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UNITED STATES
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
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FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 000-22513
AMAZON.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 91-1646860
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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1516 SECOND AVENUE
SEATTLE, WASHINGTON 98101
(206) 622-2335
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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Aggregate market value of voting stock held by
non-affiliates of the registrant as of March 13, 1998..... $787,637,606
Number of shares of common stock outstanding as of March 13,
1998...................................................... 24,157,867
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated herein by reference from the Registrant's
definitive proxy statement relating to the annual meeting of stockholders to be
held in 1998, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
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AMAZON.COM, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
Item 13. Certain Relationships and Related Transactions.............. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 37
Signatures................................................................ 39
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth herein under "Additional Factors That May Affect Future
Results," as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Liquidity and Capital
Resources." Particular attention should be paid to the cautionary statements
involving the Company's limited operating history, the unpredictability of its
future revenues, the unpredictable and evolving nature of its business model,
the intensely competitive online commerce and retail book environments and the
risks associated with capacity constraints, systems development, management of
growth and business expansion. Except as required by law, the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the Securities and Exchange Commission ("SEC").
GENERAL
Amazon.com, Inc. ("Amazon.com" or the "Company") is the leading online
retailer of books. Since opening for business as "Earth's Biggest Bookstore" in
July 1995, Amazon.com has become one of the most widely known, used and cited
commerce sites on the World Wide Web (the "Web"). Amazon.com strives to offer
its customers compelling value through innovative use of technology, broad
selection, high-quality content, a high level of customer service, competitive
pricing and personalized services. The Company offers a catalog of more than 2.5
million titles, easy-to-use search and browse features, e-mail services,
personalized shopping services, Web-based credit card payment and direct
shipping to customers. The Company intends over time to expand its catalog into
other information-based products, such as music. Amazon.com has virtually
unlimited online shelf space and offers customers a vast selection through an
efficient search-and-retrieval interface.
Operating as an online book retailer, Amazon.com has grown rapidly since
first opening its Web site in July 1995. Through December 31, 1997, the Company
had sales of more than $164 million to approximately 1.5 million customer
accounts in over 150 countries. Repeat customers currently account for over 58%
of orders. International sales represented 25% of net sales in 1997 and 22% of
sales in the quarter ended December 31, 1997. No material part of the Company's
revenue was attributable to a single customer or group of customers, or a
foreign corporation. No foreign country accounted for more than 10% of revenue.
Since inception, the Company has grown rapidly; however, percentage growth rates
experienced to date are not sustainable. The Company incurred net losses of
$27.6 million and $5.8 million in the fiscal years ended December 31, 1997 and
1996, respectively. See "Additional Factors That May Affect Future Results --
Limited Operating History; Accumulated Deficit; Anticipated Losses."
Amazon.com was incorporated in 1994 in the State of Washington and
reincorporated in 1996 in Delaware. The Company's principal corporate offices
are located in Seattle, Washington. Amazon.com completed its initial public
offering in May 1997 and its common stock is listed on the NASDAQ National
Market under the symbol "AMZN". Information contained on the Company's Web site
will not be deemed to be a part of this Annual Report on Form 10-K. As used
herein, "titles" offered by the Company means the number of items offered in the
Company's catalog and includes primarily books but also a small number of CDs,
videotapes, audiotapes and other products.
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THE AMAZON.COM WEB SITE
Amazon.com strives to offer an online shopping experience that involves
discovery and fulfillment for its customers. The Company believes that the sale
of books and other products and services over the Web can offer attractive
benefits to consumers, including, without limitation, enhanced selection,
convenience, ease-of-use, competitive pricing, depth of content and information
and personalization. Customers entering the Amazon.com Web site can, in addition
to ordering books and other products, purchase gift certificates, conduct
targeted searches, browse highlighted selections, bestsellers and other
features, search for books by subject category, read and post reviews, register
for personalized services, participate in promotions and check order status. The
key components of Amazon.com's offerings include browsing, searching, reviews
and content, online community, recommendations and personalization, a gift
center and an out-of-print book service.
Browsing. The Amazon.com site offers visitors a variety of highlighted
subject areas and special features arranged in a simple, easy-to-use fashion
intended to enhance book search, selection and discovery. In addition, the
Amazon.com home page presents a variety of products and information of topical
or current-event interest. To enhance the shopping experience and increase
sales, the Company features a variety of books on a rotating basis throughout
the store.
Searching. A primary feature of the Amazon.com Web site is its interactive,
searchable catalog of more than 2.5 million titles, including most of the
estimated 1.5 million English-language books believed to be in print, more than
one million out-of-print titles believed to be in circulation and a small number
of CDs, videotapes, audiotapes and other products. The Company provides a
selection of search tools to find books and other products based on title,
subject, author, keyword, publication date or ISBN. Customers can also use more
complex and precise search tools such as Boolean search queries. The Company
licenses some of its catalog and other information from third parties.
Reviews and Content. The Amazon.com store offers numerous forms of content
to entertain and engage readers, enhance the customer's shopping experience and
encourage purchases. Various types of content are available for particular
titles, including cover art, synopses, annotations, interviews by authors or
reviews by other readers. Customers are encouraged to write and post their own
reviews and authors are invited to "self-administer" interviews by answering
predefined questions.
Online Community. By creating an online community, the Company hopes to
provide customers with an inviting and familiar experience that will encourage
them to return frequently to the site and to interact with other users and that
will promote loyalty and repeat purchases. Amazon.com invites readers, authors
and publishers to post reviews, sponsors review competitions and provides a
forum for author interviews.
Recommendations and Personalization. During its history, Amazon.com has
continually sought to personalize its product and service offerings. These
improvements have included greeting customers by name, instant recommendations,
collaborative filtering and a number of other related features. The Company
believes that personalization of a customer's shopping experience at the
Company's Web site is an important element of the value proposition it offers to
customers and intends to continue to enhance its personalized services.
Gift Center. In November 1997, Amazon.com launched its Gift Center,
including features such as gift recommendations from Amazon.com editors, dynamic
personalized gift-matching services and both traditional and electronic gift
certificates. Customers can select and order gifts, choose from a number of
gift-wraps and have packages wrapped and sent with a personalized message.
Out-of-Print. Amazon.com began offering an out-of-print book service in
March 1997. More than one million out-of-print titles are listed in the
Company's catalog. Because of the difficulty of sourcing out-of-print titles,
customers are advised to expect one- to three-month delivery times and that such
titles may not be available at all.
Availability and Fulfillment. Many of the Company's titles are available
for shipment within 24 hours, others are available within 48 to 72 hours and the
remainder of in-print titles are generally available within
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four to six weeks, although some titles may not be available at all.
Out-of-print titles generally are available in one to three months, although
some titles may not be available at all. Customers may select from a variety of
delivery options, including overnight and various international shipping
options, as well as gift-wrapping services. The Company uses e-mail to notify
customers of order status under various conditions. The Company seeks to provide
rapid and reliable fulfillment of customer orders and to continue to improve its
speed of availability and fulfillment.
MARKETING AND PROMOTION
Amazon.com's marketing strategy is designed to strengthen the Amazon.com
brand name, increase customer traffic to the Amazon.com Web site, build strong
customer loyalty, maximize repeat purchases and develop incremental revenue
opportunities. Amazon.com seeks to build customer loyalty by creatively applying
technology to deliver personalized programs and service, as well as creative and
flexible merchandising. The Company employs a variety of media, business
development and promotional methods to achieve these goals, including online and
traditional advertising and public relations activities.
The Company also extends its market presence through its Associates
Program, which includes thousands of enrolled members. The program enables
Associate Web sites to make books available to their audiences with order
fulfillment by Amazon.com.
CUSTOMER SERVICE
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases
depends, in part, on the strength of its customer support and service operations
and staff. Furthermore, the Company seeks to achieve frequent communication with
and feedback from its customers to continually improve the Amazon.com store and
services. Amazon.com offers a number of e-mail addresses to enable customers to
request information and to encourage feedback and suggestions. The Company has
automated certain of the tools used by its customer support and service staff
and intends to actively pursue enhancements to and further automation of its
customer support and service systems and operations.
WAREHOUSING AND FULFILLMENT
The Company sources product from a network of book distributors and
publishers. Although the Company carries its own inventory (some of which is
purchased directly from publishers), it also relies on rapid fulfillment from
major distributors and wholesalers that carry a broad selection of titles. The
Company purchases a substantial majority of its products from Ingram Book Group
("Ingram") and Baker & Taylor, Inc. ("B&T"). Ingram is the Company's single
largest supplier and accounted for 58% and 59% of the Company's inventory
purchases in 1997 and 1996, respectively. See "Additional Factors That May
Affect Future Results -- Reliance on Certain Suppliers."
The Company utilizes automated interfaces for sorting and organizing its
orders to enable it to achieve the most rapid and economic purchase and delivery
terms possible. The Company's proprietary software selects the orders that can
be filled via electronic interfaces with vendors and forwards remaining orders
to its special orders group. Under the Company's arrangements with distributors,
electronically ordered books often are shipped by the distributor within hours
of a receipt of an order from Amazon.com. The Company has developed customized
information systems and trained dedicated ordering personnel who specialize in
sourcing hard-to-find books.
TECHNOLOGY
The Company has implemented an array of site management, search, customer
interaction, transaction-processing and fulfillment services and systems using a
combination of its own proprietary technologies and commercially available,
licensed technologies. The Company's current strategy is to focus its
development efforts on creating and enhancing the specialized, proprietary
software that is unique to its business and to license commercially developed
technology for other applications where available and appropriate.
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The Company uses a set of applications for accepting and validating
customer orders, organizing, placing and managing orders with suppliers,
managing inventory, assigning inventory to customer orders and managing shipment
of product to customers based on various ordering criteria. The Company's
transaction-processing systems handle millions of items, a number of different
availability statuses, gift-wrapping requests and multiple shipment methods and
allow the customer to choose whether to receive single or several shipments
based on availability. These applications also manage the process of accepting,
authorizing and charging customer credit cards. The Amazon.com Web site also
incorporates a variety of search and database tools.
A group of systems administrators and network managers monitor and operate
the Company's Web site, network operations and transaction-processing systems.
The continued uninterrupted operation of the Company's Web site and
transaction-processing systems is essential to its business and it is the job of
the site operations staff to ensure, to the greatest extent possible, their
reliability. The Company uses the services of three Internet service providers,
UUNet Technologies, Inc., InterNAP Network Services LLC and Interconnected
Associates, Inc., to obtain connectivity to the Internet over multiple dedicated
lines.
COMPETITION
The online commerce market, particularly over the Web, is new, rapidly
evolving and intensely competitive. In addition, the retail book industry is
intensely competitive. The Company's current or potential competitors include
(i) various online booksellers and vendors of other information-based products
such as CDs and videotapes, including entrants into narrow specialty niches,
(ii) a number of indirect competitors that specialize in online commerce or
derive a substantial portion of their revenues from online commerce, through
which retailers other than the Company may offer products and (iii) publishers,
distributors and retail vendors of books, music and videotapes, including Barnes
& Noble, Inc., Bertelsmann AG and other large specialty booksellers and
integrated media corporations, many of which possess significant brand
awareness, sales volume and customer bases. The Company believes that the
principal competitive factors in its market are brand recognition, selection,
personalized services, convenience, price, accessibility, customer service,
quality of search tools, quality of editorial and other site content,
reliability and speed of fulfillment. Many of the Company's competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
Certain of the Company's competitors may be able to secure merchandise from
vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and systems
development than the Company. Increased competition may result in reduced
operating margins, loss of market share and a diminished brand franchise. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors.
The Company expects that competition in the online commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on online retailers, including the Company.
For example, "shopping agent" technologies will permit customers to quickly
compare the Company's prices with those of its competitors. Competitive
pressures created by any one of the Company's competitors, or by the Company's
competitors collectively, could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations. See
"Additional Factors That May Affect Future Results -- Competition."
INTELLECTUAL PROPERTY
The Company regards its patents, copyrights, service marks, trademarks,
trade dress, trade secrets, proprietary technology and similar intellectual
property as critical to its success, and relies on trademark, copyright and
patent law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company pursues the registration of its trademarks and
service marks in the U.S. and internationally, and has applied for the
registration of certain of its trademarks and service marks. In addition, the
Company has filed U.S. and
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international patent applications covering certain of its proprietary
technology. Effective trademark, service mark, copyright, patent and trade
secret protection may not be available in every country in which the Company's
products and services are made available online. The Company has licensed in the
past, and expects that it may license in the future, certain of its proprietary
rights, such as trademarks or copyrighted material, to third parties. While the
Company attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress, patents and
similar proprietary rights. In addition, there can be no assurance that other
parties will not assert infringement claims against the Company. The Company has
been subject to claims and expects to be subject to legal proceedings and claims
from time to time in the ordinary course of its business, including claims of
alleged infringement of the trademarks and other intellectual property rights of
third parties by the Company and its licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
EMPLOYEES
As of December 31, 1997, the Company employed 614 full-time employees. The
Company also employs independent contractors and other temporary employees in
its editorial, fulfillment and finance departments. None of the Company's
employees is represented by a labor union, and the Company considers its
employee relations to be good. Competition for qualified personnel in the
Company's industry is intense, particularly for software development and other
technical staff. The Company believes that its future success will depend in
part on its continued ability to attract, hire and retain qualified personnel.
See "Additional Factors That May Affect Future Results -- Management of
Potential Growth" and "-- Dependence on Key Personnel."
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact or may have a significant impact on the Company's business, prospects,
financial condition and results of operations.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES. The
Company was incorporated in July 1994 and commenced offering products for sale
on its Web site in July 1995. Accordingly, the Company has a limited operating
history on which to base an evaluation of its business and prospects. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
online commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model and the management of growth. To
address these risks, the Company must, among other things, maintain and increase
its customer base, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, improve its Web site, provide superior customer
service and order fulfillment, respond to competitive developments and attract,
retain and motivate qualified personnel. There can be no assurance that the
Company will be successful in addressing such risks, and the failure to do so
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Since inception, the Company has incurred significant losses and as of
December 31, 1997 had an accumulated deficit of $33.6 million. The Company
believes that its success will depend in large part on its ability to (i) extend
its brand position, (ii) provide its customers with outstanding value and a
superior shopping experience and (iii) achieve sufficient sales volume to
realize economies of scale. Accordingly, the Company intends to continue to
invest heavily in marketing and promotion, product development and technology
and operating infrastructure development. The Company also offers attractive
pricing programs, which have reduced its gross margins. Because the Company has
relatively low product gross margins,
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achieving profitability given planned investment levels depends upon the
Company's ability to generate and sustain substantially increased revenue
levels. As a result, the Company believes that it will continue to incur
substantial operating losses for the foreseeable future and that the rate at
which such losses will be incurred may increase significantly from current
levels. Although the Company has experienced significant revenue growth in
recent periods, such growth rates are not sustainable and will decrease in the
future. In view of the rapidly evolving nature of the Company's business and its
limited operating history, the Company believes that period-to-period
comparisons of its operating results, including the Company's gross profit and
operating expenses as a percentage of net sales, are not necessarily meaningful
and should not be relied upon as an indication of future performance.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY. As a result of the Company's limited operating
history and the emerging nature of the markets in which it competes, the Company
is unable to accurately forecast its revenues. The Company's current and future
expense levels are based largely on its investment plans and estimates of future
revenues and are to a large extent fixed. Sales and operating results generally
depend on the volume of, timing of and ability to fulfill orders received, which
are difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in revenues in relation to the Company's planned
expenditures would have an immediate adverse effect on the Company's business,
prospects, financial condition and results of operations. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service, marketing or acquisition
decisions that could have a material adverse effect on its business, prospects,
financial condition and results of operations. For example, the Company has
agreed in certain of its promotional arrangements with Internet aggregators to
make significant fixed payments. There can be no assurance that these
arrangements will generate adequate revenues to cover the associated
expenditures and any significant shortfall would have a material adverse effect
on the Company's financial condition and results of operations. See Note
4 -- "Commitments" of Notes to Financial Statements.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the Company's ability to acquire product, to maintain
appropriate inventory levels and to manage fulfillment operations, (iii) the
Company's ability to maintain gross margins in its existing business and in
future product lines and markets, (iv) the development, announcement or
introduction of new sites, services and products by the Company and its
competitors, (v) price competition or higher wholesale prices in the industry,
(vi) the level of use of the Internet and online services and increasing
consumer acceptance of the Internet and other online services for the purchase
of consumer products such as those offered by the Company, (vii) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (viii) the level of traffic on the
Company's Web site, (ix) technical difficulties, system downtime or Internet
brownouts, (x) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and infrastructure,
(xi) the number of popular books introduced during the period, (xii) the level
of merchandise returns experienced by the Company, (xiii) governmental
regulation and taxation policies, (xiv) disruptions in service by common
carriers due to strikes or otherwise and (xv) general economic conditions and
economic conditions specific to the Internet, online commerce and the book
industry.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book industry are significantly higher in the fourth calendar
quarter of each year than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
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COMPETITION. The online commerce market, particularly over the Web, is new,
rapidly evolving and intensely competitive. In addition, the retail book
industry is intensely competitive. The Company's current or potential
competitors include (i) various online booksellers and vendors of other
information-based products such as CDs and videotapes, including entrants into
narrow specialty niches, (ii) a number of indirect competitors that specialize
in online commerce or derive a substantial portion of their revenues from online
commerce, through which retailers other than the Company may offer products and
(iii) publishers, distributors and retail vendors of books, music and
videotapes, including Barnes & Noble, Inc., Bertelsmann AG and other large
specialty booksellers and integrated media corporations, many of which possess
significant brand awareness, sales volume and customer bases. The Company
believes that the principal competitive factors in its market are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other site content and reliability and speed of fulfillment. Many of the
Company's competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than the Company. Certain of the Company's competitors may be
able to secure merchandise from vendors on more favorable terms, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to
Web site and systems development than the Company. Increased competition may
result in reduced operating margins, loss of market share and a diminished brand
franchise. There can be no assurance that the Company will be able to compete
successfully against current and future competitors.
The Company expects that competition in the online commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage their
market power to the detriment of participants in other market segments. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures on online retailers, including the Company.
For example, "shopping agent" technologies will permit customers to quickly
compare the Company's prices with those of its competitors. Competitive
pressures created by any one of the Company's competitors, or by the Company's
competitors collectively, could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
SYSTEM DEVELOPMENT AND OPERATION RISKS. The Company's revenues depend on
the number of visitors who shop on its Web site and the volume of orders it
fulfills. Any system interruptions that result in the unavailability of the
Company's Web site or reduced order fulfillment performance would reduce the
volume of goods sold and the attractiveness of the Company's product and service
offerings. The Company has experienced periodic system interruptions, which it
believes will continue to occur from time to time. The Company uses an
internally developed system for its Web site, search engine and substantially
all aspects of transaction processing, including order management, cash and
credit card processing, purchasing, inventory management and shipping. The
Company will be required to add additional software and hardware and further
develop and upgrade its existing technology, transaction-processing systems and
network infrastructure to accommodate increased traffic on its Web site and
increased sales volume through its transaction-processing systems. Any inability
to do so may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of order
fulfillment, or delays in reporting accurate financial information. There can be
no assurance that the Company will be able to accurately project the rate or
timing of increases, if any, in the use of its Web site or in a timely manner to
effectively upgrade and expand its transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with its existing
systems. Any inability to do so could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Substantially all of the Company's computer and communications hardware is
located at a single leased facility in Seattle, Washington. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. The Company does not currently have redundant systems or a formal
disaster recovery plan and does not carry sufficient business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of critical data or
7
<PAGE> 10
the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing events could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
MANAGEMENT OF POTENTIAL GROWTH. The Company has rapidly and significantly
expanded its operations and anticipates that further expansion will be required
to address potential growth in its customer base, to expand its product and
service offerings and its international operations and to pursue other market
opportunities. The Company's employee base has similarly expanded, growing from
158 employees as of December 31, 1996 to 614 employees as of December 31, 1997.
The expansion of the Company's operations and employee base has placed, and is
expected to continue to place, a significant strain on the Company's management,
operational and financial resources. To manage the expected growth of its
operations and personnel, the Company will be required to improve existing and
implement new transaction-processing, operational and financial systems,
procedures and controls and to expand, train and manage its growing employee
base. There can be no assurance that the Company's current and planned
personnel, systems, procedures and controls will be adequate to support the
Company's future operations, that management will be able to hire, train,
retain, motivate and manage required personnel or that Company management will
be able to successfully identify, manage and exploit existing and potential
market opportunities. If the Company is unable to manage growth effectively,
such inability could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
RISKS OF NEW BUSINESS AREAS. The Company over time intends to expand its
operations by promoting new or complementary products or sales formats and by
expanding the breadth and depth of its product or service offerings. Expansion
of the Company's operations in this manner would require significant additional
expenses and development, operations and editorial resources and would strain
the Company's management, financial and operational resources. Furthermore, the
Company may not benefit from the first-mover advantage that it experienced in
the online book market and gross margins attributable to new business areas may
be lower than those associated with the Company's existing business activities.
There can be no assurance that the Company will be able to expand its operations
in a cost-effective or timely manner. Furthermore, any new business launched by
the Company that is not favorably received by consumers could damage the
Company's reputation or the Amazon.com brand. The lack of market acceptance of
such efforts or the Company's inability to generate satisfactory revenues from
such expanded services or products to offset their cost could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RISKS OF INTERNATIONAL EXPANSION. The Company over time intends to expand
its presence in foreign markets. To date, the Company has only limited
experience in sourcing, marketing and distributing products on an international
basis and in developing localized versions of its Web site and other systems.
The Company expects to incur significant costs in establishing international
facilities and operations, in promoting its brand internationally, in developing
localized versions of its Web site and other systems and in sourcing, marketing
and distributing products in foreign markets. There can be no assurance that the
Company's international efforts will be successful. If the revenues resulting
from international activities are inadequate to offset the expense of
establishing and maintaining foreign operations, such inadequacy could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, there are certain risks
inherent in doing business on an international level, such as unexpected changes
in regulatory requirements, export and import restrictions, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity in other parts of the world and
potentially adverse tax consequences, any of which could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of such factors will not have a material adverse impact on the
Company's future international operations and, consequently, on the Company's
business, prospects, financial condition and results of operations.
RISKS OF BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES. The Company may
choose to expand its operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
third parties. Any such transaction would be accompanied by the risks commonly
encountered in such transactions. These include, among others, the difficulty of
assimilating the operations,
8
<PAGE> 11
technology and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, the maintenance of uniform standards, controls and policies
and the impairment of relationships with existing employees and customers. There
can be no assurance that the Company would be successful in overcoming these
risks or any other problems encountered in connection with such business
combinations, investments, joint ventures or other strategic alliances, or that
such transactions will not have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the Amazon.com online store. The Internet and the online commerce industry
are characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
embodying new technologies and the emergence of new industry standards and
practices that could render the Company's existing Web site and proprietary
technology and systems obsolete. The Company's success will depend, in part, on
its ability to license leading technologies useful in its business, enhance its
existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of its prospective customers and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of Web site and other
proprietary technology entails significant technical, financial and business
risks. There can be no assurance that the Company will successfully implement
new technologies or adapt its Web site, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, such inability could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the continued services and on the performance of its senior
management and other key personnel, particularly Jeffrey P. Bezos, its
President, Chief Executive Officer and Chairman of the Board. The Company does
not have long-term employment agreements with any of its key personnel and
maintains no "key person" life insurance policies. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
RELIANCE ON CERTAIN SUPPLIERS. The Company purchases a substantial majority
of its products from two major vendors, Ingram and B&T. Ingram is the Company's
single largest supplier and accounted for 58% and 59% of the Company's inventory
purchases in 1997 and 1996, respectively. The Company has no long-term contracts
or arrangements with any of its vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. There can be no assurance that the Company's current vendors will
continue to sell merchandise to the Company on current terms or that the Company
will be able to establish new or extend current vendor relationships to ensure
acquisition of merchandise in a timely and efficient manner and on acceptable
commercial terms. If the Company were unable to develop and maintain
relationships with vendors that would allow it to obtain sufficient quantities
of merchandise on acceptable commercial terms, such inability could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
IMPACT OF LOAN FACILITY. On December 23, 1997, the Company borrowed $75
million pursuant to a three-year senior secured term credit agreement (the
"Loan"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." The Loan includes
covenants restricting certain activities by the Company, including (i) the
incurrence of additional indebtedness, (ii) consolidations, mergers and sales of
assets and (iii) dividends and distributions to stockholders. In addition,
financial covenants require the Company to, among other things, maintain a
minimum cash balance, maintain certain levels of earnings or losses before
interest, taxes, depreciation and amortization, limit its accounts payable aging
and limit its capital and acquisition expenditures. The Loan contains standard
events of default including, among other things, a change in ownership or
control. As a result, the Loan may reduce
9
<PAGE> 12
the Company's operational flexibility and may limit its ability to pursue market
opportunities. The Company's ability to generate planned future revenues, and
therefore its ability to comply with the Loan covenants, may be affected by
events beyond its control. If the Company were unable to satisfy the Loan
covenants, the lending institutions would be entitled to exercise their
remedies, including the right to declare all principal and interest immediately
due and payable. If the Company were unable to make such payment, or were unable
to repay the amount owing under the Loan at the end of its term, the lending
institutions could foreclose on the Company's assets, substantially all of which
are pledged as security for the Loan. In connection with the Loan, the Company
issued warrants to purchase a total of 750,000 shares of the Company's common
stock. All or a portion of the warrants will be canceled if the Company repays
the Loan in full prior to certain specified dates. If the Company does not repay
the Loan prior to such dates, and if any of the warrants are exercised, such
exercise may dilute the economic interests of the Company's stockholders.
RISKS ASSOCIATED WITH DOMAIN NAMES. The Company currently holds various Web
domain names relating to its brand, including the "Amazon.com" domain name. The
acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. For example, in the United States,
the National Science Foundation has appointed Network Solutions, Inc. as the
exclusive registrar for the ".com, " ".net" and ".org" generic top-level
domains. The regulation of domain names in the United States and in foreign
countries is subject to change. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, there can be no assurance
that the Company will be able to acquire or maintain relevant domain names in
all countries in which it conducts business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. The Company, therefore, may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of its trademarks and other proprietary
rights. Any such inability could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any domestic or foreign governmental
agency, other than regulations applicable to businesses generally and laws or
regulations directly applicable to access to online commerce. However, due to
the increasing popularity and use of the Internet and other online services, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet or other online services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. Furthermore, the growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's products and services and increase the Company's
cost of doing business, or otherwise have an adverse effect on the Company's
business, prospects, financial condition and results of operations. Moreover,
the applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
10
<PAGE> 13
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of March 27, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey P. Bezos....................... 34 President, Chief Executive Officer and
Chairman of the Board
George T. Aposporos.................... 39 Vice President of Business Development
Joy D. Covey........................... 34 Chief Financial Officer, Vice President
of Finance and Administration, and
Secretary
Richard L. Dalzell..................... 40 Vice President and Chief Information
Officer
Mary E. Engstrom....................... 35 Vice President of Publisher Affairs
Sheldon J. Kaphan...................... 45 Vice President and Chief Technology
Officer
John D. Risher......................... 32 Senior Vice President of Product
Development
Joel R. Spiegel........................ 42 Vice President of Engineering
</TABLE>
- ---------------
JEFFREY P. BEZOS. Mr. Bezos has been President and Chairman of the Board of
the Company since founding it in 1994, and Chief Executive Officer since May
1996, and served as Treasurer and Secretary from May 1996 to March 1997. From
December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw & Co., a Wall
Street investment firm, becoming Senior Vice President in 1992. From April 1988
to December 1990, Mr. Bezos was employed by Bankers Trust Company, becoming Vice
President in February 1990. Mr. Bezos received his B.S. in Electrical
Engineering and Computer Science, Summa Cum Laude, from Princeton University.
GEORGE T. APOSPOROS. Mr. Aposporos joined the Company in May 1997 as Vice
President of Business Development. From August 1995 to May 1997, Mr. Aposporos
was founder and President of Digital Brands, Inc., a strategic consulting and
interactive marketing firm. From March 1994 to August 1995, Mr. Aposporos served
as Vice President at I.C.E., a Toronto-based multimedia developer and corporate
communications firm. From 1989 to March 1994, Mr. Aposporos was self-employed as
an independent producer in a variety of media. Mr. Aposporos was an Olin Scholar
at Wesleyan University.
JOY D. COVEY. Ms. Covey joined the Company in December 1996 as Chief
Financial Officer and Vice President of Finance and Administration, and became
Secretary in March 1997. Ms. Covey also served as Treasurer of the Company from
March 1997 to February 1998. From June 1995 to February 1996, Ms. Covey served
as Vice President, Operations of the Broadcast Division of Avid Technology, Inc.
("Avid"), a developer of digital media systems, and from January 1995 to June
1995, Ms. Covey served as Vice President of Business Development for Avid. From
July 1991 to January 1995, Ms. Covey served as Chief Financial Officer of
Digidesign, Inc., a developer of random access digital audio systems and
software. Prior to that, she was an associate at Wasserstein Perella & Co., and
a certified public accountant at Arthur Young & Company (now Ernst & Young LLP).
Ms. Covey received her B.S. in Business Administration, Summa Cum Laude, from
California State University, Fresno, her M.B.A., With High Distinction, from
Harvard Business School and her J.D., Magna Cum Laude, from Harvard Law School.
She is a Certified Public Accountant and a member of the California State Bar.
RICHARD L. DALZELL. Mr. Dalzell joined the Company in August 1997 as Vice
President and Chief Information Officer. From February 1990 to August 1997, Mr.
Dalzell held several management positions within the Information Systems
Division at Wal-Mart Stores, Inc., including Vice President of Information
Systems from January 1994 to August 1997. From 1987 to 1990, Mr. Dalzell acted
as the Business Development Manager for E-Systems, Inc. Prior to joining
E-Systems, Inc. he served seven years in the United States Army as a
teleprocessing officer. Mr. Dalzell received a B.S. in Engineering from the
United States Military Academy, West Point, in 1979.
MARY E. ENGSTROM. Ms. Engstrom joined the Company in February 1997 as Vice
President of Publisher Affairs. From December 1996 to February 1997, Ms.
Engstrom served as Vice President of Product
11
<PAGE> 14
Marketing of Symantec Corporation ("Symantec"), a developer of information
management and productivity enhancement software, and from February 1996 to
February 1997, Ms. Engstrom served as General Manager of the Security Business
Unit of Symantec. From July 1989 to September 1994, Ms. Engstrom held several
management positions at Microsoft Corporation, including Group Product Manager
for Microsoft Access, Group Product Manager for Microsoft Project and Director
of Marketing, Strategic Relations. Ms. Engstrom received her B.A. in Economics
from the University of California, Berkeley, and her M.B.A. from the Anderson
Graduate School of Management at the University of California, Los Angeles.
SHELDON J. KAPHAN. Mr. Kaphan has served as the Company's Vice President
and Chief Technology Officer since March 1997. From October 1994 to March 1997,
Mr. Kaphan served as Vice President of Research and Development of the Company.
From October 1992 to July 1994, Mr. Kaphan served as senior engineer at Kaleida
Labs Inc., a multimedia joint venture between Apple Computer Inc. and
International Business Machines Corporation. Mr. Kaphan received his B.A. in
Mathematics from the University of California, Santa Cruz.
JOHN D. RISHER. Mr. Risher joined the Company in February 1997 as Vice
President of Product Development. Mr. Risher was promoted to Senior Vice
President of Product Development in November 1997. From July 1991 to February
1997, Mr. Risher held a variety of marketing and project management positions at
Microsoft Corporation, including Team Manager for Microsoft Access and Founder
and Product Unit Manager for MS Investor, Microsoft's Web site for personal
investment. Mr. Risher received his B.A. in Comparative Literature, Magna Cum
Laude, from Princeton University and his M.B.A. from Harvard Business School.
JOEL R. SPIEGEL. Mr. Spiegel joined the Company in March 1997 as Vice
President of Engineering. From March 1995 to March 1997, Mr. Spiegel held
several positions with Microsoft Corporation, including Windows 95 Multimedia
Development Manager, Windows Multimedia Group Manager and Product Unit Manager,
Information Retrieval. From June 1986 to March 1995, he held a variety of
positions at Apple Computer Inc., most recently as Senior Manager responsible
for new product development in the Apple Business Systems Division. Prior to
that, Mr. Spiegel held software product development positions at a number of
companies, including Hewlett-Packard Company and VisiCorp. Mr. Spiegel received
his B.A. in Biology with Honors from Grinnell College.
BOARD OF DIRECTORS AT DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Jeffrey P. Bezos.......... 34 Chairman of the Board, President and Chief Executive
Officer of the Company
Tom A. Alberg............. 57 Principal in Madrona Investment Group, L.L.C.
Scott D. Cook............. 44 Chairman of the Board of Intuit, Inc.
L. John Doerr............. 45 General Partner, Kleiner Perkins Caufield & Byers
Patricia Q. Stonesifer.... 41 Chairman of the Gates Library Foundation and Former
Senior Vice President of the Interactive Media
Division of Microsoft Corporation
</TABLE>
ITEM 2. PROPERTIES
The Company's principal administrative, engineering, marketing and customer
service facilities total approximately 88,000 square feet and are located in
Seattle, Washington under leases that expire in May 1999, July 1999 and January
2003. The Company's warehousing and merchandising operations are housed in an
approximately 85,000-square-foot facility in Seattle, Washington under a lease
that expires in October 1999, and in a 200,000-square-foot facility located in
New Castle, Delaware under a lease that expires in October 2002. The Company
anticipates that it will require additional administrative, customer service,
warehouse and fulfillment space within the next 12 months, but that suitable
additional space will be available on commercially reasonable terms, although
there can be no assurance in this regard. The Company does not own any real
estate.
12
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights. The Company currently is not
aware of any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of stockholders of the Company during
the fourth quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The common stock is traded on The NASDAQ National Market under the symbol
"AMZN." Information regarding the market prices of the Company's common stock
may be found in Note 8 -- "Quarterly Results" of Notes to Financial Statements.
Holders
As of March 13, 1998 there were 304 stockholders of record of the common
stock.
Dividends
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all future earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company is prohibited from paying cash
dividends under the Loan. See Note 3 -- "Debt" of Notes to Financial Statements.
Use of Proceeds
The Company's registration statement under the Securities Act of 1933, as
amended, for its initial public offering (the "Registration Statement") became
effective on May 14, 1997. Offering proceeds, net of aggregate expenses of
approximately $4.9 million, were $49.1 million. The Company has used
approximately $9.6 million of the net offering proceeds for working capital paid
directly or indirectly to third parties, approximately $7.2 million for the
purchase or installation of machinery and equipment and approximately $32.3
million for the purchase of temporary investments consisting of cash, cash
equivalents and short-term investments. The Company has not used any of the net
offering proceeds for construction of plant, building or facilities, purchases
of real estate, acquisition of other businesses, or repayment of indebtedness.
None of the net offering proceeds were paid directly or indirectly to directors,
officers, or general partners of the Company or their associates, persons owning
10% or more of any class of the Company's securities, or affiliates of the
Company.
Recent Sales of Unregistered Securities
In connection with the Loan, the Company issued warrants to purchase a
total of 750,000 shares of the Company's common stock. The warrants will be
canceled if the Company repays the Loan in full according to the following
schedule: all warrants if repayment occurs within 12 months; warrants to
purchase 675,000 shares if repayment occurs within 15 months; warrants to
purchase 562,500 shares if repayment occurs within 18 months; warrants to
purchase 450,000 shares if repayment occurs within 24 months; warrants to
purchase 225,000 shares if repayment occurs within 30 months; and no warrants if
repayment occurs after 30 months. Warrants become exercisable when they can no
longer be canceled and remain exercisable for five years after such date. The
exercise price for the warrants is $52.11 per share.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto and the information contained
herein in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JULY 5, 1994
(INCEPTION)
YEARS ENDED DECEMBER 31, TO
---------------------------- DECEMBER 31,
1997 1996 1995 1994
-------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $147,758 $15,746 $ 511 $ --
Cost of sales........................................ 118,945 12,287 409 --
-------- ------- ------- -------
Gross profit......................................... 28,813 3,459 102 --
Operating expenses:
Marketing and sales................................ 38,964 6,090 200 --
Product development................................ 12,485 2,313 171 38
General and administrative......................... 6,573 1,035 35 14
-------- ------- ------- -------
Total operating expenses................... 58,022 9,438 406 52
-------- ------- ------- -------
Loss from operations................................. (29,209) (5,979) (304) (52)
Interest income...................................... 1,898 202 1 --
Interest expense..................................... (279) -- -- --
-------- ------- ------- -------
Net loss............................................. $(27,590) $(5,777) $ (303) $ (52)
======== ======= ======= =======
Pro forma basic and diluted loss per share(1)........ $ (1.27) $ (0.31) $ (0.02) $ (0.00)
======== ======= ======= =======
Shares used in computation of pro forma basic and
diluted loss per share(1).......................... 21,651 18,544 14,394 13,191
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995 1994
-------- ------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $109,810 $6,248 $ 996 $ 52
Working capital (deficiency)................................ 93,517 2,270 920 (16)
Total assets...................................... 149,006 8,271 1,084 76
Long-term debt, net of current portion...................... 76,702 -- -- --
Stockholders' equity........................................ 28,486 3,401 977 8
</TABLE>
- ---------------
(1) See Note 1 -- "Accounting Policies" of Notes to Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements, including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek" and "intend" and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual
14
<PAGE> 17
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth below as well as in "Business -- Additional Factors That May Affect Future
Results." Particular attention should be paid to the cautionary statements
involving the Company's limited operating history, the unpredictability of its
future revenues, the unpredictable and evolving nature of its business model,
the intensely competitive online commerce and retail book environments and the
risks associated with capacity constraints, systems development, management of
growth and business expansion. Except as required by law, the Company undertakes
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the SEC.
OVERVIEW
Amazon.com is the leading online retailer of books. The Company also sells
a smaller number of CDs, videotapes, audiotapes and other products. All of these
products are sold through the Company's Web site. The Company was incorporated
in July 1994 and commenced offering products for sale on its Web site in July
1995. Accordingly, the Company has a limited operating history on which to base
an evaluation of its business and prospects. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as online commerce. Such
risks for the Company include, but are not limited to, an evolving and
unpredictable business model and the management of growth. To address these
risks, the Company must, among other things, maintain and increase its customer
base, implement and successfully execute its business and marketing strategy,
continue to develop and upgrade its technology and transaction-processing
systems, improve its Web site, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Since inception, the Company has incurred significant losses and as of
December 31, 1997 had an accumulated deficit of $33.6 million. The Company
believes that its success will depend in large part on its ability to (i) extend
its brand position, (ii) provide its customers with outstanding value and a
superior shopping experience and (iii) achieve sufficient sales volume to
realize economies of scale. Accordingly, the Company intends to continue to
invest heavily in marketing and promotion, product development and technology
and operating infrastructure development. The Company also offers attractive
pricing programs, which have reduced its gross margins. Because the Company has
relatively low product gross margins, achieving profitability given planned
investment levels depends upon the Company's ability to generate and sustain
substantially increased revenue levels. As a result, the Company believes that
it will continue to incur substantial operating losses for the foreseeable
future and that the rate at which such losses will be incurred may increase
significantly from current levels. Although the Company has experienced
significant revenue growth in recent periods, such growth rates are not
sustainable and will decrease in the future. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the Company
believes that period-to-period comparisons of its operating results, including
the Company's gross profit and operating expenses as a percentage of net sales,
are not necessarily meaningful and should not be relied upon as an indication of
future performance.
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to accurately
forecast its revenues. The Company's current and future expense levels are based
largely on its investment plans and estimates of future revenues and are to a
large extent fixed. Sales and operating results generally depend on the volume
of, timing of and ability to fulfill orders received, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to the Company's planned expenditures would
have an immediate adverse effect on the Company's business, prospects, financial
condition and results of operations. Further, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing, service, marketing or
15
<PAGE> 18
acquisition decisions that could have a material adverse effect on its business,
prospects, financial condition and results of operations. For example, the
Company has agreed in certain of its promotional arrangements with Internet
aggregators to make significant fixed payments. There can be no assurance that
these arrangements will generate adequate revenues to cover the associated
expenditures and any significant shortfall would have a material adverse effect
on the Company's financial condition and results of operations.
