowing......................................................................11
SECTION 2.03. Notes....................................................................................12
SECTION 2.04. Maturity of Loans........................................................................12
SECTION 2.05. Interest Rates...........................................................................12
SECTION 2.06. Fees.....................................................................................13
SECTION 2.07. Optional Termination or Reduction of
Commitments; Optional Prepayment.........................................................14
SECTION 2.08. Method of Electing Interest Rates........................................................14
SECTION 2.09. Mandatory Termination of Commitments.....................................................15
SECTION 2.10. General Provisions as to Payments........................................................15
SECTION 2.11. Funding Losses...........................................................................16
SECTION 2.12. Computation of Interest and Fees.........................................................16
SECTION 2.13. Letters of Credit........................................................................16
ARTICLE 3 CONDITION .........................................................................................19
SECTION 3.01. Closing..................................................................................19
SECTION 3.02. Borrowings and Issuances of Letters of
Credit...................................................................................19
ARTICLE 4 REPRESENTATIONS AND WARRANTIES........................................................................20
SECTION 4.01. Corporate Existence and Power............................................................20
SECTION 4.02. Corporate and Governmental Authorization;
No Contravention.........................................................................20
SECTION 4.03. Binding Effect...........................................................................20
SECTION 4.04. Financial Information....................................................................20
SECTION 4.05. Litigation...............................................................................21
SECTION 4.06. Compliance with ERISA....................................................................21
SECTION 4.07. Environmental Matters....................................................................21
SECTION 4.08. Taxes....................................................................................22
SECTION 4.09. Intellectual Property....................................................................22
SECTION 4.10. Capitalization...........................................................................22
SECTION 4.11. Debt and Liens...........................................................................22
SECTION 4.12. Subsidiaries.............................................................................23
SECTION 4.13. Regulatory Restrictions on Borrowing.....................................................23
SECTION 4.14. Full Disclosure..........................................................................23
ARTICLE 5 COVENANTS.............................................................................................24
SECTION 5.01. Information..............................................................................24
SECTION 5.02. Payment of Obligations...................................................................25
SECTION 5.03. Maintenance of Property; Insurance.......................................................26
SECTION 5.04. Conduct of Business and Maintenance of
Existence................................................................................26
SECTION 5.05. Compliance with Laws.....................................................................26
SECTION 5.06. Inspection of Property, Books and Records................................................26
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 5.07. Merger and Sales of Assets...............................................................27
SECTION 5.08. Use of Proceeds..........................................................................27
SECTION 5.09. Negative Pledge..........................................................................27
SECTION 5.10. Limitation on Debt.......................................................................28
SECTION 5.11. Minimum Tangible Net Worth...............................................................28
SECTION 5.12. Debt: Tangible Net Worth.................................................................28
SECTION 5.13. Investments..............................................................................29
SECTION 5.14. Working Capital..........................................................................29
SECTION 5.15. Current Ratio............................................................................29
SECTION 5.16. Restricted Payments......................................................................29
SECTION 5.17. Minimum Net Income.......................................................................29
SECTION 5.18. Sale-Leaseback Transactions..............................................................29
SECTION 5.19. Transactions with Affiliates.............................................................29
SECTION 5.20. Lines of Business........................................................................30
ARTICLE 6 DEFAULTS..............................................................................................30
SECTION 6.01. Events of Default........................................................................30
SECTION 6.02. Notice of Default........................................................................31
SECTION 6.03. Cash Cover...............................................................................31
ARTICLE 7 THE AGENT.............................................................................................32
SECTION 7.01. Appointment and Authorization............................................................32
SECTION 7.02. Agent and Affiliates.....................................................................32
SECTION 7.03. Action by Agent..........................................................................32
SECTION 7.04. Consultation with Experts................................................................32
SECTION 7.05. Liability of Agent.......................................................................32
SECTION 7.06. Indemnification..........................................................................32
SECTION 7.07. Credit Decision..........................................................................33
SECTION 7.08. Successor Agent..........................................................................33
SECTION 7.09. Agent's Fee..............................................................................33
ARTICLE 8 CHANGES IN CIRCUMSTANCE...............................................................................33
SECTION 8.01. Basis for Determining Interest Rate
Inadequate or Unfair.........................................................33
SECTION 8.02. Illegality...............................................................................34
SECTION 8.03. Increased Cost and Reduced Return........................................................34
SECTION 8.04. Taxes....................................................................................35
SECTION 8.05. Base Rate Loans Substituted for
Affected EuroDollar Loans....................................................36
ARTICLE 9 MISCELLANEOUS.........................................................................................37
SECTION 9.01. Notices..................................................................................37
SECTION 9.02. No Waivers...............................................................................37
SECTION 9.03. Expenses; Indemnification................................................................37
SECTION 9.04. Sharing of Set-offs......................................................................38
SECTION 9.05. Amendments and Waivers...................................................................38
SECTION 9.06. Successors and Assigns...................................................................38
SECTION 9.07. Collateral...............................................................................40
SECTION 9.08. Continuing Obligation....................................................................40
SECTION 9.09. Governing Law; Submission to Jurisdiction................................................40
SECTION 9.10. Counterparts; Integration; Effectiveness.................................................40
SECTION 9.11. WAIVER OF JURY TRIAL.....................................................................40
SECTION 9.12. Confidentiality..........................................................................41
</TABLE>
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<PAGE> 4
AGREEMENT dated as of January 21, 1997 among GT INTERACTIVE SOFTWARE CORP.,
the BANKS listed on the signature pages hereof, the LETTER OF CREDIT ISSUING
BANK named herein and REPUBLIC NATIONAL BANK OF NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1.
DEFINITION
SECTION 1.1. Definitions. The following terms, as used herein, have the
following meanings:
"ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in
Section 2.05(b).
"AFFILIATE" means (i) any Person that directly, or indirectly through one
or more intermediaries, controls the Borrower (a "CONTROLLING PERSON") or (ii)
any Person (other than the Borrower or a Subsidiary) which is controlled by or
is under common control with a Controlling Person. As used herein, the term
"control" means possession, directly or indirectly, of the power to vote 25% or
more of any class of voting securities of a Person or to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGENT" means RNB, in its capacity as agent for the Banks hereunder, and
its successors in such capacity.
"APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the
case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of
its EuroDollar Loans, its EuroDollar Lending Office.
"ASSET SALE" means any sale or other disposition (excluding any lease or
license and any such transaction effected by way of merger or consolidation) by
the Borrower or any of its Subsidiaries of any asset, but excluding (i)
dispositions of inventory, cash, cash equivalents and other cash management
investments and obsolete, unused or unnecessary equipment and undeveloped real
estate, in each case in the ordinary course of business and (ii) dispositions to
the Borrower or a Subsidiary of the Borrower.
"ASSIGNEE" has the meaning set forth in Section 9.06(c).
"BANK" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 9.06(c), and their respective
successors and shall include, as the context may require, any Issuing Bank in
such capacity.
"BASE RATE" means, for any day, a rate per annum equal to the Reference
Rate for such day.
<PAGE> 5
"BASE RATE LOAN" means (i) a Loan which bears interest at the Base Rate
pursuant to the applicable Notice of Borrowing or Notice of Interest Rate
Election or the provisions of Article 8 or (ii) an overdue amount which was a
Base Rate Loan immediately before it became overdue.
"BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the
meaning of Section (3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by any member of the ERISA
Group.
"BORROWER" means GT Interactive Software Corp., a Delaware corporation, and
its successors.
"BORROWING" means a borrowing hereunder consisting of Loans made to the
Borrower on the same day pursuant to Article 2, all of which Loans are of the
same type (subject to Article 8) and, except in the case of Base Rate Loans,
have the same initial Interest Period. A Borrowing is a "BASE RATE BORROWING" if
such Loans are Base Rate Loans or a "EURODOLLAR BORROWING" if such Loans are
EuroDollar Loans.
"CAYRE FAMILY" shall have the meaning set forth in Section 6.01(j) hereof.
"CLOSING DATE" means the date on or after the Effective Date on which the
Agent shall have received the documents specified in or pursuant to Section
3.01.
"COMMITMENT" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Section 2.07.
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the additions to
property, plant and equipment and other capital expenditures of the Borrower and
its Consolidated Subsidiaries for such period, as the same are or would be set
forth in a consolidated statement of cash flows of the Borrower and its
Consolidated Subsidiaries for such period.
"CONSOLIDATED DEBT" means at any date the Debt of the Borrower and its
Consolidated Subsidiaries, determined on a consolidated basis as of such date.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the net income of
the Borrower and its Consolidated Subsidiaries, determined on a consolidated
basis for such period, exclusive of the effect of any extraordinary or other
nonrecurring gain or loss.
"CONSOLIDATED CURRENT ASSETS" means all cash, short term investments,
customers' accounts receivable, inventory and deposits, of the Borrower and its
Consolidated Subsidiaries.
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<PAGE> 6
"CONSOLIDATED CURRENT LIABILITIES" means those amounts due or to become due
for payment within twelve (12) months subsequent to the relevant statement date,
including all outstanding Loans (regardless of when due), Standby Letter of
Credit Liabilities and Documentary Letter of Credit Liabilities of the type
described in clause (x) of the definition of Letter of Credit Liabilities, but
excluding Documentary Letter of Credit Liabilities of the type described in
clause (y) of the definition of Letter of Credit Liabilities, by the Borrower or
its Consolidated Subsidiaries (excluding intercompany amounts due to the
Borrower).
"CONSOLIDATED TANGIBLE NET WORTH" means at any date (1) the aggregate
amount at which all assets of Borrower and its Consolidated Subsidiaries would
be shown on a balance sheet at such date after deducting capitalized research
and development costs, capitalized interest, goodwill, patents, trademarks,
copyrights, franchises, licenses and such other assets as are properly
classified as "intangible assets", less (2) the aggregate principal amount of
all indebtedness, liabilities (including tax and other proper accruals and all
Loans and Standby Letter of Credit Liabilities, but excluding Documentary Letter
of Credit Liabilities), deferred tax assets and reserves of Borrower and its
Consolidated Subsidiaries but only to the extent not deducted in clause (1).
"CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity
the accounts of which would be consolidated with those of the Borrower in its
consolidated financial statements if such statements were prepared as of such
date.
"CONSOLIDATED TOTAL LIABILITIES" means at any date all liabilities of the
Borrower and its Consolidated Subsidiaries (including all Loans and Letter of
Credit Liabilities (other than in the case of Documentary Letters of Credit
only, liabilities described in clause (y) of the definition of Letter of Credit
Liabilities)) which would properly appear on the liability side of a balance
sheet, other than capital stock, capital surplus, retained earnings, minority
interest, deferred credits, and contingency reserves.
"CONSOLIDATED WORKING CAPITAL" means at any date the excess of Consolidated
Current Assets over Consolidated Current Liabilities.
"DEBT" of any Person means at any date, without duplication, (i) the
principal portion of all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable and
accrued expenses arising in the ordinary course of business, (iv) all
obligations of such Person as lessee which are capitalized in accordance with
generally accepted accounting principles (the
-3-
<PAGE> 7
amount of such Debt being the capitalized amount thereof on the Borrower's
financial statements), (v) all non-contingent obligations (and, for purposes of
Section 5.09 and the definition of Material Debt, all contingent obligations) of
such Person to reimburse any bank or other Person in respect of amounts paid
under a letter of credit or similar instrument, (vi) all Debt secured by a Lien
on any asset of such Person, whether or not such Debt is otherwise an obligation
of such Person (the amount of such Debt being limited to the fair market value
of such asset if such Person's liability with regard to such Debt is limited
solely to such asset) and (vii) all Debt of others Guaranteed by such Person, it
being understood that Debt shall not include amounts of outstanding Documentary
Letters of Credit but shall include amounts of outstanding Standby Letters of
Credit.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"DOCUMENTARY LETTER OF CREDIT" means a letter of credit which is used as
the payment mechanism for the acquisition of goods, rights or other assets.
"DOCUMENTARY LETTER OF CREDIT LIABILITIES" means any liabilities ensuing
from Documentary Letters of Credit.
"DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
"DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its
address set forth below its name on the signature page thereof as its Domestic
Lending Office or such other office as such Bank may hereafter designate as its
Domestic Lending Office by notice to the Borrower and the Agent.
"DOMESTIC SUBSIDIARY" means any Subsidiary of the Borrower organized in a
jurisdiction within the United States.
"EFFECTIVE DATE" means the date this Agreement becomes effective in
accordance with Section 9.10.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and other governmental restrictions relating to the
environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
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<PAGE> 8
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"EQUITY RIGHTS" means with respect to any Person, any outstanding
subscriptions, options, warrants, commitments, preemptive rights or agreements
of any kind (including, without limitation, any stockholders' or voting trust
agreements) for the issuance, sale, registration or voting of, or outstanding
securities convertible into, any additional shares of capital stock of any class
of, or partnership or other ownership interests of any type in, such Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means the Borrower, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"EURODOLLAR BUSINESS DAY" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"EURODOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or
affiliate located at its address set forth below its name on the signature page
thereof as its EuroDollar Lending Office or such other office, branch or
affiliate of such Bank as it may hereafter designate as its EuroDollar Lending
Office by notice to the Borrower and the Agent.
"EURODOLLAR LOAN" means (i) a Loan which bears interest at a EuroDollar
Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate
Election or (ii) an overdue amount which was a EuroDollar Loan immediately
before it became overdue.
"EURODOLLAR MARGIN" means 1 1/4%.
"EURODOLLAR RATE" means a rate of interest determined pursuant to Section
2.05(b) on the basis of an Adjusted London Interbank Offered Rate.
"EURODOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section
2.05(b).
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01.
"EXISTING APPLICATION FOR COMMERCIAL CREDIT" means the Application for
Commercial Credit dated December 24, 1996 between the Borrower and the Issuing
Bank.
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<PAGE> 9
"EXISTING LETTER OF CREDIT" means the letter of credit in the face
amount of $1,666,666.66 issued before the Closing Date under the existing
Application for Commercial Credit.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to the Agent on such day on such
transactions as reasonably determined by the Agent to be relevant.
"FINANCING DOCUMENTS" means this Agreement and the Notes.
"FOREIGN SUBSIDIARY" means any Subsidiary of the Borrower
that is not a Domestic Subsidiary.