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include (i) the Company's ability to retain existing
customers, attract new customers at a steady rate and maintain customer
satisfaction, (ii) the Company's ability to acquire product, to maintain
appropriate inventory levels and to manage fulfillment operations, (iii) the
Company's ability to maintain gross margins in its existing business and in
future product lines and markets, (iv) the development, announcement or
introduction of new sites, services and products by the Company and its
competitors, (v) price competition or higher wholesale prices in the industry,
(vi) the level of use of the Internet and online services and increasing
consumer acceptance of the Internet and other online services for the purchase
of consumer products such as those offered by the Company, (vii) the Company's
ability to upgrade and develop its systems and infrastructure and attract new
personnel in a timely and effective manner, (viii) the level of traffic on the
Company's Web site, (ix) technical difficulties, system downtime or Internet
brownouts, (x) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and infrastructure,
(xi) the number of popular books introduced during the period, (xii) the level
of merchandise returns experienced by the Company, (xiii) governmental
regulation and taxation policies, (xiv) disruptions in service by common
carriers due to strikes or otherwise and (xv) general economic conditions and
economic conditions specific to the Internet, online commerce and the book
industry.
The Company expects that it will experience seasonality in its business,
reflecting a combination of seasonal fluctuations in Internet usage and
traditional retail seasonality patterns. Internet usage and the rate of Internet
growth may be expected to decline during the summer. Further, sales in the
traditional retail book industry are significantly higher in the fourth calendar
quarter of each year than in the preceding three quarters.
Due to the foregoing factors, in one or more future quarters the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the common stock would likely be
materially adversely affected.
The Company has recorded aggregate deferred compensation of approximately
$3.3 million. The amount recorded represents the difference between the grant
price and the deemed fair value of the Company's common stock for shares subject
to options granted in 1997 and 1996. Deferred compensation is amortized over the
vesting period of the options, which is typically five years. Amortization for
the year ended December 31, 1997 was $1.4 million. No amortization expense was
recognized in 1996.
RESULTS OF OPERATIONS
Net Sales
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
-------- -------- ------- -------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................. $147,758 838% $15,746 2,981% $511
</TABLE>
Net sales are composed of the selling price of books and other merchandise
sold by the Company, net of returns, as well as outbound shipping and handling
charges. Growth in net sales reflects a significant increase in units sold due
to the significant growth of the Company's customer base and repeat purchases
from the Company's existing customers. This increase was partially offset by a
decrease in prices during 1997. International sales represented 25%, 33% and 39%
of net sales for the years ended December 31, 1997, 1996 and 1995, respectively.
16
<PAGE> 19
Gross Profit
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
------- -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross profit.............................. $28,813 733% $3,459 3,291% $ 102
Gross margin.............................. 19.5% 22.0% 20.0%
</TABLE>
Gross profit equals sales less cost of sales, which consists of the cost of
merchandise sold to customers and outbound and inbound shipping costs. Gross
profit increased in absolute dollars reflecting the Company's increased sales
volume. The Company's gross margin decreased due to a combination of lower
prices and lower overall shipping margins, partially offset by improvements in
product cost.
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. Accordingly, the Company offers
20% and 30% discounts on more than 400,000 titles, with featured titles
discounted at 40% and certain "special value" editions discounted up to 89%. The
Company may in the future expand or increase the discounts it offers to its
customers and may otherwise alter its pricing structure and policies.
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities.
Marketing and Sales
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
------- -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Marketing and sales....................... $38,964 540% $6,090 2,945% $ 200
Percentage of net sales................... 26.4% 38.7% 39.1%
</TABLE>
Marketing and sales expenses consist primarily of advertising, public
relations and promotional expenditures, as well as payroll and related expenses
for personnel engaged in marketing, selling and fulfillment activities. All
fulfillment costs not included in cost of sales, including the cost of operating
and staffing distribution centers and customer service, are included in
marketing and sales. Marketing and sales expenses increased primarily due to
increases in the Company's advertising and promotional expenditures (including
expenses associated with Internet aggregator promotional relationships),
increased costs associated with fulfilling customer demand, increased personnel
and related expenses required to implement the Company's marketing strategy and
increased credit card merchant fees resulting from higher sales. Such expenses
decreased as a percentage of net sales due to the significant increase in net
sales. The Company intends to continue to pursue its aggressive branding and
marketing campaign and expects its costs of fulfillment to increase based on
anticipated sales growth. Therefore, the Company expects marketing and sales
expenses to increase significantly in absolute dollars.
Product Development
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
------- -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Product development....................... $12,485 440% $2,313 1,253% $ 171
Percentage of net sales................... 8.4% 14.7% 33.5%
</TABLE>
Product development expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants, systems and telecommunications infrastructure and
costs of acquired content. The increases in product development expenses were
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of the Company's Web site and
transaction-processing systems, as well as increased investment in systems and
telecommunications infrastructure. Such expenses decreased significantly as a
percentage of
17
<PAGE> 20
net sales due to the significant increase in net sales. To date, all product
development costs have been expensed as incurred. The Company believes that
continued investment in product development is critical to attaining its
strategic objectives and, as a result, expects product development expenses to
increase significantly in absolute dollars.
General and Administrative
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
------ -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
General and administrative................. $6,573 535% $1,035 2,857% $ 35
Percentage of net sales.................... 4.4% 6.6% 6.8%
</TABLE>
General and administrative expenses consist of payroll and related expenses
for executive, accounting and administrative personnel, recruiting, professional
fees and other general corporate expenses. The increase in general and
administrative expenses was primarily due to increased salaries and related
expenses associated with the hiring of additional personnel, increases in
professional fees and, in 1997, costs attributable to being a public company.
Such expenses decreased as a percentage of net sales due to the significant
increase in net sales. The Company expects general and administrative expenses
to increase in absolute dollars as the Company expands its staff and incurs
additional costs related to the growth of its business.
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1997 % CHANGE 1996 % CHANGE 1995
------ -------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............................ $1,898 840% $ 202 N/M $ 1
Interest expense........................... (279) N/A -- N/A --
</TABLE>
Interest income on cash, cash equivalents and short-term investments
increased due to higher cash, cash equivalents and short-term investment
balances resulting from the Company's financing activities.
Interest expense in 1997 consists of interest and amortization of deferred
charges related to the Loan and interest on asset acquisitions financed through
loans and capital leases.
INCOME TAXES
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. The Company has provided a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company's cash and cash equivalents were $109.8
million, compared to $6.2 million at December 31, 1996.
Net cash provided by operating activities of $3.5 million for the year
ended December 31, 1997 was primarily attributable to increases of $29.8 million
in accounts payable, $5.1 million in other accrued expenses and $2.9 million in
accrued advertising, plus $4.7 million in depreciation and amortization, largely
offset by a net loss of $27.6 million and increases of $8.4 million in
inventories and $3.0 million in prepaid expenses and other assets. For 1996,
cash used in operating activities was $1.7 million and resulted from a net loss
of $5.8 million and increases of $554,000 in inventories, $307,000 in prepaid
expenses and other assets and $146,000 in deposits, largely offset by increases
of $2.8 million in accounts payable, $598,000 in accrued advertising and $1.4
million in other liabilities and accrued expenses, plus $286,000 in depreciation
and amortization. Net cash used in investing activities was $22.5 million for
the year ended December 31, 1997
18
<PAGE> 21
and consisted of purchases of short-term investments of $20.5 million and
purchases of fixed assets of $7.2 million, partially offset by maturities of
short-term investments of $5.2 million. For 1996, net cash used in investing
activities consisted of $1.2 million for the purchase of fixed assets. The large
increases in the components of working capital on a period-to-period basis are a
direct result of the rapid growth of the Company's revenues and related
activities. Such growth has required the Company to purchase additional fixed
assets and increase purchases of products, which resulted in corresponding
increases in inventories and accounts payable.
Cash flows provided by financing activities of $122.5 million for the year
ended December 31, 1997 consisted of net proceeds of approximately $72.7 million
from the Loan obtained in December 1997, $49.1 million from the Company's May
1997 initial public offering, $518,000 from the exercise of common stock options
and $200,000 from the issuance of preferred stock. Cash flows of $8.2 million
attributable to financing activities for the year ended December 31, 1996
consisted primarily of net proceeds from the issuance of preferred stock.
On December 23, 1997, the Company borrowed $75 million pursuant to a
three-year senior secured term Loan. The purpose of the Loan is to finance
working capital, capital additions, operations, acquisitions, joint ventures and
general corporate purposes. The Loan is secured by a first priority lien on
substantially all of the Company's assets. The Company has the option to choose
from the following interest rate options: (i) a variable rate adjusted every
one, two, three or six months at the Company's option and based on the London
Interbank Offered Rate ("LIBOR") plus 3.50% per annum for the first six months
of the Loan and 4.00% thereafter, or (ii) a variable rate of interest based on
the lender's Base Rate plus 1.50% per annum for the first six months of the Loan
and 2.00% thereafter. In connection with the Loan, in January 1998 the Company
entered into certain interest rate risk management agreements. The Company is
required to make mandatory prepayments on the Loan equal to 50% of the proceeds
from any debt and/or equity offerings (other than the proceeds of certain
permitted debt) and 100% of the proceeds from certain sales of assets that are
not reinvested in replacement assets.
The Loan includes covenants restricting certain activities by the Company,
including (i) the incurrence of additional indebtedness, (ii) consolidations,
mergers and sales of assets and (iii) dividends and distributions to
stockholders. In addition, financial covenants require the Company to, among
other things, maintain a minimum cash balance, maintain certain levels of
earnings or losses before interest, taxes, depreciation and amortization, limit
its accounts payable aging and limit its capital and acquisition expenditures.
The Loan contains standard events of default, including, among other things, a
change in ownership or control. As a result, the Loan may reduce the Company's
operational flexibility and may limit its ability to pursue market
opportunities. The Company met all Loan covenants at December 31, 1997.
In connection with the Loan, the Company issued warrants to purchase a
total of 750,000 shares of the Company's common stock. All or a portion of the
warrants will be canceled if the Company repays the Loan in full prior to
certain specified dates. If the Company does not repay the Loan prior to such
dates, and if any of the warrants are exercised, such exercise may dilute the
economic interests of the Company's stockholders. Warrants become exercisable
when they can no longer be canceled and remain exercisable for five years after
such date. The exercise price for the warrants is $52.11 per share.
The Company expects to use the proceeds of the Loan to support its strategy
of investing heavily in marketing and promotion, product development and
technology and operating infrastructure development and may commit to
significant fixed expenditures. The Company's ability to generate planned future
revenues, and therefore its ability to comply with the Loan covenants, may be
affected by events beyond its control. If the Company were unable to satisfy the
Loan covenants, the lending institutions would be entitled to exercise their
remedies, including the right to declare all principal and interest immediately
due and payable. If the Company were unable to make such payment, or were unable
to repay the amount owing under the Loan at the end of its term, the lending
institutions could foreclose on the Company's assets, substantially all of which
are pledged as security for the Loan.
19
<PAGE> 22
In November 1997, the Company purchased fixed assets through a financing
agreement totaling approximately $3.0 million and having an imputed interest
rate of 7.7% and a term of three years. The debt is to be repaid in four equal
payments.
As of December 31, 1997 the Company's principal sources of liquidity
consisted of $109.8 million of cash and cash equivalents and $15.3 million of
short-term investments. As of that date, the Company's principal commitments
consisted of obligations outstanding under the Loan, obligations in connection
with the acquisition of fixed assets, operating leases and commitments for
advertising and promotional arrangements. Although the Company has no material
commitments for capital expenditures, it anticipates a substantial increase in
its capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. In November 1997 the Company
opened a 200,000-square-foot distribution center in Delaware and expanded its
Seattle distribution center to 85,000 square feet. The Company may establish one
or more additional distribution centers within the next 12 months, which would
require it to commit to lease obligations, stock inventories, purchase fixed
assets and install leasehold improvements. In addition, the Company has
announced plans to continue to increase its merchandise inventory in order to
provide better availability to customers and achieve purchasing efficiencies.
The Company has developed a plan to modify its information technology to
recognize the Year 2000 and has, to the extent necessary, begun converting its
critical data processing systems. Since the Company's systems and software are
relatively new, management does not expect Year 2000 issues related to its own
internal systems to be significant. The Company has initiated formal
communications with all of its significant suppliers and service providers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. There can
be no guarantee that the systems of other companies, on which the Company
relies, will be converted timely and will not have an adverse effect on the
Company's systems. The Company currently expects the project to be complete in
1999.
The Company purchases a substantial majority of its products from two major
vendors, Ingram and B&T. Ingram is the Company's largest supplier and accounted
for 58% and 59% of the Company's inventory purchases in 1997 and 1996,
respectively. The Company has no long-term contracts or arrangements with any of
its vendors that guarantee the availability of merchandise, the continuation of
particular payment terms or the extension of credit limits. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company on current terms or that the Company will be able to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely and efficient manner and on acceptable commercial terms. If the
Company were unable to develop and maintain relationships with vendors that
would allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, such inability could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
The Company believes that current cash and cash equivalent balances and
short-term investments will be sufficient to meet its anticipated cash needs for
at least 12 months. However, any projections of future cash needs and cash flows
are subject to substantial uncertainty. If cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain a line of credit.
The sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to the
Company, if at all. In addition, the Company will, from time to time, consider
the acquisition of or investment in complementary businesses, products and
technologies, which might increase the Company's liquidity requirements or cause
the Company to issue additional equity or debt securities.
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 128, Earnings per Share. SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Prior to SFAS No. 128, the SEC
required that, even where antidilutive, common and common equivalent shares
issued during the 12-month period prior to the filing of an initial public
offering be included in the calculation of earnings per
20
<PAGE> 23
share as if they were outstanding for all periods presented (using the treasury
stock method and the initial public offering price). Because of new requirements
issued in 1998 by the SEC for companies that recently completed an initial
public offering and interpretation by FASB of the initial application of SFAS
No. 128, the number of shares used in the calculation of basic net loss per
share has changed to exclude common equivalent shares, even when antidilutive,
and exercised but unvested shares subject to repurchase by the Company.
Previously reported periods affected by these changes in requirements include
net loss per share calculations for the years ended December 31, 1997, 1996 and
1995.
The Company's total net loss for these periods has not changed. However,
share count for the years ended December 31, 1997, 1996 and 1995 has been
revised from 23,602,000, 22,655,000 and 18,933,000 to 21,651,000, 18,544,000 and
14,394,000, respectively. As a result, net loss per share for the years ended
December 31, 1997, 1996 and 1995 has been revised from $1.17, $0.25 and $0.02 to
$1.27, $0.31 and $0.02, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 22
Balance Sheets.............................................. 23
Statements of Operations.................................... 24
Statements of Stockholders' Equity.......................... 25
Statements of Cash Flows.................................... 26
Notes to Financial Statements............................... 27
</TABLE>
21
<PAGE> 24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Amazon.com, Inc.
We have audited the accompanying balance sheets of Amazon.com, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 financial position of Amazon.com, Inc. at December
31, 1997 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
January 19, 1998
22
<PAGE> 25
AMAZON.COM, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $109,810 $ 6,248
Short-term investments.................................... 15,256 --
Inventories............................................... 8,971 571
Prepaid expenses and other................................ 3,298 321
-------- -------
Total current assets.............................. 137,335 7,140
Fixed assets, net........................................... 9,265 985
Deposits.................................................... 166 146
Deferred charges............................................ 2,240 --
-------- -------
Total assets...................................... $149,006 $ 8,271
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 32,697 $ 2,852
Accrued advertising....................................... 3,454 598
Accrued product development............................... -- 500
Other liabilities and accrued expenses.................... 6,167 920
Current portion of long-term debt......................... 1,500 --
-------- -------
Total current liabilities......................... 43,818 4,870
Long-term portion of debt................................... 76,521 --
Long-term portion of capital lease obligation............... 181 --
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- none and 569,396
shares in 1997 and 1996, respectively................. -- 6
Common stock, $0.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares -- 23,937,169 and
15,900,229 shares in 1997 and 1996, respectively...... 239 159
Additional paid-in capital................................ 63,792 9,873
Deferred compensation..................................... (1,930) (612)
Accumulated deficit....................................... (33,615) (6,025)
-------- -------
Total stockholders' equity........................ 28,486 3,401
-------- -------
Total liabilities and stockholders' equity...... $149,006 $ 8,271
======== =======
</TABLE>
See accompanying notes.
23
<PAGE> 26
AMAZON.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $147,758 $15,746 $ 511
Cost of sales............................................... 118,945 12,287 409
-------- ------- -------
Gross profit................................................ 28,813 3,459 102
Operating expenses:
Marketing and sales....................................... 38,964 6,090 200
Product development....................................... 12,485 2,313 171
General and administrative................................ 6,573 1,035 35
-------- ------- -------
Total operating expenses.......................... 58,022 9,438 406
Loss from operations........................................ (29,209) (5,979) (304)
Interest income............................................. 1,898 202 1
Interest expense............................................ (279) -- --
-------- ------- -------
Net loss.................................................... $(27,590) $(5,777) $ (303)
======== ======= =======
Pro forma basic and diluted loss per share.................. $ (1.27) $ (0.31) $ (0.02)
======== ======= =======
Shares used in computation of pro forma basic and diluted
loss
per share................................................. 21,651 18,544 14,394
======== ======= =======
</TABLE>
See accompanying notes.
24
<PAGE> 27
AMAZON.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADVANCES ADDITIONAL
----------------- ------------------- RECEIVED FOR PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMMON STOCK CAPITAL COMPENSATION DEFICIT
-------- ------ ---------- ------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994........................ -- $ -- 10,200,000 $ 10 $ 50 $ -- $ -- $ (52)
Sale of common stock........ -- -- 4,235,244 1,172 (50) -- -- --
Reclassification of
accumulated deficit due to
termination of S
Corporation status........ -- -- -- (107) -- -- -- 107
Advances received for common
stock..................... -- -- -- -- 150 -- -- --
Exercise of common stock
options................... -- -- 120,000 -- -- -- -- --
Net loss for the year ended
December 31, 1995......... -- -- -- -- -- -- -- (303)
-------- ---- ---------- ------ ----- ------- ------- --------
Balance at December 31,
1995........................ -- -- 14,555,244 1,075 150 -- -- (248)
Reincorporation in
Delaware.................. -- -- -- (929) -- 929 -- --
Sale of preferred stock, net
of $30 issuance costs..... 569,396 6 -- -- -- 7,964 -- --
Sale of common stock........ -- -- 840,528 8 (150) 178 -- --
Exercise of common stock
options................... -- -- 504,457 5 -- 190 -- --
Unearned compensation
related to stock
options................... -- -- -- -- -- 612 (612) --
Net loss for the year ended
December 31, 1996......... -- -- -- -- -- -- -- (5,777)
-------- ---- ---------- ------ ----- ------- ------- --------
Balance at December 31,
1996........................ 569,396 6 15,900,229 159 -- 9,873 (612) (6,025)
Sale of preferred stock..... 5,000 -- -- -- -- 200 -- --
Exercise of common stock
options................... -- -- 1,365,564 14 -- 504 -- --
Public stock offering, net
of $1,117 issuance
costs..................... -- -- 3,000,000 30 -- 49,073 -- --
Conversion of preferred
stock into common stock... (574,396) (6) 3,446,376 34 -- (28) -- --
Issuance of common stock for
fixed assets and accrued
product development....... -- -- 225,000 2 -- 1,498 -- --
Unearned compensation
related to stock
options................... -- -- -- -- -- 2,741 (2,741) --
Amortization of unearned
compensation related to
stock options............. -- -- -- -- -- (69) 1,423 --
Net loss for the year ended
December 31, 1997......... -- -- -- -- -- -- -- (27,590)
-------- ---- ---------- ------ ----- ------- ------- --------
Balance at December 31,
1997........................ -- $ -- 23,937,169 $ 239 $ -- $63,792 $(1,930) $(33,615)
======== ==== ========== ====== ===== ======= ======= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31,
1994........................ $ 8
Sale of common stock........ 1,122
Reclassification of
accumulated deficit due to
termination of S
Corporation status........ --
Advances received for common
stock..................... 150
Exercise of common stock
options................... --
Net loss for the year ended
December 31, 1995......... (303)
--------
Balance at December 31,
1995........................ 977
Reincorporation in
Delaware.................. --
Sale of preferred stock, net
of $30 issuance costs..... 7,970
Sale of common stock........ 36
Exercise of common stock
options................... 195
Unearned compensation
related to stock
options................... --
Net loss for the year ended
December 31, 1996......... (5,777)
--------
Balance at December 31,
1996........................ 3,401
Sale of preferred stock..... 200
Exercise of common stock
options................... 518
Public stock offering, net
of $1,117 issuance
costs..................... 49,103
Conversion of preferred
stock into common stock... --
Issuance of common stock for
fixed assets and accrued
product development....... 1,500
Unearned compensation
related to stock
options................... --
Amortization of unearned
compensation related to
stock options............. 1,354
Net loss for the year ended
December 31, 1997......... (27,590)
--------
Balance at December 31,
1997........................ $ 28,486
========
</TABLE>
See accompanying notes.
25
<PAGE> 28
AMAZON.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(27,590) $(5,777) $(303)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 3,388 286 19
Amortization of unearned compensation related to stock
options................................................ 1,354 -- --
Changes in operating assets and liabilities:
Inventories.......................................... (8,400) (554) (17)
Prepaid expenses and other........................... (2,977) (307) (14)
Deposits............................................. (20) (146) --
Accounts payable..................................... 29,845 2,753 99
Accrued advertising.................................. 2,856 598 --
Other liabilities and accrued expenses............... 5,066 1,412 (16)
-------- ------- -----
Net cash provided by (used in) operating
activities...................................... 3,522 (1,735) (232)
INVESTING ACTIVITIES
Maturities of short-term investments........................ 5,198 -- --
Purchases of short-term investments......................... (20,454) -- --
Purchases of fixed assets................................... (7,221) (1,214) (52)
-------- ------- -----
Net cash used in investing activities............. (22,477) (1,214) (52)
FINANCING ACTIVITIES
Proceeds from initial public offering....................... 49,103 -- --
Proceeds from exercise of stock options and sale of common
stock..................................................... 518 231 1,272
Proceeds from sale of preferred stock....................... 200 7,970 --
Proceeds from (repayment of) notes payable and long-term
debt...................................................... 75,000 -- (44)
Financing costs............................................. (2,304) -- --
-------- ------- -----
Net cash provided by financing activities......... 122,517 8,201 1,228
-------- ------- -----
Net increase in cash........................................ 103,562 5,252 944
Cash and cash equivalents at beginning of period............ 6,248 996 52
-------- ------- -----
Cash and cash equivalents at end of period.................. $109,810 $ 6,248 $ 996
======== ======= =====
SUPPLEMENTAL CASH FLOW INFORMATION
Common stock issued for fixed assets and accrued product
development............................................... $ 1,500 $ -- $ --
Fixed assets acquired under capital lease................... $ 362 $ -- $ --
Fixed assets acquired under financing agreement............. $ 3,021 $ -- $ --
Interest paid............................................... $ 30 $ -- $ --
</TABLE>
See accompanying notes.
26
<PAGE> 29
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
Description of Business
Amazon.com, Inc. ("Amazon.com" or the "Company") was incorporated on July
5, 1994. The Company is an online retailer of books and other information-based
products on the Company's Web site and offers more than 2.5 million titles.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company invests certain of its excess cash in debt instruments of the
U.S. government and its agencies, foreign governments and high-quality corporate
issuers. The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates market.
Short-term Investments
At December 31, 1997, short-term investments consist primarily of
high-quality corporate notes, and were classified as held-to-maturity and
carried at cost, which approximates market. The average maturity of short-term
investments at December 31, 1997 was 139 days with a weighted-average yield of
5.7%. Unrealized holding gains and losses at December 31, 1997 were not
significant. At December 31, 1996, the Company did not hold any short-term
investments.
Deferred Charges
On December 23, 1997, the Company borrowed $75 million pursuant to a
three-year senior secured term credit agreement (the "Loan"). At December 31,
1997, deferred charges consisted of fees associated with the Loan. The fees will
be amortized over the life of the Loan using the straight-line method. During
1997 the Company recognized $64,000 in deferred charge amortization.
Inventories
Inventories are valued at the lower of average cost or market.
The Company purchases a substantial majority of its products from two major
vendors, Ingram Book Group ("Ingram") and Baker & Taylor, Inc. ("B&T"). Ingram
is the Company's largest supplier and accounted for 58% and 59% of the Company's
inventory purchases in 1997 and 1996, respectively. The Company has no long-term
contracts or arrangements with any of its vendors that guarantee the
availability of merchandise, the continuation of particular payment terms or the
extension of credit limits. There can be no assurance that the Company's current
vendors will continue to sell merchandise to the Company on current terms or
that the Company will be able to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If the Company were unable to develop
and maintain relationships with vendors that would allow it to obtain sufficient
quantities of merchandise on acceptable commercial terms, such inability could
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations.
27
<PAGE> 30
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation of fixed assets is provided using primarily the straight-line
method over the estimated useful lives of two to five years.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. The Company has
provided a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, because of uncertainty regarding
its realizability.
Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping and handling
charges are included in net sales. Revenue from gift certificates is recognized
upon product shipment following redemption. The Company provides an allowance
for sales returns, which have been insignificant, based on historical
experience. International sales were $36.2 million, $5.1 million and $198,000
for the years ended December 31, 1997, 1996 and 1995, representing 25%, 33% and
39% of sales, respectively. No foreign country or geographical area accounted
for more than 10% of revenue in any of the periods presented.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1996 and 1995, the Company incurred advertising expense of
$21.2 million, $3.4 million and $30,000, respectively.
Product Development
Product development expenses consist principally of payroll and related
expenses for development, editorial, systems and telecommunications operations
personnel and consultants, systems and telecommunications infrastructure and
costs of acquired content. To date, all product development costs have been
expensed as incurred.
Stock Compensation
The Company has elected to apply the disclosure-only provisions of
Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Compensation cost for stock options is measured as the
excess, if any, of the fair value of the Company's common stock at the date of
grant over the stock option exercise price.
Concentrations of Credit Risk
The Company is subject to concentrations of credit risk from its holdings
of cash, cash equivalents and short-term investments. The Company's credit risk
is managed by investing its cash in high-quality money market instruments and
securities of the U.S. government and its agencies, foreign governments and
high-quality corporate issuers. In addition, the Company's accounts receivable
are not significant and are due from domestic banks. The Company believes it had
no unusual concentrations of credit risk at December 31, 1997.
28
<PAGE> 31
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, Earnings per Share. SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Basic earnings per share is computed using the weighted-
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted-average number of common and common
stock equivalent shares outstanding during the period. Common equivalent shares
are excluded from the computation if their effect is antidilutive. Net loss per
share amounts for all periods have been restated to conform to SFAS No. 128
requirements.
Pro forma loss per share is based on the weighted average number of common
and common equivalent shares outstanding during each period. To calculate pro
forma loss per share, all outstanding shares of convertible preferred stock are
assumed to have been converted to common stock for all periods presented.
Prior to SFAS No. 128, the SEC required that, even where antidilutive,
common and common equivalent shares issued during the 12-month period prior to
the filing of an initial public offering be included in the calculation of
earnings per share as if they were outstanding for all periods presented (using
the treasury stock method and the initial public offering price). Because of new
requirements issued in 1998 by the SEC for companies that recently completed an
initial public offering and interpretation by FASB of the initial application of
SFAS No. 128, the number of shares used in the calculation of basic net loss per
share has changed to exclude common equivalent shares, even when antidilutive,
and exercised but unvested shares subject to repurchase by the Company.
Previously reported periods affected by these changes in requirements include
net loss per share calculations for the years ended December 31, 1997, 1996 and
1995.
The Company's total net loss for these periods has not changed. However,
share count for the years ended December 31, 1997, 1996 and 1995 has been
revised from 23,602,000, 22,655,000 and 18,933,000 to 21,651,000, 18,544,000 and
14,394,000, respectively. As a result, net loss per share for the years ended
December 31, 1997, 1996 and 1995 has been revised from $1.17, $0.25 and $0.02 to
$1.27, $0.31 and $0.02, respectively.
New Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting comprehensive income, and SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for reporting information about operating segments. The
Company is required to adopt these statements in 1998. The Company does not
expect the impact of these statements to be material.
Reclassifications
Certain prior-year balances have been reclassified to conform to the
current-year presentation.
29
<PAGE> 32
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- FIXED ASSETS
Fixed assets, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Computers and equipment..................................... $ 7,118 $1,031
Purchased software.......................................... 4,505 134
Leasehold improvements...................................... 914 130
Leased assets............................................... 362 --
------- ------
12,899 1,295
Less accumulated depreciation and amortization.............. 3,634 310
------- ------
Fixed assets, net................................. $ 9,265 $ 985
======= ======
</TABLE>
NOTE 3 -- DEBT
Financing Arrangements
On December 23, 1997, the Company borrowed $75 million pursuant to a
three-year senior secured term Loan. The purpose of the Loan is to finance
working capital, capital additions, operations, acquisitions, joint ventures and
general corporate purposes. The Loan is secured by a first priority lien on
substantially all of the Company's assets. The Company has the option to choose
from the following interest rate options: (i) a variable rate adjusted every
one, two, three or six months at the Company's option and based on the London
Interbank Offered Rate ("LIBOR") plus 3.50% per annum for the first six months
of the Loan and 4.00% thereafter, or (ii) a variable rate of interest based on
the lender's Base Rate plus 1.50% per annum for the first six months of the Loan
and 2.00% thereafter. In connection with the Loan, in January 1998 the Company
entered into certain interest rate risk management agreements. The Company is
required to make mandatory prepayments on the Loan equal to 50% of the proceeds
from any debt and/or equity offerings (other than the proceeds of certain
permitted debt) and 100% of the proceeds from certain sales of assets that are
not reinvested in replacement assets.
The Loan includes covenants restricting certain activities by the Company,
including (i) the incurrence of additional indebtedness, (ii) consolidations,
mergers and sales of assets and (iii) dividends and distributions to
stockholders. In addition, financial covenants require the Company to, among
other things, maintain a minimum cash balance, maintain certain levels of
earnings or losses before interest, taxes, depreciation and amortization, limit
its accounts payable aging and limit its capital and acquisition expenditures.
The Loan contains standard events of default, including, among other things, a
change in ownership or control. As a result, the Loan may reduce the Company's
operational flexibility and may limit its ability to pursue market
opportunities. The Company met all Loan covenants at December 31, 1997.
In connection with the Loan, the Company issued warrants to purchase a
total of 750,000 shares of the Company's common stock. All or a portion of the
warrants will be canceled if the Company repays the Loan in full according to
the following schedule: all warrants if repayment occurs within 12 months;
warrants to purchase 675,000 shares if repayment occurs within 15 months;
warrants to purchase 562,500 shares if repayment occurs within 18 months;
warrants to purchase 450,000 shares if repayment occurs within 24 months;
warrants to purchase 225,000 shares if repayment occurs within 30 months; and no
warrants if repayment occurs after 30 months. Warrants become exercisable when
they can no longer be canceled and remain exercisable for five years after such
date. The exercise price for the warrants is $52.11 per share.
30
<PAGE> 33
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Financing Agreement for Purchase of Fixed Assets
In November 1997, the Company purchased fixed assets through a financing
agreement with a vendor having an imputed interest rate of 7.7% and a term of
three years. The debt is to be repaid in four equal payments.
Future minimum debt payments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
(IN THOUSANDS)
<S> <C>
1998............................................. $ 1,500
1999............................................. 761
2000............................................. 75,760
-------
Total debt......................................... 78,021
Less current portion............................... 1,500
-------
Long-term debt..................................... $76,521
=======
</TABLE>
NOTE 4 -- COMMITMENTS
The Company currently leases office and distribution center facilities and
fixed assets under non-cancelable operating and capital leases. Rental expense
under operating lease agreements for 1997, 1996 and 1995 was $2 million,
$257,000 and $12,000, respectively. The Company has also entered into certain
advertising agreements.
Future minimum commitments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASES AND
YEAR ENDING DECEMBER 31, LEASE ADVERTISING
------------------------ ------- -----------
(IN THOUSANDS)
<S> <C> <C>
1998..................................................... $145 $13,908
1999..................................................... 145 15,507
2000..................................................... 60 13,171
2001..................................................... -- 1,406
2002..................................................... -- 1,176
Thereafter............................................... -- 23
---- -------
Total minimum lease payments..................... $350 $45,191
=======
Less imputed interest...................................... 55
----
Present value of net minimum lease payments................ 295
Less current portion............................. 114
----
Long-term capital lease obligation......................... $181
====
</TABLE>
NOTE 5 -- STOCKHOLDERS' EQUITY
Reincorporation and Authorized Capital
On May 28, 1996, the Company reincorporated in the state of Delaware with
authorized capital of 5,000,000 shares of $0.01 par value preferred stock and
25,000,000 shares of $0.01 par value common stock. The accompanying financial
statements have been restated to reflect the reincorporation. On April 18, 1997,
the Company increased its authorized common stock to 100,000,000 shares and
increased its authorized preferred stock to 10,000,000 shares.
31
<PAGE> 34
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
In June 1996, the Company issued 569,396 shares of Series A convertible
preferred stock at a price of $14.05 per share. In January and February 1997,
the Company sold an additional 5,000 shares of Series A preferred stock at $40
per share. While outstanding, the preferred stock was convertible into common
stock at the option of the holder, at any time, at a rate of six shares of
common stock for one share of preferred stock. As of the closing of the initial
public offering, all of the preferred stock outstanding was converted into an
aggregate of 3,446,376 shares of common stock.
Common Stock
On November 23, 1996, the Company effected a four-for-one common stock
split. On April 18, 1997, the Company effected a three-for-two common stock
split. The accompanying financial statements have been restated to reflect these
stock splits.
Initial Public Offering
On May 15, 1997, the Company completed an initial public offering of
3,000,000 shares of its common stock. Net proceeds to the Company aggregated
$49.1 million.
Stock Options
The Company's stock option plans consist of the 1997 Stock Option Plan and
the 1994 Stock Option Plan (collectively, the "Plans"). Shares reserved under
the Plans consist of 6,000,000 shares in the 1997 plan and 4,800,000 shares in
the 1994 plan. Any shares of common stock available for issuance under the 1994
Stock Option Plan that are not issued under that plan may be added to the
aggregate number of shares available for issuance under the 1997 Stock Option
Plan.
Generally, options are granted by the Company's Board of Directors at an
exercise price of not less than the fair market value of the Company's common
stock at the date of grant. Each outstanding option granted prior to December
20, 1996 has a term of five years from the date of vesting. Each outstanding
option granted on or subsequent to December 20, 1996 has a term of ten years
from the date of grant. Subject to IRS limitations, options granted under the
Plans generally become exercisable immediately. Options generally vest at the
rate of 20% after year one, 20% after year two and 5% at the end of each quarter
for years three through five. Shares issued upon exercise of options that are
unvested are subject to repurchase by the Company upon termination of employment
or services. At December 31, 1997, 809,921 shares of common stock were subject
to repurchase.
During 1995, the Company granted a total of 360,000 nonqualified stock
options outside of the Plans under separate agreements with three individuals.
Under the terms of these agreements, the option prices range from $0.333 to
$0.667 and vest at the rate of 40% on the date of grant, 30% after two years and
30% after four years. Unexercised options expire five years after the date of
grant. At December 31, 1997, options for 156,000 shares of common stock were
exercisable and options for 96,000 shares had been exercised.
32
<PAGE> 35
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1994............................ 1,176,816 $ 0.001
Options granted..................................... 742,464 0.344
Options canceled.................................... (30,000) 0.172
Options exercised................................... (120,000) 0.001
----------
Balance December 31, 1995............................. 1,769,280 0.142
Options granted:
At fair market value............................. 1,038,600 0.333
At less than fair market value................... 1,554,150 0.796
Options canceled.................................... (528,722) 0.278
Options exercised................................... (504,457) 0.387
----------
Balance December 31, 1996............................. 3,328,851 0.448
Options granted:
At fair market value............................. 1,592,425 23.128
At less than fair market value................... 1,378,350 2.840
Options canceled.................................... (424,230) 3.195
Options exercised................................... (1,365,564) 0.380
----------
Balance December 31, 1997............................. 4,509,832 8.949
==========
</TABLE>
At December 31, 1997, 4,660,145 shares of common stock were available for
future grant under the Plans.
The following table summarizes information about options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.001 - $ 0.332 169,964 6.3 years $ 0.172 169,964 $ 0.172
0.333 - 1.000 1,528,035 6.5 years 0.599 1,379,433 0.596
1.001 - 2.667 970,608 9.1 years 2.231 573,108 2.173
2.668 - 4.667 320,200 9.2 years 4.416 283,574 4.444
4.668 - 12.000 789,475 9.3 years 11.861 511,909 11.848
12.001 - 25.313 283,100 9.6 years 21.978 234,363 21.983
25.314 - 55.250 373,200 9.8 years 42.549 236,091 41.520
55.251 - 62.563 75,250 9.9 years 58.078 36,773 58.006
--------- ---------
$ 0.001 - $62.563 4,509,832 8.2 years $ 8.949 3,425,215 $ 7.739
========= =========
</TABLE>
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1997, 1996 and 1995,
33
<PAGE> 36
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the pro forma amounts of the Company's net loss and net loss per share for the
years ended December 31, 1997, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported..................... $(27,590) $(5,777) $ (303)
Net loss -- pro forma....................... (32,543) (5,808) (304)
Pro forma basic and diluted loss per common
share -- as reported...................... $ (1.27) $ (0.31) $(0.02)
Pro forma basic and diluted loss per common
share -- pro forma........................ (1.50) (0.31) (0.02)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model. For the year ended December 31, 1997, the weighted-average
value was estimated using an expected life of three years, no dividends,
risk-free interest rates ranging from 5.70% to 6.93% and a volatility of .50.
For 1996 and 1995 the value was estimated using risk-free interest rates of
5.16% to 7.60%, an expected option life of three years and no expected
dividends. As the Company was privately held in 1996 and 1995, expected
volatility was not applicable. The weighted-average fair value of options
granted during the years 1997, 1996 and 1995 was $12.69, $0.08 and $0.06,
respectively, for options granted at fair market value. The weighted-average
fair value of options granted at less than fair market value during 1997 and
1996 was $3.31 and $0.53, respectively.
Deferred Compensation
The Company recorded aggregate deferred compensation of $2.7 million and
$612,000 in 1997 and 1996, respectively. The amounts recorded represent the
difference between the grant price and the deemed fair value of the Company's
common stock for shares subject to options granted in 1997 and 1996. The
amortization of deferred compensation will be charged to operations over the
vesting period of the options, which is typically five years. Total amortization
recognized in 1997 was $1.4 million. No amortization was recognized in 1996.
Common Stock Reserved
At December 31, 1997, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Stock options............................................... 9,169,977
Common stock warrants....................................... 750,000
---------
Total............................................. 9,919,977
=========
</TABLE>
NOTE 6 -- INCOME TAXES
The Company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception. At
December 31, 1997, the Company had net operating loss carryforwards of
approximately $29.9 million. Utilization of net operating loss carryforwards may
be subject to certain limitations under Section 382 of the Internal Revenue
Code. The carryforwards begin to expire in 2011.
34
<PAGE> 37
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 8,201 $ 1,855
Reserves.............................................. 1,395 --
Compensation expense.................................. 460 --
Other................................................. 306 --
-------- -------
Total deferred tax assets..................... 10,362 1,855
Valuation allowance for deferred tax assets............. (10,362) (1,855)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
</TABLE>
NOTE 7 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.
NOTE 8 -- QUARTERLY RESULTS (UNAUDITED)
The following tables contain selected unaudited Statement of Operations and
stock price data for each quarter of 1997 and 1996. The Company believes that
the following information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods presented. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
1997
----------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................... $66,011 $37,887 $27,855 $16,005
Gross profit................................ 12,892 7,178 5,222 3,521
Net loss.................................... (9,337) (8,510) (6,705) (3,038)
Pro forma basic and diluted loss per
share..................................... (0.41) (0.37) (0.31) (0.16)
Shares used in computation of pro forma
basic and diluted loss per share.......... 23,021 22,863 21,317 19,402
Stock sales prices per share:
High...................................... $ 65.50 $ 57.75 $ 30.00 N/A
Low....................................... $ 42.25 $ 18.13 $ 15.75 N/A
</TABLE>
35
<PAGE> 38
AMAZON.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................................... $ 8,468 $ 4,173 $ 2,230 $ 875
Gross profit........................................ 1,891 911 477 180
Net loss............................................ (2,299) (2,380) (767) (331)
Pro forma basic and diluted loss per share.......... (0.12) (0.12) (0.04) (0.02)
Shares used in computation of pro forma basic and
diluted loss per share............................ 19,085 19,041 18,339 17,712
Stock sales prices per share:
High.............................................. N/A N/A N/A N/A
Low............................................... N/A N/A N/A N/A
</TABLE>
Because of new requirements issued in 1998 by the SEC for companies that
recently completed an initial public offering and interpretation by FASB of the
initial application of SFAS No. 128, the number of shares used in the
calculation of basic net loss per share has changed to exclude common equivalent
shares, even when antidilutive, and exercised but unvested shares subject to
repurchase by the Company. Previously reported periods affected by these changes
in requirements include net loss per share calculations for the years ended
December 31, 1997, 1996 and 1995.
The Company's total net loss for these periods has not changed. However,
share count for the years ended December 31, 1997 and 1996 has been revised from
23,602,000 and 22,655,000 to 21,651,000 and 18,544,000, respectively. As a
result, net loss per share for the years ended December 31, 1997 and 1996 has
been revised from $1.17 and $0.25 to $1.27 and $0.31, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Registrant's executive officers called for by
Part III, Item 10, is set forth in Item 1 of Part I herein under the caption
"Executive Officers of the Registrant." Information called for by Part III, Item
10, regarding the Registrant's directors is included in the Company's Proxy
Statement relating to the Company's annual meeting of stockholders to be held on
May 28, 1998, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Election of Directors." Such Proxy
Statement will be filed within 120 days of December 31, 1997, the Company's year
end.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders to be
held on May 28, 1998, and is incorporated herein by reference. The information
appears in the Proxy Statement under the caption "Executive Compensation." Such
Proxy Statement will be filed within 120 days of December 31, 1997, the
Company's year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders to be
held on May 28, 1998, and is incorporated herein by
36
<PAGE> 39
reference. The information appears in the Proxy Statement under the caption
"Beneficial Ownership of Shares." Such Proxy Statement will be filed within 120
days of December 31, 1997, the Company's year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain of the Company's relationships and related
transactions is set forth under "Certain Transactions" in the Company's Proxy
Statement relating to the Company's annual meeting of stockholders to be held on
May 28, 1998, and is incorporated herein by reference. Such Proxy Statement will
be filed within 120 days of December 31, 1997, the Company's year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) Index to Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations for each of the three years ended December 31,
1997, 1996 and 1995
Statements of Stockholders' Equity for each of the three years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for each of the three years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
(2) Index to Financial Statement Schedules:
II Valuation and Qualifying Accounts
All other schedules not listed above have been omitted because the required
information is included in the financial statements or the notes thereto, or is
not applicable or required.
(3) Index to Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
3.1* -- Restated Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
10.1*+ -- Amended and Restated 1994 Stock Option Plan (version as of
December 20, 1996 for Amended and Restated Grants and
version as of December 20, 1996 for New Grants).
10.2*+ -- 1997 Stock Option Plan.
10.3*+ -- Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers.
10.4*+ -- Amended and Restated Incentive Stock Option Letter
Agreement, effective October 24, 1994, from the Company to
Sheldon J. Kaphan, as amended January 14, 1997.
10.5*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg.
10.6*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg.
10.7*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 20, 1996, from the Company to Joy D. Covey.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.8*+ -- Incentive Stock Option Letter Agreement, effective December
20, 1996, from the Company to Joy D. Covey.
10.9* -- Investor Rights Agreement, dated as of June 21, 1996, by and
among the Company, Kleiner Perkins Caufield & Byers VIII,
KPCB Information Sciences Zaibatsu Fund II and Jeffrey P.
Bezos.
10.10* -- Lease Agreement, dated July 1, 1996, as amended on December
21, 1996, January 9, 1997 and February 27, 1997, by and
between the Company and Trident Investments, Inc.
10.11* -- Lease Agreement, dated September 30, 1996, by and between
the Company and Pacific Northwest Group A.
10.12** -- Amendment No. 1 to Lease Agreement, dated July 16, 1997, by
and between the Company and Pacific Northwest Group A.
10.13** -- Amendment No. 2 to Lease Agreement, dated September 11,
1997, by and between the Company and Pacific Northwest Group
A.
10.14* -- Sublease Agreement, dated February 19, 1997, by and between
C.C. Filson Company and the Company.
10.15* -- Sublease Agreement, dated January 19, 1996, by and between
the Company and Coast Wide Supply Co.
10.16* -- Master Lease Agreement No. 6672336, dated February 12, 1997,
by and between the Company and Digital Financial Services, a
division of General Electric Capital Corporation.
10.17** -- Lease Agreement, dated August 22, 1997, by and between the
Company and McConnell Development, Inc.
10.18++ -- Credit Agreement, dated December 23, 1997, by and between
the Company, Deutsche Bank AG, New York Branch/Cayman
Islands Branch, Banque Paribas, BankBoston, N.A., Van Kampen
American Capital and Silicon Valley Bank, with Deutsche Bank
AG, New York Branch, as Administrative Agent.
10.19 -- Stock Purchase Warrant, Certificate No. 1, issued December
23, 1997 to Deutsche Bank AG, New York Branch.
10.20*+ -- Subrogation Agreement dated as of June 19, 1996, by and
between the Company and Jeffrey P. Bezos.
10.21 -- Lease Agreement, dated March 23, 1998, by and between
Pacific NW Title Building, Inc. and the Company.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Executive Compensation Plan or Agreement
++ Confidential Treatment Requested
* Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-23795).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1997.
(b) FORM 8-K:
On November 10, 1997, the Company filed a Form 8-K in connection with the
Loan.
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<C> <S>
AMAZON.COM, INC.
Date: March 30, 1998 By: /s/ JEFFREY P. BEZOS
--------------------------------------------
Jeffrey P. Bezos, President
and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March 1998.
<TABLE>
<C> <S>
/s/ JEFFREY P. BEZOS President, Chief Executive Officer and
- -------------------------------------------------------- Chairman of the Board (Principal Executive
Jeffrey P. Bezos Officer)
/s/ JOY D. COVEY Chief Financial Officer, Vice President of
- -------------------------------------------------------- Finance and Administration (Principal
Joy D. Covey Financial and Accounting Officer)
/s/ TOM A. ALBERG Director
- --------------------------------------------------------
Tom A. Alberg
/s/ SCOTT D. COOK Director
- --------------------------------------------------------
Scott D. Cook
/s/ L. JOHN DOERR Director
- --------------------------------------------------------
L. John Doerr
/s/ PATRICIA Q. STONESIFER Director
- --------------------------------------------------------
Patricia Q. Stonesifer
</TABLE>
39
<PAGE> 42
AMAZON.COM, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
CHARGED/
(CREDITED) COLLECTION OF
BALANCE AT TO COSTS ACCOUNTS ACCOUNTS BALANCE AT
BEGINNING AND PREVIOUSLY WRITTEN END OF
YEAR ENDED OF PERIOD EXPENSES WRITTEN OFF OFF PERIOD
---------- ---------- ---------- ------------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1997.................... $20 $203 $ -- $(154) $69
=== ==== ==== ===== ===
December 31, 1996.................... -- 30 -- (10) 20
=== ==== ==== ===== ===
December 31, 1995.................... -- -- -- -- --
=== ==== ==== ===== ===
</TABLE>
INVENTORY VALUATION ALLOWANCE
<TABLE>
<CAPTION>
CHARGED/
(CREDITED)
BALANCE AT TO COSTS INVENTORY BALANCE AT
BEGINNING AND DISPOSED END OF
YEAR ENDED OF PERIOD EXPENSES OR WRITTEN OFF PERIOD
---------- ---------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997............................. $ -- $800 $ -- $800
==== ==== ===== ====
December 31, 1996............................. -- -- -- --
==== ==== ===== ====
December 31, 1995............................. -- -- -- --
==== ==== ===== ====
</TABLE>
40
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1* -- Restated Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
10.1*+ -- Amended and Restated 1994 Stock Option Plan (version as of
December 20, 1996 for Amended and Restated Grants and
version as of December 20, 1996 for New Grants).
10.2*+ -- 1997 Stock Option Plan.
10.3*+ -- Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers.
10.4*+ -- Amended and Restated Incentive Stock Option Letter
Agreement, effective October 24, 1994, from the Company to
Sheldon J. Kaphan, as amended January 14, 1997.
10.5*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg.
10.6*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 6, 1995, from the Company to Tom A. Alberg.
10.7*+ -- Non-Qualified Stock Option Letter Agreement, effective
December 20, 1996, from the Company to Joy D. Covey.
10.8*+ -- Incentive Stock Option Letter Agreement, effective December
20, 1996, from the Company to Joy D. Covey.
10.9* -- Investor Rights Agreement, dated as of June 21, 1996, by and
among the Company, Kleiner Perkins Caufield & Byers VIII,
KPCB Information Sciences Zaibatsu Fund II and Jeffrey P.
Bezos.
10.10* -- Lease Agreement, dated July 1, 1996, as amended on December
21, 1996, January 9, 1997 and February 27, 1997, by and
between the Company and Trident Investments, Inc.
10.11* -- Lease Agreement, dated September 30, 1996, by and between
the Company and Pacific Northwest Group A.
10.12** -- Amendment No. 1 to Lease Agreement, dated July 16, 1997, by
and between the Company and Pacific Northwest Group A.
10.13** -- Amendment No. 2 to Lease Agreement, dated September 11,
1997, by and between the Company and Pacific Northwest Group
A.
10.14* -- Sublease Agreement, dated February 19, 1997, by and between
C.C. Filson Company and the Company.
10.15* -- Sublease Agreement, dated January 19, 1996, by and between
the Company and Coast Wide Supply Co.
10.16* -- Master Lease Agreement No. 6672336, dated February 12, 1997,
by and between the Company and Digital Financial Services, a
division of General Electric Capital Corporation.
10.17** -- Lease Agreement, dated August 22, 1997, by and between the
Company and McConnell Development, Inc.
10.18++ -- Credit Agreement, dated December 23, 1997, by and between
the Company, Deutsche Bank AG, New York Branch/Cayman
Islands Branch, Banque Paribas, BankBoston, N.A., Van Kampen
American Capital and Silicon Valley Bank, with Deutsche Bank
AG, New York Branch, as Administrative Agent.
10.19 -- Stock Purchase Warrant, Certificate No. 1, issued December
23, 1997 to Deutsche Bank AG, New York Branch.
10.20*+ -- Subrogation Agreement dated as of June 19, 1996, by and
between the Company and Jeffrey P. Bezos.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.21 -- Lease Agreement, dated March 23, 1998, by and between
Pacific NW Title Building, Inc. and the Company.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
+ Executive Compensation Plan or Agreement
++ Confidential Treatment Requested
* Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-23795).
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the Quarterly Period Ended September 30, 1997.
42
<PAGE> 1
EXHIBIT 10.18
Redacted Version
CREDIT AGREEMENT
AMONG
AMAZON.COM, INC.,
DEUTSCHE BANK AG, NEW YORK BRANCH
AS ADMINISTRATIVE AGENT,
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
DEUTSCHE MORGAN GRENFELL, INC.
DATED AS OF DECEMBER 23, 1997
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE> 2
TABLE OF CONTENTS
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I DEFINITIONS ............................................................. 1
1.1 Certain Defined Terms .............................................. 1
1.2 Other Interpretive Provisions ...................................... 20
1.3 Accounting Principles .............................................. 21
ARTICLE II THE CREDIT ............................................................. 21
2.1 Amounts and Terms of Commitment .................................... 21
2.2 Loan Accounts ...................................................... 22
2.3 Funding of Loans ................................................... 22
2.4 Conversion and Continuation Elections .............................. 22
2.5 Optional Prepayments ............................................... 24
2.6 Mandatory Prepayments of Loans ..................................... 24
2.7 Repayment .......................................................... 25
2.8 Interest ........................................................... 26
2.9 Fees ............................................................... 26
2.10 Computation of Fees and Interest ................................... 27
2.11 Payments by the Borrower ........................................... 27
2.12 Payments by the Lenders to the Agent ............................... 28
2.13 Sharing of Payments, Etc. .......................................... 28
2.14 Security ........................................................... 29
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY ................................ 29
3.1 Taxes .............................................................. 29
3.2 Illegality ......................................................... 30
3.3 Increased Costs and Reduction of Return ............................ 31
3.4 Funding Losses ..................................................... 32
3.5 Inability to Determine Rates ....................................... 33
3.6 Certificates of Lenders ............................................ 33
3.7 Survival ........................................................... 33
ARTICLE IV CONDITIONS PRECEDENT ................................................... 33
4.1 Conditions of Loans ................................................ 33
4.2 Conditions to Continuations/Conversions ............................ 36
ARTICLE V REPRESENTATIONS AND WARRANTIES .......................................... 36
5.1 Corporate Existence and Power ...................................... 36
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
5.2 Corporate Authorization; No Contravention .......................... 37
5.3 Governmental Authorization ......................................... 37
5.4 Binding Effect ..................................................... 37
5.5 Litigation ......................................................... 38
5.6 No Default ......................................................... 38
5.7 ERISA Compliance ................................................... 38
5.8 Use of Proceeds; Margin Regulations ................................ 39
5.9 Title to Properties ................................................ 39
5.10 Taxes .............................................................. 39
5.11 Financial Condition ................................................ 40
5.12 Environmental Matters .............................................. 40
5.13 Collateral Documents ............................................... 41
5.14 Regulated Entities ................................................. 42
5.15 No Burdensome Restrictions ......................................... 42
5.16 Copyrights, Patents, Trademarks and Licenses, Etc. ................. 42
5.17 Subsidiaries ....................................................... 42
5.18 Insurance .......................................................... 42
5.19 Solvency ........................................................... 43
5.20 Full Disclosure .................................................... 43
ARTICLE VI AFFIRMATIVE COVENANTS .................................................. 43
6.1 Financial Statements ............................................... 43
6.2 Certificates; Other Information .................................... 44
6.3 Notices ............................................................ 45
6.4 Preservation of Corporate Existence, Etc. .......................... 46
6.5 Maintenance of Property ............................................ 47
6.6 Insurance .......................................................... 47
6.7 Payment of Obligations ............................................. 48
6.8 Compliance with Laws ............................................... 48
6.9 Compliance with ERISA .............................................. 48
6.10 Inspection of Property and Books and Records ....................... 48
6.11 Environmental Laws ................................................. 49
6.12 Use of Proceeds .................................................... 49
6.13 Swap Contracts ..................................................... 50
6.14 Further Assurances ................................................. 50
ARTICLE VII NEGATIVE COVENANTS .................................................... 52
7.1 Limitation on Liens ................................................ 52
7.2 Disposition of Assets .............................................. 54
7.3 Consolidations and Mergers ......................................... 55
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
7.4 Loans and Investments .............................................. 55
7.5 Limitation on Indebtedness ......................................... 56
7.6 Transactions with Affiliates ....................................... 57
7.7 Use of Proceeds .................................................... 57
7.8 Contingent Obligations ............................................. 58
7.9 Lease Obligations .................................................. 58
7.10 Restricted Payments ................................................ 59
7.11 ERISA .............................................................. 59
7.12 Change in Business ................................................. 60
7.13 Accounting Changes ................................................. 60
7.14 Financial Covenants ................................................ 60
7.15 Subordinated Debt .................................................. 61
7.16 Non-Material Subsidiaries .......................................... 62
ARTICLE VIII EVENTS OF DEFAULT .................................................... 62
8.1 Event of Default ................................................... 62
8.2 Remedies ........................................................... 66
8.3 Rights Not Exclusive ............................................... 66
8.4 Certain Financial Covenant Defaults ................................ 67
8.5 Non-Material Subsidiaries .......................................... 67
8.6 Acquired Subsidiaries .............................................. 67
ARTICLE IX THE AGENT .............................................................. 67
9.1 Appointment and Authorization ...................................... 67
9.2 Delegation of Duties ............................................... 68
9.3 Liability of Agent ................................................. 68
9.4 Reliance by Agent .................................................. 68
9.5 Notice of Default .................................................. 69
9.6 Credit Decision .................................................... 69
9.7 Indemnification of Agent ........................................... 70
9.8 Agent in Individual Capacity ....................................... 71
9.9 Successor Agent .................................................... 71
9.10 Withholding Tax .................................................... 71
9.11 Collateral Matters ................................................. 73
ARTICLE X MISCELLANEOUS ........................................................... 74
10.1 Amendments and Waivers ............................................. 74
10.2 Notices ............................................................ 75
10.3 No Waiver; Cumulative Remedies ..................................... 76
10.4 Costs and Expenses ................................................. 76
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
10.5 Borrower Indemnification ........................................... 77
10.6 Marshalling; Payments Set Aside .................................... 77
10.7 Successors and Assigns ............................................. 78
10.8 Assignments, Participations, Etc. .................................. 78
10.9 Confidentiality .................................................... 80
10.10 Set-off ............................................................ 81
10.11 Automatic Debits of Fees ........................................... 81
10.12 Notification of Addresses, Lending Offices, Etc. ................... 82
10.13 Counterparts ....................................................... 82
10.14 Severability ....................................................... 82
10.15 No Third Parties Benefited ......................................... 82
10.16 Governing Law and Jurisdiction ..................................... 82
10.17 Waiver of Jury Trial ............................................... 83
10.18 Entire Agreement ................................................... 83
</TABLE>
<PAGE> 6
SCHEDULES
Schedule 2.1 Commitments and Pro Rata Shares
Schedule 5.5 Litigation
Schedule 5.7 ERISA
Schedule 5.11 Permitted Liabilities
Schedule 5.12 Environmental Matters
Schedule 5.16 Subsidiaries and Minority Interests
Schedule 5.17 Insurance Matters
Schedule 6.14 Financing Statement Filing Schedule
Schedule 7.1 Permitted Liens
Schedule 7.5 Permitted Indebtedness
Schedule 7.8 Contingent Obligations
Schedule 10.2 LIBOR and Domestic Lending Offices; Addresses for Notices
EXHIBITS
Exhibit A Form of Notice of Conversion/Continuation
Exhibit B Form of Compliance Certificate
Exhibit C Form of Legal Opinion of Borrower's Counsel
Exhibit D Form of Assignment and Acceptance
Exhibit E Form of Promissory Note
Exhibit F Form of Warrant
Exhibit G Form of Consent of Lessors/Warehousemen
<PAGE> 7
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of December 23, 1997, among
Amazon.com, Inc., a Delaware corporation (the "Borrower"), the several financial
institutions from time to time party to this Agreement (collectively, the
"Lenders"; individually, a "Lender"), and Deutsche Bank AG, New York Branch, as
administrative agent for the Lenders.
WHEREAS, the Lenders have agreed to make available to the Borrower a
secured term loan facility upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINED TERMS
The following terms have the following meanings:
"Acquisition" means any transaction or series of related transactions
for the purpose of or resulting, directly or indirectly, in (a) the acquisition
of all or substantially all of the assets of a Person, or of any business or
division of a Person, (b) the formation or acquisition of all or any portion of
the capital stock, partnership interests, membership interests or equity of any
Person, or otherwise, resulting in a Joint Venture or causing any Person to
become a Subsidiary, or (c) a merger or consolidation or any other combination
with another Person (other than a Person that is a Subsidiary) provided that the
Borrower or the Subsidiary is the surviving entity.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, membership interests, by contract,
or otherwise.
"Agent" means Deutsche Bank in its capacity as administrative agent for
the Lenders hereunder, and any successor administrative agent arising under
Section 9.9.
"Agent-Related Persons" means Deutsche Bank and any successor agent
arising under Section 9.9, together with their respective Affiliates (including,
in the
<PAGE> 8
case of Deutsche Bank, the Arranger), and the officers, directors, employees,
agents and attorneys-in-fact of such Persons and Affiliates.
"Agent's Payment Office" means the address for payments set forth on the
signature page hereto in relation to the Agent, or such other address as the
Agent may from time to time specify.
"Agreement" means this Credit Agreement.
"Arranger" means Deutsche Morgan Grenfell, Inc., a Delaware corporation.
"Assignee" has the meaning specified in subsection 10.8(a).
"Attorney Costs" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the reasonable
allocated cost of internal legal services and all disbursements of internal
counsel.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11
U.S.C. Section 101, et seq.).
"Base Rate" means, for any day, the higher of:
(a) 0.50% per annum above the latest Federal Funds Rate; and (b)
the rate of interest in effect for such day as publicly announced from
time to time by Deutsche Bank in New York, New York, as its "prime
lending rate." The "prime lending rate" shall mean the rate announced by
Deutsche Bank from time to time as its prime lending rate for secured
commercial loans within the United States (but is not intended to be the
lowest rate of interest charged by Deutsche Bank in connection with
extensions of credit to debtors.)
Any change in the prime rate announced by Deutsche Bank shall take
effect at the opening of business on the day specified in the public
announcement of such change.
"Base Rate Loan" means a Loan that bears interest based on the Base
Rate.
"Borrowing" means a borrowing hereunder consisting of Loans of the same
Type made to the Borrower on the same day by the Lenders under Article II, and,
other than in the case of Base Rate Loans, having the same Interest Period.
"Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required by law to
close
-2-
<PAGE> 9
and, if the applicable Business Day relates to any LIBOR Rate Loan, means such a
day on which dealings are carried on in the London interbank market.
"Capital Adequacy Regulation" means any guideline, request or directive
of any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Capital Expenditure Component" shall mean, with respect to the fiscal
years described below, the lower of Limit A and Limit B set forth below:
FISCAL YEAR LIMIT A LIMIT B
[ * ]
in each case, where "Sales" means revenues on a GAAP basis for the relevant
period as reported (or to be reported) on annual financial statements filed with
the SEC or in connection with delivery of financial information under Section
6.1 hereof if such financial statements are no longer filed by the Borrower with
the SEC.
"Cash Equivalents" means (i) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (ii) certificates of deposit,
eurodollar time deposits, overnight bank deposits, bankers' acceptances and
repurchase agreements of any Lender or any other commercial bank whose unsecured
long-term debt obligations are rated at least A-1 by Standard & Poor's Ratings
Service Group, a division of the McGraw Hill Companies, Inc., and any successor
thereto ("S&P") or A3 by Moody's Investors Service, Inc. having maturities of
one year or less from the date of acquisition, and (iii) commercial paper rated
at least A-1 by S&P or P-1 by Moody's Investors Service, Inc., or carrying an
equivalent rating by a nationally recognized rating agency, if both of the two
named rating agencies cease publishing ratings of investments.
"CERCLA" has the meaning specified in the definition of "Environmental
Laws."
"Change of Control" means the occurrence of the following: (a) any
single person or single entity or group of persons acting in concert that is not
a significant shareholder of the Borrower as of the date of closing acquires 20%
or more of the
- --------------
[ * ] Confidential Treatment Requested
-3-
<PAGE> 10
issued and outstanding stock of the Borrower and (b) the aggregate percentage of
the issued and outstanding stock of the Borrower owned by Jeffrey Bezos, his
immediate family (which only includes his spouse, his parents, his children, his
siblings and his aunts and uncles) and their heirs which are members of his
immediate family, trusts and other entities established for and controlled by
Jeffrey Bezos and his immediate family and funds controlled by Kleiner Perkins
Caufield & Byers is less than 40% in the aggregate.
"Closing Date" means the date on which all conditions precedent set
forth in Section 4.1 are satisfied or waived by all Lenders (or, in the case of
subsection 4.1(e), waived by the Person entitled to receive such payment).
"Code" means the Internal Revenue Code of 1986, and regulations
promulgated thereunder.
"Collateral" means all property and interests in property and proceeds
thereof now owned or hereafter acquired by the Borrower and its Subsidiaries in
or upon which a Lien now or hereafter exists in favor of the Lenders, or the
Agent on behalf of the Lenders, whether under this Agreement or under any other
documents executed by any such Person and delivered to the Agent or the Lenders.
"Collateral Documents" means, collectively, (i) the Security Agreement,
and all other security agreements, mortgages, deeds of trust, patent and
trademark assignments, lease assignments, guarantees and other similar
agreements between the Borrower or any Subsidiary and the Lenders or the Agents
for the benefit of the Lenders now or hereafter delivered to the Lenders or the
Agent pursuant to or in connection with the transactions contemplated hereby,
and all financing statements (or comparable documents now or hereafter filed in
accordance with the Uniform Commercial Code or comparable law) against the
Borrower or any Subsidiary as debtor in favor of the Lenders or the Agent for
the benefit of the Lenders as secured party, and (ii) any amendments,
supplements, modifications, renewals, replacements, consolidations,
substitutions and extensions of any of the foregoing.
"Commitment" means seventy-five million dollars ($75,000,000).
"Commitment Letter" means that certain letter dated as of November 7,
1997, among the Arranger, the Agent and the Borrower.
"Compliance Certificate" means a certificate substantially in the form
of Exhibit B.
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<PAGE> 11
"Contingent Obligation" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without recourse,
(a) with respect to any Indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the "primary
obligor"), including any obligation of that Person (i) to purchase, repurchase
or otherwise acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; (c) to purchase any
materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such services, shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered, or (d) in respect of any Swap Contract. The amount of any
Contingent Obligation shall, in the case of Guaranty Obligations, be deemed
equal to the stated or determinable amount of the primary obligation in respect
of which such Guaranty Obligation is made or, if not stated or if
indeterminable, the maximum reasonably anticipated liability in respect thereof,
and in the case of other Contingent Obligations, shall be equal to the maximum
reasonably anticipated liability in respect thereof.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or agreement to
which such Person is a party or by which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which, under Section
2.4, the Borrower (a) converts Loans of one Type to another Type, or (b)
continues as Loans of the same Type, but with a new Interest Period, Loans
having Interest Periods expiring on such date.
"Debt Consideration" means, with respect to any Acquisition or
Investment, the aggregate amount, without duplication, of all Indebtedness and
Contingent Obligations which would appear on a balance sheet of the Person
subject to such
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<PAGE> 12
Acquisition or Investment immediately after giving effect to such Acquisition or
Investment to the extent such Indebtedness or Contingent Obligation is a
recourse obligation of the Person making such Investment or consummating such
Acquisition.
"Default" means any event or circumstance which, with the giving of
notice, the lapse of time, or both, would (if not cured or otherwise remedied
during such time) constitute an Event of Default.
"Deutsche Bank" means Deutsche Bank AG, New York Branch, the New York
Branch of Deutsche Bank AG, a German banking corporation.
"Disposition" means (i) the sale, lease, conveyance or other disposition
of property, other than sales or other dispositions expressly permitted under
subsection 7.2(a) or 7.2(b), and (ii) the sale or transfer by the Borrower or
any Subsidiary of the Borrower of any equity securities issued by any Subsidiary
of the Borrower and held by such transferor Person.
"Dollars," "dollars" and "$" each mean lawful money of the United
States.
"EBITDA" means, with respect to the Borrower and its Subsidiaries for
any applicable period, Net Income for such period, plus, to the extent deducted
in determining Net Income for such period, the aggregate amount of (i) Interest
Expense, (ii) federal, state, local, foreign income and business and occupation
taxes and up to $150,000 of Delaware franchise taxes per fiscal year paid by the
Borrower and (iii) depletion, depreciation and amortization of tangible and
intangible assets (including, without limitation, amortization of unearned
compensation in respect of stock options to the extent reported in accordance
with GAAP in the Borrower's consolidated statements of cash flows).
"Eligible Assignee" means (i) a commercial bank organized under the laws
of the United States, or any state thereof, and having a combined capital and
surplus of at least $100,000,000; (ii) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $100,000,000,
provided that such bank is acting through a branch or agency located in the
country in which it is organized or another country which is also a member of
the OECD; (iii) a Person that is primarily engaged in the business of commercial
banking and that is (A) a Subsidiary of a Lender, (B) a Subsidiary of a Person
of which a Lender is a Subsidiary, or (C) a Person of which a Lender is a
Subsidiary; or (iv) a finance company, insurance company, other financial
institution or fund, reasonably acceptable to the Agent, which has a combined
capital and surplus in excess of
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<PAGE> 13
$100,000,000, which is regularly engaged in making, purchasing or investing in
loans of the type proposed to be assigned to such assignee; provided, however,
that no Eligible Assignee shall be an Affiliate or competitor of the Borrower,
or an Affiliate of such competitor.
"Environmental Claims" means all claims, however asserted, by any
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law, or for release or injury
to the environment or threat to public health, personal injury (including
sickness, disease or death), property damage, natural resources damage, or
otherwise alleging liability or responsibility for damages (punitive or
otherwise), cleanup, removal, remedial or response costs, restitution, civil or
criminal penalties, injunctive relief, or other type of relief, resulting from
or based upon the presence, placement, discharge, emission or release (including
intentional and unintentional, negligent and non-negligent, sudden or
non-sudden, accidental or non-accidental, placement, spills, leaks, discharges,
emissions or releases) of any Hazardous Material at, in, or from property used
by the Borrower, whether or not owned by the Borrower.
"Environmental Laws" means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any Governmental Authorities, in each case
relating to environmental, health, safety and land use matters; including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972,
the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery
Act, the Toxic Substances Control Act, and the Emergency Planning and Community
Right-to-Know Act.
"Equity Consideration" shall mean, in connection with an Acquisition or
Investment, the value (determined as of the date of such Acquisition or
Investment) of all common equity of the Borrower used as consideration in making
such Acquisition or Investment.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the meaning of
Section 414(b) or (c) of the Code (and, solely for purposes of provisions herein
relating to Section 412 of the Code, Sections 414(m) and (o) of the Code).
-7-
<PAGE> 14
"ERISA Event" means (a) a Reportable Event with respect to a Pension
Plan; (b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under Title IV of
ERISA, other than PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon the Borrower or any ERISA Affiliate.
"Eurodollar Reserve Percentage" has the meaning specified in the
definition of "LIBOR Rate."
"Event of Default" means any of the events or circumstances specified in
Section 8.1.
"Event of Loss" means, with respect to any property, any of the
following: (a) any loss, destruction or damage of such property; (b) any pending
or threatened institution of any proceedings for the condemnation or seizure of
such property or for the exercise of any right of eminent domain; or (c) any
actual condemnation, seizure or taking, by exercise of the power of eminent
domain or otherwise, of such property, or confiscation of such property or the
requisition of the use of such property.
"Exchange Act" means the Securities and Exchange Act of 1934, and
regulations promulgated thereunder.
"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including any
such successor, "H.15(519)") on the preceding Business Day opposite the caption
"Federal Funds (Effective)"; or, if for any relevant day such rate is not so
published on any such preceding Business Day, the rate for such day will be the
arithmetic mean as determined by the Agent of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on
that day by each of three leading brokers of Federal funds transactions in New
York City selected by the Agent.
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<PAGE> 15
"FRB" means the Board of Governors of the Federal Reserve System, and
any Governmental Authority succeeding to any of its principal functions.
"GAAP" means generally accepted accounting principles set forth from
time to time in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the definition of
"Contingent Obligation."
"Hazardous Materials" means all those substances that are regulated by,
or which may form the basis of liability under, any Environmental Law, including
all substances identified under any Environmental Law as a pollutant,
contaminant, hazardous waste, hazardous constituent, special waste, hazardous
substance, hazardous material, or toxic substance, or petroleum or petroleum
derived substance or waste.
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on terms of not more
than 180 days); (c) all non-contingent reimbursement or payment obligations with
respect to Surety Instruments; (d) all obligations evidenced by notes, bonds,
debentures or similar instruments, including obligations so evidenced incurred
in connection with the acquisition of property, assets or businesses; (e) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
property acquired by the Person (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property); (f) all obligations with respect to
capital leases; (g) all net obligations with respect to Swap Contracts; (h) all
indebtedness referred to in clauses (a) through (g) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any
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<PAGE> 16
Lien upon or in property (including accounts and contracts rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness; and (i) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (a)
through (g) above.
"Indemnified Liabilities" has the meaning specified in Section 10.5.
"Indemnified Person" has the meaning specified in Section 10.5.
"Independent Auditor" has the meaning specified in subsection 6.1(a).
"Insolvency Proceeding" means (a) any case, action or proceeding before
any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution, winding-up
or relief of debtors, or (b) any general assignment for the benefit of
creditors, composition, marshalling of assets for creditors, or other, similar
arrangement in respect of its creditors generally or any substantial portion of
its creditors; undertaken under U.S. Federal, state or foreign law, including
the Bankruptcy Code.
"Interest Expense" means, for any applicable period, the aggregate
consolidated interest expense (both cash and non-cash and determined without
regard to original issue discount) of the Borrower and its Subsidiaries for such
period, as determined in accordance with GAAP, including, to the extent
allocable to interest expense in accordance with GAAP, (i) all other fees paid
or owed with respect to the issuance or maintenance of Contingent Obligations
(including letters of credit of the Borrower and its Subsidiaries), (ii) net
costs or benefits under Swap Contracts of the Borrower and its Subsidiaries and
(iii) the portion of any payments made in respect of obligations in respect of
capitalized leases of the Borrower and its Subsidiaries allocable to interest
expense.
"Interest Margin" means
(i) with respect to Base Rate Loans, 1.50%; and
(ii) with respect to LIBOR Rate Loans, 3.50%;
provided that in each instance the Interest Margin shall increase by 0.50%
following the sixth month anniversary of the disbursement of Loans hereunder.
"Interest Payment Date" means, as to any Loan other than a Base Rate
Loan, the last day of each Interest Period applicable to such Loan and, as to
any Base Rate Loan, the last Business Day of each calendar quarter and each date
such Loan is converted into another Type of Loan; provided, however, that if any
Interest Period
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<PAGE> 17
for a LIBOR Rate Loan exceeds three months, the date that falls three months
after the beginning of such Interest Period and after each Interest Payment Date
thereafter is also an Interest Payment Date.
"Interest Period" means, as to any LIBOR Rate Loan, the period
commencing on the Conversion/Continuation Date on which the Loan is converted
into or continued as a LIBOR Rate Loan, and ending on the date one, two, three
or six months thereafter as selected by the Borrower in its Notice of
Conversion/Continuation;
provided that:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, that Interest Period shall be extended to the following
Business Day unless, in the case of a LIBOR Rate Loan, the result of such
extension would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the preceding Business Day;
(ii) any Interest Period pertaining to a LIBOR Rate Loan that
begins on the last 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 end on the last Business Day of the calendar month at the
end of such Interest Period; and
(iii) no Interest Period shall extend beyond the Maturity Date.
"Investment" means any investment, ownership or similar interest in any
Person, whether by means of share purchase, capital, equity or similar
contribution, including, without limitation, any Acquisition, and "Investment"
shall include any loan or advance (including any Contingent Liability with
respect thereto), time deposit or otherwise (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business and excluding trade receivables owing to the Borrower or its
Subsidiaries in the ordinary course of business and on terms no less favorable
to the Borrower and its Subsidiaries than would be obtained in an arms-length
transaction with Persons which are not Affiliates of the Borrower). The original
amount of any Investment shall be the original principal or capital amount
thereof and shall, if made by the transfer or exchange or property other than
cash, be deemed to have been made in an original principal or capital amount
equal to the fair market value of such property.
"IRS" means the Internal Revenue Service, and any Governmental Authority
succeeding to any of its principal functions under the Code.
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<PAGE> 18
"Joint Venture" means a corporation, partnership, limited liability
company, joint venture or other similar legal arrangement (whether created by
contract or conducted through a separate legal entity) now or hereafter formed
by the Borrower or any of its Subsidiaries with one or more other Persons in
order to conduct a common venture or enterprise with such Person.
"Lender" has the meaning specified in the introductory clause hereto.
"Lending Office" means, as to any Lender, the office or offices of such
Lender specified as its "Lending Office" or "Domestic Lending Office" or "LIBOR
Lending Office," as the case may be, on Schedule 10.2, or such other office or
offices as the Lender may from time to time notify the Borrower and the Agent.
"LIBOR Rate" means, for any Interest Period, with respect to LIBOR Rate
Loans comprising part of the same Borrowing, the rate of interest per annum
(rounded upward to the next 1/16th of 1%) determined by the Agent as follows:
LIBOR Rate = LIBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for any Interest
Period the maximum reserve percentage (expressed as a decimal, rounded upward to
the next 1/100th of 1%) in effect on such day (whether or not applicable to any
Lender) under regulations issued from time to time by the FRB for determining
the maximum reserve requirement (including any emergency, supplemental or other
marginal reserve requirement) with respect to Eurocurrency funding (currently
referred to as "Eurocurrency liabilities"); and
"LIBOR" means the rate of interest per annum determined by the Agent as
the rate of interest at which dollar deposits in the approximate amount of the
amount of the Loan to be made or continued as, or converted into, a LIBOR Rate
Loan and for the relevant Interest Period therefor as quoted on the Telerate
Page 3750 (as defined herein) as of 11:00 a.m. (London time) on the day two (2)
Business Days before the commencement of such Interest Period. If Telerate Page
3750 is not available, such rate of interest shall be that quoted by the
Reference Bank and having a maturity comparable to such Interest Period as would
be offered to major banks in the London interbank market at their request at
approximately 11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
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<PAGE> 19
The LIBOR Rate shall be adjusted automatically as to all LIBOR Rate
Loans then outstanding as of the effective date of any change in the Eurodollar
Reserve Percentage.
"LIBOR Rate Loan" means a Loan that bears interest based on the LIBOR
Rate.
"Lien" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment for security purposes, charge, encumbrance, lien
(statutory or other) of any kind or nature whatsoever in respect of any property
(including those created by, arising under or evidenced by any conditional sale
or other title retention agreement, the interest of a lessor under a capital
lease, any financing lease having substantially the same economic effect as any
of the foregoing, or the filing of any financing statement naming the owner of
the asset to which such lien relates as debtor, under the Uniform Commercial
Code or any comparable law) and any contingent or other agreement to provide any
of the foregoing, but not including the interest of a lessor under an operating
lease.
"Loan" means an extension of credit by a Lender to the Borrower under
Article II, and may be a Base Rate Loan or a LIBOR Rate Loan (each, a "Type" of
Loan).
"Loan Documents" means this Agreement, any Notes, the Warrants, the
Collateral Documents, the Commitment Letter and all other documents delivered to
the Agent or any Lender in connection herewith.
"Margin Stock" means "margin stock" as such term is defined in
Regulation G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Borrower or the Borrower and its
Subsidiaries taken as a whole; (b) a material impairment of the ability of the
Borrower or any Subsidiary to perform under any Loan Document and to avoid any
Event of Default; or (c) a material adverse effect upon (i) the legality,
validity, binding effect or enforceability against the Borrower or any
Subsidiary of any Loan Document, or (ii) the perfection or priority of any Lien
granted under any of the Collateral Documents; provided, an effect described in
the preceding clauses (a), (b), and (c) shall constitute a "Material Adverse
Effect" only if it could reasonably be expected to materially impair the ability
or legally enforceable obligation of the Borrower or any Subsidiary to perform
its obligations under the Loan Documents or otherwise deprive the Lenders or any
one of them of the practical realization of the principal benefits intended
thereby.
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<PAGE> 20
"Material Subsidiary" means, at any time, any Subsidiary which has not
been designated by the Borrower as a "Non-Material Subsidiary" pursuant to
Section 7.16.
"Maturity Date" means the earlier of (i) December 23, 2000 and (ii) the
date the Obligations are accelerated pursuant to Section 8.2 hereof.
"Minimum Cash Balance" shall mean the sum of (a) the difference of (i)
[ * ] 1 less (ii) cash interest payments that have already been paid hereunder
in respect of the Loans plus (b) the positive difference, if any, of (i) the
aggregate of all Special Investments after the date hereof less (ii) the
aggregate of all Special Investment Returns after the date hereof.
"Multiemployer Plan" means a "multiemployer plan," within the meaning of
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes,
is making, or is obligated to make contributions or, during the preceding three
calendar years, has made, or been obligated to make, contributions.
"Net Income" means, for any applicable period, the aggregate of all
amounts which, in accordance with GAAP, would be included as net income (or net
loss (including any extraordinary losses)) on a consolidated statement of income
of the Borrower and its Subsidiaries for such period; provided, however, that
"Net Income" shall exclude (i) the effect of any extraordinary or other
non-recurring non-cash gain outside the ordinary course of business and (ii) any
write-up in the value of any asset (to the extent such write-up exceeds any
write-down taken in connection with the same transaction or event which gave
rise to such write-up).
"Net Issuance Proceeds" means, as to any issuance of debt for borrowed
money or equity by any Person, cash and Cash Equivalent proceeds and instruments
received or receivable by such Person in connection therewith, net of reasonable
out-of-pocket costs and expenses paid or incurred in connection therewith in
favor of any Person not an Affiliate of such Person, such costs and expenses not
to exceed 5% of the gross proceeds of such issuance.
"Net Proceeds" means, as to any Disposition by a Person, proceeds in
cash, checks or other Cash Equivalent financial instruments as and when received
by such Person, net of: (a) the direct costs relating to such Disposition
excluding amounts payable to such Person or any Affiliate of such Person, (b)
sale, use or other
- -----------
[ * ] Confidential Treatment Requested
1 To be increased by the percentage that facility is in excess of $75
million.