"GROUP OF LOANS" means at any time a group of Loans consisting of (i)
all Loans which are Base Rate Loans at such time or (ii) all EuroDollar Loans
having the same Interest Period at such time, provided that, if a Loan of any
particular Bank is converted to or made as a Base Rate Loan pursuant to Article
8, such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation for the payment of money of any other Person and, without limiting
the generality of the foregoing, any obligation, direct or indirect, contingent
or otherwise, of such Person (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Debt or other obligation for the payment of
money (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt or other
obligation of the payment thereof or to protect such holder against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
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<PAGE> 10
"HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics.
"INDEMNITEE" has the meaning set forth in Section 9.03(b).
"INTEREST PERIOD" means with respect to each EuroDollar Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing or on the date specified in the applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter, as the Borrower
may elect in the applicable notice; provided that:
(i) any Interest Period which would otherwise end on a day which is
not a EuroDollar Business Day shall be extended to the next succeeding
EuroDollar Business Day unless such EuroDollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding EuroDollar Business Day;
(ii) any Interest Period which begins on the last EuroDollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (iii) below, end on the last EuroDollar Business
Day of a calendar month; and
(iii) any Interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"INVESTMENT" means any investment in any Person, whether by means of share
purchase, capital contribution, loan, Guarantee, time deposit or otherwise (but
not including any demand deposit).
"ISSUING BANK" means RNB as issuer of a Letter of Credit hereunder.
"JOINT VENTURE" means at any time (i) any corporation of which not less
than 10% nor more than 50% of each class of capital stock having ordinary voting
power to elect the board of directors of such corporation or other persons
performing similar functions are at the time directly or indirectly owned by the
Borrower and (ii) any partnership, association or joint venture not less than
10% nor more than 50% of the equity interests of which are at the time directly
or indirectly owned by the Borrower, but excluding in any event any Subsidiary
of the Borrower.
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<PAGE> 11
"LETTER OF CREDIT" means a letter of credit to be issued under Section
2.13(b) by the Issuing Bank.
"LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, the sum
of (x) the amounts then owing to such Bank (including in the case of RNB in its
capacity as an Issuing Bank) by the Borrower to reimburse it in respect of
amounts drawn under Letters of Credit and (y) such Bank's ratable participation
in the aggregate amount then available for drawing under all outstanding Letters
of Credit.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"LOAN" means a Base Rate Loan or a EuroDollar Loan and "Loans" means Base
Rate Loans or EuroDollar Loans or any combination of the foregoing..
"LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section
2.05(b).
"MATERIAL DEBT" means Debt (other than the Notes) of the Borrower and/or
one or more of its Subsidiaries (other than intercompany indebtedness), arising
(a) in a single transaction, in a principal or face amount exceeding $1,000,000,
or (b) in more than one related or unrelated transactions in an aggregate
principal or face amount exceeding $2,000,000.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $1,000,000.
"MATERIAL SUBSIDIARY" means a subsidiary, including its subsidiaries, (i)
the investments in and advances to which by the Borrower and its other
subsidiaries exceed 10% of the total consolidated assets of the Borrower and its
consolidated subsidiaries as of the end of the most recently completed fiscal
quarter, or (ii) the proportionate share of the Borrower or its other
subsidiaries in the total assets of which exceeds 10% of the total assets (after
intercompany eliminations) of the Borrower and its other subsidiaries
consolidated as of the end of the most recently completed fiscal quarter, or
(iii) of which the Borrower's or its other subsidiaries' equity in the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principles of the subsidiary exceeds
10% of such income of the Borrower and its
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<PAGE> 12
subsidiaries consolidated for the most recently completed fiscal quarter.
"MONTHLY DATES" means the last day of each calendar month.
"MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"NBD" means NBD Bank, a Michigan banking corporation and its successors.
"NOTES" means promissory notes of the Borrower, substantially in the
respective forms of Exhibits A-1 and A-2 hereto, evidencing the obligation of
the Borrower to repay the Loans, and "Note" means any one of such promissory
notes issued hereunder.
"NOTICE OF BORROWING" has the meaning set forth in Section 2.02.
"NOTICE OF ISSUANCE" has the meaning set forth in Section 2. 13(b).
"NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section
2.08.
"PARENT" means, with respect to any Bank, any Person controlling such Bank.
"PARTICIPANT" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ACQUISITION" means the acquisition by the Borrower or any
Subsidiary of any Person or of any division or line of business of any Person or
of any minority or majority equity interest therein, either by merger,
consolidation, purchase of stock or other equity interest, or purchase of all or
a substantial part of the assets of such business or purchase of less than all
of the equity of any Person; provided that, unless waived by the Agent and each
of the Banks, in the exercise of their respective sole discretions, each of the
following conditions shall have been satisfied:
(a) such acquisition shall be of a business which is a developer,
publisher, merchandiser or distributor of consumer software or a business
related thereto or is a start-up company intending to engage in any such
business (including in each case,
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<PAGE> 13
without limitation, Internet and similar on-line or electronic related
businesses); and
(b) such transaction shall not be a "hostile" acquisition or other
"hostile" transaction (i.e., such transaction shall not be opposed by the Board
of Directors of the business), provided that in the event the Borrower proposes
to initiate such transaction as a hostile transaction with the intent to attempt
to subsequently obtain the approval of the Board of Directors of such business,
the Borrower may notify the Agent and each Bank in writing in advance of the
initiation of such proposed transaction together with any information concerning
such transaction as the Agent and Bank may reasonably request, and, provided
that each Bank shall have approved such transaction in writing prior to the
initiation of such transaction, with the approval of each Bank being based
solely on a conflict of any kind of such Bank concerning such proposed
acquisition and with such approval not to be unreasonably withheld, the Borrower
may proceed with such transaction so long as the transaction ultimately is
approved by the Board of Directors of such business (and a majority of which
were members of such Board of Directors at the time such transaction was
initiated) and is otherwise in accordance with the terms of this Agreement.
"PERSON" means an individual, a corporation, a limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof
"PLAN" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group, and as to which Borrower may have
contingent liability exceeding $1,000,000.
"REFERENCE RATE" means the rate of interest established by RNB from time to
time at its principal domestic office as its reference lending rate for domestic
commercial loans.
"REFERENCE BANK" means the principal London offices of RNB.
"REGULATION U" means Regulation U of the Board of Governors of the Federal
Reserve System, as in effect from time to time.
"REIMBURSEMENT OBLIGATIONS" means at any date the obligations of the
Borrower then outstanding under Section 2.13
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<PAGE> 14
to reimburse any Bank for the amount paid by such Bank in respect of a drawing
under a Letter of Credit.
"REQUIRED BANKS" means at any time Banks having at least 75% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 75% of the sum of the aggregate
unpaid principal amount of the Loans and Letter of Credit Liabilities.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution on any
shares of the Borrower's capital stock (except dividends payable solely in
shares of its capital stock) or (ii) any payment on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the Borrower's
capital stock or (b) any option, warrant or other right to acquire shares of the
Borrower's capital stock (but not including payments of principal, premium (if
any) or interest made pursuant to the terms of convertible debt securities prior
to conversion), in each case excluding repurchases under employee stock option
plans and warrant agreements, other than with the Cayre Family, to which the
Borrower is a party in an aggregate amount not exceeding $1,000,000; and
excluding the acquisition by the Borrower of shares of its Common Stock in open
market or privately negotiated transactions pursuant to a stock repurchase
program approved by its Board of Directors, provided that (i) the aggregate
amount expended therefor does not exceed $20,000,000, and (ii) such shares are
not acquired in privately negotiated transactions from any members of the Cayre
Family.
"REVOLVING CREDIT PERIOD" means the period from and including the Closing
Date to but not including the Termination Date.
"RNB" means Republic National Bank of New York, a bank organized and
existing under the laws of the United States and it successors.
"SALE-LEASEBACK TRANSACTION" means any arrangement with any Person
providing for the leasing by the Borrower or any Subsidiary of any property
that, or of any property similar to and used for substantially the same purposes
as any other property that, has been or is to be sold, assigned, transferred or
otherwise disposed of by the Borrower or any of its Subsidiaries to such Person
with the intention of entering into such a lease.
"STANDBY LETTER OF CREDIT" means any Letter of Credit which is not a
Documentary Letter of Credit.
"STANDBY LETTER OF CREDIT LIABILITIES" means any liabilities ensuing from
Standby Letters of Credit.
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<PAGE> 15
"SUBSIDIARY" means, as to any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person; unless
otherwise specified, "SUBSIDIARY" means a Subsidiary of the Borrower.
"TEMPORARY CASH INVESTMENT" means any Investment in (a) (i) direct
obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or any agency thereof, (ii) commercial paper
rated at least A-1 by Standard & Poor's Ratings Services and PI by Moody's
Investors Service, Inc., (iii) time deposits with, including certificates of
deposit issued by, any office located in the United States of any bank or trust
company which is organized under the laws of the United States or any state
thereof and has capital, surplus and undivided profits aggregating at least
$1,000,000,000 or (iv) repurchase agreements with respect to securities
described in clause (i) above entered into with an office of a bank or trust
company meeting the criteria specified in clause (iii) above, provided in each
case that such Investment matures within one year from the date of acquisition
thereof by the Borrower or a Subsidiary, (b) any money market mutual fund,
provided its investment policies require substantially all of its assets to be
limited to Temporary Cash Investments described in clause (a) above, or (c) such
obligations or instruments as are permitted under the Company's "Investment
Policy Guidelines", attached hereto as Exhibit C.
"TERMINATION DATE" means December 31, 1998, or, if such day is
not a
EuroDollar Business Day, the next succeeding EuroDollar Business Day unless such
EuroDollar Business Day falls in another calendar month, in which case the
Termination Date shall be the next preceding EuroDollar Business Day.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"UNITED STATES" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.
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SECTION 1.2. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if the Borrower notifies the Agent that the
Borrower wishes to amend any covenant in Article 5 to eliminate the effect of
any change in generally accepted accounting principles on the operation of such
covenant (or if the Agent notifies the Borrower that the Required Banks wish to
amend Article 5 for such purpose), then the Borrower's compliance with such
covenant shall be determined on the basis of generally accepted accounting
principles in effect immediately before the relevant change in generally
accepted accounting principles became effective, until either such notice is
withdrawn or such covenant is amended in a manner satisfactory to the Borrower
and the Required Banks.
ARTICLE 2
The Credits
SECTION 2.1. Commitments to Lend. During the Revolving Credit Period, each
Bank severally agrees, on the terms and conditions set forth in this Agreement,
to make loans to the Borrower from time to time in amounts such that the
aggregate principal amount of Loans by such Bank at any one time outstanding
plus its Letter of Credit Liabilities shall not exceed the amount of its
Commitment. Each Borrowing under this Section shall be in an aggregate principal
amount of $1,000,000 or any larger multiple of $100,000 (except that any such
Borrowing may be in the aggregate amount of the unused Commitments) and shall be
made from the several Banks ratably in proportion to their respective
Commitments. Within the foregoing limits, the Borrower may borrow under this
Section, prepay Loans to the extent permitted by Section 2.07 and reborrow at
any time during the Revolving Credit Period under this Section.
SECTION 2.2. Method of Borrowing. (a) The Borrower shall give the Agent
notice (a "NOTICE OF BORROWING") not later than 11:00 A.M. (New York City time)
on (x) the date of each Base Rate Borrowing and (y) the third EuroDollar
Business Day before each EuroDollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Base Rate Borrowing or a EuroDollar Business Day in the
case of a EuroDollar Borrowing;
(ii) the aggregate amount of such Borrowing;
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(iii) whether the Loans comprising such Borrowing are to bear interest
initially at the Base Rate or the EuroDollar Rate; and
(iv) in the case of a EuroDollar Borrowing, the duration of the
initial Interest Period applicable thereto, subject to the provisions of
the definition of Interest Period.
(b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify
each Bank of the contents thereof and of such Bank's ratable share of such
Borrowing and such Notice of Borrowing shall not thereafter be revocable by the
Borrower.
(c) Not later than 12:30 P.M. (New York City time) on the date of each
Borrowing, each Bank shall make available its ratable share of such Borrowing,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in Section 9.01. Unless the Agent determines that any
applicable condition specified in Article 3 has not been satisfied, the Agent
will make the funds so received from the Banks available to the Borrower at the
Agent's aforesaid address.
(d) Unless the Agent shall have received notice from a Bank prior to the
date of any Borrowing that such Bank will not make available to the Agent such
Bank's share of such Borrowing, the Agent may assume that such Bank has made
such share available to the Agent on the date of such Borrowing in accordance
with subsection (c) of this Section and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Bank shall not have so made such share available
to the Agent, such Bank and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at (i) in the case of the Borrower,
a rate per annum equal to the higher of the Federal Funds Rate and the interest
rate applicable thereto pursuant to Section 2.05 and (ii) in the case of such
Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such
corresponding amount, such amount so repaid shall constitute such Bank's Loan
included in such Borrowing for purposes of this Agreement.
SECTION 2.3. Notes. (a) The Loans of each Bank shall be evidenced by a
single Note payable to the order of such Bank in an amount equal to the
aggregate unpaid principal amount of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request that
its Loans of a particular type be evidenced by a separate Note in an amount
equal to the aggregate unpaid principal amount of such Loans. Each such Note
shall be in substantially the form of Exhibit A hereto with appropriate
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modifications to reflect the fact that it evidences solely Loans of the relevant
type. Each reference in this Agreement to the "Note" of such Bank shall be
deemed to refer to and include any or all of such Notes, as the context may
require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.01(c), the Agent
shall forward such Note to such Bank. Each Bank shall record the date, amount
and type of each Loan made by it and the date and amount of each payment of
principal made by the Borrower with respect thereto, and may, if such Bank so
elects in connection with any transfer or enforcement of its Note, endorse on
the schedule forming a part thereof appropriate notations to evidence the
foregoing information with respect to each such Loan then outstanding; provided
that the failure of any Bank to make any such recordation or endorsement shall
not affect the obligations of the Borrower hereunder or under the Notes. Each
Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and
to attach to and make a part of its Note a continuation of any such schedule as
and when required.
SECTION 2.4. Maturity of Loans. Each Loan shall mature, and the principal
amount thereof shall be due and payable, on the Termination Date.