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<PAGE> 21
transaction taxes (including capital gains taxes) paid or payable by such Person
as a direct result thereof, and (c) amounts required to be applied to repay
principal, interest and prepayment premiums and penalties on Indebtedness
secured by a Lien on the asset which is the subject of such Disposition to the
extent such Lien is permitted hereunder. "Net Proceeds" shall also include
proceeds paid on account of any Event of Loss, net of (i) all money actually
applied to repair or reconstruct the damaged property or property affected by
the condemnation or taking, (ii) all of the costs and expenses reasonably
incurred in connection with the collection of such proceeds, award or other
payments, and (iii) any amounts retained by or paid to parties having superior
rights to such proceeds, awards or other payments.
"Non-Material Subsidiary" means any Subsidiary which is designated as
such by the Borrower pursuant to Section 7.16.
"Note" means a promissory note executed by the Borrower in favor of a
Lender pursuant to subsection 2.2(b), in substantially the form of Exhibit E.
"Notice of Conversion/Continuation" means a notice in substantially the
form of Exhibit A.
"Obligations" means all advances, debts, liabilities, obligations,
covenants and duties arising under any Loan Document owing by the Borrower to
any Lender, the Agent, or any Indemnified Person, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due or to
become due, now existing or hereafter arising.
"Organization Documents" means, for any corporation, the certificate or
articles of incorporation, the bylaws, any certificate of determination or
instrument relating to the rights of preferred shareholders of such corporation,
any shareholder rights agreement, and all applicable resolutions of the board of
directors (or any committee thereof) of such corporation pertaining to the Loan
Documents.
"Other Taxes" means any present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies which arise from
any payment made hereunder or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement or any other Loan Documents.
"Participant" has the meaning specified in subsection 10.8(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions under ERISA.
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<PAGE> 22
"Pension Plan" means a pension plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA which the Borrower sponsors, maintains, or
to which it makes, is making, or is obligated to make contributions, or in the
case of a multiple employer plan (as described in Section 4064(a) of ERISA) has
made contributions at any time during the immediately preceding five (5) plan
years.
"Permitted Liens" has the meaning specified in Section 7.1.
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which the Borrower sponsors or maintains or to which the Borrower makes,
is making, or is obligated to make contributions and includes any Pension Plan.
"Pro Rata Share" means, as to any Lender at any time, the percentage
equivalent (expressed as a decimal, rounded to the ninth decimal place) at such
time of such Lender's Commitment divided by the combined Commitments of all
Lenders.
"Reference Bank" means Deutsche Bank.
"Reportable Event" means, any of the events set forth in Section 4043(c)
of ERISA or the regulations thereunder, other than any such event for which the
30-day notice requirement under ERISA has been waived by statute, regulation or
otherwise.
"Required Cash Balance" shall mean the lesser of (i) [ * ] and (ii) the
Minimum Cash Balance.
"Required Lenders" means at any time at least two Lenders then holding
at least 51% of the then aggregate unpaid principal amount of the Loans, or, if
no such principal amount is then outstanding, at least two Lenders then having
Pro Rata Shares equal to at least 51% of the Commitments.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
- ------------
[ * ] Confidential Treatment Requested
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<PAGE> 23
"Responsible Officer" means the chief executive officer or the president
of the Borrower, or any other officer having substantially the same authority
and responsibility; or, with respect to compliance with financial covenants, the
chief financial officer or the treasurer of the Borrower, or any other officer
having substantially the same authority and responsibility.
"Restricted Person" shall mean any Person (a) which has not executed a
guaranty as described in Section 6.14(d), (b) which has not executed a security
agreement as described in Section 6.14(d) granting a perfected first priority
security interest (subject only to Permitted Liens other than those described in
Section 7.1(i)) in substantially all of the property of such Person (including,
without limitation, all material property of such Person) in favor of the Agent
for the benefit of the Lenders, or (c) the stock or other equity interests of
which, to the extent owned, directly or indirectly, by the Borrower and its
Affiliates, has not been pledged, to the Agent for the benefit of the Lenders
pursuant to a pledge agreement as described in Section 6.14(d) which pledge
agreement grants in favor of the Agent a perfected first priority pledge
agreement (subject only to Permitted Liens other than those described in Section
7.1(i)), in each case of clauses (a), (b) and (c) of this definition, whether or
not such Person is a Subsidiary of the Borrower.
"SEC" means the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.
"Special Investment" shall mean, without duplication, each of the
following: (a) Investments in Restricted Persons (excluding Investments to the
extent made by the Borrower using Equity Consideration and including any Debt
Consideration in respect thereof) and, (b) Investments consisting of the
assumption or incurrence of Indebtedness by the Borrower, or any Subsidiary
which is not Restricted Person, permitted under Section 7.5(h).
"Special Investment Return" shall mean, without duplication, each of the
following: (a) the amount of all proceeds, dividends, or distributions (in each
case to the extent consisting of cash and Cash Equivalents) received by the
Borrower, or any Subsidiary which is not a Restricted Person, in respect of a
Special Investment made by the Borrower or such Subsidiary, as the case may be,
and applied, to extent required pursuant thereto in accordance with Section 2.6,
but limited in the aggregate to the extent of the original amount of such
Special Investment, (b) the amount of any Special Investment (if of the type
described in clause (a) of the definition thereof) to the extent the Person in
which such Special Investment was made ceases to be a Restricted Person and (c)
the amount of any Special Investment consisting of a Contingent Obligation
permitted under Section 7.8(e) to the extent the underlying obligation is
satisfied, not by the Borrower, but by the primary obligor thereof, or
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another Person which is not the Borrower or an Affiliate of the Borrower. For
purposes of clause (b) of this definition, the amount of a Special Investment
shall be deemed reduced from the original amount thereof by all proceeds,
dividends and distributions received by the Borrower as described in clause (a)
of this definition.
"Solvent" means, as to any Person at any time, that (a) the fair value
of the property of such Person is greater than the amount of such Person's
liabilities (including disputed, contingent and unliquidated liabilities) as
such value is established and liabilities evaluated for purposes of Section
101(31) of the Bankruptcy Code and, in the alternative, for purposes of the New
York Uniform Fraudulent Transfer Act; (b) the present fair saleable value of the
property of such Person is not less than the amount that will be required to pay
the probable liability of such Person on its debts as they become absolute and
matured; (c) such Person is able to realize upon its property and pay its debts
and other liabilities (including disputed, contingent and unliquidated
liabilities) as they mature in the normal course of business; (d) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature; and (e) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
"Subordinated Debt" shall mean Indebtedness of the Borrower which is
subordinated to the Obligations of the Borrower and the Subsidiaries hereunder
in right of payment, exercise of remedies or both, on terms and conditions
reasonably acceptable to the Agent and the Required Lenders.
"Subsidiary" of a Person means any corporation association, partnership,
limited liability company, joint venture or other business entity of which more
than 50% of the voting stock membership interests or other equity interests (in
the case of Persons other than corporations), is owned or controlled directly or
indirectly by the Person, or one or more of the Subsidiaries of the Person, or a
combination thereof. Unless the context otherwise clearly requires, references
herein to a "Subsidiary" refer to a Subsidiary of the Borrower.
"Surety Instruments" means all letters of credit (including standby and
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"Swap Contract" means any agreement (including any master agreement and
any agreement, whether or not in writing, relating to any single transaction)
that is an interest rate swap agreement, basis swap, forward rate agreement,
commodity swap, commodity option, equity or equity index swap or option, bond
option, interest rate
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option, forward foreign exchange agreement, rate cap, collar or floor agreement,
currency swap agreement, cross-currency rate swap agreement, swaption, currency
option or any other, similar agreement (including any option to enter into any
of the foregoing).
"Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and the Agent, such taxes (including
income taxes or franchise taxes) as are imposed on or measured by each Lender's
net income by the jurisdiction (or any political subdivision thereof) under the
laws of which such Lender or the Agent, as the case may be, is organized or
maintains a lending office.
"Telerate Page 3750" means the display designated as "Page 3750" on the
Telerate Service (or other such page as may replace Page 3750 on that service or
such other service as may be nominated by the British Bankers' Association as
the information vendor for the purpose of displaying British Bankers'
Association Interest Settlement Rates for U.S. Dollar deposits).
"Type" has the meaning specified in the definition of "Loan."
"UCC" means the Uniform Commercial Code as in effect in the State of New
York.
"Unfunded Pension Liability" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Pension Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the applicable
plan year.
"United States" and "U.S." each means the United States of America.
"Warrants" shall mean, the warrants for Common Stock, $0.01 par value,
of the Borrower, substantially in the form of Exhibit F, to be delivered to
Agent for the benefit of the Lenders in proportion to their respective Pro Rata
Shares, in three series, for 75,000 shares, 225,000 shares and 450,000 shares,
respectively.
"Wholly-Owned Subsidiary" means any corporation in which (other than
directors' qualifying shares required by law) 100% of the capital stock of each
class having ordinary voting power, and 100% of the capital stock of every other
class, in each case, at the time as of which any determination is being made, is
owned, beneficially and of record, by the Borrower, or by one or more of the
other Wholly-Owned Subsidiaries, or both.
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1.2 OTHER INTERPRETIVE PROVISIONS
(a) The meanings of defined terms are equally applicable to the singular
and plural forms of the defined terms.
(b) The words "hereof," "herein," "hereunder" and similar words refer to
this Agreement as a whole and not to any particular provision of this Agreement;
and subsection, Section, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including
without limitation."
(iii) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the words
"to" and "until" each mean "to but excluding," and the word "through" means "to
and including."
(iv) The term "property" includes any kind of property or asset,
real, personal or mixed, tangible or intangible.
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto, but
only to the extent such amendments and other modifications are not prohibited by
the terms of any Loan Document, and (ii) references to any statute or regulation
are to be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.
(e) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Agent, the Borrower
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and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Lenders or the Agent merely because of the
Agent's or Lenders' involvement in their preparation.
(h) Each reference hereunder to Subsidiaries is effective at such time
and to the extent that the Borrower has existing Subsidiaries (as defined
herein).
1.3 ACCOUNTING PRINCIPLES
(a) Unless the context otherwise clearly requires, all accounting terms
not expressly defined herein shall be construed, and all financial computations
required under this Agreement shall be made, in accordance with GAAP,
consistently applied.
(b) References herein to "fiscal year" and "fiscal quarter" refer to
such fiscal periods of the Borrower.
(c) In the event that GAAP changes during the term of this Agreement
such that the covenants contained in Section 7.14 would then be calculated in a
different manner or with different components or with components which are
calculated differently, (i) the parties hereto agree to enter into negotiations
with respect to amendments to this Agreement to conform those covenants as
criteria for evaluating the Borrower's and its Subsidiaries' financial condition
to substantially the same criteria as were effective prior to such change in
GAAP, and (ii) the Borrower shall be deemed to be in compliance with the
affected covenants contained in Section 7.14 during the 60 days following any
change in GAAP if and to the extent that the Borrower would have been in
compliance therewith under GAAP as in effect immediately before such change;
provided, however, that this paragraph shall not be deemed to require the
Borrower, the Agent or the Lenders to agree to modify any provision of this
Agreement or any of the other Loan Documents to reflect any such change to GAAP
and, if, after such 60 days, the parties, in their sole discretion, fail to
reach agreement on such modifications, the terms of this Agreement will remain
unchanged and the compliance by the Borrower with the covenants contained in
Section 7.14 will be calculated in accordance with GAAP as in effect immediately
before such change.
ARTICLE II
THE CREDIT
2.1 AMOUNTS AND TERMS OF COMMITMENT
Each Lender severally agrees, on the terms and conditions set forth
herein, to make a single loan to the Borrower (each such loan, a "Loan") on the
Closing Date in
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an amount not to exceed such Lender's Pro Rata Share of the Commitment. Amounts
borrowed hereunder which are repaid or prepaid by the Borrower may not be
reborrowed.
2.2 LOAN ACCOUNTS
(a) The Loan made by each Lender shall be evidenced by one or more loan
accounts or records maintained by such Lender in the ordinary course of
business. The loan accounts or records maintained by the Agent and each Lender
shall be conclusive absent manifest error of the amount of the Loans made by the
Lenders to the Borrower and the interest and payments thereon. Any failure so to
record or any error in doing so shall not, however, limit or otherwise affect
the obligation of the Borrower hereunder to pay any amount owing with respect to
the Loans.
(b) Upon the request of any Lender made through the Agent, the Loans
made by such Lender may be evidenced by one or more Notes, instead of loan
accounts. Each such Lender shall endorse on the schedules annexed to its Note(s)
the date, amount and maturity of the Loan made by it and the amount of each
payment of principal made by the Borrower with respect thereto. Each such Lender
is irrevocably authorized by the Borrower to endorse its Note(s) and each
Lender's record shall be conclusive absent manifest error; provided, however,
that the failure of a Lender to make, or an error in making, a notation thereon
with respect to any Loan shall not limit or otherwise affect the obligations of
the Borrower hereunder or under any such Note to such Lender.
2.3 FUNDING OF LOANS
(a) Each Lender will make the amount of its Pro Rata Share of the
Commitment available to the Agent for the account of the Borrower at the Agent's
Payment Office by 1:00 p.m. (New York City time) on the Closing Date in funds
immediately available to the Agent. The proceeds of all such Loans will then be
made available to the Borrower by the Agent by wire transfer in accordance with
written instructions provided to the Agent by the Borrower of like funds as
received by the Agent.
(b) During the first three (3) Business Days following the Closing Date,
all Loans shall be Base Rate Loans.
2.4 CONVERSION AND CONTINUATION ELECTIONS
(a) The Borrower may, upon irrevocable written notice to the Agent in
accordance with subsection 2.4(b):
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(i) elect, as of any Business Day, in the case of Base Rate
Loans, or as of the last day of the applicable Interest Period, in the case of
any other Type of Loans, to convert any such Loans (or any part thereof in an
amount not less than $1,000,000, or that is in an integral multiple of $500,000
in excess thereof) into Loans of any other Type; or
(ii) elect, as of the last day of the applicable Interest Period,
to continue as LIBOR Rate Loans any Loans having Interest Periods expiring on
such day (or any part thereof in an amount not less than $1,000,000, or that is
in an integral multiple of $500,000 in excess thereof).
(b) The Borrower shall deliver a Notice of Conversion/Continuation to be
received by the Agent not later than 1:00 p.m. (New York City time) at least (i)
three Business Days in advance of the Conversion/Continuation Date, if the Loans
are to be converted into or continued as LIBOR Rate Loans; and (ii) one Business
Day in advance of the Conversion/Continuation Date, if the Loans are to be
converted into Base Rate Loans, specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or renewed;
(C) the Type of Loans resulting from the proposed conversion or
continuation; and
(D) other than in the case of conversions into Base Rate Loans,
the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to LIBOR
Rate Loans, the Borrower has failed to select timely a new Interest Period to be
applicable to such LIBOR Rate Loans, or if any Event of Default then exists, the
Borrower shall be deemed to have elected to convert such LIBOR Rate Loans into
Base Rate Loans effective as of the expiration date of such Interest Period.
(d) The Agent will promptly notify each Lender of its receipt of a
Notice of Conversion/Continuation, or, if no timely notice is provided by the
Borrower, the Agent will promptly notify each Lender of the details of any
automatic conversion. All conversions and continuations shall be made ratably
according to the respective outstanding principal amounts of the Loans with
respect to which the notice was given held by each Lender.
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(e) Unless the Required Lenders otherwise agree, during the existence of
an Event of Default, the Borrower may not elect to have a Loan converted into or
continued as a LIBOR Rate Loan.
(f) After giving effect to any conversion or continuation of Loans,
there may not be more than three different Interest Periods in effect.
2.5 OPTIONAL PREPAYMENTS
Subject to Section 3.4, the Borrower may, at any time or from time to
time, upon not less than one Business Day's (in the case of Base Rate Loans) or
three Business Days' (in the case of LIBOR Rate Loans) notice to the Agent
(which in either case shall be irrevocable one Business Day prior to the
proposed prepayment date), ratably prepay Loans in whole or in part, in minimum
amounts of $1,000,000 or any multiple of $500,000 in excess thereof. Such notice
of prepayment shall specify the date and amount of such prepayment and the
Type(s) of Loans to be prepaid. The Agent will promptly notify each Lender of
its receipt of any such notice, and of such Lender's Pro Rata Share of such
prepayment. If such notice is given by the Borrower and not rescinded in writing
by the Borrower more than one Business Day prior to the proposed prepayment
date, the Borrower shall make such prepayment and the payment amount specified
in such notice shall be due and payable on the date specified therein, together
with accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.4.
2.6 MANDATORY PREPAYMENTS OF LOANS
(a) Asset Dispositions. If the Borrower or any Subsidiary shall at any
time or from time to time make or agree to make a Disposition then (i) the
Borrower shall promptly notify the Agent of such proposed Disposition (including
the amount of the estimated Net Proceeds to be received by the Borrower or such
Subsidiary in respect thereof) and (ii) promptly upon, and in no event later
than 90 days after, receipt by the Borrower or the Subsidiary of the Net
Proceeds of such Disposition, the Borrower shall prepay the Loans in an
aggregate amount equal to the amount of such Net Proceeds; provided, however,
that no such prepayment shall be required to the extent, in each case, such Net
Proceeds are used within 90 days of receipt thereof to purchase replacement
assets; provided further, that such notice and prepayment shall be required only
if (A) such Net Proceeds exceed $500,000 or (B) the aggregate of all Net
Proceeds theretofore received by the Borrower and not reinvested or used to make
a prepayment hereunder exceeds $1,000,000 in any fiscal year.
(b) Event of Loss. If the Borrower or any Subsidiary shall at any time
or from time to time suffer an Event of Loss, then (i) the Borrower shall
promptly notify
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the Agent of such Event of Loss (including the amount of the estimated Net
Proceeds to be received by the Borrower or such Subsidiary in respect thereof)
and (ii) promptly upon, and in no event later than two (2) Business Days after,
receipt by the Borrower or the Subsidiary of the Net Proceeds of such Event of
Loss, the Borrower shall, to the extent not inconsistent with any lease to which
the Borrower is bound, either (A) prepay the Loans in an aggregate amount equal
to the amount of such Net Proceeds or (B) deposit an aggregate amount equal to
the amount of such Net Proceeds into a blocked interest bearing account
maintained with the Agent pending release for usage by the Borrower in a manner,
and during the time, specified in the proviso below; provided, however, that no
such prepayment shall be required to the extent, in each case, such Net Proceeds
are used within 90 days, or provision for use within 180 days is made, of
receipt thereof to repair, replace or restore the assets, if any, relating to
such Event of Loss; provided further, that such notice and prepayment shall be
required only if (i) such Net Proceeds exceed $500,000 or (ii) the aggregate of
all Net Proceeds theretofore received by the Borrower and not reinvested or used
to make a prepayment hereunder exceeds $1,000,000 in any fiscal year.
(c) Equity or Debt Issuance. If the Borrower shall issue new common or
preferred equity, or shall incur additional Indebtedness (other than
Indebtedness permitted under Sections 7.5(b), (c), (e) or (f)), the Borrower
shall promptly notify the Agent of the estimated Net Issuance Proceeds of such
issuance or incurrence to be received by the Borrower in respect thereof.
Promptly upon, and in no event later than 3 days after, receipt by the Borrower
of Net Issuance Proceeds of such issuance or incurrence, the Borrower shall
prepay the Loans in an aggregate amount equal to 50% of the amount of such Net
Issuance Proceeds.
(d) General. Any prepayments pursuant to this Section 2.6 shall be
applied first to any Base Rate Loans then outstanding and then to LIBOR Rate
Loans with the shortest Interest Periods remaining; provided, however, that if
the amount of Base Rate Loans then outstanding is not sufficient to satisfy the
entire prepayment requirement, the Borrower may, at its option, place any
amounts which it would otherwise be required to use to prepay LIBOR Rate Loans
on a day other than the last day of the Interest Period therefor in an
interest-bearing account pledged to the Agent for the benefit of the Lenders
until the end of such Interest Period at which time such pledged amounts will be
applied to prepay such LIBOR Rate Loans. The Borrower shall pay, together with
each prepayment under this Section 2.6, accrued interest on the amount prepaid
and any amounts required pursuant to Section 3.4.
2.7 REPAYMENT
The Borrower shall repay the Loans in full, together with all accrued
and unpaid interest thereon, on the Maturity Date.
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2.8 INTEREST
(a) Each Loan shall bear interest on the outstanding principal amount
thereof from the Closing Date at a rate per annum equal to the LIBOR Rate or the
Base Rate, as the case may be (and subject to the Borrower's right to convert to
other Types of Loans under Section 2.4), plus the Interest Margin.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment of Loans
under Section 2.5 or 2.6 for the portion of the Loans so prepaid and upon
payment (including prepayment) in full thereof and, during the existence of any
Event of Default, interest shall be paid on demand of the Agent at the request
or with the consent of the Required Lenders.
(c) Notwithstanding subsection (a) of this Section, while any Event of
Default exists or after acceleration, the Borrower shall pay interest (after as
well as before entry of judgment thereon to the extent permitted by law) on the
principal amount of all outstanding Loans, at a rate per annum which is
determined by adding 2% per annum to the Interest Margin then in effect for such
Loans; provided, however, that, on and after the expiration of any Interest
Period applicable to any LIBOR Rate Loan outstanding on the date of occurrence
of such Event of Default or acceleration, the principal amount of such Loan
shall, during the continuation of such Event of Default or after acceleration,
bear interest at a rate per annum equal to the Base Rate plus 3.5% (or, if later
than six (6) months after the disbursement of Loans hereunder, plus 4%).
(d) Anything herein to the contrary notwithstanding, the obligations of
the Borrower to any Lender hereunder shall be subject to the limitation that
payments of interest shall not be required, for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Lender would be contrary to the provisions of
any law applicable to such Lender limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Lender, and in such
event the Borrower shall pay such Lender interest at the highest rate permitted
by applicable law.
2.9 FEES
(a) Arrangement, Agency Fees. The Borrower shall pay a syndication and
underwriting fee to the Arranger and to Deutsche Bank, for their respective
accounts, and shall pay an agency fee to the Agent for the Agent's own account,
as required by the Commitment Letter.
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2.10 COMPUTATION OF FEES AND INTEREST
(a) All computations of interest for Base Rate Loans when the Base Rate
is determined by Deutsche Bank's "prime lending rate" shall be made on the basis
of a year of 365 or 366 days, as the case may be, and actual days elapsed. All
other computations of fees and interest shall be made on the basis of a 360-day
year and actual days elapsed (which results in more interest being paid than if
computed on the basis of a 365-day year). Interest and fees shall accrue during
each period during which interest or such fees are computed from the first day
thereof to the last day thereof.
(b) Each determination of an interest rate by the Agent shall be
conclusive and binding on the Borrower and the Lenders in the absence of
manifest error. The Agent will, at the request of the Borrower or any Lender,
deliver to the Borrower or the Lender, as the case may be, a statement showing
the quotations used by the Agent in determining any interest rate and the
resulting interest rate.
(c) The Reference Bank shall use its best efforts to furnish quotations
of rates to the Agent as contemplated hereby.
2.11 PAYMENTS BY THE BORROWER
(a) All payments to be made by the Borrower shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Borrower shall be made to the Agent for the account
of the Lenders at the Agent's Payment Office, and shall be made in dollars and
in immediately available funds, no later than 2:00 p.m. (New York City time) on
the date specified herein. The Agent will promptly distribute to each Lender its
Pro Rata Share (or other applicable share as expressly provided herein) of such
payment in like funds as received. Any payment received by the Agent later than
2:00 p.m. (New York City time) shall be deemed to have been received on the
following Business Day and any applicable interest or fee shall continue to
accrue.
(b) Subject to the provisions set forth in the definition of "Interest
Period" herein, whenever any payment is due on a day other than a Business Day,
such payment shall be made on the following Business Day, and such extension of
time shall in such case be included in the computation of interest or fees, as
the case may be.
(c) Unless the Agent receives notice from the Borrower prior to the date
on which any payment is due to the Lenders that the Borrower will not make such
payment in full as and when required, the Agent may assume that the Borrower has
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made such payment in full to the Agent on such date in immediately available
funds and the Agent may (but shall not be so required), in reliance upon such
assumption, distribute to each Lender on such due date an amount equal to the
amount then due such Lender. If and to the extent the Borrower has not made such
payment in full to the Agent, each Lender shall repay to the Agent on demand
such amount distributed to such Lender, together with interest thereon at the
Federal Funds Rate for each day from the date such amount is distributed to such
Lender until the date repaid.
2.12 PAYMENTS BY THE LENDERS TO THE AGENT
(a) Unless the Agent receives notice from a Lender on or prior to the
Closing Date that such Lender will not make available on the Closing Date to the
Agent for the account of the Borrower the amount of that Lender's Pro Rata Share
of the Commitment, the Agent may assume that each Lender has made such amount
available to the Agent in immediately available funds on the Closing Date and
the Agent may (but shall not be so required), in reliance upon such assumption,
make available to the Borrower on such date a corresponding amount. If and to
the extent any Lender shall not have made its full amount available to the Agent
in immediately available funds and the Agent in such circumstances has made
available to the Borrower such amount, that Lender shall on the Business Day
following the Closing Date make such amount available to the Agent, together
with interest at the Federal Funds Rate for each day during such period. A
notice of the Agent submitted to any Lender with respect to amounts owing under
this subsection (a) shall be conclusive, absent manifest error. If such amount
is so made available, such payment to the Agent shall constitute such Lender's
Loan on the Closing Date for all purposes of this Agreement.
(b) The failure of any Lender to make any Loan on the Closing Date shall
not relieve any other Lender of any obligation hereunder to make a Loan on the
Closing Date, but no Lender shall be responsible for the failure of any other
Lender to make the Loan to be made by such other Lender on the Closing Date.
2.13 SHARING OF PAYMENTS, ETC.
If, other than as expressly provided elsewhere herein, any Lender shall
obtain on account of the Loans made by it any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) in
excess of its Pro Rata Share, such Lender shall immediately (a) notify the Agent
of such fact, and (b) purchase from the other Lenders such participations in the
Loans made by them as shall be necessary to cause such purchasing Lender to
share the excess payment pro rata with each of them; provided, however, that if
all or any portion of such excess payment is thereafter recovered from the
purchasing Lender, such purchase shall to
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that extent be rescinded and each other Lender shall repay to the purchasing
Lender the purchase price paid therefor, together with an amount equal to such
paying Lender's ratable share (according to the proportion of (i) the amount of
such paying Lender's required repayment to (ii) the total amount so recovered
from the purchasing Lender) of any interest or other amount paid or payable by
the purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender may, to
the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.10) with respect to
such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation. The Agent will keep records (which
shall be conclusive and binding in the absence of manifest error) of
participations purchased under this Section and will in each case notify the
Lenders following any such purchases or repayments.
2.14 SECURITY
All obligations of the Borrower and the Subsidiaries under this
Agreement, the Notes and all other Loan Documents shall be secured in accordance
with the Collateral Documents.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.1 TAXES
(a) Any and all payments by the Borrower to each Lender or the Agent
under this Agreement and any other Loan Document shall be made free and clear
of, and without deduction or withholding for any Taxes. In addition, the
Borrower shall pay all Other Taxes.
(b) The Borrower agrees to indemnify and hold harmless each Lender and
the Agent for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section)
paid by the Lender or the Agent and any liability (including penalties,
interest, additions to tax and expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. Payment under this indemnification shall be made within 30 days after
the date the Lender or the Agent makes written demand therefor.
(c) If the Borrower shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any
Lender or the Agent, then:
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(i) the sum payable shall be increased as necessary so that after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section) such
Lender or the Agent, as the case may be, receives an amount equal to the sum it
would have received had no such deductions or withholdings been made;
(ii) the Borrower shall make such deductions and withholdings;
(iii) the Borrower shall pay the full amount deducted or withheld
to the relevant taxing authority or other authority in accordance with
applicable law; and
(iv) the Borrower shall also pay to each Lender or the Agent for
the account of such Lender, at the time interest is paid, all additional amounts
which the respective Lender specifies as necessary to preserve the after-tax
yield the Lender would have received if such Taxes or Other Taxes had not been
imposed.
(d) Within 30 days after the date of any payment by the Borrower of
Taxes or Other Taxes, the Borrower shall furnish the Agent the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment satisfactory to the Agent.
(e) If the Borrower is required to pay additional amounts to any Lender
or the Agent pursuant to subsection (c) of this Section, then such Lender shall
use reasonable efforts (consistent with legal and regulatory restrictions) to
change the jurisdiction of its Lending Office so as to eliminate any such
additional payment by the Borrower which may thereafter accrue, if such change
in the judgment of such Lender is not otherwise disadvantageous to such Lender.
3.2 ILLEGALITY
(a) If any Lender reasonably determines that the introduction of any
Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Governmental Authority has asserted
that it is unlawful, for any Lender or its applicable Lending Office to make
LIBOR Rate Loans, then, on notice thereof by the Lender to the Borrower through
the Agent, any obligation of that Lender to make LIBOR Rate Loans shall be
suspended until the Lender notifies the Agent and the Borrower that the
circumstances giving rise to such determination no longer exist.
(b) If a Lender reasonably determines that it is unlawful to maintain
any LIBOR Rate Loan, the Borrower shall, upon its receipt of notice of such fact
and
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demand from such Lender (with a copy to the Agent), prepay in full such LIBOR
Rate Loans of that Lender then outstanding, together with interest accrued
thereon and amounts required under Section 3.4, either on the last day of the
Interest Period thereof, if the Lender may lawfully continue to maintain such
LIBOR Rate Loans to such day, or immediately, if the Lender may not lawfully
continue to maintain such LIBOR Rate Loan. If the Borrower is required to so
prepay any LIBOR Rate Loan, then concurrently with such prepayment, the Borrower
shall borrow from the affected Lender, in the amount of such repayment, a Base
Rate Loan.
(c) If the obligation of any Lender to make or maintain LIBOR Rate Loans
has been so terminated or suspended, the Borrower may elect, by giving notice to
the Lender through the Agent that all Loans which would otherwise be made by the
Lender as LIBOR Rate Loans shall be instead Base Rate Loans.
(d) Before giving any notice to the Agent under this Section, the
affected Lender shall designate a different Lending Office with respect to its
LIBOR Rate Loans if such designation will avoid the need for giving such notice
or making such demand and will not, in the judgment of the Lender, be illegal or
otherwise disadvantageous to the Lender.
3.3 INCREASED COSTS AND REDUCTION OF RETURN
(a) If any Lender reasonably determines that, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance by that Lender with any guideline or request
from any central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to such Lender of
agreeing to make or making, funding or maintaining any LIBOR Rate Loans, then
the Borrower shall be liable for, and shall from time to time, upon demand (with
a copy of such demand to be sent to the Agent), pay to the Agent for the account
of such Lender, additional amounts as are sufficient to compensate such Lender
for such increased costs.
(b) If any Lender shall have reasonably determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation, (iii) any change in the interpretation or administration of
any Capital Adequacy Regulation by any central bank or other Governmental
Authority charged with the interpretation or administration thereof, or (iv)
compliance by the Lender (or its Lending Office) or any corporation controlling
the Lender with any Capital Adequacy Regulation, affects or would affect the
amount of capital required or expected to be maintained by the Lender or any
corporation controlling the Lender and (taking into consideration such Lender's
or such corporation's policies with respect to capital adequacy and such
Lender's desired return on capital) reasonably
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determines that the amount of such capital is increased as a consequence of its
Commitment, loans, credits or obligations under this Agreement, then, upon
demand of such Lender to the Borrower through the Agent, the Borrower shall pay
to the Lender, from time to time as specified by the Lender, additional amounts
sufficient to compensate the Lender for such increase.
3.4 FUNDING LOSSES
The Borrower shall reimburse each Lender and hold each Lender harmless
from any loss (excluding consequential damages consisting of lost profits) or
expense which the Lender may sustain or incur as a consequence of:
(a) the failure of the Borrower to make on a timely basis any payment of
principal of any LIBOR Rate Loan;
(b) the failure of the Borrower to borrow the Loans on the Closing Date,
or to continue or convert a Loan after the Borrower has given (or is deemed to
have given) a Notice of Conversion/Continuation;
(c) the failure of the Borrower to make any prepayment in accordance
with any notice delivered under Section 2.5;
(d) the prepayment (including pursuant to Sections 2.5 and 2.6) or other
payment (including after acceleration thereof) of a LIBOR Rate Loan on a day
that is not the last day of the relevant Interest Period; or
(e) the automatic conversion under Section 2.4 of any LIBOR Rate Loan to
a Base Rate Loan on a day that is not the last day of the relevant Interest
Period;
including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its LIBOR Rate Loans or from fees payable to
terminate the deposits from which such funds were obtained. For purposes of
calculating amounts payable by the Borrower to the Lenders under this Section
and under subsection 3.3(a), each LIBOR Rate Loan made by a Lender (and each
related reserve, special deposit or similar requirement) shall be conclusively
deemed to have been funded at the LIBOR used in determining the LIBOR Rate for
such LIBOR Rate Loan by a matching deposit or other borrowing in the interbank
eurodollar market for a comparable amount and for a comparable period, whether
or not such LIBOR Rate Loan is in fact so funded.
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3.5 INABILITY TO DETERMINE RATES
If the Agent reasonably determines that for any reason adequate and
reasonable means do not exist for determining the LIBOR Rate for any requested
Interest Period with respect to a proposed LIBOR Rate Loan, or that the LIBOR
Rate applicable pursuant to subsection 2.8(a) for any requested Interest Period
with respect to a proposed LIBOR Rate Loan does not adequately and fairly
reflect the cost to the of funding such Loan, the Agent will promptly so notify
the Borrower and each Lender. Thereafter, the obligation of the Lenders to make
or maintain LIBOR Rate Loans hereunder shall be suspended until the Agent
revokes such notice in writing, which it shall do promptly when possible. Upon
receipt of such notice, the Borrower may revoke any Notice of
Conversion/Continuation then submitted by it. If the Borrower does not revoke
such Notice, the Lenders shall make, convert or continue the Loans, as proposed
by the Borrower, in the amount specified in the applicable notice submitted by
the Borrower, but such Loans shall be made, converted or continued as Base Rate
Loans instead of LIBOR Rate Loans.
3.6 CERTIFICATES OF LENDERS
Any Lender claiming reimbursement or compensation under this Article III
shall deliver to the Borrower (with a copy to the Agent) a certificate setting
forth in reasonable detail the amount payable to the Lender hereunder and such
certificate shall be conclusive and binding on the Borrower in the absence of
manifest error.
3.7 SURVIVAL
The agreements and obligations of the Borrower in this Article III shall
survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 CONDITIONS OF LOANS
The obligation of each Lender to make its Loan hereunder is subject to
the condition that the Agent has received on or before the Closing Date all of
the following, in form and substance satisfactory to the Agent and each Lender,
and in sufficient copies for each Lender:
(a) Credit Agreement and Notes. This Agreement, the Notes and the
Warrants executed by each party thereto;
(b) Resolutions; Incumbency.
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(i) Copies of the resolutions of the board of directors of the
Borrower and each Subsidiary that may become party to a Loan Document
authorizing the transactions contemplated hereby, certified as of the Closing
Date by the Secretary or an Assistant Secretary of such Person; and
(ii) A certificate of the Secretary or Assistant Secretary or an
executive officer of the Borrower, and each Subsidiary that may become party to
a Loan Document certifying the names and true signatures of the officers of the
Borrower or such Subsidiary authorized to execute, deliver and perform, as
applicable, this Agreement, and all other Loan Documents to be delivered by it
hereunder;
(c) Organization Documents; Good Standing. Each of the following
documents:
(i) the articles or certificate of incorporation and the bylaws
of the Borrower and each Subsidiary party to any Loan Document as in effect on
the Closing Date, certified by the Secretary or Assistant Secretary of the
Borrower or such Subsidiary as of the Closing Date; and
(ii) a good standing certificate for the Borrower and each
Subsidiary party to any Loan Document from the Secretary of State (or similar,
applicable Governmental Authority) of its state of incorporation and each state
where the Borrower or such Subsidiary is qualified to do business as a foreign
corporation as of a recent date;
(d) Legal Opinions. An opinion of Perkins Coie - Seattle, counsel to the
Borrower and addressed to the Agent and the Lenders, substantially in the form
of Exhibit C;
(e) Payment of Fees. Evidence of payment by the Borrower of all accrued
and unpaid fees, costs and expenses to the extent then due and payable on the
Closing Date, together with Attorney Costs of Deutsche Bank to the extent
invoiced prior to or on the Closing Date; including any such costs, fees and
expenses arising under or referenced in Sections 2.9 and 10.4;
(f) Collateral Documents. The Collateral Documents, executed by the
Borrower, in appropriate form for recording, where necessary, together with:
(i) copies of all UCC-l financing statements filed, registered or
recorded to perfect the security interests of the Agent for the benefit of the
Lenders, or other evidence satisfactory to the Agent that there has been filed,
registered or
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recorded all financing statements and other filings, registrations and
recordings necessary and advisable to perfect the Liens of the Agent for the
benefit of the Lenders in accordance with applicable law (provided that filings
to be made in connection with Intellectual Property Collateral (as defined in
the Security Agreement) shall be made within seven days after the Closing Date);
(ii) written advice relating to such Lien and judgment searches
as the Agent shall have requested, and such termination statements or other
documents as may be necessary to confirm that the Collateral is subject to no
other Liens in favor of any Persons (other than Permitted Liens);
(iii) funds sufficient to pay any filing or recording tax or fee
in connection with any and all UCC-1 financing statements; and
(iv) evidence that all other actions necessary or, in the
reasonable opinion of the Agent or the Lenders, desirable, to perfect and
protect the first priority security interest created by the Collateral Documents
and to enhance the Agent's ability to preserve and protect its interests in and
access to the Collateral, have been taken;
(g) Insurance Policies. Standard lenders' payable endorsements with
respect to the insurance policies or other instruments or documents evidencing
insurance coverage on the properties of the Borrower in accordance with
Section 6.6;
(h) Certificate. A certificate signed by a Responsible Officer, dated as
of the Closing Date, stating that:
(i) the representations and warranties contained in Article V are
true and correct on and as of such date, as though made on and as of such date;
(ii) no Default or Event of Default exists or would result from
making the Loans under Article II; and
(iii) there has occurred since September 30, 1997, no event or
circumstance that has resulted or could reasonably be expected to result in a
Material Adverse Effect; and
(i) Other Documents. Such other approvals, opinions, documents or
materials as the Agent or any Lender may reasonably request.
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4.2 CONDITIONS TO CONTINUATIONS/CONVERSIONS
The obligation of each Lender to continue or convert any Loan under
Section 2.4 is subject to the satisfaction of the following conditions precedent
on the relevant Conversion/Continuation Date:
(a) Notice of Conversion/Continuation. The Agent shall have
received a Notice of Conversion/Continuation;
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct on and as
of such Conversion/Continuation Date with the same effect as if made on and as
of such Conversion/Continuation Date (except to the extent such representations
and warranties solely and expressly refer to an earlier date, in which case they
shall be true and correct as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall
exist or shall result from such continuation or conversion.
Each Notice of Conversion/Continuation submitted by the Borrower
hereunder shall constitute a representation and warranty by the Borrower
hereunder, as of the date of each such notice and as of each
Conversion/Continuation Date, as applicable, that the conditions in Section 4.2
are satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and each Lender that:
5.1 CORPORATE EXISTENCE AND POWER
The Borrower and each of its Subsidiaries:
(a) is a corporation, partnership, limited liability company or
similar entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation;
(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its business
and to execute, deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified as a foreign corporation, partnership,
limited liability company or similar entity and is licensed and in good standing
under the laws
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of each jurisdiction where its ownership, lease or operation of property or the
conduct of its business requires such qualification or license; and
(d) is in compliance with all Requirements of Law; except, in
each case referred to in clause (c) or clause (d), to the extent that the
failure to do so could not reasonably be expected to have a Material Adverse
Effect.
5.2 CORPORATE AUTHORIZATION; NO CONTRAVENTION
The execution, delivery and performance by the Borrower and its
Subsidiaries of this Agreement and each other Loan Document to which such Person
is party, have been duly authorized by all necessary corporate, partnership,
limited liability company or similar entity action, and do not and will not:
(a) contravene the terms of any of that Person's Organization
Documents;
(b) conflict with or result in any breach or contravention of, or
the creation of any Lien under, any document evidencing any Contractual
Obligation to which such Person is a party or any order, injunction, writ or
decree of any Governmental Authority to which such Person or its property is
subject; or
(c) violate any Requirement of Law.
5.3 GOVERNMENTAL AUTHORIZATION
No approval, consent, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority (except for recordings or
filings in connection with the Liens granted to the Agent under the Collateral
Documents and except for state and federal securities laws filings in connection
with the issuance of the Warrants that may be required) is necessary or required
in connection with the execution, delivery or performance by, or enforcement
against, the Borrower or any of its Subsidiaries of the Agreement or any other
Loan Document.
5.4 BINDING EFFECT
This Agreement and each other Loan Document to which the Borrower or any
of its Subsidiaries is a party constitute the legal, valid and binding
obligations of the Borrower and any of its Subsidiaries to the extent it is a
party thereto, enforceable against such Person in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
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5.5 LITIGATION
Except as specifically disclosed in Schedule 5.5, as of the date of this
Agreement there are no actions, suits, proceedings, claims or disputes pending,
or to the best knowledge of the Borrower, threatened or contemplated, at law, in
equity, in arbitration or before any Governmental Authority, against the
Borrower, or its Subsidiaries or any of their respective properties which:
(a) purport to affect or pertain to this Agreement or any other
Loan Document, or any of the transactions contemplated hereby or thereby; or
(b) if determined adversely to the Borrower or its Subsidiaries,
would reasonably be expected to have a Material Adverse Effect.
No injunction, writ, temporary restraining order or any order of any
nature has been issued by any court or other Governmental Authority purporting
to enjoin or restrain the execution, delivery or performance of this Agreement
or any other Loan Document, or directing that the transactions provided for
herein or therein not be consummated as herein or therein provided.
5.6 NO DEFAULT
No Default or Event of Default exists or would result from the incurring
of any Obligations by the Borrower or from the grant or perfection of the Liens
of the Agent and the Lenders on the Collateral. As of the Closing Date, neither
the Borrower nor any Subsidiary is in default under or with respect to any
Contractual Obligation in any respect which, individually or together with all
such defaults, could reasonably be expected to have a Material Adverse Effect,
or that would, if such default had occurred after the Closing Date, create an
Event of Default under subsection 8.1(e).
5.7 ERISA COMPLIANCE
Except as specifically disclosed in Schedule 5.7:
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such qualification.
The Borrower and each ERISA Affiliate has made all required contributions to any
Plan subject to Section 412 of the Code, and no application for a funding waiver
or an extension of any amortization period pursuant to Section 412 of the Code
has been made with respect to any Plan.
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(b) There are no pending or, to the best knowledge of Borrower,
threatened claims, actions or lawsuits, or action by any Governmental Authority,
with respect to any Plan which has resulted or could reasonably be expected to
result in a Material Adverse Effect. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to any Plan which
has resulted or could reasonably be expected to result in a Material Adverse
Effect.
(c)(i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Borrower nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA, which in the case of each
of the foregoing clauses (i) through (v) could reasonably be expected to have a
Material Adverse Effect.
5.8 USE OF PROCEEDS; MARGIN REGULATIONS
The proceeds of the Loans are to be used solely for the purposes set
forth in and permitted by Section 6.12 and Section 7.7. Neither the Borrower nor
any Subsidiary is generally engaged in the business of purchasing or selling
Margin Stock or extending credit for the purpose of purchasing or carrying
Margin Stock.
5.9 TITLE TO PROPERTIES
The Borrower and each Subsidiary have good record and marketable title
in fee simple to, or valid leasehold interests in, all real property necessary
or used in the ordinary conduct of their respective businesses, except for such
defects in title which could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect. As of the Closing Date, the
property of the Borrower and its Subsidiaries is subject to no Liens, other than
Permitted Liens.
5.10 TAXES
The Borrower and its Subsidiaries have filed all Federal and other
material tax returns and reports required to be filed, and have paid all Federal
and other material taxes, assessments, fees and other governmental charges
levied or imposed upon them or their properties, income or assets otherwise due
and payable, except those which
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are being contested in good faith by appropriate proceedings and for which
adequate reserves have been provided in accordance with GAAP. There is no
proposed tax assessment against the Borrower or any Subsidiary that would, if
made, have a Material Adverse Effect.
5.11 FINANCIAL CONDITION
(a) The unaudited consolidated financial statements of the Borrower and
its Subsidiaries dated September 30, 1997, and the related consolidated
statements of income or operations, shareholders' equity and cash flows for the
fiscal quarter ended on that date:
(i) were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly noted
therein, subject to ordinary, good faith year-end audit adjustments;
(ii) fairly present the financial condition of the Borrower and
its Subsidiaries as of the date thereof and results of operations for the period
covered thereby; and
(iii) except as specifically disclosed in Schedule 5.11, show all
material indebtedness and other liabilities, direct or contingent, of the
Borrower and its consolidated Subsidiaries as of the date thereof, including
liabilities for taxes, material commitments and Contingent Obligations.
(b) Since September 30, 1997, there has been no Material Adverse Effect.
5.12 ENVIRONMENTAL MATTERS
(a) Except as specifically disclosed in Schedule 5.12, the on-going
operations of the Borrower and each of its Subsidiaries comply in all respects
with all Environmental Laws, except such non-compliance which would not (if
enforced in accordance with applicable law) result in liability in excess of
$2,000,000 in the aggregate.
(b) Except as specifically disclosed in Schedule 5.12, the Borrower and
each of its Subsidiaries have obtained all licenses, permits, authorizations and
registrations required under any Environmental Law ("Environmental Permits") and
necessary for their respective ordinary course operations, all such
Environmental Permits are in good standing, and the Borrower and each of its
Subsidiaries are in compliance with all material terms and conditions of such
Environmental Permits except to the extent the failure to have such
Environmental Permits or to comply therewith could not reasonably be expected to
have a Material Adverse Effect.
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(c) Except as specifically disclosed in Schedule 5.12, none of the
Borrower, any of its Subsidiaries or any of their respective present property or
operations, is subject to any outstanding written order from or agreement with
any Governmental Authority, nor subject to any judicial or docketed
administrative proceeding, respecting any Environmental Law, Environmental Claim
or Hazardous Material, which would if adversely determined, result in a
liability or in economic loss in excess of $2,000,000 in the aggregate.
(d) Except as specifically disclosed in Schedule 5.12, there are no
Hazardous Materials or other conditions or circumstances existing with respect
to any property of the Borrower or any Subsidiary, or arising from operations
prior to the Closing Date, of the Borrower or any of its Subsidiaries that would
reasonably be expected to give rise to Environmental Claims with a potential
liability of the Borrower and its Subsidiaries in excess of $2,000,000 in the
aggregate for any such condition, circumstance or property. In addition, (i)
neither the Borrower nor any Subsidiary has any underground storage tanks (x)
that are not properly registered or permitted under applicable Environmental
Laws, or (y) that are leaking or disposing of Hazardous Materials off-site, and
(ii) the Borrower and its Subsidiaries have notified all of their employees of
the existence, if any, of any health hazard arising from the conditions of their
employment and have met all notification requirements under Title III of CERCLA
and all other Environmental Laws.
5.13 COLLATERAL DOCUMENTS
(a) As of the date hereof, the provisions of each of the Collateral
Documents are effective to create in favor of the Agent for the benefit of the
Lenders, a legal, valid and enforceable security interest in all right, title
and interest of the Borrower and its Subsidiaries in the collateral described
therein; and financing statements have been delivered to the Agent for filing in
the offices in all of the jurisdictions listed in the schedule to the Security
Agreement and executed Patent Assignments, Trademarks Assignments and Copyright
Assignments have been delivered to the Agent for filing in the U.S. Patent and
Trademark Office and the U.S. Copyright Office and upon the filing of such
assignments and such financing statements in such offices, the Agent, for the
benefit of the Lenders, will have a perfected first priority security interest
(subject only to Permitted Liens) in the collateral described thereon in which a
security interest may be perfected by the filing of such financing statements or
assignments, and upon delivery of those items of Collateral for which physical
possession is the method for perfection, the Agent, for the benefit of the
Lenders will have a valid, first priority security interest thereon.
(b) All representations and warranties of the Borrower and any of its
Subsidiaries party thereto contained in the Collateral Documents are true and
correct.
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5.14 REGULATED ENTITIES
None of the Borrower, any Person controlling the Borrower, or any
Subsidiary, is an "Investment Company" within the meaning of the Investment
Company Act of 1940. The Borrower is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Interstate
Commerce Act, any state public utilities code, or any other Federal or state
statute or regulation limiting its ability to incur Indebtedness.
5.15 NO BURDENSOME RESTRICTIONS
As of the date of this Agreement, neither the Borrower nor any
Subsidiary is a party to or bound by any Contractual Obligation, or subject to
any restriction in any Organization Document, or any Requirement of Law, which
could reasonably be expected to have a Material Adverse Effect.
5.16 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC.
The Borrower or its Subsidiaries own or are licensed or otherwise have
the right to use all of the patents, trademarks, service marks, trade names,
copyrights, contractual franchises, authorizations and other rights that are
reasonably necessary for the operation of their respective businesses, without
conflict with the rights of any other Person. To the best knowledge of the
Borrower, no slogan or other advertising device, product, process, method,
substance, part or other material now employed, or now contemplated to be
employed, by the Borrower or any Subsidiary infringes upon any rights held by
any other Person. Except as specifically disclosed in Schedule 5.5, no claim or
litigation regarding any of the foregoing is pending or threatened, and no
patent, invention, device, application, principle or any statute, law, rule,
regulation, standard or code is pending or, to the knowledge of the Borrower,
proposed, which, in either case, could reasonably be expected to have a Material
Adverse Effect.
5.17 SUBSIDIARIES
As of the date of this Agreement, the Borrower has no Subsidiaries other
than those specifically disclosed in part (a) of Schedule 5.17 hereto and has no
Investments in any other corporation or entity other than those specifically
disclosed in part (b) of Schedule 5.17.
5.18 INSURANCE
Except as specifically disclosed in Schedule 5.18, the properties of the
Borrower and its Subsidiaries are insured with financially sound and reputable
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insurance companies not Affiliates of the Borrower, in such amounts, with such
deductibles and covering such risks as are customarily carried by companies
engaged in similar businesses and owning similar properties in localities where
the Borrower or such Subsidiary operates.
5.19 SOLVENCY
The Borrower and each of its Material Subsidiaries are Solvent.
5.20 FULL DISCLOSURE
None of the representations or warranties made by the Borrower or any
Subsidiary in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Borrower or any Subsidiary in connection with the Loan Documents (including the
offering and disclosure materials delivered by or on behalf of the Borrower to
the Lenders prior to the Closing Date), contains any untrue statement of a
material fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they are made, not misleading as of the time when made or delivered.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, or any Loan
or other Obligation shall remain unpaid or unsatisfied, unless the Required
Lenders waive compliance in writing:
6.1 FINANCIAL STATEMENTS
The Borrower shall deliver to the Agent, in form and detail reasonably
satisfactory to the Agent and the Required Lenders, with sufficient copies for
each Lender:
(a) as soon as available, but not later than 95 days after the
end of each fiscal year, a copy of the audited consolidated balance sheet of the
Borrower and its Subsidiaries as at the end of such year and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, and accompanied by the opinion of Ernst & Young
LLP or another nationally recognized independent public accounting firm
("Independent Auditor") which report shall state
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that such consolidated financial statements present fairly the financial
position for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years with the exception of changes noted therein. Such
opinion shall not be qualified or limited because of a restricted or limited
examination by the Independent Auditor of any material portion of the Borrower's
or any Subsidiary's records;
(b) as soon as available, but not later than 50 days after the
end of each of the first three fiscal quarters of each fiscal year a copy of the
unaudited consolidated balance sheet (including a statement of stockholders'
equity) of the Borrower and its Subsidiaries as of the end of such quarter and
the related consolidated statements of income and cash flows for the period
commencing on the first day and ending on the last day of such quarter, and
certified by a Responsible Officer as fairly presenting, in accordance with GAAP
(subject to normal good faith year-end audit adjustments), the financial
position and the results of operations of the Borrower and the Subsidiaries;
(c) concurrent with the delivery of each of the reports required
under clauses (a) and (b) above, a good faith reasonable estimate by the
Borrower for the Non-Material Subsidiaries of such Non-Material Subsidiaries'
(i) total (gross) revenues (on a consolidated basis) for the four fiscal quarter
period ending as of the report date and (ii) total assets (on a consolidated
basis), as of the last day of the fiscal quarter ending as of the report date,
reported on a net book value basis; provided, that any Non-Material Subsidiary
which has less than four fiscal quarters of financial information shall
annualize the financial results of its operations for purposes of this
Section 6.1(c).
6.2 CERTIFICATES; OTHER INFORMATION
The Borrower shall furnish to the Agent, with sufficient copies for each
Lender:
(a) concurrently with the delivery of the financial statements
referred to in subsection 6.1(a), a certificate of the Independent Auditor
stating that in making the examination necessary therefor no knowledge was
obtained of any Default or Event of Default, except as specified in such
certificate;
(b) concurrently with the delivery of the financial statements
referred to in subsections 6.1(a) and (b), a Compliance Certificate executed by
a Responsible Officer;
(c) promptly, copies of all financial statements and reports that
the Borrower sends to its shareholders, and copies of all financial statements
and regular,
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periodical or special reports (including Forms 10K, 10Q and 8K) that the
Borrower or any Subsidiary may make to, or file with, the SEC;
(d) promptly, such additional information regarding the business,
financial or corporate affairs of the Borrower or any Subsidiary as the Agent,
at the request of any Lender, may from time to time reasonably request; and
(e) concurrently with the delivery of the financial statements
referred to in subsections 6.1(a) and (b) and immediately prior to each
Acquisition or Investment resulting in a Person becoming a Subsidiary, a
certification of a Responsible Officer specifying which of the Subsidiaries of
the Borrower are Non-Material Subsidiaries and demonstrating compliance with
Section 7.16 (after giving effect to such Acquisition or Investment), together
with the information required under Section 6.1(c).
6.3 NOTICES
The Borrower shall promptly notify the Agent and each Lender:
(a) of the occurrence of any Default or Event of Default;
(b) of (i) any breach or non-performance of, or any default
under, any Contractual Obligation of the Borrower or any of its Subsidiaries
which could reasonably be expected to result in a Material Adverse Effect; and
(ii) any dispute, litigation, investigation, proceeding or suspension which may
exist at any time between the Borrower or any of its Subsidiaries and any
Governmental Authority which could have a Material Adverse Effect, if adversely
determined;
(c) of the commencement of, or any material development in, any
litigation or proceeding affecting the Borrower or any Subsidiary (i) in which
the amount of damages claimed is $2,000,000 (or its equivalent in another
currency or currencies) or more, (ii) in which injunctive or similar relief is
sought and which, if adversely determined, would reasonably be expected to have
a Material Adverse Effect, or (iii) in which the relief sought is an injunction
or other stay of the performance of this Agreement or any Loan Document;
(d) upon, but in no event later than 10 days after, becoming
aware of (i) any and all enforcement, cleanup, removal or other governmental or
regulatory actions instituted, completed or threatened against the Borrower or
any Subsidiary or any of their respective properties pursuant to any applicable
Environmental Laws, (ii) all other Environmental Claims, and (iii) any
environmental or similar condition on any real property adjoining or in the
vicinity of the property of the Borrower or any
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Subsidiary that could reasonably be anticipated to cause such property or any
part thereof to be subject to any restrictions on the ownership, occupancy,
transferability or use of such property under any Environmental Laws;
(e) of any other litigation or proceeding affecting the Borrower
or any of its Subsidiaries which the Borrower would be required to report to the
SEC pursuant to the Exchange Act, within four days after reporting the same to
the SEC;
(f) of any of the following events affecting the Borrower,
together with a copy of any notice with respect to such event that may be
required to be filed with a Governmental Authority and any notice delivered by a
Governmental Authority to the Borrower with respect to such event:
(i) an ERISA Event;
(ii) if any of the representations and warranties in
Section 5.7 ceases to be true and correct;
(iii) the adoption of any new Pension Plan or other Plan
subject to Section 412 of the Code;
(iv) the adoption of any amendment to a Pension Plan or
other Plan subject to Section 412 of the Code, if such amendment results in a
material increase in contributions or Unfunded Pension Liability; or
(v) the commencement of contributions to any Pension Plan
or other Plan subject to Section 412 of the Code; and
(g) of any material change in accounting policies or financial
reporting practices by the Borrower or any of its consolidated Subsidiaries.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action the Borrower or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under subsection 6.3(a) shall describe with particularity any and all clauses or
provisions of this Agreement or other Loan Document that have been (or
foreseeably will be) breached or violated.
6.4 PRESERVATION OF CORPORATE EXISTENCE, ETC.
The Borrower shall, and shall cause each Subsidiary to:
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(a) preserve and maintain in full force and effect its corporate,
partnership, limited liability or other existence and good standing under the
laws of its state or jurisdiction of incorporation or formation;
(b) preserve and maintain in full force and effect all
governmental rights, privileges, qualifications, permits, licenses and
franchises necessary or desirable in the normal conduct of its business except
in connection with transactions permitted by Section 7.3 and sales of assets
permitted by Section 7.2;
(c) use reasonable efforts, in the ordinary course of business,
to preserve its business organization and goodwill (subject in the case of
Subsidiaries, to transactions permitted under Sections 7.2 and 7.3); and
(d) preserve or renew all of its registered patents, trademarks,
trade names and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
6.5 MAINTENANCE OF PROPERTY
The Borrower shall maintain, and shall cause each Subsidiary to
maintain, and preserve all its property which is used or useful in its business
in good working order and condition, ordinary wear and tear excepted and make
all necessary repairs thereto and renewals and replacements thereof except where
the failure to do so could not reasonably be expected to have a Material Adverse
Effect, except as permitted by Section 7.2.
6.6 INSURANCE
In addition to insurance requirements set forth in the Collateral
Documents, the Borrower shall maintain, and shall cause each of its Subsidiaries
to maintain, with financially sound and reputable independent insurers,
insurance with respect to its properties and business against loss or damage of
the kinds customarily insured against by Persons engaged in the same or similar
business, of such types and in such amounts as are customarily carried under
similar circumstances by such other Persons; including workers' compensation
insurance, public liability and property and casualty insurance which amount
shall not be reduced by the Borrower in the absence of 30 days' prior notice to
the Agent. All such insurance shall name the Agent as loss payee/mortgagee and
as additional insured, for the benefit of the Lenders, as their interests may
appear. Upon request of the Agent or any Lender, the Borrower shall furnish the
Agent, with sufficient copies for each Lender, at reasonable intervals (but not
more than once per calendar year) a certificate of a Responsible Officer of the
Borrower (and, if requested by the Agent, any insurance broker of the Borrower)
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setting forth the nature and extent of all insurance maintained by the Borrower
and its Subsidiaries in accordance with this Section or any Collateral Documents
(and which, in the case of a certificate of a broker, were placed through such
broker).
6.7 PAYMENT OF OBLIGATIONS
The Borrower shall, and shall cause each Subsidiary to, pay and
discharge as the same shall become due and payable, all their respective
obligations and liabilities, including:
(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Borrower or such Subsidiary;
(b) all lawful claims which, if unpaid, would by law become a
Lien upon its property; and
(c) all indebtedness, as and when due and payable, but subject to
any subordination provisions contained in any instrument or agreement evidencing
such Indebtedness.
6.8 COMPLIANCE WITH LAWS
The Borrower shall comply, and shall cause each Subsidiary to comply, in
all material respects with all Requirements of Law of any Governmental Authority
having jurisdiction over it or its business (including the Federal Fair Labor
Standards Act), except such as may be contested in good faith or as to which a
bona fide dispute may exist.
6.9 COMPLIANCE WITH ERISA
The Borrower shall, and shall cause each of its ERISA Affiliates to: (a)
maintain each Plan in compliance in all material respects with the applicable
provisions of ERISA, the Code and other federal or state law; (b) cause each
Plan which is qualified under Section 401(a) of the Code to maintain such
qualification; and (c) make all required contributions to any Plan subject to
Section 412 of the Code.
6.10 INSPECTION OF PROPERTY AND BOOKS AND RECORDS
The Borrower shall maintain and shall cause each Subsidiary to maintain
proper books of record and account, in which full, true and correct entries in
conformity with GAAP consistently applied shall be made of all financial
transactions
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and matters involving the assets and business of the Borrower and such
Subsidiary. The Borrower shall permit, and shall cause each Subsidiary to
permit, in each case no more frequently than annually prior to the occurrence of
an Event of Default, representatives and independent contractors (which, in the
case of any auditing personnel, shall be employees of a nationally recognized
accounting firm) of the Agent who execute and deliver to the Borrower a
confidentiality agreement consistent with Section 10.9 hereof to visit and
inspect any of their respective properties, to examine their respective
corporate, financial and operating records, and make copies thereof or abstracts
therefrom, and to discuss their respective affairs, finances and accounts with
their respective directors, officers, and independent public accountants, all at
the reasonable expense of the Borrower and at such reasonable times during
normal business hours, upon reasonable advance notice to the Borrower; provided,
however, when an Event of Default exists the Agent or any Lender may do any of
the foregoing at the expense of the Borrower at any time during normal business
hours and without advance notice; provided, further however, that such
inspections shall be permitted with such frequency as may reasonably be desired
by the Agent on and after the occurrence of a Default or an Event of Default.
6.11 ENVIRONMENTAL LAWS
(a) The Borrower shall, and shall cause each Subsidiary to, conduct its
operations and keep and maintain its property in compliance with all
Environmental Laws in all material respects.
(b) Upon the written request of the Agent or any Lender, the Borrower
shall submit and cause each of its Subsidiaries to submit, to the Agent with
sufficient copies for each Lender, at the Borrower's sole cost and expense, at
reasonable intervals, a report providing an update of the status of any
environmental, health or safety compliance, hazard or liability issue identified
in any notice or report required pursuant to subsection 6.3(d), that could,
individually or in the aggregate, result in liability in excess of $500,000.
6.12 USE OF PROCEEDS
The Borrower shall use the proceeds of the Loans only for one or more of
the following: working capital, acquisitions permitted hereunder, funding
operations, Joint Ventures permitted hereunder and other general corporate
purposes not in contravention of any Requirement of Law or of any Loan Document.
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6.13 SWAP CONTRACTS
Within 30 days of the Closing Date, the Borrower shall enter into Swap
Contracts providing protection against fluctuations in interest rates with one
or more financial institutions each having a combined capital and surplus of at
least $100,000,000 with respect to at least $37,500,000 of the Loans, which
agreements shall provide for not less than a one-year term and contain such
other terms and provisions as are customary and satisfactory to the Agent.
6.14 FURTHER ASSURANCES
(a) The Borrower shall ensure that all written information, exhibits and
reports furnished to the Agent or the Lenders do not and will not contain any
untrue statement of a material fact and do not and will not omit to state any
material fact necessary to make the statements contained therein not misleading
in light of the circumstances in which made, and will promptly disclose to the
Agent and the Lenders and correct any defect or error that may be discovered
therein or in any Loan Document or in the execution, acknowledgment or
recordation thereof.
(b) Promptly upon request by the Agent or the Required Lenders, the
Borrower shall (and shall cause any of its Subsidiaries to) do, execute,
acknowledge, deliver, record, re-record, file, re-file, register and
re-register, any and all such further acts, deeds, conveyances, security
agreements, mortgages, assignments, estoppel certificates, financing statements
and continuations thereof, termination statements, notices of assignment,
transfers, certificates, assurances and other instruments the Agent or such
Required Lenders, as the case may be, may reasonably require from time to time
in order (i) to carry out more effectively the purposes of this Agreement or any
other Loan Document, (ii) to subject to the Liens created by any of the
Collateral Documents any of the properties, rights or interests covered by any
of the Collateral Documents, except as otherwise provided in the Loan Documents,
(iii) to perfect and maintain the validity, effectiveness and priority of any of
the Collateral Documents and the Liens intended to be created thereby, and (iv)
to better assure, convey, grant, assign, transfer, preserve, protect and confirm
to the Agent and Lenders the rights granted or now or hereafter intended to be
granted to the Lenders under any Loan Document or under any other document
executed in connection therewith.
(c) Within 20 days of the Closing Date, (i) the Borrower shall deliver
to the Agent, lien search results evidencing the filing of Financing Statements
(as defined in the Security Agreement) in the jurisdictions listed in Schedule
6.14 hereto, naming the Borrower as "debtor" and the Agent as "secured party"
and confirming that no other financing statements have been filed with respect
to the Collateral in such jurisdictions (other than Permitted Liens) and (ii)
the Borrower shall use its diligent
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efforts to obtain from its lessors/warehousemen a consent substantially in the
form attached hereto as Exhibit G.
(d) Promptly upon any Person becoming after the date hereof a Subsidiary
of the Borrower, the Borrower:
(i) shall cause such Subsidiary to execute and deliver to the
Agent a guaranty of all of the Obligations in form and substance reasonably
acceptable to the Required Lenders and the Agent;
(ii) shall cause such Subsidiary to execute and deliver to the
Agent a security agreement granting a security interest in all of such
Subsidiary's assets in favor of the Agent for the benefit of the Lenders as
security for the Obligations (including the obligations of such Subsidiary under
the guaranty referred to in clause (i) above), in form and substance reasonably
acceptable to the Required Lenders and the Agent and shall cause to be delivered
to the Agent with respect to such Subsidiary the documents referred to in
Section 4.1, mutatis mutandis, together with such opinions in form and substance
and from counsel reasonably satisfactory to the Agent, as the Agent may require;
and
(iii) shall cause each Person that is the Borrower or an Affiliate
of the Borrower that is the direct owner of any shares of capital stock (or
other evidence of beneficial ownership) of such Subsidiary to execute and
deliver to the Agent a pledge agreement pledging in favor of the Agent for the
benefit of the Lenders as security for the Obligations, all of such capital
stock, in form and substance reasonably acceptable to the Required Lenders and
the Agent, and shall cause to be delivered to the Agent certificates evidencing
all of the issued and outstanding shares of capital stock (or other evidence of
beneficial ownership) of such Subsidiary, together with undated stock powers (or
similar instruments of transfer) owned by such Persons duly executed in blank
and appropriately completed Uniform Commercial Code financing statements, if
applicable, with respect thereto (or, if any such shares of capital stock (or
other evidence of beneficial ownership) are not represented by certificates,
confirmation and evidence satisfactory to the Agent that the security interest
in such shares (or other such evidence) has been transferred and/or registered
in accordance with the laws of the applicable jurisdictions so as to create a
valid first-priority perfected security interest therein for the benefit of the
Agent and the Lenders) and together with such opinions in form and substance and
from counsel reasonably satisfactory to the Agent, as the Agent may reasonably
require;
provided, that in the case of an Acquisition where the Borrower and its
Affiliates acquire less than 100% of the common shares or other common voting
equity interests of a Person, the Borrower shall be required to provide the
security agreement and
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guaranty provided for in clauses (i) and (ii) above only if consented to by the
holders of at least 95% (other than the Borrower and its Affiliates) of the
common shares or other common voting equity interests of such Person; provided,
further, that the Borrower shall be required to make a good faith request for
such consent from such holders; provided, further, if all of the common shares
or other common voting equity interests of such Person are subsequently acquired
by the Borrower and its Affiliates, such Person shall promptly comply with
clauses (i) and (ii) above.
ARTICLE VII
NEGATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, or any Loan
or other Obligation shall remain unpaid or unsatisfied, unless the Required
Lenders waive compliance in writing:
7.1 LIMITATION ON LIENS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, directly or indirectly, make, create, incur, assume or suffer to exist any
Lien upon or with respect to any part of its property, whether now owned or
hereafter acquired, other than the following ("Permitted Liens"):
(a) any Lien (other than a Lien on the Collateral) existing on
property of the Borrower or any Subsidiary on the Closing Date and set forth in
Schedule 7.1 securing Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental
charges which are not delinquent or remain payable without penalty, or to the
extent that non-payment thereof is permitted by Section 6.7, provided that no
notice of lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the ordinary course
of business which are not delinquent or remain payable without penalty or which
are being contested in good faith and by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto;
(e) Liens (other than any Lien imposed by ERISA and other than on
the Collateral) consisting of pledges or deposits required in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other social security legislation;
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(f) Liens (other than Liens on the Collateral) on the property of
the Borrower or its Subsidiary securing (i) the non-delinquent performance of
bids, trade contracts (other than for borrowed money), leases, statutory
obligations, (ii) contingent obligations on surety and appeal bonds, and (iii)
other non-delinquent obligations of a like nature; in each case, incurred in the
ordinary course of business, provided all such Liens in the aggregate would not
(even if enforced) cause a Material Adverse Effect;
(g) Liens (other than Liens on the Collateral) consisting of
judgment or judicial attachment liens, provided that the enforcement of such
Liens is effectively stayed and all such liens in the aggregate at any time
outstanding for the Borrower and its Subsidiaries do not exceed $2,000,000;
(h) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Borrower and its
Subsidiaries;
(i) Liens on assets of corporations which become Subsidiaries
after the date of this Agreement, provided, however, that such Liens existed at
the time the respective corporations became Subsidiaries and were not created in
anticipation thereof;
(j) Liens on assets acquired in an Acquisition, which Liens
existed prior to the completion of the Acquisition and were not created in
contemplation thereof;
(k) purchase money security interests on any property (together
with proceeds, but not products, thereof) acquired or held by the Borrower or
its Subsidiaries in the ordinary course of business, securing Indebtedness
incurred or assumed for the purpose of financing all or any part of the cost of
acquiring such property; provided that (i) any such Lien attaches to such
property concurrently with or within 20 days after the acquisition thereof, (ii)
such Lien attaches solely to the property (together with the proceeds, but not
products, thereof) so acquired in such transaction, (iii) the principal amount
of the debt secured thereby does not exceed 100% of the cost of such property,
and (iv) the annual amortization of the principal amount of the Indebtedness
secured by any and all such purchase money security interests shall not at any
time exceed, together with, without duplication, the annual lease payments in
respect of Indebtedness permitted under Section 7.5(g) as required (or elected
by the Borrower) to be stated per GAAP in its cash flow statements as
amortization, $5,000,000;
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(l) Liens securing obligations in respect of capital leases on
assets subject to such leases, provided that such capital leases are otherwise
permitted hereunder;
(m) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Borrower in excess of those set forth by regulations promulgated
by the FRB except as provided on Schedule 7.1 hereof, and (ii) such deposit
account is not intended by the Borrower or any Subsidiary to provide collateral
to the depository institution; and
(n) Liens consisting of pledges of cash collateral or government
securities to secure on a mark-to-market basis obligations under Swap Contracts
entered into in the ordinary course of business as bona fide hedging
transactions, provided that (i) the counterparty to such Swap Contract is under
a similar requirement to deliver similar collateral from time to time to the
Borrower or the Subsidiary party thereto, and (ii) the aggregate value of such
collateral so pledged by the Borrower and the Subsidiaries together in favor of
any counterparty does not at any time exceed $2,000,000.
7.2 DISPOSITION OF ASSETS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise
dispose of (whether in one or a series of transactions) any property (including
accounts and notes receivable, with or without recourse) or enter into any
agreement to do any of the foregoing, except:
(a) dispositions of inventory, or used, worn-out or surplus
equipment, all in the ordinary course of business; and
(b) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied,
consistent with Section 2.6, to the purchase price of such replacement
equipment; and
(c) dispositions not otherwise permitted hereunder which are made
for fair market value; provided, that (i) at the time of any disposition, no
Event of Default shall exist or shall result from such disposition, (ii) the
aggregate sales price
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from such disposition shall be paid in cash, (iii) Net Proceeds thereof are
applied as set forth in Section 2.6 hereof.
Promptly upon the request of the Borrower, the Agent shall take all
actions, at the cost and expense of the Borrower, necessary to release its
security interest in assets that are disposed of in compliance with this
Agreement.
7.3 CONSOLIDATIONS AND MERGERS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, merge, consolidate with or into, or convey, transfer, lease or otherwise
dispose of (whether in one transaction or in a series of transactions) all or
substantially all of its assets (whether now owned or hereafter acquired) to or
in favor of any Person, except:
(a) any Subsidiary may merge with the Borrower, provided that the
Borrower shall be the continuing or surviving corporation, or with any one or
more Subsidiaries; provided that if any transaction shall be between a
Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be
the continuing or surviving corporation; provided, further, no Subsidiary which
has Indebtedness permitted under Section 7.5(e) or Contingent Obligations
permitted under Section 7.8(d) shall merge with the Borrower or any other
Subsidiary of the Borrower; and
(b) any Subsidiary may sell all or substantially all of its
assets (upon voluntary liquidation or otherwise), to the Borrower or another
Subsidiary with respect to which the Borrower owns an equal or greater
percentage interest of the stock or other equity ownership interests.
7.4 LOANS AND INVESTMENTS
The Borrower shall not purchase or acquire, or suffer or permit any
Subsidiary to purchase or acquire, or make any commitment therefor, any capital
stock, equity interest, or any obligations or other securities of, or any
interest in, any Person, or make or commit to make any Acquisitions, or make or
commit to make any other Investment in, any Person including any Affiliate of
the Borrower, except for:
(a) Investments in Cash Equivalents;
(b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business;
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(c) subject to Section 7.14(d), extensions of credit by the
Borrower to any of its Subsidiaries or by any of its Subsidiaries to another of
its Subsidiaries;
(d) extensions of credit by the Borrower to any of its employees
in an individual amount for each employee not to exceed $250,000 at any one time
outstanding, in an aggregate amount for all such extensions of credit not to
exceed $1,000,000 at any one time outstanding, and in all cases having a
maturity no longer than eighteen (18) months; and
(e) Investments in connection with Acquisitions and Special
Investments to the extent the same are permitted under Section 7.14(d) and, if
both before and after giving effect thereto, no Default or Event of Default
exists would result therefrom;
provided, in the case of extensions of credit described in clauses (c) and (d)
above, such Indebtedness shall rank at least pari passu with all other
Indebtedness of the borrowing Person and shall be evidenced by a promissory note
(which in the case of clause (c) shall be a demand note) pledged by the Borrower
or the lending Subsidiary to the Agent, for the benefit of the Lenders.
7.5 LIMITATION ON INDEBTEDNESS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, create, incur, assume, suffer to exist, or otherwise become or remain
directly or indirectly liable with respect to, any Indebtedness, except:
(a) Indebtedness incurred pursuant to this Agreement;
(b) Indebtedness consisting of Contingent Obligations permitted
pursuant to Section 7.8;
(c) Indebtedness existing on the Closing Date and set forth in
Schedule 7.5;
(d) Indebtedness consisting of Subordinated Debt incurred after
the Closing Date;
(e) Indebtedness of a Subsidiary which was the subject of an
Acquisition permitted hereunder provided that such Indebtedness existed at the
time of such Acquisition and was not incurred in contemplation thereof;
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(f) Indebtedness incurred in connection with capital leases
permitted pursuant to Section 7.9(a) or Section 7.9(c) (without duplication of
the amounts permitted thereunder);
(g) Indebtedness secured by Liens permitted by Section 7.1(k);
(h) Indebtedness of the Borrower consisting of Contingent
Obligations in respect of Indebtedness permitted under Section 7.5(g) or in
connection with a capital lease permitted pursuant to Section 7.9(c); provided,
that the rental payments and amortization in respect thereof shall, for purposes
of determining compliance with the limits set forth in Sections 7.1(k) and
7.9(c) be treated as if payable by the Borrower; and
(i) Indebtedness consisting of extensions of credit permitted
under Sections 7.4(c).
7.6 TRANSACTIONS WITH AFFILIATES
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, enter into any transaction with any Affiliate of the Borrower, except upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
than would obtain in a comparable arm's-length transaction with a Person not an
Affiliate of the Borrower or such Subsidiary; provided, that, such transactions
shall be permitted with respect to Wholly-Owned Subsidiaries so long as either
individually or in the aggregate such transactions could not reasonably be
expected to result in a Material Adverse Effect; provided, further, that such
transactions shall be permitted with respect to Subsidiaries (other than
Wholly-Owned Subsidiaries) so long as the aggregate value of all such
transactions does not exceed $2,000,000.
7.7 USE OF PROCEEDS
(a) The Borrower shall not, and shall not suffer or permit any
Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i)
to purchase or carry Margin Stock, (ii) to repay or otherwise refinance
indebtedness of the Borrower or others incurred to purchase or carry Margin
Stock, (iii) to extend credit for the purpose of purchasing or carrying any
Margin Stock, or (iv) to acquire any security in any transaction that is subject
to Section 13 or 14 of the Exchange Act.
(b) The Borrower shall not, directly or indirectly, use any portion of
the Loan proceeds (i) knowingly to purchase Ineligible Securities from the
Arranger during any period in which the Arranger makes a market in such
Ineligible Securities, (ii) knowingly to purchase during the underwriting or
placement period Ineligible
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Securities being underwritten or privately placed by the Arranger, or (iii) to
make payments of principal or interest on Ineligible Securities underwritten or
privately placed by the Arranger and issued by or for the benefit of the
Borrower or any Affiliate of the Borrower. The Arranger is a registered
broker-dealer and permitted to underwrite and deal in certain Ineligible
Securities; and "Ineligible Securities" means securities which may not be
underwritten or dealt in by member banks of the Federal Reserve System under
Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as
amended.
7.8 CONTINGENT OBLIGATIONS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, create, incur, assume or suffer to exist any Contingent Obligations except:
(a) endorsements for collection or deposit in the ordinary course
of business;
(b) Swap Contracts entered into in the ordinary course of
business for companies similarly situated as the Borrower as bona fide hedging
transactions including, without limitation, the Swap Contracts required under
Section 6.13;
(c) Contingent Obligations of the Borrower and its Subsidiaries
existing as of the Closing Date and listed in Schedule 7.8;
(d) without duplication of the amounts permitted under Section
7.5(e), Contingent Obligations of a Subsidiary which was the subject of an
Acquisition permitted hereunder provided that such Contingent Obligations
existed at the time of such Acquisition and were not incurred in contemplation
thereof; and
(e) without duplication of the amounts permitted under Section
7.5(h), Contingent Obligations of the Borrower in respect of Indebtedness of the
type described therein, subject in any case to the limits described therein.
7.9 LEASE OBLIGATIONS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, create or suffer to exist any obligations for the payment of rent for any
property under lease or agreement to lease, except for:
(a) leases of the Borrower and of Subsidiaries in existence on
the Closing Date and any renewal, extension or refinancing thereof;
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(b) operating leases entered into by the Borrower or any
Subsidiary after the Closing Date in the ordinary course of business for
companies similarly situated as the Borrower;
(c) capital leases other than those permitted under clause (a) of
this Section, entered into by the Borrower or any Subsidiary after the Closing
Date to finance the acquisition of equipment; provided that the aggregate annual
amount of rental payments for all such capital leases as required (or elected by
the Borrower) to be stated per GAAP in its cash flow statements as amortization,
together with, without duplication, the aggregate principal amortization in
respect of Indebtedness permitted under Section 7.5(f) shall not exceed in any
fiscal year, $5,000,000.
7.10 RESTRICTED PAYMENTS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of any shares of
any class of its capital stock, or purchase, redeem or otherwise acquire for
value any shares of its capital stock or any warrants, rights or options to
acquire such shares, now or hereafter outstanding; except that (a) the Borrower
may declare and make dividend payments, stock splits, or other distributions
payable solely in its common stock, (b) the Borrower may purchase or redeem
stock of the Borrower from former employees who acquired the stock pursuant to
an option plan of the Borrower but with respect to which the former employee's
rights to such stock are not vested, (c) Subsidiaries of the Borrower which are
organized as limited liability companies or as limited partnerships may, if no
Default or Event of Default then exists or would result therefrom, declare and
make the minimum amount of annual dividends and distributions necessary in order
for the partners or members thereof, as the case may be, to satisfy the tax
liability accruing to such partners or members, in respect of the net income of
such Subsidiary and (d) in addition to the foregoing, the Borrower and its
Subsidiaries may declare and pay dividends and distributions, and to consummate
purchases and redemptions, in an aggregate annual amount not to exceed
$1,000,000 provided that no Default or Event of Default exists or would result
therefrom.
7.11 ERISA
The Borrower shall not, and shall not suffer or permit any of its ERISA
Affiliates to: (a) engage in a nonexempt prohibited transaction or violation of
ERISA's fiduciary responsibility rules with respect to any Plan which has
resulted or could reasonably expected to result in liability of the Borrower in
an aggregate amount in excess of $1,000,000; or (b) engage in a transaction that
could reasonably be expected to be subject to Section 4069 or 4212(c) of ERISA.
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7.12 CHANGE IN BUSINESS
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, engage in any material line of business substantially different from lines
of business primarily relating to sales and distribution of goods and services
over the Internet and similar electronic media; it being understood that
Subsidiaries may engage in material lines of business with respect to goods and
services ancillary or substantially related to the foregoing.
7.13 ACCOUNTING CHANGES
The Borrower shall not, and shall not suffer or permit any Subsidiary
to, make any material change in accounting treatment or reporting practices,
except as required by GAAP, or change the fiscal year of the Borrower or of any
Subsidiary (except, in the case of Subsidiaries, to the extent necessary for
such Subsidiaries' fiscal year and application of GAAP to be consistent with
that of the Borrower).