SECTION 2.5. Interest Rates. (a) Each Base Rate Loan shall bear interest on
the outstanding principal amount thereof for each day from the date such Loan is
made until it becomes due, at a rate per annum equal to the Base Rate for such
day. Such interest shall be payable monthly in arrears on each Monthly Date and,
with respect to the principal amount of any Base Rate Loan converted to a
EuroDollar Loan, on each date a Base Rate Loan is so converted. Any overdue
principal of any Base Rate Loan shall bear interest, payable on demand, for each
day until paid at a rate per annum equal to the sum of 2% plus the rate
otherwise applicable to Base Rate Loans for such day.
(b) Each EuroDollar Loan shall bear interest on the outstanding principal
amount thereof for each day during each Interest Period applicable thereto, at a
rate per annum equal to the sum of the EuroDollar Margin for such day plus the
Adjusted London Interbank Offered Rate applicable to such Interest Period. Such
interest shall be payable for each Interest Period on the last day thereof and,
if such Interest Period is longer than one month, at intervals of one month
after the first day thereof.
The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest
Period means a rate per annum equal to the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London
Interbank Offered Rate by (ii) 1.00 minus the EuroDollar Reserve Percentage.
The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means
the average (rounded upward, if necessary,
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to the next higher 1/8 of 1%) of the respective rates per annum at which
deposits in dollars in immediately available funds are offered to the Reference
Bank by prime commercial banks in the London interbank market at approximately
11:00 A.M. (London time) two EuroDollar Business Days before the first day of
such Interest Period for delivery on the first day of such Interest Period in an
amount approximately equal to the principal amount of the EuroDollar Loan of the
Reference Bank to which such Interest Period is to apply and for a period of
time comparable to such Interest Period.
"EURODOLLAR RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
EuroDollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the EuroDollar
Reserve Percentage.
(c) Any overdue principal of any EuroDollar Loan shall bear interest,
payable on demand, for each day until paid at a rate per annum equal to the
higher of (i) the sum of 2% plus the EuroDollar Margin for such day plus the
quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%)
by dividing (x) the average (rounded upward, if necessary, to the next higher
1/8 of 1%) of the respective rates per annum at which one day (or, if such
amount due remains unpaid more than three EuroDollar Business Days, then for
such other period of time not longer than three months as the Agent may select)
deposits in dollars in an amount approximately equal to such overdue payment due
to Banks are offered to the Reference Bank by prime commercial banks in the
London interbank market for the applicable period determined as provided above
by (y) 1.00 minus the EuroDollar Reserve Percentage (or, if the circumstances
described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum
equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day)
and (ii) the sum of 2% plus the EuroDollar Margin for such day plus the Adjusted
London Interbank Offered Rate applicable to such Loan at the date such payment
was due.
(d) The Agent shall determine each interest rate applicable to the Loans
hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of demonstrable error.
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SECTION 2.6. Fees. (a) During the Revolving Credit Period, the Borrower
shall pay to the Agent for the account of the Banks ratably in proportion to
their Commitments a commitment fee of 1/4 of 1% per annum on the daily amount by
which the aggregate amount of the Commitments exceeds the sum of the aggregate
outstanding principal amount of the Loans and the aggregate amount of Letter of
Credit Liabilities. Such commitment fee shall accrue from and including the
Closing Date to but excluding the date of termination of the Commitments in
their entirety.
(b) The Borrower shall pay to the Agent for the account of the Issuing Bank
(to be shared with the Banks in accordance with a letter agreement among the
Issuing Bank and the Banks) (i) a letter of credit fee accruing daily on the
aggregate amount then available for drawing under all Documentary Letters of
Credit at a rate per annum equal to 3/4 of 1% and (ii) a Letter of Credit fee
accruing daily on the aggregate amount then available for drawing under all
Standby Letters of Credit at a rate per annum equal to 3/4 of 1%, plus upon each
draw 1/8 of 1% the amount so drawn upon.
(c) The Borrower shall pay to the Agent, for the account of the Banks
ratably on the Closing Date, a non-refundable facility fee in an amount equal to
1/4 of 1% of the aggregate amount of the Commitments.
(d) Other than the standby letter of credit drawing fee referred to in
clause (b) above (which is due upon the Issuing Bank's payment of such draw) and
the facility fee referred to in clause (c) above, the accrued fees under this
Section shall be payable quarterly in arrears commencing March 31, 1997 and on
the date of termination of the Commitments in their entirety (and, if later, the
date the Loans and the aggregate amount of Letter of Credit Liabilities shall be
repaid in their entirety to the extent Letters of Credit have been drawn upon,
or to the extent not drawn upon, the date such Letter of Credit shall have
terminated).
SECTION 2.7. Optional Termination or Reduction of Commitments; Optional
Prepayment. (a) During the Revolving Credit Period, the Borrower may, upon at
least three Domestic Business Days' notice to the Agent, (i) terminate the
Commitments at any time, if no Loans or Letter of Credit Liabilities are
outstanding at such time or (ii) ratably reduce from time to time by an
aggregate amount of $1,000,000 or a larger multiple of $100,000, the aggregate
amount of the Commitments in excess of the sum of the aggregate outstanding
principal amount of the Loans and the aggregate amount of Letter of Credit
Liabilities.
(b) Subject in the case of any EuroDollar Borrowing to Section 2.11, the
Borrower may, upon at least one Domestic Business Day's notice to the Agent,
prepay any Group of Base Rate Loans or upon at least three EuroDollar Business
Day's notice to the Agent, prepay any Group of EuroDollar Loans, in each case in
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whole at any time, or from time to time in part in amounts aggregating
$1,000,000 or any larger multiple of $100,000, by paying the principal amount to
be prepaid together with accrued interest thereon to the date of prepayment.
Each such optional prepayment shall be applied to prepay ratably the Loans of
the several Banks included in such Group.
(c) Upon receipt of a notice of prepayment pursuant to this Section, the
Agent shall promptly notify each Bank of the contents thereof and of such Bank's
ratable share of such prepayment and such notice shall not thereafter be
revocable by the Borrower.
SECTION 2.8. Method of Electing Interest Rates. (a) The Loans included in
each Borrowing shall bear interest initially at the type of rate specified by
the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may
from time to time elect to change or continue the type of interest rate borne by
each Group of Loans (subject in each case to the provisions of Article 8), as
follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect to
convert such Loans to EuroDollar Loans as of any EuroDollar Business
Day; and
(ii) if such Loans are EuroDollar Loans, the Borrower may elect
to convert such Loans to Base Rate Loans or elect to continue such
Loans as EuroDollar Loans for an additional Interest Period, subject
to Section 2.11 in the case of any such conversion or continuation
effective on any day other than the last day of the then current
Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "NOTICE OF
INTEREST RATE ELECTION") to the Agent not later than 11:00 A.M. (New York City
time) on the third EuroDollar Business Day before the conversion or continuation
selected in such notice is to be effective. A Notice of Interest Rate Election
may, if it so specifies, apply to only a portion of the aggregate principal
amount of the relevant Group of Loans; provided that (i) such portion is
allocated ratably among the Loans comprising such Group and (ii) the portion to
which such Notice applies, and the remaining portion to which it does not apply,
are each $1,000,000 or any larger multiple of $100,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in such
notice is to be effective, which shall comply with the applicable clause of
subsection(a) above;
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(iii) if the Loans comprising such Group are to be converted, the
new type of Loans and, if the Loans being converted are to be
EuroDollar Loans, the duration of the next succeeding Interest Period
applicable thereto; and
(iv) if such Loans are to be continued as EuroDollar Loans for an
additional Interest Period, the duration of such additional Interest
Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the Borrower
pursuant to subsection (a) above, the Agent shall promptly notify each Bank of
the contents thereof and such notice shall not thereafter be revocable by the
Borrower.
(d) An election by the Borrower to change or continue the rate of interest
applicable to any Group of Loans pursuant to this section shall not constitute a
"Borrowing" subject to the provisions of Section 3.02.
SECTION 2.9. Mandatory Termination of Commitments. The Commitments shall
terminate on the Termination Date and any Loans then outstanding (together with
accrued interest thereon) shall be due and payable on such date.
SECTION 2.10. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of and interest on, the Loans and of Letter of
Credit Liabilities and interest thereon and of fees hereunder (other than fees
payable directly to the Issuing Bank), not later than 12:00 Noon (New York City
time) on the date when due, in Federal or other funds immediately available in
New York City, to the Agent at its address referred to in Section 9.01. The
Agent will promptly distribute to each Bank its ratable share of each such
payment received by the Agent for the account of the Banks. Whenever any payment
of principal of or interest on, the Base Rate Loans or of Letter of Credit
Liabilities or interest thereon or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of or
interest on, the EuroDollar Loans shall be due on a day which is not a
EuroDollar Business Day, the date for payment thereof shall be extended to the
next succeeding EuroDollar Business Day unless such EuroDollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding EuroDollar Business Day. If the date for any payment
of principal is extended by operation of law or otherwise, interest thereon
shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior to
the date on which any payment is due to the
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Banks hereunder that the Borrower will not make such payment in full, the Agent
may assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount then due
to such Bank. If and to the extent that the Borrower shall not have so made such
payment, each Bank shall repay to the Agent forthwith on demand such amount
distributed to such Bank together with interest thereon, for each day from the
date such amount is distributed to such Bank until the date such Bank repays
such amount to the Agent, at the Federal Funds Rate.
SECTION 2.11. Funding Losses. If the Borrower makes any payment of
principal with respect to any EuroDollar Loan or any EuroDollar Loan is
converted (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the
last day of an Interest Period applicable thereto, or the last day of an
applicable period fixed pursuant to Section 2.05(c), or if the Borrower fails to
borrow, prepay, convert or continue any EuroDollar Loans after notice has been
given to any Bank in accordance with Section 2.02(b) or 2.08 the Borrower shall
reimburse each Bank within 15 days after demand for any resulting loss or
expense incurred by it (or by an existing or prospective Participant in the
related Loan), including (without limitation) any loss incurred in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after any such payment or conversion or failure to borrow,
prepay, convert or continue, provided that such Bank shall have delivered to the
Borrower a certificate as to the amount of such loss or expense, which
certificate shall be conclusive in the absence of demonstrable error.
SECTION 2.12. Computation of Interest and Fees. All interest and fees
hereunder shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.13. Letters of Credit. (a) On the Closing Date, the Issuing Bank
that has issued the Existing Letter of Credit shall be deemed, without further
action by any party hereto, to have sold to each Bank, and each such Bank shall
be deemed, without further action by any party hereto, to have purchased from
the Issuing Bank, a participation in the Existing Letter of Credit and the
related Letter of Credit Liabilities in proportion to their Commitments. On and
after the Closing Date, the Existing Letter of Credit shall constitute a Letter
of Credit for all purposes hereof.
(b) Subject to the terms and conditions hereof the Issuing Bank agrees to
issue Letters of Credit hereunder from time to time before the 30th day before
the Termination Date upon the request of the Borrower; provided that,
immediately after each Letter of Credit is issued, the aggregate amount of the
Letter of Credit Liabilities shall not exceed $15,000,000 and the aggregate
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amount of the Letter of Credit Liabilities plus the aggregate outstanding amount
of all Loans shall not exceed the aggregate amount of the Commitments. Upon the
date of issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank
shall be deemed, without further action by any party hereto, to have sold to
each Bank, and each Bank shall be deemed, without further action by any party
hereto, to have purchased from the Issuing Bank, a participation in such Letter
of Credit and the related Letter of Credit Liabilities in the proportion their
respective Commitments bear to the aggregate Commitments.
(c) The Borrower shall give the Issuing Bank notice at least three days
prior to the requested issuance of a Letter of Credit specifying the date such
Letter of Credit is to be issued, and describing the terms of such Letter of
Credit and the nature of the transactions to be supported thereby (such notice,
including any such notice given in connection with the extension of a Letter of
Credit, a "NOTICE OF ISSUANCE"). Upon receipt of a Notice of Issuance, the
Issuing Bank shall promptly notify the Agent, and the Agent shall promptly
notify each Bank of the contents thereof and of the amount of such Bank's
participation in such Letter of Credit. The issuance by the Issuing Bank of each
Letter of Credit shall be subject to the conditions precedent that such Letter
of Credit shall be in such form and contain such terms as shall be satisfactory
to the Issuing Bank and that the Borrower shall have executed and delivered such
other instruments and agreements relating to such Letter of Credit as the
Issuing Bank shall have reasonably requested. The Borrower shall also pay to the
Issuing Bank for its own account amendment and extension charges in the amounts
and at the times as agreed between the Borrower and the Issuing Bank. The
extension or renewal of any Letter of Credit shall be deemed to be an issuance
of such Letter of Credit, and if any Letter of Credit contains a provision
pursuant to which it is deemed to be extended unless notice of termination is
given by the Issuing Bank, the Issuing Bank shall timely give such notice of
termination unless it has theretofore timely received a Notice of Issuance and
the other conditions to issuance of a Letter of Credit have also theretofore
been met with respect to such extension. No Letter of Credit shall have a term
of more than one year; provided that a Letter of Credit may contain a provision
pursuant to which it is deemed to be extended on an annual basis unless notice
of termination is given by the Issuing Bank; provided further that no Letter of
Credit shall have a term extending or be so extendible beyond six (6) months
following the Termination Date.
(d) Upon receipt from the beneficiary of any Letter of Credit of any notice
of a drawing under such Letter of Credit, the Issuing Bank shall notify the
Agent and the Agent shall promptly notify the Borrower and each other Bank as to
the amount to be paid as a result of such demand or drawing and the payment
date. Subject to the foregoing, the Borrower shall be irrevocably and
unconditionally obligated forthwith to reimburse
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the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under
any Letter of Credit, without presentment, demand, protest or other formalities
of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by
the Borrower shall bear interest, payable on demand, for each day until paid at
a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate
Loans for such day. In addition, each Bank will pay to the Agent, for the
account of the Issuing Bank, immediately upon the Issuing Bank's demand at any
time during the period commencing after such drawing until reimbursement
therefor in full by the Borrower, an amount equal to such Bank's ratable share
of such drawing (in proportion to its participation therein), together with
interest on such amount for each day from the date of the Issuing Bank's demand
for such payment (or, if such demand is made after 12:00 Noon (New York City
time) on such date, from the next succeeding Domestic Business Day) to the date
of payment by such Bank of such amount at a rate of interest per annum equal to
the rate applicable to Base Rate Loans for such period. The Issuing Bank will
pay to each Bank ratably all amounts received from the Borrower for application
in payment of its Reimbursement Obligations in respect of any Letter of Credit,
but only to the extent such Bank has made payment to the Issuing Bank in respect
of such Letter of Credit pursuant hereto.