7.14 FINANCIAL COVENANTS
(a) Minimum Cash Balance. The Borrower shall maintain at all times a
minimum balance of readily available unencumbered cash and Cash Equivalents on
deposit in deposit or similar accounts at least equal to the Required Cash
Balance.
(b) EBITDA/Negative EBITDA Covenant. The Borrower's EBITDA, measured at
end of the first fiscal quarter of 1998 for the quarter then ended, at the end
of the second fiscal quarter of 1998 for the two consecutive fiscal quarters
then ended, at the end of the third fiscal quarter of 1998 for the three
consecutive fiscal quarters then ended, and at each quarter end thereafter for
the three consecutive quarters then ended shall not be less than the amounts
indicated below for such quarter end (and, if expressed as a deficit, the
Borrower's EBITDA loss shall not be greater than the amount indicated below for
the relevant period):
[ * ]
provided that for purposes hereof, "EBITDA" shall be determined without
reduction for non-cash charges consisting of expenses recognized with respect to
goodwill, intangibles, and purchased research and development related to
Acquisitions permitted hereunder and accounted for during the relevant measuring
period.
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[ * ] Confidential Treatment Requested
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(c) Maximum Payable Days. As of the end of each fiscal quarter, the
product of (i) the quotient of (A) the accounts payable (excluding accounts
payable in respect of general administration and marketing to the extent not
included in cost of goods sold as reported per GAAP) of the Borrower as of the
end of such fiscal quarter divided by (B) the product of (I) the cost of goods
sold as reported per GAAP by the Borrower for such fiscal quarter and to be
disclosed in financials to be filed with the SEC times (II) 4 times (ii) 365,
shall be equal to or less than 100.
(d) Capital Expenditures/Acquisitions. (i) Without duplication, the
aggregate capital expenditures made, Acquisitions consummated, and Special
Investments made pursuant to Section 7.4(e), by the Borrower and its
Subsidiaries, shall not exceed in any fiscal year the Capital Expenditure
Component plus [ * ] (excluding any Equity Consideration paid in connection
therewith). (ii) Capital expenditures (excluding Acquisitions) made by the
Borrower and its Subsidiaries, in the aggregate, in any fiscal year, shall not
exceed the Capital Expenditure Component for such fiscal year; (iii) The
aggregate amount, without duplication, of Acquisitions consummated and Special
Investments made by the Borrower and its Subsidiaries in the aggregate for any
fiscal year shall not exceed [ * ]; it being understood that the use of common
stock, $0.01 par value, of the Borrower, to consummate Acquisitions shall not be
limited (including as specified in the parenthetical clause at the end of
subsection (d)(i) above).
7.15 SUBORDINATED DEBT
Not, and not permit any of its Subsidiaries to:
(a) subject to clause (c) below, make any payment (whether of
principal, interest or otherwise) on any Subordinated Debt on any day other than
the stated, scheduled date for such payment set forth in the documents and
instruments evidencing such Subordinated Debt (which shall in all cases for
principal be at least 45 days later than the Maturity Date);
(b) make any payment on any Subordinated Debt in contravention or
violation of the subordination provisions thereof; or
(c) prepay, redeem, purchase or defease any Subordinated Debt, or
make any deposit for any of the foregoing purposes; or
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[ * ] Confidential Treatment Requested
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(d) enter into any amendment or modification of any Subordinated
Debt.
7.16 NON-MATERIAL SUBSIDIARIES
The Borrower shall not permit (i) the total (gross) revenues of all
Non-Material Subsidiaries in the aggregate for the preceding four fiscal quarter
period to exceed [ * ] of total (gross) revenues of the Borrower and all its
Subsidiaries for such period or (ii) total assets, as of the last day of the
preceding fiscal quarter, with a net book value in excess of [ * ] of the total
net book value of total assets of the Borrower and all its Subsidiaries, in each
case, based upon the Borrower's most recent annual or quarterly financial
statements delivered to the Agent under Section 6.1; provided, that the Borrower
shall have the power to designate in writing to the Agent any Non-Material
Subsidiary as a Material Subsidiary, subject to all provisions in this Agreement
concerning Material Subsidiaries, (within three days of determining
non-compliance with this Section 7.16) for the purposes of complying with this
Section 7.16; provided further any Subsidiary which is acquired or formed in
connection with a permitted Acquisition or otherwise has been a Subsidiary of
the Borrower for less than four fiscal quarters shall, for purposes of the
foregoing tests, include its financial results for the relevant fiscal quarters
(i.e., those necessary to report four fiscal quarters of revenues) prior to
becoming a Subsidiary of the Borrower, as if such Subsidiary had become a
Subsidiary of the Borrower at the beginning of such four fiscal quarter period.
Subject to the foregoing and delivery of the certificate called for in Section
6.2, the Borrower may from time to time designate Subsidiaries as Non-Material
Subsidiaries.
ARTICLE VIII
EVENTS OF DEFAULT
8.1 EVENT OF DEFAULT
Any of the following shall constitute an "Event of Default":
(a) Non-Payment. The Borrower fails to pay, (i) when and as
required to be paid herein, any amount of principal of any Loan, or (ii) within
5 days after the same becomes due, any interest, fee or any other amount payable
hereunder or under any other Loan Document; or
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[ * ] Confidential Treatment Requested
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(b) Representation or Warranty. Any representation or warranty by
the Borrower or any Subsidiary made or deemed made herein, in any other Loan
Document, or which is contained in any certificate, document or financial or
other statement by the Borrower, any Subsidiary, or any Responsible Officer,
furnished at any time under this Agreement, or in or under any other Loan
Document, is incorrect in any material respect on or as of the date made or
deemed made; or
(c) Specific Defaults. (i) The Borrower fails to perform or
observe any term, covenant or agreement contained in any of Section 6.1, 6.2,
6.3, or 6.6 or in Article VII other than Sections 7.6 and 7.13; provided,
failure to promptly notify the Agent of a non-material Default shall not
constitute an Event of Default if the underlying event giving rise to such
Default has been cured or waived; or (ii) the Borrower fails to perform or
observe any term, covenant or agreement contained in Section 6.9 and such
default shall continue unremedied for a period of 3 days; or
(d) Other Defaults. The Borrower or any Subsidiary party thereto
fails to perform or observe any other term or covenant contained in this
Agreement or any other Loan Document, and such default shall continue unremedied
for a period of 20 days (or such longer period of time of not more than 45 days
as is reasonably necessary to cure provided that the Borrower is diligently
pursuing a cure and then only if the cure can reasonably be effected during such
extended period) after the earlier of (i) the date upon which a Responsible
Officer knew or reasonably should have known of such failure or (ii) the date
upon which written notice thereof is given to the Borrower by the Agent or any
Lender; provided in the case of Warrants, such default shall exist with respect
to or be asserted by, a holder thereof which is a Lender or an Affiliate of a
Lender; or
(e) Cross-Default. The Borrower or any Subsidiary (i) fails to
make any payment in respect of any Indebtedness or Contingent Obligation having
an aggregate principal amount (including undrawn committed or available amounts
and including amounts owing to all creditors under any combined or syndicated
credit arrangement) of more than $1,000,000 when due (whether by scheduled
maturity, required prepayment, acceleration, demand, or otherwise) and such
failure continues after the applicable grace or notice period, if any, specified
in the relevant document on the date of such failure; or (ii) fails to perform
or observe any other condition or covenant, or any other event shall occur or
condition exist, under any agreement or instrument relating to any such
Indebtedness or Contingent Obligation, and such failure continues after the
applicable grace or notice period, if any, specified in the relevant document on
the date of such failure, if the effect of such failure, event or condition is
to cause, or to permit the holder or holders of such Indebtedness or beneficiary
or beneficiaries of such Indebtedness (or a trustee or agent on behalf of
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such holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated maturity,
or such Contingent Obligation to become payable or cash collateral in respect
thereof to be demanded; provided, in the case of undrawn committed facilities
which have not been terminated by the parties (other than the Borrower or its
Subsidiaries) thereto, the Borrower shall have ten (10) days to either cure the
underlying default or terminate such facility; or
(f) Insolvency; Voluntary Proceedings. The Borrower or any
Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or
admits in writing its inability to pay, its debts as they become due, subject to
applicable grace periods, if any, whether at stated maturity or otherwise; (ii)
voluntarily ceases to conduct its business in the ordinary course; (iii)
commences any Insolvency Proceeding with respect to itself; or (iv) takes any
action to effectuate or authorize any of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Borrower or any Subsidiary, or any
writ, judgment, warrant of attachment, execution or similar process, is issued
or levied against a substantial part of the Borrower's or any Subsidiary's
properties, and any such proceeding or petition shall not be dismissed, or such
writ, judgment, warrant of attachment, execution or similar process shall not be
released, vacated or fully bonded within 60 days after commencement, filing or
levy; (ii) the Borrower or any Subsidiary admits the material allegations of a
petition against it in any Insolvency Proceeding, or an order for relief (or
similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or
(iii) the Borrower or any Subsidiary acquiesces in the appointment of a
receiver, trustee, custodian, conservator, liquidator, mortgagee in possession
(or agent therefor), or other similar Person for itself or a substantial portion
of its property or business; or
(h) ERISA. (i) An ERISA Event shall occur with respect to a
Pension Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of the Borrower under Title IV of ERISA to the
Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of
$1,000,000; or (ii) the aggregate amount of Unfunded Pension Liability among all
Pension Plans at any time exceeds $1,000,000; or (iii) the Borrower or any ERISA
Affiliate shall fail to pay when due, after the expiration of any applicable
grace period, any installment payment with respect to its withdrawal liability
under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in
excess of $1,000,000; or
(i) Monetary Judgments. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Borrower
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or any Subsidiary involving in the aggregate a liability (i) (to the extent not
covered by independent third-party insurance as to which the insurer does not
dispute coverage) as to any single or related series of transactions, incidents
or conditions, of $2,000,000 or more, or (ii) as to any single or related series
of transactions, incidents or conditions, of $10,000,000 or more (whether or not
covered by third-party insurance as to which the insurer does not dispute
coverage), and the same shall remain unvacated and unstayed pending appeal for a
period of 30 days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or
decree is entered against the Borrower or any Subsidiary which does or would
reasonably be expected to have a Material Adverse Effect, and there shall be any
period of 30 consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(k) Change of Control. There occurs any Change of Control which
shall have continued for three (3) days; or
(l) Adverse Change. There occurs a Material Adverse Effect; or
(m) Invalidity of Subordination Provisions. The subordination
provisions of any agreement or instrument governing any Subordinated Debt is for
any reason revoked or invalidated, or otherwise cease to be in full force and
effect, the Borrower, its shareholders, or their Affiliates contest in any
manner the validity or enforceability thereof or denies that it has any further
liability or obligation thereunder, or the Indebtedness hereunder is for any
reason subordinated or does not have the priority contemplated by this Agreement
or such subordination provisions; or
(n) Collateral.
(i) (A) Any provision of any Collateral Document shall for
any reason cease to be valid and binding on or enforceable in any material
respect against the Borrower or any Subsidiary party thereto (other than
Non-Material Subsidiaries which do not have any material Collateral) or (B) the
Borrower or any Subsidiary shall state that any provision of any Collateral
Document shall for any reason cease to be valid and binding on or enforceable
against the Borrower or any Subsidiary party thereto in writing or bring an
action to limit its obligations or liabilities thereunder; or
(ii) any Collateral Document shall for any reason (other
than pursuant to the terms thereof) cease to create a valid security interest in
the Collateral purported to be covered thereby or such security interest shall
for any reason cease to
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be a perfected and first priority security interest with respect to any material
item of collateral subject only to Permitted Liens.
8.2 REMEDIES
If any Event of Default occurs, the Agent shall, at the request of, or
may, with the consent of, the Required Lenders,
(a) if the Closing Date has not occurred, declare the commitment
of each Lender to make Loans to be terminated, whereupon such commitments shall
be terminated;
(b) declare the unpaid principal amount of all outstanding Loans,
all interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower; and
(c) exercise on behalf of itself and the Lenders all rights and
remedies available to it and the Lenders under the Loan Documents or applicable
law;
provided, however, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation of each
Lender to make Loans shall automatically terminate and the unpaid principal
amount of all outstanding Loans and all interest and other amounts as aforesaid
shall automatically become due and payable without further act of the Agent or
any Lender.
8.3 RIGHTS NOT EXCLUSIVE
The rights provided for in this Agreement and the other Loan Documents
are cumulative and are not exclusive of any other rights, powers, privileges or
remedies provided by law or in equity, or under any other instrument, document
or agreement now existing or hereafter arising.
8.4 CERTAIN FINANCIAL COVENANT DEFAULTS
In the event that, after taking into account any extraordinary charge to
earnings taken or to be taken as of the end of any fiscal period of the Borrower
(a "Charge"), and if solely by virtue of such Charge, there would exist an Event
of Default due to the breach of any of Section 7.14(b) as of such fiscal period
end date, such Event of Default shall be deemed to arise upon the earlier of (a)
the date after such fiscal period end date on which the Borrower announces
publicly it will take, is taking or
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has taken such Charge (including an announcement in the form of a statement in a
report filed with the SEC) or, if such announcement is made prior to such fiscal
period end date, the date that is such fiscal period end date, and (b) the date
the Borrower delivers to the Agent its audited annual or unaudited quarterly
financial statements in respect of such fiscal period reflecting such Charge as
taken.
8.5 NON-MATERIAL SUBSIDIARIES
Notwithstanding any provision hereof to the contrary, any non-compliance
by a Non-Material Subsidiary (or the failure of the Borrower to cause a
Non-Material Subsidiary to comply) with, or the occurrence with respect to, the
provisions of Sections 5.16, 5.19, 6.7, 8.1(f) and 8.1(g) shall not constitute
an Event of Default unless such non-compliance could reasonably be expected to
have a Material Adverse Effect.
8.6 ACQUIRED SUBSIDIARIES
Notwithstanding anything contained in Section 8.1(b) to the contrary,
the failure of any representation or warranty contained herein or any of the
Loan Documents with respect to any Subsidiary which was acquired pursuant to an
Acquisition permitted hereunder to be correct in all material respects on or as
of the date made or deemed made, which failure relates solely to events,
circumstances or conditions occurring or existing prior to such Acquisition,
shall not constitute a Default or Event of Default hereunder if the aggregate
liability or impairment to Collateral which could reasonably be expected to
result from all such failures does not exceed $2,000,000.
ARTICLE IX
THE AGENT
9.1 APPOINTMENT AND AUTHORIZATION
Each Lender hereby irrevocably (subject to Section 9.9) appoints,
designates and authorizes the Agent to take such action on its behalf under the
provisions of this Agreement and each other Loan Document and to exercise such
powers and perform such duties as are expressly delegated to it by the terms of
this Agreement or any other Loan Document, together with such powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
contained elsewhere in this Agreement or in any other Loan Document, the Agent
shall not have any duties or responsibilities, except those expressly set forth
herein, nor shall the Agent have or be deemed to have any fiduciary relationship
with any Lender, and no implied covenants,
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functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or any other Loan Document or otherwise exist against the
Agent.
9.2 DELEGATION OF DUTIES
The Agent may execute any of its duties under this Agreement or any
other Loan Document by or through agents, employees or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Agent shall not be responsible for the negligence or misconduct of
any agent or attorney-in-fact that it selects with reasonable care.
9.3 LIABILITY OF AGENT
None of the Agent-Related Persons shall (i) be liable for any action
taken or omitted to be taken by any of them under or in connection with this
Agreement or any other Loan Document or the transactions contemplated hereby
(except for its own gross negligence or willful misconduct), or (ii) be
responsible in any manner to any of the Lenders for any recital, statement,
representation or warranty made by the Borrower or any Subsidiary or Affiliate
of the Borrower, or any officer thereof, contained in this Agreement or in any
other Loan Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Agent under or in connection
with, this Agreement or any other Loan Document, or for the value of or title to
any Collateral, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other Loan Document, or for any failure of
the Borrower or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, or to inspect the properties, books or records of the
Borrower or any of the Borrower's Subsidiaries or Affiliates.
9.4 RELIANCE BY AGENT
(a) The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any writing, resolution, notice, consent, certificate, affidavit,
letter, telegram, facsimile, telex or telephone message, statement or other
document or conversation believed by it to be genuine and correct and to have
been signed, sent or made by the proper Person or Persons, and upon advice and
statements of legal counsel (including counsel to the Borrower), independent
accountants and other experts selected by the Agent. The Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any
other Loan Document unless it shall first receive such advice or concurrence of
the Required Lenders as it deems
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appropriate and, if it so requests, it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Agreement or any other Loan Document in accordance with a
request or consent of the Required Lenders and such request and any action taken
or failure to act pursuant thereto shall be binding upon all of the Lenders.
(b) For purposes of determining compliance with the conditions specified
in Section 4.1, each Lender that has executed this Agreement shall be deemed to
have consented to, approved or accepted or to be satisfied with, each document
or other matter either sent by the Agent to such Lender for consent, approval,
acceptance or satisfaction, or required thereunder to be consented to or
approved by or acceptable or satisfactory to the Lender.
9.5 NOTICE OF DEFAULT
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default, except with respect to defaults
in the payment of principal, interest and fees required to be paid to the Agent
for the account of the Lenders, unless the Agent shall have received written
notice from a Lender or the Borrower referring to this Agreement, describing
such Default or Event of Default and stating that such notice is a "notice of
default." The Agent will notify the Lenders of its receipt of any such notice.
The Agent shall take such action with respect to such Default or Event of
Default as may be requested by the Required Lenders in accordance with Article
VIII; provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Lenders.
9.6 CREDIT DECISION
Each Lender acknowledges that none of the Agent-Related Persons has made
any representation or warranty to it, and that no act by the Agent hereinafter
taken, including any review of the affairs of the Borrower and its Subsidiaries,
shall be deemed to constitute any representation or warranty by any
Agent-Related Person to any Lender. Each Lender represents to the Agent that it
has, independently and without reliance upon any Agent-Related Person and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of the Borrower and
its Subsidiaries, the value of and title to any Collateral, and all applicable
bank regulatory laws relating to the transactions
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contemplated hereby, and made its own decision to enter into this Agreement and
to extend credit to the Borrower hereunder. Each Lender also represents that it
will, independently and without reliance upon any Agent-Related Person and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Borrower. Except for notices, reports and other
documents expressly herein required to be furnished to the Lenders by the Agent,
the Agent shall not have any duty or responsibility to provide any Lender with
any credit or other information concerning the business, prospects, operations,
property, financial and other condition or creditworthiness of the Borrower
which may come into the possession of any of the Agent-Related Persons.
9.7 INDEMNIFICATION OF AGENT
Whether or not the transactions contemplated hereby are consummated, the
Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not
reimbursed by or on behalf of the Borrower and without limiting the obligation
of the Borrower to do so), pro rata, from and against any and all Indemnified
Liabilities; provided, however, that no Lender shall be liable for the payment
to the Agent-Related Persons of any portion of such Indemnified Liabilities
resulting solely from such Person's gross negligence or willful misconduct.
Without limitation of the foregoing, each Lender shall reimburse the Agent upon
demand for its ratable share of any costs or out-of-pocket expenses (including
Attorney Costs) incurred by the Agent in connection with the preparation,
execution, delivery, administration, modification, amendment or enforcement
(whether through negotiations, legal proceedings or otherwise) of, or legal
advice in respect of rights or responsibilities under, this Agreement, any other
Loan Document, or any document contemplated by or referred to herein, to the
extent that the Agent is not reimbursed for such expenses by or on behalf of the
Borrower. The undertaking in this Section shall survive the payment of all
Obligations hereunder and the resignation or replacement of the Agent.
9.8 AGENT IN INDIVIDUAL CAPACITY
Deutsche Bank and its Affiliates may make loans to, issue letters of
credit for the account of, accept deposits from, acquire equity interests in and
generally engage in any kind of banking, trust, financial advisory, underwriting
or other business with the Borrower and its Subsidiaries and Affiliates as
though Deutsche Bank were not the Agent hereunder and without notice to or
consent of the Lenders. The Lenders acknowledge that, pursuant to such
activities, Deutsche Bank or its Affiliates may
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receive information regarding the Borrower or its Affiliates (including
information that may be subject to confidentiality obligations in favor of the
Borrower or such Subsidiary) and acknowledge that the Agent shall be under no
obligation to provide such information to them. With respect to its Loans,
Deutsche Bank shall have the same rights and powers under this Agreement as any
other Lender and may exercise the same as though it were not the Agent, and the
terms "Lender" and "Lenders" include Deutsche Bank in its individual capacity.
9.9 SUCCESSOR AGENT
The Agent may, and at the request of the Required Lenders shall, resign
as Agent upon 30 days' notice to the Lenders. If the Agent resigns under this
Agreement, the Required Lenders shall appoint from among the Lenders a successor
agent for the Lenders which successor agent shall, if no Default or Event of
Default then exists, be approved by the Borrower. If no successor agent is
appointed prior to the effective date of the resignation of the Agent, the Agent
may appoint, after consulting with the Lenders and the Borrower, a successor
agent from among the Lenders. Upon the acceptance of its appointment as
successor agent hereunder, such successor agent shall succeed to all the rights,
powers and duties of the retiring Agent and the term "Agent" shall mean such
successor agent and the retiring Agent's appointment, powers and duties as Agent
shall be terminated. After any retiring Agent's resignation hereunder as Agent,
the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement. If no successor agent has accepted appointment as Agent by
the date which is 30 days following a retiring Agent's notice of resignation,
the retiring Agent's resignation shall nevertheless thereupon become effective
and the Lenders shall perform all of the duties of the Agent hereunder until
such time, if any, as the Required Lenders appoint a successor agent as provided
for above.
9.10 WITHHOLDING TAX
(a) If any Lender is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Lender claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Lender agrees with and in favor of the Agent, to deliver to the Agent:
(i) if such Lender claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed IRS Forms
1001 and W-8 before the payment of any interest in the first calendar year and
before the payment of any interest in each third succeeding calendar year during
which interest may be paid under this Agreement;
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(ii) if such Lender claims that interest paid under this Agreement
is exempt from United States withholding tax because it is effectively connected
with a United States trade or business of such Lender, two properly completed
and executed copies of IRS Form 4224 before the payment of any interest is due
in the first taxable year of such Lender and in each succeeding taxable year of
such Lender during which interest may be paid under this Agreement, and IRS Form
W-9; and
(iii) such other form or forms as may be required under the Code or
other laws of the United States as a condition to exemption from, or reduction
of, United States withholding tax.
Such Lender agrees to promptly notify the Agent of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.
(b) If any Lender claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 and such Lender
sells, assigns, grants a participation in, or otherwise transfers all or part of
the Obligations of the Borrower to such Lender, such Lender agrees to notify the
Agent of the percentage amount in which it is no longer the beneficial owner of
Obligations of the Borrower to such Lender. To the extent of such percentage
amount, the Agent will treat such Lender's IRS Form 1001 as no longer valid.
(c) If any Lender claiming exemption from United States withholding tax
by filing IRS Form 4224 with the Agent sells, assigns, grants a participation
in, or otherwise transfers all or part of the Obligations of the Borrower to
such Lender, such Lender agrees to undertake sole responsibility for complying
with the withholding tax requirements imposed by Sections 1441 and 1442 of the
Code.
(d) If any Lender is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Lender
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Lender not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United States
or other jurisdiction asserts a claim that the Agent did not properly withhold
tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because such
Lender failed to notify the Agent of a change in circumstances which rendered
the exemption from, or reduction
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of, withholding tax ineffective, or for any other reason) such Lender shall
indemnify the Agent fully for all amounts paid, directly or indirectly, by the
Agent as tax or otherwise, including penalties and interest, and including any
taxes imposed by any jurisdiction on the amounts payable to the Agent under this
Section, together with all costs and expenses (including Attorney Costs). The
obligation of the Lenders under this subsection shall survive the payment of all
Obligations and the resignation or replacement of the Agent.
9.11 COLLATERAL MATTERS
(a) The Agent is authorized on behalf of all the Lenders, without the
necessity of any notice to or further consent from the Lenders, from time to
time to take any action with respect to any Collateral or the Collateral
Documents which may be necessary to perfect and maintain perfected the security
interest in and Liens upon the Collateral granted pursuant to the Collateral
Documents.
(b) The Lenders irrevocably authorize the Agent, at its option and in
its discretion, to release any Lien granted to or held by the Agent upon any
Collateral (i) upon termination of the Commitments and payment in full of all
Loans and all other Obligations known to the Agent and payable under this
Agreement or any other Loan Document; (ii) constituting property sold or to be
sold or disposed of as part of or in connection with any disposition permitted
hereunder; (iii) constituting property in which the Borrower or any Subsidiary
owned no interest at the time the Lien was granted or at any time thereafter;
(iv) constituting property leased to the Borrower or any Subsidiary under a
lease which has expired or been terminated in a transaction permitted under this
Agreement or is about to expire and which has not been, and is not intended by
the Borrower or such Subsidiary to be, renewed or extended; (v) consisting of an
instrument evidencing Indebtedness or other debt instrument, if the indebtedness
evidenced thereby has been paid in full; or (vi) if approved, authorized or
ratified in writing by the Required Lenders or all the Lenders, as the case may
be, as provided in subsection 10.1(f). Upon request by the Agent at any time,
the Lenders will confirm in writing the Agent's authority to release particular
types or items of Collateral pursuant to this subsection 9.11(b).
(c) Each Lender agrees with and in favor of each other (which agreement
shall not be for the benefit of the Borrower or any Subsidiary) that the
Borrower's obligation to such Lender under this Agreement and the other Loan
Documents is not and shall not be secured by any real property collateral now or
hereafter acquired by such Lender.
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ARTICLE X
MISCELLANEOUS
10.1 AMENDMENTS AND WAIVERS
No amendment or waiver of any provision of this Agreement or any other
Loan Document, and no consent with respect to any departure by the Borrower or
any applicable Subsidiary therefrom, shall be effective unless the same shall be
in writing and signed by the Required Lenders (or by the Agent at the written
request of the Required Lenders) and the Borrower and acknowledged by the Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Lenders and the Borrower and acknowledged by the Agent, do any of the
following:
(a) increase or extend the Commitment of any Lender (or reinstate
any Commitment terminated pursuant to Section 8.2), unless such Lender has
consented thereto in writing;
(b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment (including without limit mandatory
prepayments) of principal, interest, fees or other amounts due to the Lenders
(or any of them) hereunder or under any other Loan Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or (subject to clause (ii) below) any fees or other amounts
payable hereunder or under any other Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Lenders or any of
them to take any action hereunder; or
(e) amend the definition of "Required Lenders," this Section, or
Section 2.13, or any provision herein providing for consent or other action by
all Lenders; or
(f) release any material portion of the Collateral except as
otherwise may be provided in a Loan Document or except where the consent of the
Required Lenders only is specifically provided for;
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Required Lenders or all the
Lenders, as the case may be, affect the rights or duties of the Agent under this
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Agreement or any other Loan Document, and (ii) the Commitment Letter may be
amended, or rights or privileges thereunder waived, in a writing executed by the
parties thereto.
10.2 NOTICES
(a) All notices, requests and other communications shall be in writing
(including, unless the context expressly otherwise provides, by facsimile
transmission, provided that any matter transmitted by the Borrower by facsimile
(i) shall be immediately confirmed by a telephone call to the recipient at the
number specified on Schedule 10.2, and (ii) shall be followed promptly by
delivery of a hard copy original thereof) and mailed, faxed or delivered, to the
address or facsimile number specified for notices on Schedule 10.2; or, as
directed to the Borrower or the Agent, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to any other party, at such other address as shall be designated by
such party in a written notice to the Borrower and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Agent.
(c) Any agreement of the Agent and the Lenders herein to receive certain
notices by telephone or facsimile is solely for the convenience and at the
request of the Borrower. The Agent and the Lenders shall be entitled to rely on
the authority of any Person purporting to be a Person authorized by the Borrower
to give such notice and the Agent and the Lenders shall not have any liability
to the Borrower or other Person on account of any action taken or not taken by
the Agent or the Lenders in reliance upon such telephonic or facsimile notice.
The obligation of the Borrower to repay the Loans shall not be affected in any
way or to any extent by any failure by the Agent and the Lenders to receive
written confirmation of any telephonic or facsimile notice or the receipt by the
Agent and the Lenders of a confirmation which is at variance with the terms
understood by the Agent and the Lenders to be contained in the telephonic or
facsimile notice.
10.3 NO WAIVER; CUMULATIVE REMEDIES
No failure to exercise and no delay in exercising, on the part of the
Agent or any Lender, any right, remedy, power or
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privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
10.4 COSTS AND EXPENSES
The Borrower shall:
(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse Deutsche Bank (including in its capacity as Agent)
within five Business Days after demand (subject to subsection 4.1(e)) for all
reasonable costs and expenses incurred by Deutsche Bank (including in its
capacity as Agent) in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to (in each case, whether or not consummated), this Agreement, any
Loan Document and any other documents prepared in connection herewith or
therewith, and the consummation of the transactions contemplated hereby and
thereby, including reasonable Attorney Costs incurred by Deutsche Bank
(including in its capacity as Agent) with respect thereto, but excluding
printing, duplicating, mailing and travel costs related to the syndication of
the Loans; and
(b) pay or reimburse the Agent, the Arranger and each Lender
within five Business Days after demand (subject to subsection 4.1(e)) for all
costs and expenses (including reasonable Attorney Costs) incurred by them in
connection with the enforcement, attempted enforcement, or preservation of any
rights or remedies under this Agreement or any other Loan Document during the
existence of an Event of Default or after acceleration of the Loans (including
in connection with any "workout" or restructuring regarding the Loans, and
including in any Insolvency Proceeding or appellate proceeding); and
(c) pay or reimburse Deutsche Bank (including in its capacity as
Agent) within five Business Days after demand (subject to subsection 4.1(e)) for
all appraisal (including the allocated cost of internal appraisal services),
audit, environmental inspection and review (including the allocated cost of such
internal services), search and filing costs, fees and expenses, incurred or
sustained by Deutsche Bank (including in its capacity as Agent) in connection
with the matters referred to under subsections (a) and (b) of this Section.
10.5 BORROWER INDEMNIFICATION
(a) Whether or not the transactions contemplated hereby are consummated,
the Borrower shall indemnify, defend and hold the Agent-Related Persons, and
each Lender and each of its respective officers, directors, employees, counsel,
agents and
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attorneys-in-fact (each, an "Indemnified Person") harmless from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, charges, expenses and disbursements (including
reasonable Attorney Costs) of any kind or nature whatsoever which may at any
time (including at any time following repayment of the Loans and the
termination, resignation or replacement of the Agent or replacement of any
Lender) be imposed on, incurred by or asserted against any such Person in any
way relating to or arising out of this Agreement or any document contemplated by
or referred to herein, or the transactions contemplated hereby, or any action
taken or omitted by any such Person under or in connection with any of the
foregoing, including with respect to any investigation, litigation or proceeding
(including any Insolvency Proceeding or appellate proceeding) related to or
arising out of this Agreement or the Loans or the use of the proceeds thereof,
whether or not any Indemnified Person is a party thereto (all the foregoing,
collectively, the "Indemnified Liabilities"); provided, that the Borrower shall
have no obligation hereunder to any Indemnified Person with respect to
Indemnified Liabilities resulting solely from the gross negligence or willful
misconduct of or from a breach of contract by such Indemnified Person. The
agreements in this Section shall survive payment of all other Obligations.
(c) Survival; Defense. The obligations in this Section shall survive
payment of all other Obligations. At the election of any Indemnified Person, the
Borrower shall defend such Indemnified Person using legal counsel reasonably
satisfactory to such Indemnified Person in such Person's sole discretion, at the
sole cost and expense of the Borrower. All amounts owing under this Section
shall be paid within 30 days after demand.
10.6 MARSHALLING; PAYMENTS SET ASIDE
Neither the Agent nor the Lenders shall be under any obligation to
marshall any assets in favor of the Borrower or any other Person or against or
in payment of any or all of the Obligations. To the extent that the Borrower
makes a payment to the Agent or the Lenders, or the Agent or the Lenders
exercise their right of set-off, and such payment or the proceeds of such
set-off or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required (including pursuant to any
settlement entered into by the Agent or such Lender in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any
Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such set-off had not occurred, and (b) each Lender severally agrees to pay to
the Agent upon demand its pro rata share of any amount so recovered from or
repaid by the Agent.
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10.7 SUCCESSORS AND ASSIGNS
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 transfer any of its rights or
obligations under this Agreement without the prior written consent of the Agent
and each Lender.
10.8 ASSIGNMENTS, PARTICIPATIONS, ETC.
(a) Any Lender may, with the written consent of the Agent and the
Borrower which shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
the Agent or the Borrower shall be required in connection with any assignment
and delegation by a Lender to an Eligible Assignee that is an Affiliate of such
Lender or to another Lender; provided, further, no Borrower consent shall be
required if there is a continuing Default or an Event of Default) (each an
"Assignee") all, or any ratable part of all, of the Loans, the Commitments and
the other rights and obligations of such Lender hereunder, in a minimum amount
of $5,000,000; provided, however, that the Borrower and the Agent may continue
to deal solely and directly with such Lender in connection with the interest so
assigned to an Assignee until (i) written notice of such assignment, together
with payment instructions, addresses and related information with respect to the
Assignee, shall have been given to the Borrower and the Agent by such Lender and
the Assignee; (ii) such Lender and its Assignee shall have delivered to the
Borrower and the Agent an Assignment and Acceptance in the form of Exhibit D
("Assignment and Acceptance") together with any Note or Notes subject to such
assignment and (iii) the assignor Lender or Assignee has paid to the Agent a
processing fee in the amount of $3,500.
(b) From and after the date that the Agent notifies the assignor Lender
that the proposed assignee is an approved Eligible Assignee (to the extent
approval is necessary), that it has received (and provided its consent with
respect to) an executed Assignment and Acceptance and payment of the
above-referenced processing fee, (i) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and obligations of a Lender under the Loan Documents, and (ii) the assignor
Lender shall, to the extent that rights and obligations hereunder and under the
other Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Loan Documents.
(c) Within five Business Days after its receipt of notice by the Agent
that it has received an executed Assignment and Acceptance and payment of the
processing
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fee, the Borrower shall execute and deliver to the Agent, new Notes evidencing
such Assignee's assigned Loans and Commitment and, if the assignor Lender has
retained a portion of its Loans and its Commitment, replacement Notes in the
principal amount of the Loans retained by the assignor Lender (such Notes to be
in exchange for, but not in payment of, the Notes held by such Lender).
Immediately upon each Assignee's making its processing fee payment under the
Assignment and Acceptance, this Agreement shall be deemed to be amended to the
extent, but only to the extent, necessary to reflect the addition of the
Assignee and the resulting adjustment of the Commitments arising therefrom. The
Commitment allocated to each Assignee shall reduce such Commitments of the
assigning Lender pro tanto.
(d) Any Lender may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Borrower (a "Participant") participating
interests in any Loans, the Commitment of that Lender and the other interests of
that Lender (the "originating Lender") hereunder and under the other Loan
Documents; provided, however, that (i) the originating Lender's obligations
under this Agreement shall remain unchanged, (ii) the originating Lender shall
remain solely responsible for the performance of such obligations, (iii) the
Borrower and the Agent shall continue to deal solely and directly with the
originating Lender in connection with the originating Lender's rights and
obligations under this Agreement and the other Loan Documents, (iv) no Lender
shall transfer or grant any participating interest under which the Participant
has rights to approve any amendment to, or any consent or waiver with respect
to, this Agreement or any other Loan Document, except to the extent such
amendment, consent or waiver would require unanimous consent of the Lenders as
described in the first proviso to Section 10.1, and (v) each such participation
shall be in an aggregate principal amount of at least $3,000,000 (or such lesser
amount as shall equal the portion of the originating Lender's Loans for which
participating interests have not been sold hereunder). In the case of any such
participation, the Participant shall be entitled to the benefit of Sections 3.1,
3.3 and 10.5 as though it were also a Lender hereunder, and if amounts
outstanding under this Agreement are due and unpaid, or shall have been declared
or shall have become due and payable upon the occurrence of an Event of Default,
each Participant shall be deemed to have the right of set-off in respect of its
participating interest in amounts owing under this Agreement to the same extent
as if the amount of its participating interest were owing directly to it as a
Lender under this Agreement.
(e) Notwithstanding any other provision in this Agreement, any Lender
may at any time create a security interest in, or pledge, all or any portion of
its rights under and interest in this Agreement and the Note held by it in favor
of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31
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CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or
security interest in any manner permitted under applicable law.
10.9 CONFIDENTIALITY
Agent and each Lender agree to take and to cause their Affiliates to
take normal and reasonable precautions and exercise due care to maintain the
confidentiality of all information identified as "confidential" or "secret" by
the Borrower as well as information that, given its nature, should reasonably be
believed by such Persons to be confidential, provided to them by the Borrower or
any Subsidiary, or by the Agent on such Borrower's or Subsidiary's behalf, under
this Agreement or any other Loan Document. Neither the Agent, the Lender nor any
of their Affiliates shall use any such information other than in connection with
or in enforcement of this Agreement and the other Loan Documents or to the
extent such information (i) was or becomes generally available to the public
other than as a result of disclosure by the Agent, such Lender, or their
respective Affiliate or (ii) was or becomes available on a non-confidential
basis from a source other than the Borrower or a Subsidiary, provided that such
source is not bound by a confidentiality agreement with the Borrower or a
Subsidiary known to the Agent, such Lender, or their respective Affiliate;
provided, however, that the Agent, any Lender, or any of their respective
Affiliates may disclose such information at the request or pursuant to any
requirement of any Governmental Authority to which the Lender is subject or in
connection with an examination of such Lender by any such authority (with
subsequent notice thereof promptly given to the Borrower) or, after having given
notice to the Borrower (unless such notice is prohibited by law) and reasonable
opportunity, in light of the circumstances, for the Borrower to obtain a
confidentiality agreement or a protective order (substantively similar to the
requirements herein), as appropriate, (A) pursuant to subpoena or other court
process; (B) when required to do so in accordance with the provisions of any
applicable Requirement of Law; (C) to the extent reasonably required in
connection with any litigation or proceeding to which the Agent, any Lender or
their respective Affiliates may be party; (D) to the extent reasonably required
in connection with the exercise of any remedy hereunder or under any other Loan
Document; provided, further, that the Agent, any Lender, or any of their
respective Affiliates may disclose such information (W) to such Lender's
independent auditors and other professional advisors; (X) to any Participant or
Assignee, actual or potential, provided that such Person agrees in writing for
the express benefit of the Borrower to keep such information confidential to the
same extent required of the Lenders hereunder; (Y) as to any Lender or its
Affiliate, as expressly permitted under the terms of any other document or
agreement regarding confidentiality to which the Borrower or any Subsidiary is
party or is deemed party with such Lender or such Affiliate; and (Z) to its
Affiliates; however, in each of the
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foregoing clauses (W) through (Z), (i) the agreement referred to in clause (Y)
is made for the express benefit of the Borrower; (ii) disclosure to any Person
is prohibited unless the Agent or such Lender believes in good faith that such
Person is not a competitor of the Borrower; and (iii) any disclosure made in
accordance with the foregoing clauses (W) through (Z) is made to Persons only on
a need-to-know basis.
10.10 SET-OFF
In addition to any rights and remedies of the Lenders provided by law,
if an Event of Default exists or the Loans have been accelerated, each Lender is
authorized at any time and from time to time, without prior notice to the
Borrower, any such notice being waived by the Borrower to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held by, and other
indebtedness at any time owing by, such Lender to or for the credit or the
account of the Borrower against any and all Obligations owing to such Lender,
now or hereafter existing, irrespective of whether or not the Agent or such
Lender shall have made demand under this Agreement or any Loan Document and
although such Obligations may be contingent or unmatured. Each Lender agrees
promptly to notify the Borrower and the Agent after any such set-off and
application made by such Lender; provided, however, that the failure to give
such notice shall not affect the validity of such set-off and application.
10.11 AUTOMATIC DEBITS OF FEES
With respect to any arrangement fee, underwriting fee or other fee, or
any other cost or expense (including Attorney Costs) due and payable to the
Agent, Deutsche Bank or the Arranger under the Loan Documents, the Borrower
hereby irrevocably authorizes Deutsche Bank to debit any deposit account of the
Borrower with Deutsche Bank in an amount such that the aggregate amount debited
from all such deposit accounts does not exceed such fee or other cost or
expense. If there are insufficient funds in such deposit accounts to cover the
amount of the fee or other cost or expense then due, such debits will be
reversed (in whole or in part, in Deutsche Bank's sole discretion) and such
amount not debited shall be deemed to be unpaid. No such debit under this
Section shall be deemed a set-off.
10.12 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC.
Each Lender shall notify the Agent in writing of any changes in the
address to which notices to the Lender should be directed, of addresses of any
Lending Office, of payment instructions in respect of all payments to be made to
it hereunder and of such other administrative information as the Agent shall
reasonably request.
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<PAGE> 88
10.13 COUNTERPARTS
This Agreement may be executed in any number of separate counterparts,
each of which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the same
instrument.
10.14 SEVERABILITY
The illegality or unenforceability of any provision of this Agreement or
any instrument or agreement required hereunder shall not in any way affect or
impair the legality or enforceability of the remaining provisions of this
Agreement or any instrument or agreement required hereunder.
10.15 NO THIRD PARTIES BENEFITED
This Agreement is made and entered into for the sole protection and
legal benefit of the Borrower, the Lenders, the Agent and the Agent-Related
Persons, and their permitted successors and assigns, and no other Person shall
be a direct or indirect legal beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any of the other
Loan Documents.
10.16 GOVERNING LAW AND JURISDICTION
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENT AND
THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF
THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWER, THE AGENT AND THE LENDERS
CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE BORROWER, THE AGENT AND THE LENDERS
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE BORROWER, THE AGENT AND
THE
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<PAGE> 89
LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS,
WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW.
10.17 WAIVER OF JURY TRIAL
THE BORROWER, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE
RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE LENDERS AND THE
AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A
COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER
AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF
THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN
WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
10.18 ENTIRE AGREEMENT
This Agreement, together with the other Loan Documents, embodies the
entire agreement and understanding among the Borrower, the Lenders and the
Agent, and supersedes all prior or contemporaneous agreements and understandings
of such Persons, verbal or written, relating to the subject matter hereof and
thereof.
[Signature page(s) follows]
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<PAGE> 90
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in New York, New York by their proper and duly
authorized officers as of the day and year first above written.
AMAZON.COM, INC.
By: Joy D. Covey
------------------------------------
Title: Chief Financial Officer
---------------------------------
DEUTSCHE BANK AG, NEW YORK BRANCH, as
Administrative Agent
By: Ira Lubinsk
------------------------------------
Title: Vice President
---------------------------------
By: Inken S. Finnamore
------------------------------------
Title: Assistant Vice President
---------------------------------
DEUTSCHE BANK AG, NEW YORK BRANCH AND CAYMAN
ISLANDS BRANCH, as a Bank
By: William W. McGinty
------------------------------------
Title: Director
---------------------------------
By: Ira Lubinsky
------------------------------------
Title: Vice President
---------------------------------
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<PAGE> 91
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME
TRUST, as a Lender
By: Jeffery W. Maillet
----------------------------------
Title: Sr. Vice President & Director
-------------------------------
By:
----------------------------------
Title:
-------------------------------
BANKBOSTON N.A., as a Bank
By: David B. Herter
----------------------------------
Title: Managing Director
-------------------------------
By:
----------------------------------
Title:
-------------------------------
BANQUE PARIBAS, as a Bank
By: Nanci Meyer
-------------------------------
Title: Vice President
----------------------------
By: [signature illegible]
-------------------------------
Title: Director
----------------------------
SILICON VALLEY BANK, as a Bank
By: Laurita J. Hernandez
-------------------------------
Title: Vice President
----------------------------
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<PAGE> 92
By:___________________________________
Title:________________________________
-86-
<PAGE> 1
EXHIBIT 10.19
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
DECEMBER 23, 1997 AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT OR LAWS OR THE RULES AND
REGULATIONS THEREUNDER (PROVIDED AMAZON RECEIVES AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IT TO SUCH EFFECT) OR THE PROVISIONS OF THIS
WARRANT.
STOCK PURCHASE WARRANT
Closing Date: December 23, 1997 Certificate No. 1
For value received, Amazon.com, Inc., a Delaware corporation
("Amazon"), hereby grants to Deutsche Bank AG, New York Branch, for the benefit
of the lenders party to that certain Credit Agreement (as hereinafter defined),
or its registered assigns (the "Registered Holder"), the right to purchase from
Amazon 750,000 shares of Warrant Stock at a price of $52.11 per share (as
adjusted from time to time hereunder), (the "Exercise Price"). This Warrant is
the warrant (the "Warrant") issued pursuant to the terms of the Credit Agreement
(as amended or modified, the "Credit Agreement"), dated as of December 23, 1997,
among Amazon, the other financial institutions party thereto and Deutsche Bank
AG, New York Branch, as administrative agent. Certain capitalized terms used
herein are defined in Section 6 hereof. Capitalized terms used herein but not
otherwise defined herein shall have the meanings set forth for such terms in the
Credit Agreement. The amount and kind of securities purchasable pursuant to the
rights granted hereunder and the Exercise Price are subject to adjustment
pursuant to the provisions contained in this Warrant.
Amazon and the Registered Holder agree that the value of this
Warrant shall be zero ($0) for tax purposes.
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
1.A. Exercise Period. Subject to Section 2.D, the Registered
Holder may exercise, in whole or in part, the purchase rights represented by
this Warrant at any time and from time to time in series as follows (provided
any such exercise shall be for
<PAGE> 2
a minimum of 100 shares of Warrant Stock unless less than 100 shares of Warrant
Stock are then issuable hereunder):
(i) with respect to 75,000 shares of Warrant Stock (as adjusted
from time to time hereunder) issuable upon exercise of this Warrant, on
December 23, 1998 (the "Series I Warrant Stock");
(ii) with respect to 225,000 shares of Warrant Stock (as adjusted
from time to time hereunder) issuable upon exercise of this Warrant, on
December 23, 1999 (the "Series II Warrant Stock"); and
(iii) with respect to 450,000 shares of Warrant Stock (as
adjusted from time to time hereunder) issuable upon exercise of this
Warrant, on December 23, 2000 (the "Series III Warrant Stock"),
in each case to and including the fifth anniversary of the date on which such
series first becomes exercisable (the "Exercise Period").
1.B. Exercise Procedure.
(i) This Warrant shall be deemed to have been exercised when
Amazon has received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph 1.C
below, executed by the Person exercising all or part of the purchase
rights represented by this Warrant (the "Purchaser");
(b) this Warrant;
(c) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in Exhibit
II hereto evidencing the assignment of this Warrant to the Purchaser, in
which case the Registered Holder shall have complied with the provisions
set forth in Section 8 hereof; and
(d) either (1) a check payable to Amazon in an amount equal to
the product of the Exercise Price multiplied by the number of shares of
Warrant Stock being purchased upon such exercise (the "Aggregate
Exercise Price"), (2) a written notice to Amazon that the Person is
exercising the Warrant (or a portion thereof) by authorizing Amazon to
withhold from issuance a number of shares of Warrant Stock issuable
-2-
<PAGE> 3
upon such exercise of the Warrant which when multiplied by the Market
Price of the Warrant Stock is equal to the Aggregate Exercise Price (and
such withheld shares shall no longer be issuable under this Warrant).
(ii) Certificates for shares of Warrant Stock purchased upon
exercise of this Warrant shall be delivered by Amazon to the Purchaser within
five business days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
Amazon shall prepare a new Warrant, substantially identical hereto, representing
the rights formerly represented by this Warrant which have not expired or been
exercised and shall, within such five-day period, deliver such new Warrant to
the Person designated for delivery in the Exercise Agreement. The rights of, and
restrictions on, the holders of Underlying Common Stock set forth herein will
survive the expiration of this Warrant and the exercise in full of all of the
purchase rights represented hereby.
(iii) The Warrant Stock issuable upon the exercise of this
Warrant shall be deemed to have been issued to the Purchaser at the Exercise
Time, and the Purchaser shall be deemed for all purposes to have become the
record holder of such Warrant Stock at the Exercise Time.
(iv) The issuance of certificates for shares of Warrant Stock
upon exercise of this Warrant shall be made without charge to the Registered
Holder or the Purchaser for any issuance tax in respect thereof or other cost
incurred by Amazon in connection with such exercise and the related issuance of
shares of Warrant Stock (other than any transfer taxes resulting from a
simultaneous exercise and transfer). Each share of Warrant Stock issuable upon
exercise of this Warrant shall, upon payment of the Exercise Price therefor, be
fully paid and nonassessable and free from all liens, encumbrances, adverse
claims and charges with respect to the issuance thereof.
(v) Amazon shall not close its books against the transfer of this
Warrant or of any share of Warrant Stock issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. Amazon shall from time to time take all such action as may be necessary
to assure that the par value per share of the unissued Warrant Stock acquirable
upon exercise of this Warrant is at all times equal to or less than the sum of
the Exercise Price then in effect.
(vi) Amazon shall assist and cooperate with any Registered Holder
or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in
-3-
<PAGE> 4
connection with any exercise of this Warrant (including, without limitation,
making any filings required to be made by Amazon).
(vii) Notwithstanding any other provision hereof, if an exercise
of any portion of this Warrant is to be made in connection with a public
offering or a sale of Amazon, the exercise of any portion of this Warrant may,
at the election of the holder hereof, be conditioned upon the consummation of
the public offering or such sale of Amazon in which case such exercise shall not
be deemed to be effective until the consummation of such transaction.
(viii) Amazon shall at all times reserve and keep available out
of its authorized but unissued shares of Warrant Stock, solely for the purpose
of issuance upon the exercise of the Warrant, such number of shares of Warrant
Stock as are issuable upon the exercise of the Warrant. All shares of Warrant
Stock which are so issuable shall, when issued, be duly and validly issued,
fully paid and nonassessable and free from all taxes, liens, encumbrances,
adverse claims and charges. Amazon shall take all such actions as may be
necessary to ensure that all such shares of Warrant Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any securities exchange (or the Nasdaq Stock Market) upon which
shares of Warrant Stock may be listed (except for official notice of issuance
which shall be immediately delivered by Amazon upon each such issuance).
1.C. Exercise Agreement. Upon any exercise of this Warrant, the
Exercise Agreement shall be substantially in the form set forth in Exhibit I
hereto, except that if the shares of Warrant Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Warrant Stock are to be issued, and if the number of shares of
Warrant Stock to be issued does not include all the shares of Warrant Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Section 2. Adjustment of Exercise Price and Number of Shares. The
Exercise Price shall be subject to adjustment from time to time as provided in
this Section 2, and the number of shares of Warrant Stock obtainable upon
exercise of this Warrant shall be subject to adjustment from time to time as
provided in this Section 2.
2.A. Subdivision or Combination of Common Stock. If Amazon at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its
-4-
<PAGE> 5
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision shall be proportionately
reduced and the number of shares of Warrant Stock obtainable upon exercise of
this Warrant shall be proportionately increased. If Amazon at any time combines
(by reverse stock split or otherwise) one or more classes of its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect immediately prior to such combination shall be proportionately increased
and the number of shares of Warrant Stock obtainable upon exercise of this
Warrant shall be proportionately decreased.
2.B. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of Amazon's assets to another Person or
other transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock, other than
an event otherwise provided for in this Section 2, is referred to herein as an
"Organic Change." Prior to the consummation of any Organic Change, Amazon shall
make appropriate provision to ensure that the holders of this Warrant shall
thereafter have the right to acquire and receive, upon exercise of this Warrant
during the Exercise Period and upon payment of the Exercise Price then in
effect, such shares of stock, securities or other assets as may be issued or
payable with respect to or in exchange for the number of shares of Warrant Stock
immediately theretofore acquirable and receivable upon exercise of this Warrant
had such Organic Change not taken place. In any such case, Amazon shall make
appropriate provision with respect to such holders' rights and interests to
ensure that the provisions of this Section 2 and Section 3 hereof shall
thereafter be applicable to the Warrants. Amazon shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than Amazon) resulting from consolidation or merger
or the entity purchasing such assets assumes by written instrument the
obligation to deliver to each such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire.
2.C. Minimum Adjustment; Rounding. In the event any adjustment of
the Exercise Price pursuant to this Section 2 shall result in an adjustment of
the Exercise Price of less than $.05 per share, no such adjustment shall be
made, but any such lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which, together
with any adjustments so carried forward, shall amount to $.05 or more per share;
provided, however, that upon any adjustment of the
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<PAGE> 6
Exercise Price resulting from any event set forth in this Section 2, the
foregoing figure of $.05 per share (or such figure as last adjusted) shall be
proportionately adjusted; and provided, further, that upon the exercise of this
Warrant, the Company shall make all necessary adjustments not theretofore made
to the Exercise Price up to and including the date upon which this Warrant is
exercised or repurchased. All calculations under this Section 2 shall be rounded
to the nearest cent or the nearest share, as the case may be.
2.D. Clawback. In the event Amazon repays all outstanding
principal, accrued interest, fees and expenses (for which expenses Amazon has
received notice from Agent or any Lender as of the date the principal is repaid
in full) in accordance with the terms of the Credit Agreement in full and the
Commitment of the Lenders is terminated on the dates set forth below, this
Warrant shall immediately (with no further action on the part of Amazon or the
Registered Holder) terminate and be of no further force or effect with respect
to the number of shares of Warrant Stock set forth in the corresponding column
below:
<TABLE>
<CAPTION>
================================================================================
Payment and Termination Date Warrant Terminated with
respect to:
- --------------------------------------------------------------------------------
<S> <C>
on or prior to December 23, 1998 100% of Series I, II and III
- --------------------------------------------------------------------------------
After December 23, 1998 but 100% of Series II and III
prior to March 23, 1999
- --------------------------------------------------------------------------------
After March 23, 1999, but 50% of Series II and 100% of
prior to June 23, 1999 Series III
- --------------------------------------------------------------------------------
After June 23, 1999, but 100% of Series III
prior to December 23, 1999
- --------------------------------------------------------------------------------
After December 23, 1999, but 50% of Series III
prior to June 23, 2000
- --------------------------------------------------------------------------------
Thereafter None
================================================================================
</TABLE>
Section 3. Liquidating Dividends. If Amazon pays a dividend upon
the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with applicable corporate law and generally
accepted accounting principles consistently applied), except for a stock
dividend payable in shares of Common Stock or any distribution to holders of
Common Stock in respect of the sale of all or substantially all of Amazon's
assets to another Person; provided that Amazon has complied with Section 2 of
this Warrant (a "Liquidating Dividend"), then, (i) upon exercise hereof and
payment of the
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<PAGE> 7
Exercise Price, Amazon shall pay to the Registered Holder of this Warrant, the
Liquidating Dividend which would have been paid to such Registered Holder on the
Warrant Stock had this Warrant been fully exercised immediately prior to the
date on which a record is taken for such Liquidating Dividend, or, if no record
is taken, the date as of which the record holders of Common Stock entitled to
such dividends are to be determined; or (ii) in lieu of clause (i), at the
option of the holder (such option to be exercised in writing by the holder at
least 10 days after receipt of notice of such dividend from Amazon), the
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of any class of securities
entitled to receive such Liquidating Dividend shall be reduced, effective as of
the close of business on such record date, to a price determined by multiplying
such Exercise Price by a fraction:
(A) the numerator of which shall be the Market Price in
effect on such record date or, if any class of Common Stock
trades on an ex-dividend basis, the date prior to the
commencement of ex-dividend trading, less the value of such
dividend or distribution (as determined by the Board of Directors
of the Company in the good faith, reasonable exercise of its
business judgment) applicable to one share of Common Stock, and
(B) the denominator of which shall be such Market Price.
There shall be no additional adjustments under this Section 3 upon the
consummation of any such Liquidating Dividend.
Section 4. Certificates, Notices and Consents.
4.A. Certificates. Upon the occurrence of any event requiring
adjustments of the Exercise Price and/or number of shares subject to this
Warrant pursuant to Section 2, Amazon shall mail to the Registered Holder (by
registered or certified mail, postage prepaid) a certificate signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer of
Amazon, setting forth in reasonable detail the events requiring the adjustment
and the method by which such proposed adjustment was calculated, specifying the
adjusted Exercise Price and/or number of shares subject to this Warrant after
giving effect to the proposed adjustment(s).
4.B. Notices. If Amazon after the date hereof, and so long as
this Warrant(s) shall be outstanding, shall propose to:
(i) pay any dividend (including, without limitation, any
extraordinary dividend) payable in
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<PAGE> 8
stock to the holders of Common Stock or to make any other distribution
to the holders of Common Stock, or any pro rata subscription offer to
holders of Common Stock to purchase any additional shares of any class
of stock or any other rights or options (other than stock repurchases
under Amazon's employee stock option plans as in effect on the date
hereof or similar plans or other repurchase agreements in effect on the
date hereof; or
(ii) effect any Organic Change or sale transaction described in
Section 2.B or the liquidation, dissolution or winding up of Amazon;
then, in each such case, Amazon shall mail (by registered or certified
mail, postage prepaid) to the Registered Holders notice of such proposed
action, which shall specify the date on which the books of Amazon shall
close, or a record date shall be established, for determining holders of
Common Stock entitled to receive such stock dividends or other
distribution or participate in such offering, or the date on which such
Organic Change, liquidation, dissolution or winding up shall take place
or commence, as the case may be, and the date as of which it is expected
that holders of Common Stock of record shall be entitled to receive
securities or other property deliverable upon such action, if any such
date is to be fixed.
Such notice shall be mailed, in the case of any action described by clause (i)
above, at least 10 days prior to the record date for determining holders of
Common Stock for purposes of receiving such payment or offer, and in case of
clause (ii) above, at least 20 days prior to the date upon which such action
takes place.
4.C. Failure and Defects. Failure to mail any certificate or
notice, or any defect in any certificate or notice, pursuant to this Section 4,
shall not affect the legality or validity of the adjustment of the Exercise
Price and/or number of shares of Warrant Stock subject to this Warrant pursuant
to Section 2.
Section 5. Registration and Qualification.
5.A. Piggyback Registration. If prior to December 23, 2007 Amazon
proposes (whether at the request of any other Person or otherwise) to register
any security under the Securities Act on any registration form (otherwise than
for the registration of securities to be offered and sold pursuant to (a) an
employee
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<PAGE> 9
benefit plan, (b) a dividend or interest reinvestment plan, (c) other similar
plans or (d) reclassifications of securities, mergers, consolidations and
acquisitions of assets on Form S-4 or any successor thereto) prescribed by the
Securities and Exchange Commission (the "Commission") permitting a secondary
offering or distribution, Amazon shall promptly give to the holders of
Underlying Common Stock written notice of such proposal which shall describe in
detail the proposed registration and distribution (including those jurisdictions
where registration or qualification under the securities or blue sky laws is
intended) and, upon the written request of any holder of Underlying Common Stock
given within 15 days after the date of any such notice, proceed to include in
such registration such shares of Underlying Common Stock as have been requested
by any such holder to be included in such registration; provided, however, that
Amazon shall not be required to give such notice to the holder of a Warrant if
the Warrant is not exercisable prior to the anticipated effective date of the
registration. Amazon shall in each instance use its reasonable best efforts to
cause any Underlying Common Stock (the holders of which shall have so requested
registration thereof) to be registered under the Securities Act and qualified
under the securities or blue sky laws of any jurisdiction requested by a
prospective seller, all to the extent necessary to permit the sale or other
disposition thereof (in the manner stated in such request) by a prospective
seller of the securities so registered.
If the registration of which Amazon gives notices is for a registered
public offering involving an underwriting, Amazon shall so advise the holders of
Underlying Common Stock as a part of the written notice given pursuant to this
section. In such event, the right of any holder of Underlying Common Stock to
registration pursuant to this section shall be conditioned upon such holder's
participation in such underwriting and the inclusion of such holder's Underlying
Common Stock in the underwriting, to the extent requested, to the extent
provided herein. All holders of Underlying Common Stock proposing to distribute
their securities through such underwriting shall (together with Amazon and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by Amazon. Notwithstanding any other provision of
this section, if the managing underwriter determines and advises Amazon in
writing that, in its opinion, the inclusion of the Underlying Common Stock with
the securities being registered by Amazon and other shares of prospective
sellers would materially adversely affect the distribution of all such
securities, then the managing underwriter may limit the number of shares of
Underlying Common Stock and other prospective sellers to be included in the
registration and underwriting, on a pro rata basis based on the
-9-
<PAGE> 10
total number of securities (including, without limitation, Underlying Common
Stock) entitled to registration pursuant to registration rights granted by
Amazon; provided, however, no such reduction may reduce the number of securities
being sold by all the holders of securities entitled to registration other than
Amazon to less than fifteen percent (15%) of the shares being sold in such
offering. To facilitate the allocation of shares in accordance with the above
provisions, Amazon or the underwriters may round the number of shares allocated
to any holder of Underlying Common Stock or other holder to the nearest 100
shares. If any holder of Underlying Common Stock or other securities entitled to
registration disapproves of the terms of any such underwriting, such holder may
elect to withdraw therefrom by written notice to Amazon and the managing
underwriter delivered at least twenty-one (21) days prior to the effective date
of the registration statement. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one hundred twenty (120) days
after the effective date of the registration statement relating thereto. In the
event of such delay, Amazon shall use its reasonable best efforts to effect any
registration or qualification under the Securities Act and the securities or
blue sky laws of any jurisdiction as may be necessary to permit such prospective
seller to make its proposed offering and sale following the end of such period
of delay.
The Company shall have the right to terminate or withdraw any
registration initiated by it under this section prior to the effectiveness of
such registration, whether or not any holder of Underlying Common Stock has
elected to include securities in such registration.
The holder of Underlying Common Stock who has requested
Underlying Common Stock to be included in a registration pursuant to this
Section 5.A by acceptance hereof or thereof, agrees to execute an underwriting
agreement with such underwriter that is (i) reasonably satisfactory to such
holder and (ii) in customary form.
5.B. Registration and Qualification Procedures. Whenever Amazon is
required by the provisions of Section 5.A to use its reasonable best efforts to
effect the registration of any of its securities under the Securities Act,
Amazon shall, as expeditiously as possible:
(i) prepare and file with the Commission a registration statement with
respect to such securities and use its reasonable best efforts to cause such
registration statement to become effective and, before filing a registration
statement or prospectus or any amendments or supplements thereto, furnish to
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<PAGE> 11
counsel selected by the majority of holders of Underlying Common Stock
participating in such registration copies of all documents proposed to be filed
with the Commission or other federal, state or local agencies, which documents
shall be subject to the review and comments of such counsel;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
the prospectus current for up to 60 days after the effectiveness of the
registration statement (or such shorter time as is required to effect the
distribution and sale of all the securities subject to such registration
statement) and, subject to the foregoing limitations, to comply with the
provisions of the Securities Act with respect to the sale of all securities
covered by such registration statement whenever the seller of such securities
shall desire to sell the same;
(iii) furnish to each seller such number of copies of preliminary
prospectuses and prospectuses and each supplement or amendment thereto and such
other documents as each seller may reasonably request in order to facilitate the
sale or other disposition of the securities owned by such seller in conformity
with (A) the requirements of the Securities Act and (B) the seller's proposed
method of distribution;
(iv) use its reasonable best efforts to register or qualify the
securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions within the United States as each seller shall
reasonably request, and do such other reasonable acts and things as may be
required of it to enable each seller to consummate the sale or other disposition
in such jurisdictions of the securities owned by such seller; provided, however,
that Amazon shall not be required in order to accomplish any of the foregoing to
(A) qualify as a foreign corporation or consent to a general and unlimited
service of process in any such jurisdiction, (B) qualify as a dealer in
securities or (C) register or qualify in any jurisdiction if Amazon would be
required to pay income taxes in such jurisdictions solely as a result of such
registration or qualification;
(v) if such registration is underwritten, use its reasonable best
efforts to furnish, at the request of any underwriter (A) on the date such
securities are delivered to the underwriters for sale pursuant to such
registration, an opinion, dated such date, of counsel representing Amazon for
purposes of such registration, addressed to the underwriters covering such legal
matters with respect to the registration in respect of which such opinion is
being given as the underwriters may reasonably request and are customarily
included in such an opinion and (B) letters, dated the
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effective date of the registration statement and the date such securities are
delivered to the underwriters for sale pursuant to such registration, from a
firm of independent certified public accountants of recognized standing selected
by Amazon, addressed to the underwriters covering such financial, statistical
and accounting matters with respect to the registration in respect of which such
letters are being given as the underwriters may reasonably request and are
customarily included in such letters;
(vi) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders as soon as reasonably practicable an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act;
(vii) enter into and perform an underwriting agreement with the managing
underwriter, if any, selected as provided in Section 5.A, containing customary
terms;
(viii) provide a transfer agent and registrar for all such Underlying
Common Stock not later than the effective date of such registration statement;
(ix) notify each seller of any Underlying Common Stock included in any
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement
contains an untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading, and, at the request of any such
seller, Amazon shall prepare a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of the Common Stock or other
securities, such prospectus shall not contain an untrue statement of a material
fact or omit to state any fact necessary to make the statements therein not
misleading; and
(x) otherwise keep each seller advised in writing as to the initiation
and progress of any registration under Section 5.A.
5.C. Allocation of Expenses. If Amazon is required by the provisions of
Section 5.A to use its reasonable best efforts to effect the registration or
qualification under the Securities Act or any state securities or blue sky laws
of any of the Underlying Common Stock, Amazon shall pay all expenses in
connection therewith, including, without limitation, (i) all expenses incident
to filing with the National Association of Securities Dealers, Inc., (ii)
registration fees, (iii) printing expenses, (iv) accounting and legal fees and
expenses, (v) expenses of any special audits incident to or required by any such
registration or
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<PAGE> 13
qualification, (vi) expenses of complying with the securities or blue sky laws
of any jurisdictions in connection with such registration or qualification and
(vii) the reasonable fees and expenses of one counsel to the holders of
Underlying Common Stock selected by a majority of such holders participating in
such registration or qualification; provided, however, Amazon shall not be
liable for (A) any discounts or commissions to any underwriter applicable to the
securities registered on behalf of the holders of Underlying Common Stock or (B)
any stock transfer taxes incurred in respect of the Warrant Stock sold by the
sellers.
5.D. Indemnification. In connection with any registration or
qualification of securities under Section 5.A, Amazon shall indemnify the
participating holders of Underlying Common Stock and each underwriter thereof,
including each Person, if any, who is an officer or director of, or who
controls, such holders or underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, against all actual
out-of-pocket losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and attorneys' fees and expenses, whether in
an action brought by a third party or by the parties hereto), arising, directly
or indirectly, out of or based upon (i) any untrue, or alleged untrue, statement
of a material fact contained in any registration statement, preliminary
prospectus, prospectus or notification or offering circular (as amended or
supplemented if Amazon shall have furnished any amendments or supplements
thereto); (ii) any omission, or alleged omission, to state therein a material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances in which they were made,not misleading; or (iii)
any violation by Amazon of any federal, state or common law rule or regulation
applicable to Amazon and relating to action or inaction required of Amazon in
connection with any such registration, provided, however, that with respect to
any untrue statement or omission or alleged untrue statement or omission made in
any preliminary prospectus, the indemnity agreement contained in this sentence
shall not apply to the extent that (i) any loss, claim, damage, liability or
expense results from the fact that a current copy of the prospectus was sent or
given to the Person asserting any such loss, claim, damage, liability or expense
at or prior to the written confirmation of the sale of the Underlying Common
Stock confirmed to such Person if it is determined that it was the
responsibility of the participating holder or any of its directors, officers or
agents, or any underwriter, to provide such person with a current copy of the
prospectus and such current copy of the prospectus would have cured the defect
giving rise to such loss, claim, damage, liability or expense; and (ii) such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or alleged untrue statement or omission or alleged omission
based solely upon information furnished in
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<PAGE> 14
writing to Amazon by such holder or underwriter expressly for use therein.
The participating holders of Underlying Common Stock shall indemnify
Amazon and each underwriter thereof, including each Person, if any, who is an
officer or director of Amazon or who controls Amazon or such underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and attorneys' fees and expenses, whether in
an action brought by a third party or by the parties hereto), arising out of or
based upon (x) any untrue, or alleged untrue, statement of a material fact
contained in any registration statement, preliminary prospectus or notification
or offering circular (as amended or supplemented if Amazon shall have furnished
any amendments or supplements thereto); or (y) any omission, or alleged
omission, to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made not misleading or (z) any violation by Amazon of any federal,
state or common law rule or regulation applicable to Amazon and relating to
action or inaction required of such holder in connection with any such
registration, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was based solely upon
information furnished in writing to Amazon by such holder of Underlying Common
Stock expressly for use therein; provided, however, that with respect to any
untrue statement or omission or alleged untrue statement or omission made in any
preliminary prospectus, the indemnity agreement contained in this sentence shall
not apply to the extent that any loss, claim, damage, liability or expense
results from the fact that a current copy of the prospectus was not sent or
given to the Person asserting any such loss, claim, damage, liability or expense
at or prior to the written confirmation of the sale of the Underlying Common
Stock confirmed to such Person if it is determined that it was the
responsibility of Amazon or any of its directors, officers or agents, or any
underwriter, to provide such person with a current copy of the prospectus and
such current copy of the prospectus would have cured the defect giving rise to
such loss, claim, damage, liability or expense; and provided further, that the
obligations of each such holders of Underlying Common Stock shall be limited to
an amount equal to the net proceeds to such holder from the sale of Underlying
Common Stock as contemplated herein.
Promptly upon receipt by a party to be indemnified under this Section
5.D of notice of the commencement of any action against such indemnified party
in respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 5.D, such indemnified party shall notify
the
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<PAGE> 15
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party, unless such failure shall
materially adversely affect the defense of such action. If notice of
commencement of any such action shall be given to the indemnifying party as
above provided, the indemnifying party shall be entitled to participate in and,
to the extent it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such indemnified party. The indemnified party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
(other than reasonable costs of investigation) shall be paid by the indemnified
party unless (i) the indemnifying party agrees in writing to pay the same, (ii)
the indemnifying party fails to assume the defense of such action with counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) have been advised by such
counsel that representation of such indemnified party and the indemnifying party
by the same counsel would be inappropriate under applicable standards of
professional conduct (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party).
No indemnifying party shall be liable for any settlement entered into without
its consent.
If the indemnification provided for in this Section 5.D shall for any
reason be unenforceable by an indemnified party, although otherwise available in
accordance with its terms, then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of the losses, claims, damages, liabilities
or expenses with respect to which such indemnified party has claimed
indemnification, in such proportion as is appropriate to reflect the relative
fault of the indemnified party on the one hand and the indemnifying party on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations; provided, further, that the obligations of each such
holder of Underlying Common Stock shall be limited to an amount equal to the net
proceeds to such holder from the sale of Common Stock as contemplated herein.
Amazon and each holder of Underlying Common Stock agree that it would not be
just and equitable if contribution pursuant hereto were to be determined by pro
rata allocation or by any other method of allocation which does not take into
account such equitable considerations. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses referred to herein shall be deemed to
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<PAGE> 16
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject hereof. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who is not guilty of such fraudulent
misrepresentation.
Each holder of Underlying Common Stock bearing the legend required by
Section 11, by acceptance hereof or thereof, as the case may be, agrees to the
indemnification provisions of this Section 5.D.
5.E. Supplying Information. Amazon and each holder of Underlying Common
Stock shall cooperate with each other in supplying such information as may be
necessary for any of such parties to complete and file any information reporting
forms presently or hereafter required by the Commission or any commissioner or
other authority administering the blue sky or securities laws of any
jurisdiction where shares of Common Stock are proposed to be sold pursuant to
Section 5.A.
Section 6. Definitions. The following terms have meanings set forth
below:
"Agent" has the meaning provided in the Credit Agreement.
"Commitment" has the meaning provided in the Credit Agreement.
"Common Stock" means the Common Stock and any capital stock of
any class of Amazon hereafter authorized which is not limited to a fixed
sum or percentage of par or stated value in respect to the rights of the
holders thereof to participate in dividends or in the distribution of
assets upon any liquidation, dissolution or winding up of Amazon.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Lenders" has the meaning provided in the Credit Agreement.
"Majority Warrant Holders" means the holders of Underlying Common
Stock representing a majority of the shares of Underlying Common Stock
then in existence.
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<PAGE> 17
"Market Price" means as to any security (other than the Warrants)
the average of the closing prices of such security's sales on all
domestic securities exchanges on which such security may at the time be
listed or quoted, including for this purpose, The Nasdaq Stock Market,
or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges
at the end of such day, or, if on any day such security is not so listed
or quoted, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor
organization, in each such case averaged over a period of 30 consecutive
business days immediately prior to the day as of which "Market Price" is
being determined; provided, that if such security is listed on any
domestic securities exchange the term "business days" as used in this
sentence means business days on which such exchange is open for trading.
If at any time such security is not listed on any domestic securities
exchange or quoted on The Nasdaq Stock Market or the domestic
over-the-counter market, the "Market Price" shall be the fair value
thereof determined by Amazon; provided, that if the holders of Warrants
representing a majority of the Warrant Stock issuable under
then-outstanding Warrants do not agree with Amazon's determination of
Market Price set forth in the notice delivered by Amazon in connection
with the event giving rise to the determination of Market Price, then
such holders of Warrants representing a majority of the Warrant Stock
issuable under then-outstanding Warrants may deliver written notice (the
"Objection Notice") specifying the Market Price as determined by such
holders within 10 days after receipt of Amazon's notice specifying the
Market Price. Amazon and the holders of Warrants representing a majority
of the Warrant Stock issuable under then-outstanding Warrants shall then
negotiate in good faith in an attempt to agree on the Market Price, and
if they are unable to agree within 20 days after delivery of the
Objection Notice, then Market Price shall be determined by an investment
banking firm selected by the American Arbitration Association (the
"Appraiser"). The fees and expenses of the Appraiser shall be paid by
Amazon. Any determination of Market Price of a security will be made
without giving effect to any discount for any lack of liquidity
attributable to a lack of a public market for such security, any block
discount or discount attributable to the size of any Person's
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<PAGE> 18
holdings of such security, any minority interest or any voting rights
thereof or lack thereof. The "Market Price" of a Warrant means the
excess of (i) the Market Price of the shares of Warrant Stock obtainable
upon exercise thereof over (ii) the Aggregate Exercise Price of the
Warrant Stock payable in connection with such exercise. For purposes of
Section 1.B(i)(d)(2) above, the "Market Price" of any debt security of
Amazon or any Subsidiary thereof shall be equal to the principal amount
thereof plus all accrued interest thereon plus all premium and other
amounts owing with respect thereto.
"Person" has the meaning provided in the Credit Agreement.
"Registered Holder" with respect to any Warrant means the Person
who is reflected as the holder thereof on the register maintained by
Amazon for such purpose, and "Registered Holders" at any time means all
Registered Holders of Warrants then outstanding.
"Securities Act" means the Securities Act of 1933, as amended.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon exercise of the Warrants (including the Warrant Stock),
and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above by way of stock dividend or
stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For
purposes of this Warrant, any Person who holds Warrants shall be deemed
to be the holder of the Underlying Common Stock obtainable upon exercise
of the Warrants in connection with the transfer thereof or otherwise
regardless of any restriction or limitation on the exercise of the
Warrants. As to any particular shares of Underlying Common Stock, such
shares shall cease to be Underlying Common Stock when they have been (a)
effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them or (b)
distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 under the Securities Act (or any similar provision
then in force).
"Warrant Stock" means the Common Stock or other securities issued
or issuable upon exercise of the
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<PAGE> 19
Warrant (including the Series I, Series II and Series III Warrant
Stock).
Section 7. No Voting Rights; Limitations of Liability. Prior to
the exercise of this Warrant and except as otherwise specifically provided
herein or in the Credit Agreement, this Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of Amazon. No
provision hereof, in the absence of affirmative action by the Registered Holder
to purchase Warrant Stock, and no enumeration herein of the rights or privileges
of the Registered Holder shall give rise to any liability of such holder for the
Exercise Price of Warrant Stock acquirable by exercise hereof or as a
stockholder of Amazon.
Section 8. Warrant Transferable. Subject to the transfer
conditions referred to in the legend endorsed hereon, this Warrant and all
rights hereunder are transferable, in whole or in part, without charge to the
Registered Holder, upon surrender of this Warrant with a properly executed
Assignment (in the form of Exhibit II hereto) at the principal office of Amazon;
provided that such transfer shall be at least equal to 3.3% of any series of
Warrant Stock being transferred. Notwithstanding the foregoing, this Warrant and
the Common Stock issued upon exercise of this Warrant may not be transferred
without the consent of Amazon, which consent will only be withheld or delayed,
if the proposed transferee is, has a major financial interest (excluding any
mutual fund, investment banker or similar investment advisor with any such major
financial interest as a result of accounts held by or on account of its
customers in the ordinary course of business), or is an employee or affiliate
of, a competitor of Amazon; provided, that the holders of Warrants may, without
the consent of Amazon, transfer any interest therein to any lender or to any
Affiliate of any lender.
Section 9. Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of Amazon, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of such new Warrants shall
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. All Warrants representing portions of the rights
hereunder are referred to herein as the "Warrants."
Section 10. Replacement. Upon receipt of evidence reasonably
satisfactory to Amazon (an affidavit of the Registered Holder shall be
satisfactory) of the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or destruction,
upon receipt of an indemnity reasonably satisfactory to Amazon (it being
understood
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<PAGE> 20
that an unsecured indemnity by the initial holder of the Warrants will in any
event be satisfactory), or in the case of any such mutilation, upon surrender of
such certificate, Amazon shall (at its expense) execute and deliver in lieu of
such certificate a new certificate of like tenor and dated the date of such
lost, stolen, destroyed or mutilated certificate.
Section 11. Legend. The certificates representing shares of
Warrant Stock issued upon exercise of the Warrants shall be endorsed with the
legend set forth as follows:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be transferred
unless registered under such Act or an exemption from registration is
available (provided that Amazon may require an opinion of counsel
reasonably satisfactory to it to such effect). Any transfer thereof is
also subject to the conditions specified in the Stock Purchase Warrant
of Amazon.com, Inc. (the "Company") dated as of December 23, 1997. A
copy of the form of such Warrant is on file with the Secretary of the
Company, and will be furnished without charge by the Company to the
holder of this certificate upon written request to the Secretary of the
Company at its headquarters."
Such legend shall be removed upon the request of the holder of such certificate;
provided that removal of such legend shall be in compliance with applicable
federal and state securities laws (and Amazon receives an opinion of counsel
reasonably satisfactory to it that such legend is no longer necessary on such
certificate to protect Amazon from a violation of such federal or state
securities) and that there are no further restrictions on shares represented by
such certificate under this Warrant.
Section 12. Securities Law Compliance. The holder of this
Warrant, by acceptance hereof, acknowledges that this Warrant is being acquired
for the holder's account, for the benefit of the Lenders under the Credit
Agreement, and for investment purposes only and not with a view toward
distribution or resale, and that the holder will not offer, sell, transfer,
assign or otherwise dispose of this Warrant or any shares of Common Stock to be
issued upon exercise hereof except under circumstances that will not result in a
violation of the Securities Act or any state securities laws.
Section 13. Rule 144 and 144A Reporting.
(i) With a view to making available to the Holders of Warrants or
any holders of Underlying Common Stock the benefits of certain rules and
regulations of the Commission which may permit
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<PAGE> 21
the sale of Underlying Common Stock to the public without registration, Amazon
agrees, to:
(a) make and keep public information available as those terms are
understood and defined in Rule 144;
(b) file with the Commission in a timely manner all reports and
other documents required of Amazon under the Securities Act and Exchange
Act; and
(c) furnish to the holder of Warrants or Underlying Common Stock
forthwith upon request of a written statement by Amazon as to its
compliance with the reporting requirements of Rule 144, and of the
Exchange Act, a copy of the most recent annual or quarterly report of
Amazon filed with the Commission, if any, and such other reports and
documents of Amazon and other information in the possession of or
reasonably obtainable by Amazon as the Holder or such holders may
reasonably request in availing themselves of any rule or regulation of
the Commission allowing them to sell securities without registration
under the Securities Act.
(ii) With a view to making available to the holders of Warrants
or holders of Warrant Stock the benefits of certain rules and regulations of the
Commission which may permit the sale of Warrants or Warrant Stock to qualified
institutional buyers, Amazon agrees, upon request, to provide to such holders
and prospective purchasers of Warrants or Warrant Stock with the following
information which shall be reasonably current:
(a) a brief statement of the nature of the business of Amazon and
the products and services it offers; and
(b) a copy of Amazon's most recent balance sheet and profit and
loss and retained earnings statements and similar audited financial
statements for the two preceding fiscal years.