(e) The obligations of the Borrower and each Bank under subsection (d)
above shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement, under all circumstances
whatsoever, including without limitation the following circumstances (except to
the extent such obligation of the Borrower to such Bank arose as a result of
such Bank's (including the Issuing Bank's) gross negligence or willful
misconduct):
(i) any lack of validity or enforceability of this Agreement or any
Letter of Credit or any document related hereto or thereto;
(ii) any amendment or waiver of or any consent to departure from all
or any of the provisions of this Agreement or any Letter of Credit or any
document related hereto or thereto;
(iii) the use which may be made of the Letter of Credit by, or any
acts or omission of a beneficiary of a Letter of Credit (or any Person for
whom the beneficiary may be acting);
(iv) the existence of any claim, set-off defense or other rights that
the Borrower may have at any time against a beneficiary of a Letter of
Credit (or any Person for whom the beneficiary may be acting), the Banks
(including the Issuing Bank) or any other Person, whether in connection
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with this Agreement or the Letter of Credit or any document related hereto
or thereto or any unrelated transaction;
(v) any statement or any other document presented under a Letter of
Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;
(vi) payment under a Letter of Credit against presentation to the
Issuing Bank of a draft or certificate that does not comply with the terms
of the Letter of Credit, provided that the Issuing Bank's determination
that documents presented under the Letter of Credit comply with the terms
thereof shall not have constituted gross negligence or willful misconduct
of the Issuing Bank; or
(vii) any other act or omission to act or delay of any kind by any
Bank (including the Issuing Bank), the Agent or any other Person or any
other event or circumstance whatsoever that might, but for the provisions
of this subsection (vii), constitute a legal or equitable discharge of the
Borrower's obligations hereunder.
(f) The Borrower hereby indemnifies and holds harmless each Bank (including
the Issuing Bank) and the Agent from and against any and all claims, damages,
losses, liabilities, reasonable costs or expenses (including without limitation,
reasonable counsel fees and disbursements) which such Bank or the Agent may
incur (including, without limitation, any claims, damages, losses, liabilities,
reasonable costs or expenses (including without limitation reasonable counsel
fees and disbursements incurred by such indemnified party in connection with any
of the below stated indemnified acts or omissions in any action, suit or
proceeding between such indemnified party and the Borrower or between such
indemnified party and any third party or otherwise) which the Issuing Bank may
incur by reason of or in connection with the failure of any other Bank to
fulfill or comply with its obligations to such Issuing Bank hereunder (but
nothing herein contained shall affect any rights the Borrower may have against
such defaulting Bank)), and none of the Banks (including an Issuing Bank) nor
the Agent nor any of their officers or directors or employees or agents shall be
liable or responsible, by reason of or in connection with the execution and
delivery or transfer of or payment or failure to pay under any Letter of Credit,
including without limitation any of the circumstances enumerated in subsection
(e) above, as well as (i) any error, omission, interruption or delay in
transmission or delivery of any messages, by mail, telefax, telex or otherwise,
(ii) any error in interpretation of technical terms, (iii) any loss or delay in
the transmission of any document required in order to make a drawing under a
Letter of Credit, (iv) any consequences arising from causes beyond the control
of the Issuing Bank, including without limitation any government acts, or any
other circumstances whatsoever in making or failing to make payment
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under such Letter of Credit; provided that the Borrower shall not be required to
indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs
or expenses, and the Borrower shall have a claim for direct (but not
consequential) damage suffered by it, to the extent found by a court of
competent jurisdiction to have been caused by (x) the willful misconduct or
gross negligence of the Issuing Bank in determining whether a request presented
under any Letter of Credit complied with the terms of such Letter of Credit or
(y) the Issuing Bank's failure to pay under any Letter of Credit after the
presentation to it of a request strictly complying with the terms and conditions
of the Letter of Credit. Nothing in this subsection (f) is intended to limit the
obligations of the Borrower under any other provision of this Agreement. To the
extent the Borrower does not indemnify an Issuing Bank as required by this
subsection, the Banks agree to do so ratably in accordance with their
Commitments.
ARTICLE 3
CONDITIONS
SECTION 3.1. Closing. The closing hereunder shall occur upon receipt by the
Agent of the following documents, each dated the Closing Date unless otherwise
indicated:
(a) counterparts hereof signed by each of the parties hereto (or, in the
case of any party as to which an executed counterpart shall not have been
received, telefax, telex or other written confirmation, in form satisfactory to
the Agent, from such party of execution of a counterpart hereof by such party);
(b) a duly executed Note for the account of each Bank dated on or before
the Closing Date complying with the provisions of Section 2.03;
(c) an opinion of counsel for the Borrower, substantially in the form of
Exhibit B hereto;
(d) a certificate signed by the chief financial officer or treasurer of the
Borrower as to the matters set forth in Sections 3.02(d) and 3.02(e) immediately
before and after giving effect to the transactions contemplated to occur on or
before the Closing Date;
(e) all documents the Agent may reasonably request relating to the
existence of the Borrower, the corporate authority for and the validity of the
Financing Documents, and any other matters relevant hereto, all in form and
substance satisfactory to the Agent.
The Agent shall promptly notify the Borrower and the Banks of the Closing Date,
and such notice shall be conclusive and binding on all parties hereto.
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SECTION 3.2. Borrowings and Issuances of Letters of Credit. The obligation
of any Bank to make a Loan, on the occasion of any Borrowing, and the obligation
of the Issuing Bank to issue (or renew or extend the term of) any Letter of
Credit is subject to the satisfaction of the following conditions:
(a) the fact that the Closing Date shall have occurred on or prior to
January 31, 1997;
(b) receipt by the Agent of a Notice of Borrowing as required by Section
2.02, or receipt by the Issuing Bank of a Notice of Issuance as required by
Section 2.13(c);
(c) the fact that, immediately after giving effect to such Borrowing or
issuance of a Letter of Credit, the sum of the aggregate outstanding principal
amount of the Loans and the aggregate amount of Letter of Credit Liabilities
will not exceed the aggregate amount of the Commitments;
(d) the fact that, immediately after giving effect to such Borrowing or
issuance of a Letter of Credit, no Default shall have occurred and be
continuing; and
(e) the fact that the representations and warranties of the Borrower
contained in this Agreement and any other Financing Document shall be true in
all material respects on and as of the date of and after giving effect to such
Borrowing or issuance of a Letter of Credit.
Each Borrowing and issuance of a Letter of Credit hereunder shall be deemed to
be a representation and warranty by the Borrower on the date of such Borrowing
or issuance of a Letter of Credit as to the facts specified in clauses (c), (d)
and (e) of this Section.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted and is qualified to do business and is in good
standing under the laws of the State of New York and each other jurisdiction
where the nature of its business or the ownership of property so requires,
except where the failure to so qualify does not have a material adverse effect
on the business, financial condition or results of operations of the Borrower
and its Consolidated Subsidiaries, taken as a whole.
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<PAGE> 29
SECTION 4.2. Corporate and Governmental Authorization; No Contravention.
The execution, delivery and performance by the Borrower of this Agreement and
the Notes are within the corporate powers of the Borrower, have been duly
authorized by all necessary corporate action, require no action by or in respect
of or filing with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of the Borrower or
of any agreement, judgment, injunction, order, decree or other instrument
binding upon the Borrower or any of its Subsidiaries or result in the creation
or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries, except for any contravention of or default under any agreement or
other instrument (other than agreements or instruments constituting or
evidencing Debt) not material to the business of the Borrower and its
Subsidiaries, taken as a whole, which contravention or default would not
materially adversely affect the business, financial position or results of
operations of the Borrower and its Subsidiaries, taken as a whole, or adversely
affect in any substantive way the rights and remedies of the Agent and the Banks
hereunder and under the Notes.
SECTION 4.3. Binding Effect. This Agreement constitutes a valid and binding
agreement of the Borrower and each Note, when executed and delivered in
accordance with this Agreement, will constitute a valid and binding obligation
of the Borrower, in each case enforceable in accordance with its terms, except
as the same may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and by general principles of equity.
SECTION 4.4. Financial Information. (a) The Borrower has heretofore
furnished to each of the Banks (x) the consolidated balance sheet as of December
31, 1995 and the related consolidated statements of income and cash flows for
the fiscal year then ended and (y) the consolidated balance sheet as of
September 30, 1996 and the related consolidated statements of income and cash
flows for the nine months then ended of each of the Borrower and its
Subsidiaries;
Each such set of annual financial statements and each such set of nine
month financial statements is complete and correct and presents fairly, in all
material respects, the consolidated financial condition of such entity and its
subsidiaries as of such date and the consolidated results of operations and cash
flows for the fiscal year or nine month period ended on said date, as the case
may be, all in accordance with generally accepted accounting principles and
practices applied on a consistent basis (subject to normal year-end adjustments,
in the case of such nine month financial statements). Each such set of financial
statements was accompanied by an opinion of Arthur Andersen LLP opining as to
the foregoing. None of such entities or its subsidiaries has on the date thereof
any liabilities which
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are required by generally accepted accounting principles to be set forth on the
face of such financial statements, except as referred to or reflected or
provided for in said financial statements (or in the notes thereto) as at said
date, and as to which appropriate and reasonable reserves have been provided,
and since December 31, 1995, there has been no material adverse change in the
business, financial position or results of operations of any such entity and its
subsidiaries taken as a whole from that set forth in said financial statements
as at said date.
(b) The Borrower has heretofore furnished to each of the Banks projected
consolidated balance sheets of the Borrower and its Subsidiaries as at December
31 for each of the years 1996 through 1998 and the related projected
consolidated statements of income and cash flows of the Borrower and its
Subsidiaries for each of the fiscal years that will end on said dates. It is
understood and agreed that such projections are not a representation or warranty
of future performance.
SECTION 4.5. Litigation. There is no action, suit or proceeding pending
against, or to the knowledge of the Borrower threatened against or affecting,
the Borrower or any of its Subsidiaries before any court or arbitrator or any
governmental body, agency or official in which there is a reasonable possibility
of an adverse decision which could (taking into account available insurance
coverage) materially adversely affect the business, consolidated financial
position or consolidated results of operations of the Borrower and its
Consolidated Subsidiaries, considered as a whole, or which in any manner draws
into question the validity or enforceability of this Agreement or the Notes.
SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which has resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Internal Revenue Code or (iii)
incurred any liability under Title IV of ERISA other than a liability to the
PBGC for premiums under Section 4007 of ERISA.
SECTION 4.7. Environmental Matters. The Borrower believes that it is in
substantial compliance with all applicable Environmental Laws.
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<PAGE> 31
SECTION 4.8. Taxes. The Borrower and its wholly owned Subsidiaries are
members of an affiliated group of corporations filing consolidated returns for
Federal income tax purposes, of which the Borrower is the "common parent"
(within the meaning of Section 1504 of the Internal Revenue Code) of such group.
There is no tax sharing, tax allocation or similar agreement currently in effect
providing for the manner in which tax payments owing by the members of such
affiliated group (whether in respect of Federal or state income or other taxes)
are allocated among the members of the group. The Borrower and its Subsidiaries
have filed all United States Federal income tax returns and all other material
tax returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the Borrower
or any Subsidiary except where the same is being contested in good faith and by
appropriate proceeding and appropriate reserves have been maintained in
accordance with generally accepted accounting principles. The charges, accruals
and reserves on the books of the Borrower and its Subsidiaries in respect of
taxes or other governmental charges are, in the opinion of the Borrower,
adequate, and the Borrower has not given or been requested to give a waiver of
the statute of limitations relating to the payment of Federal, state, local and
foreign taxes or other impositions.
SECTION 4.9. Intellectual Property. The Borrower and each of its
Subsidiaries owns or possesses or holds under valid licenses all patents,
trademarks, service marks, trade names, copyrights, licenses and other
intellectual property rights that are necessary for the operation of their
respective properties and businesses, and neither the Borrower nor any of its
Subsidiaries is in violation of any provision thereof except for any such
failures to own, possess or hold or violations which, individually or in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operations of the Borrower and its Subsidiaries, taken
as a whole. To the best of its knowledge, none of the proprietary intellectual
properties of the Borrower or its subsidiaries infringe any license, patent,
trademark, trade name, service mark, copyright, trade secret or any other
intellectual property right of others and there is no infringement by others of
any license, patent, trademark, trade name, service mark, copyright, trade
secret or other intellectual property right of the Borrower and its
Subsidiaries, except for such infringements, if any, by the Borrower, its
Subsidiaries or others which, individually or in the aggregate, would not have a
material adverse effect on the business, financial condition or results of
operations of the Borrower and its Subsidiaries, taken as a whole.
SECTION 4.10. Capitalization. The authorized capital stock of the Borrower
consists, on the date hereof of an aggregate of 150,000,000 shares consisting of
shares of common stock, $0.01 par value per share, of which 66,391,318 shares of
common stock
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are duly and validly issued and outstanding, each of which shares is fully paid
and nonassessable.
SECTION 4.11. Debt and Liens. (a) Part I of Schedule 4.11(a) hereto is a
complete and correct list, as of the date of this Agreement, of each credit
agreement, loan agreement, indenture, securities purchase agreement, Guarantee,
letter of credit or other arrangement providing for or otherwise relating to any
Debt or any extension of credit (or commitment for any extension of credit) to,
or Guarantee by, the Borrower or any of its Subsidiaries the aggregate principal
or face amount of which equals or exceeds (or may equal or exceed) $1,000,000,
and the aggregate principal or face amount outstanding or that may become
outstanding under each such arrangement is correctly described in Part II of
Schedule 4. 11(a).
(b) Part I of Schedule 4.11(b) hereto is a complete and correct list, as of
the date of this Agreement, of each Lien securing Debt of any Person the
aggregate principal or face amount of which equals or exceeds (or may equal or
exceed) $1,000,000 and covering any property of the Borrower or any of its
Subsidiaries, and the aggregate Debt secured (or which may be secured) by each
such Lien and the property covered by each such Lien is correctly described in
Part II of Schedule 4.11(b).
(c) None of the Borrower and its Subsidiaries is, on the date of this
Agreement, party to or subject to any indenture, agreement, instrument or other
arrangement of the type described in Section 5.18, except for this Agreement.
SECTION 4.12. Subsidiaries. (a) Set forth in Part I of Schedule 4.12(a)
hereto is a complete and correct list, as of the date hereof of all of the
Subsidiaries of the Borrower, together with, for each such Subsidiary, (i) the
exact corporate name of such Subsidiary, (ii) the jurisdiction of organization
of such Subsidiary, (iii) each Person holding ownership interests in such
Subsidiary, (iv) the nature of the ownership interests held by each such Person
and the percentage of ownership of such Subsidiary represented by such ownership
interests and, (v) whether such Subsidiary is a Foreign Subsidiary. Except as
disclosed in Part II of Schedule 4.12 hereto, as of the date hereof (x) each of
the Borrower and its Subsidiaries owns, free and clear of Liens, and has the
unencumbered right to vote, all outstanding ownership interest in each Person
shown to be held by it in Part I of Schedule 4.12(a) hereto, (y) all of the
issued and outstanding capital stock of each such Person organized as a
corporation is validly issued, fully paid and nonassessable and (z) there are no
outstanding Equity Rights with respect to such Person.
(b) Set forth in Part I of Schedule 4.12(b) hereto is a complete and
correct list, as of the date hereof of all Investments (other than Investments
disclosed in Part I of Schedule 4.12(a) hereto) held by the Borrower or any of
its
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Subsidiaries in any Person and, for each such Investment, (x) the identity of
the Person or Persons holding such Investment and (y) the nature of such
Investment. Except as disclosed in Part II of Schedule 4.12(b) hereto, as of the
date of this Agreement, each of the Borrower and its Subsidiaries owns, free and
clear of all Liens, all such Investments.
(c) Each of the Borrower's corporate Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted.
SECTION 4.13. Regulatory Restrictions on Borrowing. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended, or otherwise subject to any regulatory scheme
which restricts its ability to incur debt.
SECTION 4.14. Full Disclosure. All material factual information heretofore
furnished by the Borrower to the Agent or any Bank for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Borrower to the Agent or any
Bank will be, taken as a whole, true, complete and accurate in all material
respects (it being understood and agreed that with respect to projections, such
projections are not a representation or warranty of future performance). All
such information heretofore furnished, when taken as a whole, does not, as of
the date hereof contain any untrue statement of material fact or omit to state
any material fact necessary to make the statements herein or therein, in light
of the circumstances under which they were made, not misleading.
ARTICLE 5
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment hereunder
or any amount payable under any Note or any Letter of Credit Liability remains
unpaid:
SECTION 5.1. Information. The Borrower will deliver to each of the Banks:
(a) with respect to the Borrower, as soon as available and in any event
within 90 days after the end of each fiscal year, a consolidated balance sheet
of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal
year and the related consolidated statements of income and cash flow for such
fiscal year, accompanied by the figures for the previous years in each case and
an audit report by Arthur Andersen LLP or other independent certified public
accountants of nationally recognized
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standing (which may be a single report as to all such financial statements) and,
if prepared, as soon as available, a consolidating balance sheet of the Borrower
and its Consolidated Subsidiaries as of the end of such fiscal year and related
consolidating statements of income and cash flow for such fiscal year;
(b) with respect to the Borrower, as soon as available and in any event
within 45 days after the end of each of the first three quarters of each fiscal
year of such entity, a consolidated (and, if prepared, consolidating) balance
sheet of such entity and its Consolidated Subsidiaries as of the end of such
quarter and the related consolidated (and, if prepared, consolidating)
statements of income and cash flow for such quarter and for the portion of such
entity's fiscal year ended at the end of such quarter, accompanied by the
figures for the corresponding quarter and corresponding portion of the previous
year in each case;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate as to fairness of
presentation, generally accepted accounting principles and consistency (subject
to normal year end adjustments) on behalf of the Borrower executed by the senior
financial officer of the Borrower or of the entity to which such financial
statements relate, provided that such certificate need not be made with respect
to the annual financial statements under clause (a);
(d) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of the senior financial
officer of the Borrower (i) setting forth in reasonable detail the calculations
required to establish whether the Borrower was in compliance with the
requirements of Sections 5.07 and 5.09 to 5.15, inclusive, and 5.17, on the date
of such financial statements and (ii) stating whether any Default exists on the
date of such certificate and, if any Default then exists, setting forth the
details thereof and the action which the Borrower is taking or proposes to take
with respect thereto;
(e) simultaneously with the delivery of each set of annual financial
statement referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements (i) whether
anything has come to their attention to cause them to believe that any Default
existed on the date of such statements and (ii) confirming the calculations set
forth in the officer's certificate delivered simultaneously therewith pursuant
to clause (c) above;
(f) within five days after any of the chairman, the president, the
executive vice president or the chief financial officer of the Borrower obtains
knowledge of any Default, if such Default is then continuing, a certificate of
the chief financial officer or the chief accounting officer of the Borrower
setting
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forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto;
(g) promptly upon the filing thereof copies of all registration statements
(other than the exhibits thereto and any registration statements on Form S-8 or
its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents)
or other periodic reports which the Borrower or any of its Subsidiaries shall
have filed with the Securities and Exchange Commission, NASDAQ or any national
securities exchange;
(h) if and when any member of the ERISA Group (i) gives or is required to
give notice to the PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds for a termination
of such Plan under Title IV of ERISA, or knows that the plan administrator of
any Plan has given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be given to the
PBGC; (ii) receives notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such notice; (iii) receives notice
from the PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than for premiums under Section 4007 of ERISA) in respect of or
appoint a trustee to administer any Plan, a copy of such notice; (iv) applies
for a waiver of the minimum funding standard under Section 412 of the Internal
Revenue Code, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
other information filed with the PBGC; (vi) gives notice of withdrawal from any
Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to
make any payment or contribution to any Plan or Multiemployer Plan or in respect
of any Benefit Arrangement or makes any amendment to any Plan or Benefit
Arrangement which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security, a certificate of the chief financial
officer or the chief accounting officer of the Borrower setting forth details as
to such occurrence and action, if any, which the Borrower or applicable member
of the ERISA Group is required or proposes to take;
(i) at the request of the Banks, as soon as available and in any event not
less than 30 days after the first day of each fiscal year of the Borrower,
forecasts prepared by management of the Borrower, including consolidated and
consolidating statement of income and cash flow of the Borrower and its
Consolidated Subsidiaries, on a quarterly and annual basis for such fiscal year
and on an annual basis for the next fiscal year of the Borrower (provided that
in preparing such forecasts the Borrower and its Subsidiaries may be treated on
a consolidated basis);
(j) Promptly upon receipt thereof, copies of any reports submitted to the
Borrower by its accountants in connection with
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any examination of the financial statements of the Borrower or any of its
Consolidated Subsidiaries made by such accountants, and copies of any other
communications received by the Borrower, or any of its directors from such
accountants relative to any internal controls and systems of the Borrower
(unless the delivery of such report to the Banks would constitute the waiver of
any attorney-client privilege otherwise in effect with respect to any Person
other than the Agent or the Banks); and
(k) from time to time such additional information regarding the financial
position or business of the Borrower and its Subsidiaries as the Agent, at the
request of any Bank, may reasonably request.
SECTION 5.2. Payment of Obligations. The Borrower will pay and discharge,
and will cause each Subsidiary to pay and discharge, at or before maturity, all
their respective material obligations and liabilities (including, without
limitation, tax liabilities and claims of materialmen, warehousemen and the like
which if unpaid would by law give rise to a Lien on the Borrower's assets),
except where the same may be contested in good faith by appropriate proceedings,
and will maintain, and will cause each Subsidiary to maintain, in accordance
with generally accepted accounting principles, appropriate reserves for the
accrual of any of the same.
SECTION 5.3. Maintenance of Property; Insurance. (a) The Borrower will
keep, and will cause each Subsidiary to keep, all property useful and necessary
in its business in good working order and condition, ordinary wear and tear
excepted.
(b) The Borrower will, and will cause each of its Subsidiaries to, maintain
(either in the name of the Borrower or in such Subsidiary's own name) with
financially sound and responsible insurance companies, insurance on all their
respective properties in at least such amounts, against at least such risks and
with such risk retention as are usually maintained, insured against or retained,
as the case may be, in the same general area by companies of established repute
engaged in the same or a similar business, subject to, and including reasonable
provisions for self-insurance; and will furnish to the Banks, upon request for
the Agent, information presented in reasonable detail as to the insurance so
carried.
SECTION 5.4. Conduct of Business and Maintenance of Existence. The Borrower
will continue, and will cause each Subsidiary to continue, to engage in business
of the same general type as now conducted by the Borrower and its Subsidiaries,
and will preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect their respective
corporate existence and their respective rights, privileges and franchises
necessary or desirable in the normal conduct of business; provided that nothing
in this Section 5.04 shall prohibit (i) the merger of a
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Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with
or into another Person if the corporation surviving such consolidation or merger
is a Subsidiary and if, in each case, after giving effect thereto, no Default
shall have occurred and be continuing or (ii) the termination of the corporate
existence of any Subsidiary if the Borrower in good faith determines that such
termination is in the best interest of the Borrower and is not materially
disadvantageous to the Banks.
SECTION 5.5. Compliance with Laws. The Borrower will comply, and cause each
Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings or where the failure to so
comply, individually or in the aggregate, would not have a material adverse
effect on the business, financial position or results of operations of the
Borrower and its Subsidiaries, taken as a whole.
SECTION 5.6. Inspection of Property, Books and Records. The Borrower will
keep, and will cause each Subsidiary to keep, proper books of record and account
in which full, true and correct entries shall be made of all dealings and
transactions in relation to its business and activities; and will permit, and
will cause each Subsidiary to permit, representatives of any Bank at such Bank's
expense to visit and inspect any of their respective properties, to examine and
make abstracts from any of their respective books and records and to discuss
their respective affairs, finances and accounts with their respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
SECTION 5.7. Merger and Sales of Assets. (a) The Borrower will not, and
will not permit any Subsidiary to, consolidate or merge with or into any other
Person, provided that (i) the Borrower may merge with another Person if the
Borrower is the corporation surviving such merger and immediately after giving
effect to such merger, no Default shall have occurred and be continuing, and
(ii) any Subsidiary may merge with any other Person if the corporation surviving
the merger is the Borrower or a Subsidiary and, immediately after giving effect
to such merger, no Default have occurred and be continuing.
(b) The Borrower will not, and will not permit any of its Subsidiaries to,
make any Asset Sale, unless the consideration therefor is not less than the fair
market value of the related asset.
SECTION 5.8. Use of Proceeds. The proceeds of the Loans made under this
Agreement will be used by the Borrower for general corporate purposes and for
Permitted Acquisitions. None of such proceeds will be used, directly or
indirectly, for the
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purpose, whether immediate, incidental or ultimate, of buying or carrying any
"margin stock" within the meaning of Regulation U.
SECTION 5.9. Negative Pledge. Neither the Borrower nor any Subsidiary will
create, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired by it, except:
(a) Liens existing on the date of this Agreement securing Debt outstanding
on the date of this Agreement in an aggregate principal or face amount not
exceeding $1,000,000;
(b) any Liens existing on any asset of any Person at the time such person
becomes a Subsidiary (or such asset is acquired by the Borrower or any
Subsidiary) and not created in contemplation of such event, and Liens on the
proceeds thereof;
(c) any Lien on any asset securing Debt incurred or assumed for the purpose
of financing all or any part of the cost of acquiring such asset (including
Capital Leases), provided that such Lien attaches to such asset concurrently
with or within 180 days after the acquisition thereof;
(d) any Lien on any asset of any Person existing at the time such Person is
merged or consolidated with or into the Borrower or a Subsidiary and not created
in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof by the
Borrower or a Subsidiary and not created in contemplation of such acquisition;
(f) any Lien arising out of the refinancing, extension, renewal or
refunding of any Debt secured by any Lien permitted by any of the foregoing
clauses of this Section, provided that such Debt is not increased or is not
secured by any additional assets (other than by virtue of an after-acquired
property clause covering assets of the same category or description as were
covered by such original Lien);
(g) Liens arising in the ordinary course of its business which (i) do not
secure Debt, and (ii) do not in the aggregate materially detract from the value
of its assets or materially impair the use thereof in the operation of its
business;
(h) Liens for taxes not yet payable or being contested in good faith and by
appropriate proceedings and adequate reserves have been maintained in accordance
with generally accepted accounting principles;
(i) Statutory liens of landlords, carriers and other statutory liens
incurred in the ordinary course of business;
(j) zoning restrictions, easements, rights of way, licenses, encroachments,
covenants, conditions, tenancies, minor
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defects in title, and other restrictions, charges or encumbrances affecting real
property that do not in the aggregate have a material adverse effect on the
Borrower;
(k) deposits made and liens incurred to secure performance of bids, trade
contracts, licenses, leases and statutory and other similar obligations;
(l) rights of set-off or security interests in deposit accounts held at
banks and other financial institutions to secure the payment or reimbursement of
overdraft, acceptance or other facilities maintained at such financial
institution, to the extent permitted by this Agreement; and
(m) Liens not otherwise permitted by the foregoing clauses of this Section
securing Debt or other obligations in an aggregate principal or face amount at
any one time outstanding not to exceed $1,000,000 (excluding the Debt referred
to in clause (a)).
SECTION 5.10. Limitation on Debt. The Borrower will not, and will not
permit any of its Subsidiaries to, incur or at any time become liable with
respect to any Debt except:
(a) Debt under this Agreement;
(b) Debt secured by Liens permitted by Section 5.09(c) in an aggregate
principal amount at any time outstanding not exceeding $200,000; and
(c) Debt of the Borrower and its Subsidiaries not otherwise permitted by
this Section incurred after the Closing Date in an aggregate principal amount at
any time outstanding not to exceed $1,000,000.
SECTION 5.11. Minimum Tangible Net Worth. The Borrower will not permit
Consolidated Tangible Net Worth as at December 31, 1996 to be less than
$106,500,000, as at June 30, 1997 to be less than $106,500,000 plus 25% of
Consolidated Net Income for the six-month period ending on such date, as at
December 31, 1997 to be less than $106,500,000 plus 25% of Consolidated Net
Income for the 12-month period ending on such date, as at June 30, 1998 to be
less than such December 31, 1997 required minimum amount plus 25% of
Consolidated Net Income for the six-month period ending on June 30, 1998 and as
at December 31, 1998 such December 31, 1997 required amount plus 25% of the
Consolidated Net Income for the 12-month period ending on December 31, 1998.
SECTION 5.12. Debt: Tangible Net Worth. The Borrower will not permit the
ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth at
the end of any fiscal quarter to exceed 1.7 to 1.0.
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SECTION 5.13. Investments. The Borrower will not purchase or make any
Investment in the stock, securities or evidences of indebtedness (excluding
accounts receivable from others) of any other Person except: (i) the Borrower;
(ii) the United States Government and its agencies; (iii) certificates of
deposit of domestic banks having capital and surplus in excess of $100,000,000;
(iv) Temporary Cash Investments, and (v) Permitted Acquisitions.
SECTION 5.14. Working Capital. The Borrower will not permit Consolidated
Working Capital at the end of any fiscal quarter prior to October 1, 1997 to be
less than $20,000,000, and at the end of any fiscal quarter any time after
October 1, 1997 to be less than $30,000,000.
SECTION 5.15. Current Ratio. The Borrower will not permit the ratio of
Consolidated Current Assets to Consolidated Current Liabilities as at December
31, 1996 and thereafter as at the last day of each fiscal quarter to be less
than 1.1 to 1.0.
SECTION 5.16. Restricted Payments. Neither the Borrower nor any Subsidiary
will declare or make any Restricted Payment.
SECTION 5.17. Minimum Net Income. The Borrower will not permit: its
Consolidated Net Income for its fiscal year ending December 31, 1996 to be less
than $20,000,000, for its fiscal year ending December 31, 1997 to be less than
$25,000,000, and for its fiscal year ending December 31, 1998 to be less than
$25,000,000; and will not permit its Consolidated Net Income for any two
consecutive quarters (whether or not in the same fiscal year) to be less than
$5,000,000.
SECTION 5.18. Sale-Leaseback Transactions. Neither the Borrower nor any of
its Subsidiaries will engage in any Sale-Leaseback Transactions unless the
Borrower or such Subsidiaries would be entitled, pursuant to the other
provisions of Article 5, to incur Debt with a principal amount equal to or
exceeding the Value of such Sale-Leaseback Transaction secured by a Lien on the
property to be leased (after giving similar effect to all other Sale-Leaseback
Transactions in effect at such time). For purposes of this Section, "VALUE"
means, with respect to a Sale-Leaseback Transaction, at any time, the amount
equal to the greater of (i) the net proceeds of the sale or transfer of the
property leased pursuant to such Sale-Leaseback Transaction and (ii) the fair
value in the opinion of the Board of Directors of the Borrower of such property
at the time of entering into such Sale-Leaseback Transaction, in either case
divided first by the number of full years of the term of the lease and then
multiplied by the number of full years of such term remaining at the time of
determination, without regard to any renewal or extension options contained in
the lease.
SECTION 5.19. Transactions with Affiliates. The Borrower will not, and will
not permit any Subsidiary to, directly or
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indirectly, pay any funds to or for the account of, make any investment (whether
by acquisition of stock or indebtedness, by loan, advance transfer of property,
guarantee or other agreement to pay, purchase or service, directly or
indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise
dispose of any assets, tangible or intangible, to, or participate in, or effect,
any transaction with, any Affiliate except on an arms-length basis on terms at
least as favorable to the Borrower or such Subsidiary as could have been
obtained from a third party who was not an Affiliate; provided that the
foregoing provisions of this Section shall not prohibit any such Person from
declaring or paying any lawful dividend or other payment ratably in respect of
all of its capital stock of the relevant class so long as, after giving effect
thereto, no Default shall have occurred and be continuing.
SECTION 5.20. Lines of Business. The Borrower will not, and will not permit
any of its Subsidiaries to, engage in any line or lines of business activity
other than the business of developing, publishing, merchandising and
distributing consumer software and related businesses (including, in each case,
without limitation, Internet and similar on-line or electronic related
businesses).
ARTICLE 6
DEFAULTS
SECTION 6.1. Events of Default. If one or more of the following events
("EVENTS OF DEFAULT") shall have occurred and be continuing:
(a) the Borrower shall fail to reimburse any drawing under the Letter of
Credit when required hereunder or to pay when due any principal of any Loan or
pay within 10 days after due any interest or fees payable hereunder or under the
Notes;
(b) the Borrower shall fail to observe or perform any covenant or agreement
contained in Article 5, other than those contained in Sections 5.01 through
5.06, 5.13, 5.19 or 5.20;
(c) the Borrower shall fail to observe or perform any covenant or agreement
contained in any Financing Document (other than those covered by clause (a) or
(b) above) for 30 days after notice thereof has been given to the Borrower by
the Agent at the request of any Bank;
(d) any material representation, warranty, certification or statement made
by the Borrower in any Financing Document or in any certificate, financial
statement or other document delivered pursuant to any such Financing Document
shall prove to have been incorrect in any material respect when made (or deemed
made);
(e) any event or condition shall occur which results in the acceleration of
the maturity of any Material Debt or enables (or
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with the giving of notice or lapse of time or both, would enable) the holder of
such Debt or any Person acting on such holder's behalf to accelerate the
maturity thereof;
(f) the Borrower or any Material Subsidiary shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall take any corporate action to authorize any of
the foregoing;
(g) an involuntary case or other proceeding shall be commenced against the
Borrower or any Material Subsidiary seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower or any Material Subsidiary under
the federal bankruptcy laws as now or hereafter in effect;
(h) any member of the ERISA Group shall fail to pay when due an amount or
amounts aggregating in excess of $1,000,000 which it shall have become liable
(pursuant to a final determination by a court of competent jurisdiction, not
subject to further appeal) to pay under Title IV of ERISA; or notice of intent
to terminate a Material Plan shall be filed under Title IV of ERISA by any
member of the ERISA Group, any plan administrator or any combination of the
foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to
terminate, to impose liability (other than for premiums under Section 4007 of
ERISA) in respect of or to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any Material Plan must be
terminated; or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one
or more Multiemployer Plans which could cause one or more members of the ERISA
Group to incur a current payment obligation in excess of $1,000,000;
(i) any judgment or order for the payment of money in excess of $1,000,000
shall be rendered against the Borrower or any Material Subsidiary and such
judgment or order shall continue unsatisfied or unstayed for a period of 45 days
if such judgment or order is for an amount in excess of $1,000,000 but less than
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$15,000,000 or unsatisfied or unstayed for a period of 30 days if in an amount
equal to or in excess of $15,000,000; or
(j) Joseph J. Cayre, Jack J. Cayre, Stanley Cayre, Kenneth Cayre, their
spouses and their lineal descendents, including trusts for the benefit of any of
the foregoing (collectively the "Cayre Family"), shall (i) collectively
beneficially own less than 30%, but more than 20%, of the outstanding voting
stock of the Borrower at a time when another Person or group (as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the
date hereof) beneficially owns shares of the outstanding voting stock of the
Borrower of an equal or greater percentage than the Cayre Family; or (ii) cease
collectively to beneficially own at least 20% of the outstanding voting stock of
the Borrower;
then, and in any such event, the Agent shall if requested by the Required
Banks, by notice to the Borrower, terminate the Commitments and they shall
thereupon terminate and/or declare the Loans and the Letter of Credit
Liabilities (together with accrued interest thereon) to be, and the Loans and
the Letter of Credit Liabilities shall thereupon become, immediately due and
payable without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Borrower; provided that in the case of any of the
Events of Default specified in clause 6.01(f) or 6.01(g) above with respect to
the Borrower, without any notice to the Borrower or any other act by the Agent
or the Banks, the Commitments shall thereupon terminate and the Loans and the
Letter of Credit Liabilities (together with accrued interest thereon) shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
SECTION 6.2. Notice of Default. The Agent shall give notice to the Borrower
under Section 6.01(c) promptly upon being requested to do so by any Bank and
shall thereupon notify all the Banks thereof.
SECTION 6.3. Cash Cover. The Borrower agrees, in addition to the provisions
of Section 6.01 hereof that upon the occurrence and during the continuance of
any Event of Default, it shall, if requested by the Agent upon the written
instruction of the Required Banks, pay to the Agent an amount in immediately
available funds (which funds shall be held as collateral pursuant to
arrangements satisfactory to the Agent) equal to the aggregate amount available
for drawing under all Letters of Credit then outstanding at such time, provided
that, upon the occurrence of any Event of Default specified in Section 6.01(f)
or 6.01(g) with respect to the Borrower, the Borrower shall pay such amount
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forthwith without any notice or demand or any other act by the Agent or the
Banks.
ARTICLE 7
THE AGENT
SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement and the Notes as are delegated to the
Agent by the terms hereof or thereof together with all such powers as are
reasonably incidental thereto.
SECTION 7.2. Agent and Affiliates. RNB shall have the same rights and
powers under this Agreement as any other Bank and may exercise or refrain from
exercising the same as though it were not the Agent, and RNB and its affiliates
may accept deposits from, lend money to, and generally engage in any kind of
business with the Borrower or any Subsidiary or affiliate of the Borrower as if
it were not the Agent.
SECTION 7.3. Action by Agent. The obligations of the Agent hereunder are
only those expressly set forth herein. Without limiting the generality of the
foregoing, the Agent shall not be required to take any action with respect to
any Default, except as expressly provided in Article 6.
SECTION 7.4. Consultation with Experts. The Agent may consult with legal
counsel (who may be counsel for the Borrower), independent public accountants
and other experts selected by it and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants or experts.
SECTION 7.5. Liability of Agent. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it as Agent in connection
herewith (i) with the consent or at the request of the Required Banks or (ii) in
the absence of its own gross negligence or willful misconduct. Neither the Agent
nor any of its affiliates nor any of their respective directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with this Agreement or any borrowing hereunder; (ii) the performance
or observance of any of the covenants or agreements of the Borrower; (iii) the
satisfaction of any condition specified in Article 3, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Notes or any other instrument or writing
furnished in connection herewith. The Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex, facsimile transmission
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or similar writing) believed by it to be genuine or to be signed by the proper
party or parties.
SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with
its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by the
Borrower) against any cost, expense (including counsel fees and disbursements
incurred by such indemnitees in any action; suit or proceeding between such
indemnitees and such indemnifying Bank or between such indemnities and any third
party or otherwise), claim, demand, action, loss or liability (except such as
result from such indemnities' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement or any action
taken or omitted by such indemnitees hereunder.
SECTION 7.7. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under this Agreement.
SECTION 7.8. Successor Agent. The Agent may resign at any time by giving
notice thereof to the Banks and the Borrower. Upon any such resignation, the
Required Banks shall have the right to appoint a successor Agent reasonably
acceptable to Borrower. If no successor Agent shall have been so appointed by
the Required Banks, and shall have accepted such appointment, within 30 days
after the retiring Agent gives notice of resignation, then the retiring Agent
may, on behalf of the Banks, appoint a successor Agent reasonably acceptable to
Borrower, which shall be a commercial bank organized or licensed under the laws
of the United States of America or of any State thereof and having a combined
capital and surplus of at least $100,000,000. Upon the acceptance of its
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation hereunder as
Agent, the provisions of this Article shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent.
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SECTION 7.9. Agent's Fee. The Borrower shall pay to the Agent for its own
account fees in the amounts and at the times previously agreed upon between the
Borrower and the Agent.
ARTICLE 8
CHANGES IN CIRCUMSTANCE
SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If
on or prior to the first day of any Interest Period for any EuroDollar Loan:
(a) the Agent is advised by the Reference Bank that quotations for deposits
(in the applicable amounts) are not being offered to the Reference Bank, or
(b) Banks having 50% or more of the aggregate principal amount of the
affected Loans advise the Agent that the Adjusted London Interbank Offered Rate
will not adequately and fairly reflect the cost to such Banks of funding their
EuroDollar Loans for such Interest Period, the Agent shall forthwith give notice
thereof to the Borrower and the Banks, whereupon until the Agent notifies the
Borrower that the circumstances giving rise to such suspension no longer exist
(which notice shall be given forthwith upon receipt by the Agent of notice of
such determination), (i) the obligations of the Banks to make EuroDollar Loans,
or to continue or convert outstanding Loans as or into EuroDollar Loans, shall
be suspended and (ii) each outstanding EuroDollar Loan, shall be converted into
a Base Rate Loan on the last day of the then current Interest Period applicable
thereto. Unless the Borrower notifies the Agent at least two Domestic Business
Days before the date of any EuroDollar Borrowing for which a Notice of Borrowing
has previously been given (which has not been followed by a notification from
the Agent as aforesaid) that it elects not to borrow on such date, such
Borrowing shall instead be made as a Base Rate Borrowing.
SECTION 8.2. Illegality. If after the date of this Agreement, the adoption
of any applicable law, rule or regulation, or any change in any applicable law,
rule or regulation, 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 any Bank (or
its EuroDollar Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency shall make it unlawful or impossible for any Bank (or its EuroDollar
Lending Office) to make, maintain or fund its EuroDollar Loans and such Bank
shall so notify the Agent, the Agent shall forthwith give notice thereof to the
other Banks and the Borrower, whereupon until such Bank notifies the Borrower
and the Agent that the circumstances giving rise to such suspension no longer
exist, the obligation of such Bank to make EuroDollar Loans or to convert
outstanding Loans into EuroDollar Loans shall be suspended. Before giving any
notice to the Agent pursuant to
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this Section, such Bank shall designate a different EuroDollar Lending Office if
such designation will avoid the need for giving such notice and will not, in the
reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. If
such notice is given, each EuroDollar Loan of such Bank then outstanding shall
be converted to a Base Rate Loan either (a) on the last day of the then current
Interest Period applicable to such EuroDollar Loan if such Bank may lawfully
continue to maintain and fund such Loan to such day or (b) immediately if such
Bank shall determine that it may not lawfully continue to maintain and fund such
Loan to such day.
SECTION 8.3. Increased Cost and Reduced Return. (a) If after the date
hereof the adoption of any applicable law, rule or regulation, or any change in
any applicable law, rule or regulation, 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 any Bank (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall impose, modify or deem applicable any reserve
(including, without limitation, any such requirement imposed by the Board of
Governors of the Federal Reserve System, but excluding any such requirement
included in an applicable EuroDollar Reserve Percentage in the case of a
EuroDollar Loan), special deposit, insurance assessment or similar requirement
against assets of deposits with or for the account of or credit extended by, any
Bank (or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or the London interbank market or other relevant
market any other condition affecting its EuroDollar Loans, its Note or its
obligation to make EuroDollar Loans or its obligations hereunder in respect of
Letters of Credit and the result of any of the foregoing is to increase the cost
to such Bank (or its Applicable Lending Office) of making or maintaining any
EuroDollar Loan or of issuing or participating in any Letter of Credit, or to
reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Note with respect
thereto, by an amount reasonably deemed by such Bank to be material, then,
within 15 days after demand, which demand shall include a brief description of
the change giving rise to such increased cost or reduction and an explanation as
to how such increased cost or reduction was determined, by such Bank (with a
copy to the Agent), the Borrower shall pay to such Bank such additional amount
or amounts as will compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date hereof the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any such law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
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administration thereof or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on capital of such Bank (or its Parent) as a consequence of such Bank's
obligations hereunder to a level below that which such Bank (or its Parent)
could have achieved but for such adoption, change, request or directive (taking
into consideration its policies with respect to capital adequacy) by an amount
reasonably deemed by such Bank to be material, then from time to time, assuming
such Bank was not compensated for such reduction pursuant to Section 8.03(a)
above, within 15 days after demand, which demand shall include a brief
description of the change giving rise to such reduction and an explanation as to
how such reduction was determined, by such Bank (with a copy to the Agent), the
Borrower shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any event
of which it has knowledge, occurring after the date hereof which will entitle
such Bank to compensation pursuant to this section and will designate a
different Lending Office if such designation will avoid the need for, or reduce
the amount of such compensation and will not, in the reasonable judgment of such
Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank
claiming compensation under this section and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive in the absence of
demonstrable error. In determining such amount, such Bank may use any reasonable
averaging and attribution methods.
SECTION 8.4. Taxes. (a) For the purposes of this Section 8.04, the
following terms have the following meanings:
"TAXES" means any and all present or future taxes, duties, levies, imposts,
deductions, charges or withholdings with respect to any payment by the Borrower
pursuant to this Agreement or under any Note, and all liabilities with respect
thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on
its income, and franchise or similar taxes imposed on it, by a jurisdiction
under the laws of which such Bank or the Agent (as the case may be) is organized
or in which its principal executive office is located or, in the case of each
Bank, in which its Applicable Lending Office is located and (ii) in the case of
each Bank, any United States withholding tax imposed on such payments.
"OTHER TAXES" means any present or future stamp or documentary taxes and
any other excise or property taxes, or similar charges or levies, which arise
from any payment made pursuant to this Agreement or under any Note or from the
execution or delivery of or otherwise with respect to, this Agreement or any
Note.
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(b) Any and all payments by the Borrower to or for the account of any Bank
or the Agent hereunder or under any Note shall be made without deduction for any
Taxes or Other Taxes; provided that, if the Borrower shall be required by law to
deduct any Taxes or Other Taxes from any such payments, (i) the sum payable
shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section)
such Bank or the Agent (as the case may be) receives an amount equal to the sum
it would have received had no such deductions been made, (ii) the Borrower shall
make such deductions, (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law, and (iv) the Borrower shall furnish to the Agent, at its address referred
to in Section 9.01, the original or a certified copy of a receipt evidencing
payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Agent for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section) paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be paid within 15 days after such
Bank or the Agent (as the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this Agreement
in the case of each Bank listed on the signature pages hereof and on or prior to
the date on which it becomes a Bank in the case of each other Bank, and from
time to time thereafter if requested in writing by the Borrower (but only so
long as such Bank remains lawfully able to do so), shall provide the Borrower
and the Agent with (i) Internal Revenue Service form 1001 or 4224, as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to benefits under an income tax treaty to
which the United States is a party which exempts the Bank from United States
withholding tax or reduces the rate of withholding tax on payments of interest
for the account of such Bank or certifying that the income receivable pursuant
to this Agreement is effectively connected with the conduct of a trade or
business in the United States or (ii) solely if such Lender is claiming
exemption from United States withholding tax under Section 871(h) or 881(c) of
the Internal Revenue Code with respect to payments of "portfolio interest", a
Form W-8, or any successor form prescribed by the Internal Revenue Service, and
a certificate representing that such Lender is not a bank for purposes of
Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder
(within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the
Borrower and is not a controlled foreign corporation related to the Borrower
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(within the meaning of Section 864(d)(4) of the Internal Revenue Code).
(e) For any period with respect to which a Bank has failed to provide the
Borrower or the Agent with the appropriate form pursuant to Section 8.04(d)
(unless such failure is due to a change in treaty, law or regulation occurring
subsequent to the date on which such form originally was required to be
provided), such Bank shall not be entitled to indemnification under Section
8.04(b) or 8.04(c) with respect to Taxes imposed by the United States; provided
that if a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, becomes subject to Taxes because of its failure to deliver a
form required hereunder, the Borrower, at such Bank's sole expense, shall take
such steps as such Bank shall reasonably request to assist such Bank to recover
such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section, then such Bank will change the
jurisdiction of its Applicable Lending Office if in the reasonable judgment of
such Bank, such change (i) will eliminate or reduce any such additional payment
which may thereafter accrue and (ii) is not otherwise disadvantageous (other
than in any insignificant respect) to such Bank.
SECTION 8.5. Base Rate Loans Substituted for Affected EuroDollar Loans. If
(i) the obligation of any Bank to make, or convert outstanding Loans to,
EuroDollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank
has demanded compensation under Section 8.03 or 8.04 with respect to its
EuroDollar Loans and the Borrower shall, by at least five EuroDollar Business
Days' prior notice to such Bank through the Agent, have elected that the
provisions of this section shall apply to such Bank, then, unless and until such
Bank notifies the Borrower that the circumstances giving rise to such suspension
or demand for compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as (or continued
as or converted into) EuroDollar Loans, as the case may be, shall instead be
Base Rate Loans (on which interest and principal shall be payable
contemporaneously with the related EuroDollar Loans of the other Banks); and
(b) after each of its EuroDollar Loans, has been repaid (or converted to a
Base Rate Loan), all payments of principal which would otherwise be applied to
repay such EuroDollar Loans shall be applied to repay its Base Rate Loans
instead. If such Bank notifies the Borrower that the circumstances giving rise
to such notice no longer apply, the principal amount of each such Base Rate Loan
shall be converted into a EuroDollar Loan on the first day of the next
succeeding Interest Period applicable to the related EuroDollar Loans of the
other Banks.
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<PAGE> 51
ARTICLE 9
MISCELLANEOUS
SECTION 9.1. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or similar writing) and shall be given to such party: (a) in the
case of the Borrower, any Bank or the Agent, at its address, facsimile number or
telex number set forth on the signature pages hereof, or (b) in the case of any
party, such other address, facsimile number or telex number as such party may
hereafter specify for the purpose by notice to the Agent, the Banks and the
Borrower. Each such notice, request or other communication shall be effective
(i) if given by telex, when such telex is transmitted to the telex number
specified on the signature pages hereof and the appropriate answerback is
received, (ii) if given by facsimile transmission, when transmitted to the
facsimile number specified on the signature pages hereof and confirmation of
receipt is received, (iii) if given by mail, 72 hours after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid, (iv) if sent by recognized overnight courier, on the next business
day after delivery to such courier, or (v) if given by any other means, when
delivered at the address specified on the signature pages hereof; provided that
notices to the Agent or the Issuing Bank under Article 2 or Article 8 shall not
be effective until received.
SECTION 9.2. No Waivers. No failure or delay by the Agent or any Bank in
exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all
reasonable out-of-pocket expenses of the Agent, including reasonable fees and
disbursements of special counsel for the Agent, in connection with the
preparation of this Agreement, any waiver or consent hereunder or any amendment
hereof or any Default hereunder and (ii) if any Default or Event of Default
occurs and is continuing, all out-of-pocket expenses incurred by the Agent and
each Bank, including the reasonable fees and disbursements of counsel (which
shall be limited to counsel to the Agent unless an Event of Default has occurred
and is continuing), in connection with such Default or Event of Default and
collection, bankruptcy, insolvency and other enforcement proceedings resulting
therefrom.
(b) The Borrower agrees to indemnify the Agent, the Issuing Bank and each
Bank, their respective affiliates and the respective directors, officers, agents
and employees of the foregoing (each an "INDEMNITEE") and hold each Indemnitee
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<PAGE> 52
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind (including, without limitation, the reasonable counsel fees
and disbursements incurred by an Indemnitee in any proceedings between such
Indemnitee and the Borrower or between such Indemnitee and any third party or
otherwise), which may be incurred by such Indemnitee in connection with any
investigative, administrative or judicial proceeding (whether or not such
Indemnitee shall be designated a party thereto) brought or threatened relating
to or arising out of this Agreement or any actual or proposed use of proceeds of
Loans hereunder; provided that no Indemnitee shall have the right to be
indemnified hereunder for such Indemnitee's own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
SECTION 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by
exercising any right of set-off or counterclaim or otherwise, receive payment of
a proportion of the aggregate amount of principal and interest due with respect
to any Note held by it and any Letter of Credit Liabilities which is greater
than the proportion received by any other Bank in respect of the aggregate
amount of principal and interest due with respect to any Note and Letter of
Credit Liabilities held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
and Letter of Credit Liabilities held by the other Banks, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes and Letter of Credit
Liabilities held by the Banks shall be shared by the Banks pro rata in
proportion with their Commitments; provided that nothing in this section shall
impair the right of any Bank to exercise any right of set-off or counterclaim it
may have and to apply the amount subject to such exercise to the payment of
indebtedness of any Obligor other than its indebtedness hereunder. Borrower
agrees, to the fullest extent it may effectively do so under applicable law,
that any holder of a participation in a Note or Letter of Credit Liabilities,
whether or not acquired pursuant to the foregoing arrangements, may exercise
rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of Borrower in the amount of such participation.
SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or the
Notes may be amended or waived if but only if such amendment or waiver is in
writing and is signed by the Borrower and the Required Banks (and, if the rights
or duties of the Agent or the Issuing Banks are affected thereby, by the Agent
or the Issuing Banks, as relevant); provided that no such amendment or waiver
shall, unless signed by all the Banks, (i) increase or decrease the Commitment
of any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of or
rate of interest on any Loan or the amount to be reimbursed in
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<PAGE> 53
respect of any Letter of Credit or any interest thereon or any fees hereunder,
(iii) postpone the date fixed for any payment of principal of or interest on any
Loan or the amount to be reimbursed in respect of any Letter of Credit or any
interest thereon or any fees hereunder or for any scheduled reduction or
termination of any Commitment or (except as expressly provided in Section 2.13)
expiry date of any Letter of Credit, or (iv) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Notes and Letter
of Credit Liabilities, or the number of Banks, which shall be required for the
Banks or any of them to take any action under this section or any other
provision of this Agreement.
SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Borrower may not assign or
otherwise transfer any of its rights under this Agreement without the prior
written consent of all Banks other than in connection with a merger or
consolidation permitted under Section 5.07.
(b) Any Bank may at any time grant to one or more banks or other financial
institutions (each a "PARTICIPANT") participating interests in its Commitment or
any or all of its Loans and Letter of Credit Liabilities. In the event of any
such grant by a Bank of a participating interest to a Participant, whether or
not upon notice to the Borrower and the Agent, such Bank shall remain
responsible for the performance of its obligations hereunder, and the Borrower,
the issuing Banks and the Agent shall continue to deal solely and directly with
such Bank in connection with such Bank's rights and obligations under this
Agreement. Any agreement pursuant to which any Bank may grant such a
participating interest shall provide that such Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement described in clause (i), (ii), or (iii) of
Section 9.05 without the consent of the Participant. The Borrower agrees that
each Participant shall, to the extent provided in its participation agreement,
be entitled to the benefits (and subject to also having the corresponding
obligations) of Article 8 with respect to its participating interest. An
assignment or other transfer which is not permitted by subsection (c) or (d)
below shall be given effect for purposes of this Agreement only to the extent of
a participating interest granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an
initial Commitment of not less than $5,000,000) of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall assume
such
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<PAGE> 54
rights and obligations, pursuant to an Assignment and Assumption Agreement in
substantially the form provided by the Agent executed by such Assignee and such
transferor Bank, with (and subject to) the subscribed consent of the Borrower,
the Agent, and the Issuing Bank, except that no such consents shall be required
if such Assignee is an Affiliate of such assigning Bank or if at the time of
such assignment an Event of Default has occurred and is continuing and no such
assignment shall be made if after giving effect thereto the number of Banks
would exceed four. Upon execution and delivery of such instrument and payment by
such Assignee to such transferor Bank of an amount equal to the purchase price
agreed between such transferor Bank and such Assignee, such Assignee shall be a
Bank party to this Agreement and shall have all the rights and obligations of a
Bank with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this subsection
(c), the transferor Bank, the Agent and the Borrower shall make appropriate
arrangements so that, if required, a new Note is issued to the Assignee. In
connection with any such assignment, the transferor Bank shall pay to the Agent
an administrative fee for processing such assignment in the amount of $2,500. If
the Assignee is not incorporated under the laws of the United States of America
or a state thereof it shall deliver to the Borrower and the Agent certification
as to exemption from deduction or withholding of any United States federal
income taxes in accordance with Section 8.04.
(d) No Assignee, Participant or other transferee of any Bank's rights shall
be entitled to receive any greater payment under Section 8.03 or 8.04 than such
Bank would have been entitled to receive with respect to the rights transferred,
unless such transfer is made with the Borrower's prior written consent or by
reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to
designate a different Applicable Lending Office under certain circumstances or
at a time when the circumstances giving rise to such greater payment did not
exist.
(e) The Borrower designates the Agent to serve as the Borrower's agent,
solely for purposes of this subsection to maintain a register (the "REGISTER")
on which the Agent will record the Commitments from time to time of each Bank,
the Loans made by each Bank and each repayment in respect of the principal
amount of the Loans of each Bank and to retain a copy of each Assignment and
Assumption Agreement delivered to the Agent pursuant to this Section. Failure to
make any such recordation, or any error in such recordation, shall not affect
the Borrower's obligations in respect of such Loans. The Borrower, the Agent,
the Issuing Bank and the Banks shall treat each Person in whose name a Loan and
the Note evidencing the same is registered as the owner thereof for all purposes
of this Agreement, notwithstanding notice or any provision herein to the
contrary. With respect to
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<PAGE> 55
any Bank, no assignment or other transfer of any of its rights or obligations
under this Agreement or its Note shall be effective until such assignment or
other transfer is recorded on the Register and otherwise complies with this
Section 9.06, and prior to such recordation all amounts owing to the transferor
Bank under this Agreement and its Note shall remain owing to the transferor
Bank. The registration of any such assignment or other transfer shall be
recorded by the Agent on the Register only upon the acceptance by the Agent of a
properly executed and delivered Assignment and Assumption Agreement. The
Register shall be available at the offices where kept by the Agent for
inspection by the Borrower or any Bank at any reasonable time upon reasonable
prior notice to the Agent.
SECTION 9.7. Collateral. Each of the Banks represents to the Agent and each
of the other Banks that it in good faith is not relying upon any "margin stock"
(as defined in Regulation U) as collateral in the extension or maintenance of
the credit provided for in this Agreement.
SECTION 9.8. Continuing Obligation. Notwithstanding the occurrence and
continuance of an Event of Default or the occurrence of the Termination Date,
the Borrower's obligations and agreements hereunder shall continue until all
obligations, direct or contingent, have been satisfied and all Letter of Credit
Liabilities have terminated.
SECTION 9.9. Governing Law; Submission to Jurisdiction. This Agreement and
each Note shall be governed by and construed in accordance with the laws of the
State of New York. Borrower hereby submits to the nonexclusive jurisdiction of
the United States District Court for the Southern District of New York and of
any New York State court sitting in New York City for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum.
SECTION 9.10. Counterparts; Integration; Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement constitutes the entire agreement and understanding
among the parties hereto and supersedes any and all prior agreements and
understandings, oral or written, relating to the subject matter hereof. This
Agreement shall become effective upon receipt by the Agent of counterparts
hereof signed by each of the parties hereto (or, in the case of any party as to
which an executed counterpart shall not have been received, receipt by the Agent
in form satisfactory to it of telex, facsimile or other
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<PAGE> 56
written confirmation from such party of execution of a counterpart hereof by
such party).
SECTION 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE
BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
SECTION 9.12. Confidentiality. The Agent and each Bank agrees to keep any
information delivered or made available by the Borrower pursuant to the
provisions of this Agreement or any other Financing Document confidential from
anyone other than persons employed or retained by the Agent or such Bank who are
engaged in evaluating, approving, structuring or administering the credit
facility contemplated hereby; provided that nothing herein shall prevent the
Agent or any Bank from disclosing such information (a) to any other Bank or to
the Agent, as the case may be, (b) upon the order of any court or administrative
agency, (c) upon the request or demand of any regulatory agency or authority,
(d) which had been publicly disclosed other than as a result of a disclosure by
the Agent or any Bank prohibited by this Agreement, (e) in connection with any
litigation to which the Agent, any Bank or its subsidiaries or parent may be a
party arising out of or otherwise relating to this Agreement, (f) to such Bank's
or Agent's legal counsel and independent auditors, or other professional
advisers engaged in connection with this facility, so long as in each case such
Persons are advised of the provisions of this Section, and (g) subject to the
receipt by such Bank of an agreement or undertaking containing provisions
substantially similar to those contained in this Section, to any actual or
proposed Participant or Assignee.
IN WITNESS WHEREOF this Agreement to be duly executed by their respective
authorized officers as of the day and year first above written.
GT INTERACTIVE SOFTWARE CORP.
By: /s/ ANDREW GREGOR
---------------------------------
Name: Andrew Gregor
Title: Chief Financial Officer
16 East 40th Street
New York, NY 10016
Attention: Chief Financial Officer
Facsimile: (212) 726-6590
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<PAGE> 57
LENDERS
$25,000,000 REPUBLIC NATIONAL BANK OF NEW YORK
as a Lender and as Issuing Bank
By: /s/ ESTELLE DICHAZI
---------------------------------
Name: Estelle Dichazi
Title: Senior Vice President
Domestic Lending Office
452 Fifth Avenue
New York, NY 10018
Attention: Middle Market Lending,
Department 381
Attn.: Estelle Dichazi,
Senior Vice President
Telex: 234967; Answerback: BLICBANK
Facsimile: (212) 525-6905
EuroDollar Lending Office:
London, England
$15,000,000 NBD BANK
By: /s/ THOMAS A. LEVASSEW
---------------------------------
Name: Thomas A. Levassew
Title: Vice President
Domestic Lending Office:
611 Woodward Avenue
Detroit, Michigan 48226
Attention: Corporate Banking
Department
Attn.: Sharon Popp,
Administrative Assistant
Facsimile: (313) 225-1212
EuroDollar Lending Office:
London, England
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<PAGE> 58
$40,000,000
REPUBLIC NATIONAL BANK OF NEW YORK, as
Agent
By: /s/ ESTELLE DICHAZI
---------------------------------
Name: Estelle Dichazi
Title: Senior Vice President
452 Fifth Avenue
New York, NY 10018
Attention: Middle Market Lending,
Department 381;
Attn.: Estelle Dichazi,
Senior Vice President
Telex: 234967; Answerback: BLICBANK
Facsimile: (212) 525-6905
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<PAGE> 59
EXHIBIT A-1
NOTE
New York, New York
January 21, 1997
For value received, GT INTERACTIVE SOFTWARE CORP., a Delaware corporation
(the "BORROWER"), promises to pay to the order of Republic National Bank of New
York (the "Bank"), the unpaid principal amount of each Loan made by the Bank to
the Borrower pursuant to the Credit Agreement referred to below on the maturity
date provided for in the Credit Agreement. The Borrower promises to pay interest
on the unpaid principal amount of each such Loan on the dates and at the rate or
rates provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of the Agent at 452 Fifth Avenue, New
York, New York 10018.
All Loans made by the Bank, the respective types thereof and all repayments
of the principal thereof shall be recorded by the Bank and, if the Bank so
elects in connection with any transfer or enforcement hereof appropriate
notations to evidence the foregoing information with respect to each such Loan
then outstanding may be endorsed by the Bank on the schedule attached hereto, or
on a continuation of such schedule attached to and made a part hereof provided
that the failure of the Bank to make any such recordation or endorsement shall
not affect the obligations of the Borrower hereunder or under the Credit
Agreement.
This note is one of the Notes referred to in the Credit Agreement dated as
of January __, 1997 among the Borrower, the banks listed on the signature pages
thereof, the Letter of Credit Issuing Bank party thereto and Republic National
Bank of New York, as Agent (as the same may be amended from time to time, the
"CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with
the same meanings. Reference is made to the Credit Agreement for provisions for
the prepayment hereof and the acceleration of the maturity hereof.
GT INTERACTIVE SOFTWARE CORP.
By:
---------------------------------
Name:
Title:
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<PAGE> 60
<TABLE>
<CAPTION>
LOANS AND PAYMENTS OF PRINCIPAL
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of
Principal
Date Amount of Type of Loan Prepaid Notation Made
Loan By
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 61
EXHIBIT A-2
NOTE
New York, New York
January 21, 1997
For value received, GT INTERACTIVE SOFTWARE CORP., a Delaware corporation
(the "BORROWER"), promises to pay to the order of NBD Bank (the "Bank"), the
unpaid principal amount of each Loan made by the Bank to the Borrower pursuant
to the Credit Agreement referred to below on the maturity date provided for in
the Credit Agreement. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the rate or rates
provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of the Agent at 452 Fifth Avenue, New
York, New York 10018.
All Loans made by the Bank, the respective types thereof and all repayments
of the principal thereof shall be recorded by the Bank and, if the Bank so
elects in connection with any transfer or enforcement hereof appropriate
notations to evidence the foregoing information with respect to each such Loan
then outstanding may be endorsed by the Bank on the schedule attached hereto, or
on a continuation of such schedule attached to and made a part hereof provided
that the failure of the Bank to make any such recordation or endorsement shall
not affect the obligations of the Borrower hereunder or under the Credit
Agreement.
This note is one of the Notes referred to in the Credit Agreement dated as
of January __, 1997 among the Borrower, the banks listed on the signature pages
thereof, the Letter of Credit Issuing Bank party thereto and Republic National
Bank of New York, as Agent (as the same may be amended from time to time, the
"CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with
the same meanings. Reference is made to the Credit Agreement for provisions for
the prepayment hereof and the acceleration of the maturity hereof.
GT INTERACTIVE SOFTWARE CORP.
By:
---------------------------------
Name:
Title:
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<PAGE> 62
<TABLE>
<CAPTION>
LOANS AND PAYMENTS OF PRINCIPAL
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of
Principal
Date Amount of Type of Loan Prepaid Notation Made
Loan By
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 63
EXHIBIT B - OPINION
January __, 1997
To the Banks and the Agent
Referred to Below
c/o Republic National Bank of New York
as Agent
452 Fifth Avenue
New York, New York 10018
Ladies and Gentlemen:
We have acted as counsel for GT Interactive Software Corp. (the "BORROWER")
and certain of its Subsidiaries in connection with the Credit Agreement (the
"CREDIT AGREEMENT") dated as of December , 1996 among the Borrower, the banks
listed on the signature pages thereof, the Letter of Credit Issuing Banks party
thereto and Republic National Bank of New York, as Agent. Terms defined in the
Credit Agreement are used herein as therein defined. This opinion is being
rendered to you at the request of our clients pursuant to Section 3.01(d) of the
Credit Agreement.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments and have conducted such other investigations of
fact and law as we have deemed necessary or advisable for purposes of this
opinion.
Upon the basis of the foregoing, we are of the opinion that:
1. The Borrower is a corporation duly incorporated, validly existing and in
good standing under the laws of Delaware and is qualified to do business and is
in good standing under the laws of the State of New York and has the corporate
power to enter into the Credit Agreement and the documents and instruments
referred to therein.
2. The execution, delivery and performance by the Borrower of the Credit
Agreement and the Notes are within the corporate powers of the Borrower, have
been duly authorized by all necessary corporate action, require no action by or
in respect of, or filing with, any governmental body, agency or official and do
not contravene, or constitute a default under, any
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<PAGE> 64
provision of applicable law of regulation or of the certificate of incorporation
or by-laws of the Borrower or, to our knowledge, of any agreement, judgment,
injunction, order, decree or other instrument binding upon the Borrower or any
of its Material Subsidiaries or, to our knowledge, result in the creation or
imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.
3. The Credit Agreement constitutes a valid and binding agreement of the
Borrower and each Note constitutes a valid and binding obligation of the
Borrower, in each case enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and by general principles of equity.
4. To our knowledge, there is no action, suit or proceeding pending or
threatened against or affecting the Borrower or any of its Material Subsidiaries
before any court or arbitrator or any governmental body, agency or official, in
which there is a reasonable possibility of an adverse decision which could
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the borrower and its Consolidated
Subsidiaries, considered as a whole, or which in any manner draws into question
the validity of the Credit Agreement or the Notes.
5. Each of the Borrower's Material Subsidiaries is a corporation validly
existing and in good standing under the laws of its jurisdiction of
incorporation.
The foregoing opinions are subject to the following qualifications:
(a) We are members of the Bar of the State of New York and do not purport
to be expert or express any opinion except as to matters involving the laws of
such State, the General Corporation Law of the State of Delaware, and the
federal laws of the United States of America.
(b) [We express no opinion as to the validity, binding effect or
enforceability of any choice of law, consent to jurisdiction, consent to venue
or consent to service provision in a court other than a court of the State of
New York].
(c) [The enforceability of Sections 2.13(e), 9.03 and [9.11] of the
Agreement may be limited by laws rendering unenforceable indemnification
contrary to
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<PAGE> 65
state or federal laws or public policy underlying such laws.]
(d) We express no opinion as to the enforceability of any provision
purporting to waive unmatured rights to the extent such provision may be limited
by applicable state or federal laws or public policy underlying such laws.
(e) As used in this opinion letter, "to our knowledge" shall mean the
knowledge that attorneys employed by us have obtained solely from their
representation of the Borrower. Nothing has come to our attention which has
caused us to believe that the statements so made herein "to our knowledge" are
untrue or incorrect. However, except as specifically noted above, we do not
purport to have made any review of court records or proceedings or made any
other independent review or investigation of any factual matter.
This opinion letter is being provided to you pursuant to Section 3.01(d) of
the Credit Agreement and may not be relied upon by any other person or for any
purpose other than in connection with the transactions contemplated by the
Credit Agreement without our prior written consent in each instance.
Very truly yours,
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<PAGE> 1
EXHIBIT 11.1
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
-----------
<S> <C>
Pro forma net income $18,628
=======
Pro forma weighted average shares outstanding:
Actual 59,305
Dilutive impact of shares issued during the period and treated
as being outstanding throughout the periods presented 1,777
-------
61,082
-------
Pro forma net income per share $ 0.30
=======
</TABLE>
<PAGE> 1
EXHIBIT 11.2
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1996
-----------
<S> <C>
Net income $25,139
=======
Weighted average shares outstanding:
Actual 66,391
Dilutive impact of shares issued during the period and treated
as being outstanding throughout the periods presented --
-------
66,391
-------
Net income per share $ 0.38
=======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
G.T. Interactive Entertainment (Europe) Limited
WizardWorks Group, Inc.
Humongous Entertainment, Inc.
Candel Inc.
FormGen, Inc.
Gold Medallion Software, Inc.
Mediatechnics Ltd.
1051236 Ontario, Inc.
FormGen Corp.
Renegade Interactive Entertainment Limited
Bramblewold Computers Limited
GT Interactive Software France S.A.
GT Interactive Entertainment Company Germany GmbH
Premier European Promotion Limited
One Stop Direct Limited
Software Sourcerers International Limited
Wizardworks (UK) Limited
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-428) of GT Interactive Software Corp. of our report dated May
10, 1996, with respect to the combined financial statements of Wizardworks
Group, Inc. as of March 31, 1996 and 1995 and the related combined statements
of income and retained earnings and cash flows for each of the three years in
the period ended March 31, 1996.
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 28, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Annual Report on Form 10-K, into the
Company's previously filed Registration Statements on Form S-3 (Registration No.
333-19435) and Form S-8 (Registration No. 333-00428) of GT Interactive Software
Corp.
ARTHUR ANDERSEN LLP
New York, New York
March 28, 1997
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<FISCAL-YEAR-END> Dec-31-1996
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