Section 14. Consent for Additional Registration Rights. Amazon
shall not grant rights to register any of its securities under the Securities
Act to any other Person or entity without the consent of the Majority Warrant
Holders if the grant of any such rights would be senior to the rights granted
hereunder to the holder of the Warrant. Amazon may grant registration rights in
the future which are on parity with those granted hereunder to the holders of
the Underlying Common Stock
Section 15. Notices. Except as otherwise expressly provided
herein, all notices referred to in this Warrant shall be
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<PAGE> 22
in writing (including facsimile) and shall be delivered either personally, sent
by reputable express courier service (charges prepaid) sent by registered or
certified mail, return receipt requested, postage prepaid or forwarded by
facsimile and shall be deemed to have been given when so delivered, sent or
deposited in the U. S. Mail (i) to Amazon, at its principal executive offices
and (ii) to the Registered Holder of this Warrant and the holders of Underlying
Common Stock, at such holder's address as it appears in the records of Amazon
(unless otherwise indicated by any such holder), or if given by facsimile, when
such facsimile is transmitted to the facsimile number specified in the Credit
Agreement with respect to Amazon and, with respect to the Registered Holder and
the holders of Underlying Common Stock, as it appears in the records of Amazon
(unless otherwise indicated by such holder).
Section 16. Amendment and Waiver. Except as otherwise provided
herein, the provisions of the Warrants may be amended and Amazon may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if Amazon has obtained the written consent of the Majority
Warrant Holders; provided, that no such action may change the Exercise Price of
the Warrants or the number of shares or class of stock obtainable upon exercise
of each Warrant without the written consent of the holders of Underlying Common
Stock representing 100% of the shares of Underlying Common Stock.
Section 17. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate law
of the State of Delaware shall govern all issues concerning the relative rights
of Amazon and its stockholders. All other questions concerning the construction,
validity and interpretation of this Warrant shall be governed by and construed
and enforced in accordance with the laws of the State of New York, without
giving effect to any choice of law or conflict provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York.
Section 18. Certain Expenses. In addition to any other amounts
payable hereunder, Amazon shall pay all issuance expenses incurred in connection
with, and all taxes (other than stock transfer taxes) and other governmental
charges that may be imposed in respect of, the issuance, sale and delivery of
the Warrants or the shares of Underlying Common Stock.
* * * * *
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<PAGE> 23
Warrant - Amazon.com, Inc.
IN WITNESS WHEREOF, Amazon has caused this Warrant to be signed
and attested by its duly authorized officers and to be dated the Closing Date
hereof.
AMAZON.COM, INC.
By: /s/ Joy D. Covey
---------------------------------------
Its: Chief Financial Officer
--------------------------------------
Attest:
/s/ Alan Caplan
- -----------------------------
General Counsel
<PAGE> 24
EXHIBIT I
EXERCISE AGREEMENT
(To be executed only upon partial
or full exercise of the within Warrant)
The undersigned registered Holder of the within Warrant irrevocably
exercises the within Warrant for and subscribes for ______ shares of Common
Stock of Amazon.com, Inc. and agrees to make payment therefor in the amount of
$________, all at the price and on the terms and conditions specified in the
within Warrant and requests that a certificate (or __________ certificates in
denominations of ______ shares) for the shares of Common Stock of ________
hereby subscribed for be issued in the name of and delivered to [choose one] (a)
the undersigned or (b) ________, whose address is _____________ ____________,
and if such shares of Common Stock shall not include all the shares of Common
Stock issuable as provided in the within Warrant, that a new Warrant of like
tenor for the number of shares of Common Stock of _________ not being subscribed
for hereunder be issued in the name of and __________, whose address is
___________.
Dated: ______________, ____
By:
-------------------------------------
(Signature of Registered Holder)
Signature Guarantee:
- -------------------------
By:______________________
[Title]
<PAGE> 25
EXHIBIT II
ASSIGNMENT FORM
(To be executed only upon the assignment
of the within Warrant)
FOR VALUE RECEIVED the undersigned registered Holder of the within
Warrant hereby sells, assigns and transfer unto (the "Transferee"), whose
address is all of the rights of the undersigned under the within Warrant, with
respect to ______ shares of Common Stock of Amazon.com, Inc. and if such shares
of Common Stock shall not include all the shares of Common Stock issuable as
provided in the within Warrant, that a new Warrant of like tenor for the number
of shares of Common Stock of _________________ not being transferred hereunder
be issued in the name of and delivered to the undersigned, and does hereby
irrevocably constitute and appoint
Attorney to register such transfer on the books of maintained for
the purpose, with full power of substitution in the premises. By signing below,
the transferee agrees to be bound by all of the terms and conditions of the
within Warrant.
Dated __________________, ____
Signature Guaranteed: By
----------------------------------
(Signature of Registered Holder)
- ----------------------------------
By
--------------------------------
[Title]
Accepted and Agreed this
____ day of ___________, ___:
By
--------------------------------
(Signature of Transferee)
<PAGE> 1
EXHIBIT 10.21
MARTIN SMITH INC
500 WATERMARK TOWER OFFICE LEASE
1109 FIRST AVENUE
SEATTLE, WA 98101-2988 215 COLUMBIA BUILDING
TEL 682-3300 FAX 340-1283
THIS LEASE is made this 20th day of March 1998 by and between PACIFIC
NW TITLE BUILDING, INC., A WASHINGTON CORPORATION ("Landlord"), and AMAZON.COM,
INC., A DELAWARE CORPORATION ("Tenant"), who agree as follows:
1. FUNDAMENTAL TERMS. As used in this Lease, the following capitalized
terms shall have the following meanings:
(a) "Land" means the land on which the Building is located, situated in
the City of Seattle, County of King, State of Washington, which is described on
Exhibit A.
(b) "Building" means the building in which the Premises are located,
commonly known as the 215 Columbia Building, the street address of which is 215
Columbia Street, Seattle, Washington 98104.
(c) "Premises" means that certain space outlined in red in Exhibit B
and located on the third and fourth floors of the Building designated as Suite
400.
(d) "Agreed Areas" means the agreed amount of rentable square feet of
space in the Building and the Premises. Landlord and Tenant stipulate and agree
for all purposes under this Lease that the Building contains approximately
43,840 rentable square feet of space (the "Building Area") and that the Premises
contain approximately 22,820 rentable square feet of space (the "Premises
Area"). Landlord and Tenant further agree that the Building Area may exclude
portions of the Building which are used for other than office purposes, such as
areas used for retail purposes or for storage purposes.
(e) "Tenant's Share" means the Premises Area divided by the Building
Area, expressed as a percentage, which is fifty-two and five one-hundredths
percent (52.05%).
If a portion of the Building is damaged or condemned, or any other
event occurs which alters the number of rentable square feet of space in the
Premises or the Building, then Landlord shall adjust Tenant's Share to equal the
number of rentable square feet of space then existing in the Premises (as
altered by such event) divided by the number of rentable square feet of space
then existing in the Building (as altered by such event).
(f) "Commencement Date" means May 1, 1998, or such earlier date as
provided in Section 4 hereof.
(g) "Expiration Date" means May 31, 1999.
(h) "Term" means the period of time commencing on the Commencement Date
and ending on the Expiration Date, unless sooner terminated pursuant to this
Lease.
(i) "Minimum Monthly Rent" means Twenty-eight Thousand Five Hundred
Twenty-five and 00/100ths Dollars ($28,525.00) per month during the Term of this
Lease:
(j) "Permitted Use" means use for purposes of general
business/administrative offices for an internet- based bookseller.
(k) "Base Year" means the calendar year 1998.
(l) "Prepaid Rent" means Twenty-eight Thousand Five Hundred Twenty-five
and 00/100ths Dollars ($28,525.00).
(m) "Security Deposit" means Twenty-eight Thousand Five Hundred
Twenty-five and no/100ths Dollars ($28,525.00).
(n) "Landlord's Address for Notice" means 215 Columbia Building, c/o
Martin Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
(o) "Landlord's Address for Payment of Rent" means 215 Columbia
Building, c/o Martin Smith Inc, 1109 First Avenue, Suite 500, Seattle,
Washington 98101-2988.
(p) "Tenant's Address for Notice" means Amazon.com, Inc., Attn: General
Counsel, 1516 Second Avenue, Suite 400, Seattle, Washington 98104.
(q) "Landlord's Agent" means Martin Smith Inc or such other agent as
Landlord may appoint from time to time.
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(r) "Broker(s)" means Martin Smith Inc representing the Landlord and
Washington Partners, Inc. representing the Tenant.
(s) "Exhibits" means the following Exhibits to this Lease:
Exhibit A - Legal Description of the Property
Exhibit B - Outline Drawing of the Premises
Exhibit C - Work Letter
Exhibit D - Rules and Regulations
(t) "Rider" means the following Rider which is attached hereto: Rider
dated March 20, 1998 by and between PACIFIC NW TITLE BUILDING, INC., A
WASHINGTON CORPORATION ("Landlord"), and AMAZON.COM, INC., A DELAWARE
CORPORATION ("Tenant").
(u) "Definitions" means the words and phrases defined in Section 42
captioned "Definitions".
2. PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the
Premises for the Term.
3. APPURTENANCES. Tenant, and its authorized representatives, shall have
the right to use, in common with others and subject to the Rules and
Regulations, the Common Areas of the Building. Landlord shall have the right, in
Landlord's sole discretion, from time to time to (i) make changes to the
Building interior and exterior and Common Areas, including without limitation,
changes in the location, size, shape, number and appearance thereof, (ii) to
close temporarily any of the Common Areas for maintenance purposes so long as
reasonable access to the Premises remains available, and (iii) to use the Common
Areas while engaged in making additional improvements, repairs or alterations to
the Building. All of the windows and exterior walls of the Premises and any
space in the Premises used for shafts, stacks, pipes, conduits, ducts,
electrical equipment or other utilities or Building facilities are reserved
solely to Landlord and Landlord shall have rights of access through the Premises
for the purpose of operating, maintaining and repairing the same, provided,
however, that such changes shall not materially affect Tenant's access to, or
use and occupancy of, the Premises.
4. TERM.
(a) COMMENCEMENT DATE. This Lease shall become legally binding as of
the earlier of the date Landlord and Tenant execute this Lease or the date
Tenant enters onto the Premises or any portion thereof with Landlord's consent,
and shall remain in full force and effect thereafter until the expiration of the
Term, unless sooner terminated pursuant to this Lease. The Term shall commence
on the Commencement Date and expire on the Expiration Date, unless sooner
terminated pursuant to this Lease. The Commencement Date shall be the date
specified in Section 1.
(i) Notwithstanding anything to the contrary in this Section,
Tenant shall have the right to enter onto the Premises at any time after full
execution of this Lease by Landlord and Tenant solely for the purpose of
installation of cabling, communications equipment, office equipment and office
furniture. No Rent shall be due for such early access to the Premises.
(ii) If Tenant shall occupy the Premises or any portion thereof for
the Permitted Use prior to the Commencement Date specified in Section 1 then
Tenant shall pay Minimum Monthly Rent for such occupancy from and after the date
of such early occupancy. Landlord acknowledges that Tenant intends to occupy the
third floor in the Premises for the operation of its business as soon as
possible, and Tenant may so occupy the third floor prior to the Commencement
Date.
(b) TENANT TERMINATION RIGHTS. If Landlord is unable to deliver
possession of the Premises to Tenant on the Commencement Date as a result of
causes beyond its reasonable control, Landlord shall not be liable for any
damage caused by failing to deliver possession and this Lease shall not be void
or voidable. Tenant shall not be liable for Rent until Landlord delivers
possession of the Premises to Tenant. No delay in delivery of possession of the
Premises to Tenant shall change the Expiration Date or operate to extend the
Term. If Landlord does not deliver possession of the Premises to Tenant within
thirty (30) days of the Commencement Date, then Tenant may elect to terminate
this Lease by giving notice to Landlord within thirty (30) days following the
end of such thirty (30) day period.
(c) CONFIRMATION OF COMMENCEMENT DATE. When the Commencement Date as
provided herein has been established as an earlier or later date than the
Commencement Date specified in Section 1, Landlord shall confirm the
Commencement Date by notice to Tenant.
5. MINIMUM MONTHLY RENT; LATE CHARGE.
(a) MINIMUM MONTHLY RENT. Tenant shall pay to Landlord the Minimum
Monthly Rent without deduction, offset, prior notice or demand, in advance on
the first day of each month during the Term. Minimum Monthly Rent for any
partial month shall be prorated at the rate of 1/30th of the Minimum Monthly
Rent per day. Minimum Monthly Rent is exclusive of any sales, franchise,
business or occupation or other tax based on rents (other than Landlord's
general income taxes) and should such taxes apply during the Term, the Minimum
Monthly Rent shall be increased by the amount of such taxes. All Rent shall be
paid to Landlord at Landlord's Address for Payment of Rent or at such other
address as Landlord may specify by notice to Tenant.
(b) LATE CHARGE. Tenant acknowledges that the late payment by Tenant of
any Rent will cause Landlord to incur administrative, collection, processing and
accounting costs and expenses not contemplated under this Lease, the exact
amount of which are extremely difficult or impracticable to fix. Therefore, if
any
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Rent is not received by Landlord from Tenant by the fifth (5th) BUSINESS day
after such Rent is due, Tenant shall immediately pay to Landlord a late charge
equal to five percent (5%) of the amount of such Rent or Seventy-five and
No/100th Dollars ($75.00), whichever is greater. Landlord and Tenant agree that
this late charge represents a reasonable estimate of such costs and expenses and
is fair compensation to Landlord for its loss caused by Tenant's nonpayment.
Should Tenant pay said late charge but fail to pay contemporaneously therewith
all unpaid amounts of Rent, Landlord's acceptance of this late charge shall not
constitute a waiver of Tenant's default with respect to Tenant's nonpayment nor
prevent Landlord from exercising all other rights and remedies available to
Landlord under this Lease or under law.
6. PREPAID RENT AND SECURITY DEPOSIT. On execution of this Lease, Tenant
shall deposit with Landlord the Prepaid Rent, as monthly rent for the first full
month of the Term for which Rent is payable, and the Security Deposit, as a
Security Deposit for the performance by Tenant of the provisions of this Lease.
If Tenant is in default, Landlord may use the Security Deposit, or any portion
of it, to cure the default, including without limitation, paying for the cost of
any work necessary to restore the Premises, the Tenant improvements and any
alterations to good condition or to compensate Landlord for all damage sustained
by Landlord resulting from Tenant's default. Tenant shall within five (5) days
of demand pay to Landlord a sum equal to the portion of the Security Deposit
expended or applied by Landlord as provided in this Section so as to maintain
the Security Deposit in the sum initially deposited with Landlord. If Tenant is
not in default as of the expiration or termination of the Term, including
without limitation, in default in payment of the Rent for the last month of the
Term, then Landlord shall return the Security Deposit, without interest, to
Tenant within a reasonable period of time after the expiration or termination of
the Term. Landlord's obligations with respect to the Security Deposit are those
of a debtor and not a trustee. Landlord may commingle the Security Deposit with
Landlord's general and other funds.
7. REAL PROPERTY TAXES.
(a) PAYMENT OF TENANT'S SHARE OF INCREASES IN REAL PROPERTY TAXES.
Commencing January 1, 1999, Tenant shall pay to Landlord, as Additional Rent,
monthly, in advance on the first day of each month during the Term, an amount
equal to one-twelfth (1/12th) of Tenant's Share of all increases in Real
Property Taxes that are or will be levied or assessed against the Property
during each calendar year during the Term over and above the Real Property Taxes
that are levied or assessed against the Property during the Base Year as
reasonably estimated by Landlord. Such Additional Rent is exclusive of any
sales, franchise, business or occupation or other tax based on rents and should
such taxes apply during the Term, such Additional Rent shall be increased by the
amount of such taxes. Within one hundred twenty (120) days after the end of each
calendar year during the Term, Landlord shall furnish to Tenant a statement of
the Real Property Taxes for the preceding calendar year and Tenant's Share of
the increase in Real Property Taxes. If Tenant's Share of the increase in such
Real Property Taxes for that calendar year over such Real Property Taxes for the
Base Year exceeds the monthly payments made by Tenant, then Tenant shall pay
Landlord the deficiency within thirty (30) days after receipt of the statement.
If Tenant's payments made during that calendar year exceed Tenant's Share of the
increase in such Real Property Taxes for that calendar year over such Real
Property Taxes for the Base Year, then, at Landlord's option, either Landlord
shall pay Tenant the excess at the time Landlord furnishes the statement to
Tenant, or Tenant shall be entitled to offset the excess against the next
installment(s) of Minimum Monthly Rent and Additional Rent, provided, however,
that at the end of the Term Landlord shall pay Tenant the excess at the time
Landlord furnishes the statement to Tenant.
(b) GENERAL AND SPECIAL ASSESSMENTS. With respect to any general or
special assessments which may be levied against or upon the Property, or which
under the laws then in force may be evidenced by improvement or other bonds or
may be paid in annual installments, only the amount of such annual installment,
and interest due thereon, shall be included in the computation of Real Property
Taxes.
(c) PRORATION. Tenant's Share of Real Property Taxes shall be prorated
on the basis of a 360-day year to account for any fractional portion of a tax
year included in the Term at its commencement and expiration.
(d) NO EFFECT ON MINIMUM MONTHLY RENT. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
8. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all
personal property taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Premises or elsewhere. If possible, Tenant shall cause such trade fixtures,
furnishings, equipment and all other personal property of Tenant to be assessed
and billed separately from the Property.
9. OPERATING COSTS.
(a) PAYMENT OF TENANT'S SHARE OF INCREASES IN OPERATING COSTS.
Commencing January 1, 1999, Tenant shall pay to Landlord, as Additional Rent,
monthly, in advance on the first day of each month during the Term, an amount
equal to one-twelfth (1/12th) of Tenant's Share of the increase in the Operating
Costs of the Property for each calendar year during the Term over the Operating
Costs for the Base Year as reasonably estimated by Landlord. Landlord shall
reasonably estimate the Operating Costs for the Base Year and for each calendar
year during the Term based on the Operating Costs that would have been incurred
if the Building had been 95% occupied during the Base Year or each such calendar
year, as the case may be, taking into account historical operating costs for the
Building. Such Additional Rent is exclusive of any sales, franchise, business or
occupation or other tax based on rents and should such taxes apply during the
Term, such Additional Rent shall be increased by the amount of such taxes.
Within one hundred twenty (120) days after the end of each calendar year during
the Term, Landlord shall furnish to Tenant a statement of the Operating Costs
for the preceding calendar year and Tenant's Share of the increase in the
Operating Costs. If Tenant's Share of the
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increase in the Operating Costs for that calendar year over the Operating Costs
for the Base Year exceeds the monthly payments made by Tenant, then Tenant shall
pay Landlord the deficiency within thirty (30) days after receipt of the
statement. If Tenant's payments made during that calendar year exceed Tenant's
Share of the increase in the Operating Costs for that calendar year over the
Operating Costs for the Base Year, then, at Landlord's option, either Landlord
shall pay Tenant the excess at the time Landlord furnishes the statement to
Tenant, or Tenant shall be entitled to offset the excess against the next
installment(s) of Minimum Monthly Rent and Additional Rent, provided, however,
that at the end of the Term Landlord shall pay Tenant the excess at the time
Landlord furnishes the statement to Tenant.
(b) PRORATION. Tenant's Share of Operating Costs shall be prorated on
the basis of a 360 day year to account for any fractional portion of a year
included in the Term at its commencement and expiration.
(c) NO EFFECT ON MINIMUM MONTHLY RENT. Notwithstanding anything to the
contrary in this Section, the Minimum Monthly Rent payable by Tenant shall in no
event be less than the Minimum Monthly Rent specified in Section 1.
(d) RIGHT TO EXAMINE LANDLORD'S BOOKS AND RECORDS. Tenant or its
authorized representative shall have the right to examine Landlord's books and
records relating to Operating Costs of the Property upon reasonable prior notice
specifying such records Tenant desires to examine, during normal business hours
at the place or places where such records are normally kept by sending such
notice no later than ninety (90) days following the furnishing of the Landlord's
statement of the Operating Costs for the preceding calendar year and Tenant's
Share of the increase in the Operating Costs. Tenant may take exception to
matters included in Operating Costs, or Landlord's computation of Tenant's
Share, by sending notice specifying such exception and the reasons therefor to
Landlord no later than thirty (30) days after Landlord makes such records
available for examination. Landlord's statement of the Operating Costs for the
preceding calendar year and Tenant's Share of the increase in the Operating
Costs shall be considered final, except as to matters to which exception is
taken after examination of Landlord's books and records relating to Operating
Costs of the Property in the foregoing manner and within the foregoing times.
Tenant acknowledges that Landlord's ability to budget and incur expenses depends
on the finality of such statement, and accordingly agrees that time is of the
essence of this Section. If Tenant takes exception to any matter contained in
such statement as provided herein, Landlord shall refer the matter to an
independent certified public accountant, whose certification as to the proper
amount shall be final and conclusive as between Landlord and Tenant. Tenant
shall promptly pay the cost of such certification unless such certification
determines that Landlord's statement of the Operating Costs overstated the
Operating Costs by more than five percent (5%). Pending resolution of any such
exceptions in the foregoing manner, Tenant shall continue paying Tenant's Share
of Operating Costs in the amounts determined by Landlord, subject to adjustment
after any such exceptions are so resolved. If such certification determines that
Landlord's statement of the Operating Costs overstated the Operating Costs, then
Tenant shall receive a credit for Tenant's Share of the amount of such
overstatement against payments of Rent next due.
10. USE. Tenant shall use the Premises for the Permitted Use and for no
other use without Landlord's prior consent. Tenant agrees that it has determined
to its satisfaction that the Premises can be used for the Permitted Use. Tenant
waives any right to terminate this Lease if the Premises cannot be used for the
Permitted Use during the Term unless the prohibition on use is the result of
actions taken by Landlord. Tenant's use of the Premises shall be in accordance
with the following:
(a) INSURANCE. Tenant shall not do, bring, or keep anything in or about
the Premises or the Property that will cause a cancellation of any insurance
covering the Property. If the rate of any insurance carried by Landlord on the
Property as published by the Washington Survey and Rating Bureau, or any
successor rating bureau or agency, is increased as a result of Tenant's use,
then Tenant shall pay to Landlord not less than ten (10) days before the date
Landlord is obligated to pay a premium on the insurance, a sum equal to the
difference between the original premium and the increased premium.
(b) COMPLIANCE WITH LAWS. Tenant shall comply with all Laws concerning
the Premises and Tenant's use of the Premises. Landlord shall comply with all
Laws concerning the Building and the Building common areas and the operation and
maintenance thereof.
(c) WASTE, NUISANCE AND IMPROPER USE. Tenant shall not use the Premises
in any manner that will constitute waste, nuisance or unreasonable annoyance to
other tenants in the Building, including without limitation, (i) the use of
loudspeakers or sound or light apparatus that can be heard or seen outside the
Premises, (ii) for cooking or other activities that cause odors that can be
detected outside the Premises, or (iii) for lodging or sleeping rooms.
(d) DAMAGE TO PROPERTY. Tenant shall not do anything in, on or about
the Premises that will cause damage to the Property.
(e) RULES AND REGULATIONS. Tenant and its authorized representatives
shall comply with the Rules and Regulations set forth on Exhibit D attached
hereto. Landlord shall have the right to amend, on thirty (30) days advance
written notice, the Rules and Regulations from time to time. In the event of a
conflict between this Lease and the Rules and Regulations, as amended, this
Lease shall control. Landlord shall have the right to enforce the Rules and
Regulations. Landlord shall have no liability or responsibility whatsoever with
respect to the noncompliance by other tenants or their authorized
representatives with any of such Rules and Regulations.
11. HAZARDOUS SUBSTANCES. Tenant shall not dispose of or otherwise allow
the release of any Hazardous Substances in, on or under the Premises, or the
Property, or in any tenant improvements or alterations placed on the Premises by
Tenant. Tenant represents and warrants to Landlord that Tenant's intended use of
the
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Premises does not involve the use, production, disposal or bringing on to the
Premises of any Hazardous Substances, except for products normally used in
general business offices which constitute Hazardous Substances, provided that
such products are used, stored and disposed of in accordance with applicable
laws and manufacturer's and supplier's guidelines. Tenant shall promptly comply
with all laws and with all orders, decrees or judgments of governmental
authorities or courts having jurisdiction, relating to the use, collection,
treatment, disposal, storage, control, removal or cleanup of Hazardous
Substances, on or under the Premises or the Property, or incorporated in any
tenant improvements or alterations, at Tenant's expense.
(a) COMPLIANCE; NOTIFICATION. After notice to Tenant and a reasonable
opportunity for Tenant to effect such compliance, Landlord may, but is not
obligated to, enter upon the Premises and take such actions and incur such costs
and expenses to effect such compliance as it deems advisable to protect its
interest in the Premises and the Property, provided, however that Landlord shall
not be obligated to give Tenant notice and an opportunity to effect such
compliance if (i) such delay might result in material adverse harm to the
Premises, or the Property, or (ii) an emergency exists. Tenant shall reimburse
Landlord for the full amount of all costs and expenses incurred by Landlord in
connection with such compliance activities, and such obligation shall continue
even after expiration or termination of the Term. Tenant shall notify Landlord
immediately of any release of any Hazardous Substances on the Premises or the
Property.
(b) INDEMNITY BY TENANT. Tenant agrees to hold Landlord harmless from
and against any and all damages, charges, cleanup costs, remedial actions, costs
and expenses, which may be imposed on, incurred or paid by, or asserted against
Landlord, the Premises or the Property by reason of, or in connection with (1)
any misrepresentation, breach of warranty or other default by Tenant under this
Lease, or (2) the acts or omissions of Tenant, its authorized representatives,
or any subtenant or other person for whom Tenant would otherwise be liable,
resulting in the release of any Hazardous Substances on the Premises or the
Property.
(c) INDEMNITY BY LANDLORD. Landlord agrees to hold Tenant harmless from
and against any and all damages, charges, cleanup costs, remedial actions, costs
and expenses, which may be imposed on, incurred or paid by, or asserted against
Tenant, the Premises or the Property by reason of, or in connection with (i) any
misrepresentation, breach of warranty or other default by Landlord under this
Lease or (ii) the acts or omissions of Landlord, its authorized representatives,
or any other person for whom Landlord would otherwise be liable, resulting in
the release of any Hazardous Substances on the Premises or the Property.
(d) ACKNOWLEDGMENT AS TO HAZARDOUS SUBSTANCES. Tenant acknowledges that
the Premises may contain Hazardous Substances, and Tenant accepts the Premises
and the Building notwithstanding such Hazardous Substances. Landlord represents
to Tenant that, to the best of Landlord's knowledge without independent
investigation or inquiry, as of the date of execution of this Lease; (i) there
has been no release in the Premises or the Building of any Hazardous Substances
in violation of any applicable Laws, and (ii) the Premises and the Building
contain no asbestos-containing materials. The term "Landlord's knowledge" means
and includes only the actual knowledge of Landlord, without giving effect to any
principles of imputed or constructive knowledge and without any duty of inquiry.
If Landlord is required by any law to take any action to remove or abate any
Hazardous Substances, or if Landlord deems it necessary to conduct special
maintenance or testing procedures with regard to any Hazardous Substances, or to
remove or abate any Hazardous Substances, Landlord may take such action or
conduct such procedures at times and in a manner that Landlord deems appropriate
under the circumstances, and Tenant shall permit the same.
(e) SURVIVAL. The provisions of this Section shall survive the
expiration or sooner termination of the Term. No subsequent modification or
termination of this Lease by agreement of the parties or otherwise shall be
construed to waive or to modify any provisions of this Section unless the
termination or modification agreement or other document expressly so states in
writing.
12. LANDLORD'S MAINTENANCE; INCLUSION IN OPERATING COSTS.
(a) LANDLORD'S MAINTENANCE. Except as provided in Section 13 captioned
"Tenant's Maintenance; Remedies", Section 23 captioned "Destruction" and Section
24 captioned "Condemnation" and except for damage caused by any negligent or
intentional act or omission of Tenant or its authorized representatives,
Landlord shall maintain in good condition and repair the following:(i) the
structural parts of the Building, which structural parts include only the
foundations, bearing and exterior walls (excluding glass and doors), subflooring
and roof, (ii) the building standard lighting fixtures, window coverings and
ceiling tiles and the unexposed electrical, plumbing and sewage systems,
including without limitation, those portions lying outside the Premises, (iii)
the heating, ventilating and air-conditioning system, if any, servicing the
Building, (iv) the lobbies, corridors, elevators, public or common restrooms and
other common areas of the Building, and (v) the sidewalks, grounds, landscaping,
parking and loading areas, if any, and other common areas of the Property.
(b) INCLUSION IN OPERATING COSTS. The cost of maintaining, repairing,
replacing or servicing the portions of the Building that Landlord is required to
maintain pursuant to this Section shall be included in Operating Costs to the
extent provided in Section 9 captioned "Operating Costs".
13. TENANT'S MAINTENANCE; REMEDIES.
(a) TENANT'S MAINTENANCE. Except as provided in Section 12 captioned
"Landlord's Maintenance; Inclusion in Operating Costs", Section 23 captioned
"Destruction" and Section 24 captioned "Condemnation" and except for damage
caused by any negligent or intentional act or omission of Landlord or its
authorized representatives, Tenant, at its cost, shall maintain in good
condition and repair the Premises (ordinary wear and tear excepted), including
without limitation, all of the Tenant Improvements (except for latent defects),
Tenant's alterations, Tenant's trade fixtures, Tenant's personal property,
signs, walls, interior partitions, wall coverings, windows, non-building
standard window coverings, glass, doors, carpeting and resilient flooring,
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non-building standard ceiling tiles, plumbing fixtures and non-building standard
lighting fixtures. Tenant shall be liable for any damage to the Premises and the
Building resulting from the acts or omissions of Tenant or its authorized
representatives.
(b) LANDLORD'S REMEDIES. If Tenant fails to maintain the Premises in
good condition and repair as required by Subsection 13(a) and if such failure is
not cured within thirty (30) days after notice of such failure is given by
Landlord to Tenant, then Landlord may, at its option, cause the Premises to be
maintained in good condition and repair and Tenant shall promptly reimburse
Landlord for all costs incurred by Landlord in performance of Tenant's
obligation to maintain the Premises.
14. TENANT IMPROVEMENTS AND ALTERATIONS; TRADE FIXTURES.
(a) TENANT IMPROVEMENTS AND ALTERATIONS. Tenant accepts the Premises in
"AS IS" condition without any obligations for the performance of improvements or
other work by Landlord. Tenant shall not make any improvements or alterations
(other than cabling) to the Premises without Landlord's prior written consent,
which consent shall not be unreasonably withheld. If Tenant desires to make any
improvements or alterations to the Premises and obtains Landlord's consent as
described herein, Tenant shall pay for such improvements and alterations as
described in the Work Letter attached hereto as Exhibit C. If Tenant's
improvements and alterations coincide with Landlord's long-term plans for the
building, Landlord may, in Landlord's sole discretion, pay for all or a portion
of such improvements and alterations made to the Premises. Tenant shall not make
any other improvements or alterations to the Premises without Landlord's prior
consent. Any improvements and alterations made by either party shall remain on
and be surrendered with the Premises on expiration or termination of the Term,
except that Landlord can elect, at the time Landlord gives it consent, to
require Tenant to remove any improvements and alterations that Tenant has made
to the Premises. If Landlord so elects, Tenant, at its cost, shall restore the
Premises to the condition designated by Landlord in its election, before the
last day of the Term. Any improvements and alterations that remain on the
Premises on expiration or termination of the Term shall automatically become the
property of Landlord and title to such improvements and alterations shall
automatically pass to Landlord at such time without any payment therefor by
Landlord to Tenant. If Tenant or its authorized representatives make any
improvements or alterations to the Premises as provided in this Section, then
such improvements and alterations (i) shall be made in a first class manner in
conformity with then building standard improvements, (ii) shall be made
utilizing then building standard materials, (iii) shall be made in compliance
with the Rules and Regulations and the reasonable directions of Landlord, (iv)
shall be made pursuant to a valid building permit to be obtained by Tenant, at
its cost, (v) shall be made in conformity with then applicable Laws, including
without limitation, building codes, and (vi) shall not be commenced until five
(5) days after Landlord has received notice from Tenant stating the date the
installation of such improvements and alterations is to commence so that
Landlord can post and record an appropriate notice of nonresponsibility.
(b) TRADE FIXTURES. Tenant may install any trade fixtures in or on the
Premises with Landlord's prior consent, which shall not be unreasonably
withheld.
15. MECHANICS' LIENS. Tenant shall pay, or cause to be paid, all costs of
labor, services and/or materials supplied in connection with any Work. Tenant
shall keep the Property free and clear of all mechanics' liens and other liens
resulting from any Work. Prior to the commencement of any Work or the supply or
furnishing of any labor, services and/or materials in connection with any Work,
Tenant shall provide Landlord with a labor and material payment bond in an
amount equal to one hundred percent (100%) of the aggregate price of all
contracts therefor, with release of the bond conditioned on Tenant's payment in
full of all claims of lien claimants for such labor, services and/or materials
supplied in the prosecution of the Work. Said payment bond shall name Landlord
as a primary obligee, shall be given by a surety which is satisfactory to
Landlord, and shall be in such form as Landlord shall approve in its sole
discretion. Tenant shall have the right to contest the correctness or validity
of any such lien if, immediately on demand by Landlord, it procures and records
a lien release bond issued by a responsible corporate surety in an amount
sufficient to satisfy statutory requirements therefor in the State of
Washington. Tenant shall promptly pay or cause to be paid all sums awarded to
the claimant on its suit, and, in any event, before any execution is issued with
respect to any judgment obtained by the claimant in its suit or before such
judgment becomes a lien on the Premises, whichever is earlier. If Tenant shall
be in default under this Section, by failing to provide security for or
satisfaction of any mechanic's or other liens, then Landlord may (but shall not
be obligated to), in addition to any other rights or remedies it may have,
discharge said lien by (i) paying the claimant an amount sufficient to settle
and discharge the claim, (ii) procuring and recording a lien release bond, or
(iii) taking such other action as Landlord shall deem necessary or advisable,
and, in any such event, Tenant shall pay as Additional Rent, on Landlord's
demand, all costs (including reasonable attorney fees) incurred by Landlord in
settling and discharging such lien together with interest thereon in accordance
with Section 39 captioned "Interest on Unpaid Rent" from the date of Landlord's
payment of said costs. Landlord's payment of such costs shall not waive any
default of Tenant under this Section.
16. UTILITIES AND SERVICES.
(a) UTILITIES AND SERVICES FURNISHED BY LANDLORD. Landlord shall
furnish the Premises with:
(i) Electricity for lighting and power suitable for the use of the
Premises for ordinary general office purposes; provided, however, that Tenant
shall not at any time have a connected electrical load for lighting purposes in
excess of the wattage per square foot of Premises Area required for building
standard amounts of lighting, or a connected load for all other power
requirements in excess of four (4) watts per square foot of Premises Area as
determined by Landlord, and the electricity so provided for lighting and power
shall not exceed such limits, subject to any lower limits set by any
governmental authority with respect thereto;
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(ii) Subject to the reasonable limitations of the existing
building systems, heating, ventilating and air-conditioning to maintain a
temperature range in the Premises which is customary for similar office space in
the Seattle, Washington area (but in compliance with any applicable governmental
regulations with respect thereto). Tenant agrees to keep closed, when necessary,
blinds, draperies and windows which must be closed to provide for the efficient
operation of the heating and air conditioning systems, if any, and Tenant agrees
to cooperate with Landlord and to abide by the regulations and requirements
which Landlord may prescribe for the proper functioning and protection of the
heating, ventilating and air-conditioning system, if any. If Tenant requires
heating, ventilating and air conditioning to the Premises other than during
normal business hours from 7:00 A.M. to 6:00 P.M. Mondays through Fridays and
from the hours of 9:00 A.M. to 1:00 P.M. on Saturdays, except other than the
stated Saturday hours, Sundays and those legal holidays generally observed in
the State of Washington, Landlord shall, upon Tenant's request made not less
than 24 hours before the time Tenant requires the after hour service, and not
later than Noon on the Friday before any Saturday or Sunday on which Tenant
requires such service, and not later than Noon of the day before any holiday on
which Tenant requires such service (except as otherwise provided in the Rules
and Regulations), furnish such heating, ventilating and air conditioning. If
Tenant receives such services, then Tenant shall pay, upon demand, an amount
equal to Tenant's proportionate share of the actual direct cost to Landlord in
providing the heating, ventilating and air conditioning outside of normal
business hours;
(iii) Water for restroom and drinking purposes and access
to restroom facilities;
(iv) Elevator service for general office pedestrian usage
if the Building is serviced by elevators;
(v) Relamping of building-standard light fixtures;
(vi) Washing of interior and exterior surfaces of exterior
windows with reasonable frequency; and
(vii) Janitorial service five (5) times per week, except
holidays.
(b) PAYMENT FOR EXCESS UTILITIES AND SERVICES. All services and
utilities for the Premises not required to be furnished by Landlord pursuant to
Section 16(a) shall be paid for by Tenant. If Tenant requires, on a regular
basis, water, heat, air conditioning, electric current, elevator or janitorial
service in excess of that provided for in Section 16(a), then Tenant shall first
obtain the consent of Landlord which consent shall not be unreasonably withheld.
If Landlord consents to such excess use, Landlord may install an electric
current or water meter (including, without limitation, any additional wiring,
conduit or panel required therefor) to measure the excess electric current or
water consumed by Tenant or may cause the excess usage to be measured by other
reasonable methods (e.g. by temporary "check" meters or by survey). Tenant shall
pay to Landlord upon demand (i) the cost of any and all water, heat, air
conditioning, electric current, janitorial, elevator or other services or
utilities required to be furnished to Tenant in excess of the services and
utilities required to be furnished by Landlord as provided in Section 16(a);
(ii) the cost of installation, maintenance and repair of any meter installed in
the Premises; (iii) the cost of all electricity and water consumed by Tenant in
connection with any dedicated heating, ventilating and/or air conditioning,
computer power and/or air conditioning, telecommunications or other special
systems of Tenant, including any power usage other than through existing
standard 110-volt AC outlets; and (iv) any cost incurred by Landlord in keeping
account of or determining such excess utilities or services furnished to Tenant.
Landlord's failure to bill Tenant for any such excess utilities or services
shall not waive Landlord's right to bill Tenant for the excess at a later time.
(c) TEMPERATURE BALANCE. Landlord makes no representation to
Tenant regarding the adequacy or fitness of the heating, ventilating and
air-conditioning systems, if any, in the Building to maintain temperatures that
may be required for, or because of, any of Tenant's equipment which uses other
than the fractional horsepower normally required for office equipment, and
Landlord shall have no liability for loss or damage suffered by Tenant or others
in connection therewith. If the temperature otherwise maintained in any portion
of the Premises by the heating, air conditioning or ventilation system is
affected as a result of (i) any lights, machines or equipment (including without
limitation electronic data processing machines) used by Tenant in the Premises,
(ii) the occupancy of the Premises by more than one person per two hundred (200)
square feet of rentable area therein, (iii) an electrical load for lighting or
power in excess of the limits per square foot of rentable area of the Premises
specified in Section 16(a), or (iv) any rearrangement of partitioning or other
improvements, Landlord may install any equipment, or modify any existing
equipment (including the standard air conditioning equipment) Landlord deems
necessary to restore the temperature balance. The cost of any such equipment,
including without limitation, the cost of design and installation thereof, and
the cost of operating, metering, maintaining or repairing the same, shall be
paid by Tenant to Landlord upon demand. Tenant shall not install or operate
window-mounted heating or air-conditioning units.
(d) SPECIAL ELECTRICAL OR WATER CONNECTIONS; ELECTRICITY USE.
Tenant will not, without the prior consent of Landlord, which shall not be
unreasonably withheld, connect or use any apparatus or device in the Premises
(i) using current in excess of 110 volts or (ii) which will cause the amount of
electricity, water, heating, air conditioning or ventilation furnished to the
Premises to exceed the amount required for use of the Premises for ordinary
general office purposes during normal business hours or (iii) which would cause
Tenant's connected load to exceed any limits established in Section 16(a).
Tenant shall not connect with electric current except through existing outlets
in the Premises and shall not connect with water pipes except through existing
plumbing fixtures in the Premises. In no event shall Tenant's use of electricity
exceed the capacity of existing feeders to the Building or the risers or wiring
installation, and Landlord may prohibit the use of any electrical equipment
which in Landlord's opinion will overload such wiring or interfere with the use
thereof by other tenants in the Building. If Landlord consents to the use of
equipment requiring such changes, Tenant shall pay the cost of installing any
additional risers, panels or other facilities that may be necessary to furnish
energy to the Premises.
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Landlord will not permit additional coring of the floor of the Premises
in order to install new electric outlets in the Premises unless Tenant furnishes
Landlord with X-ray scans of the floor area where the Tenant wishes to place
additional electrical outlets and Landlord, in its absolute discretion, is
satisfied, on the basis of such X-ray scans and other information obtained by
Landlord, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
(e) LANDLORD'S DUTIES. Landlord shall not be in default under this
Lease or liable for any damages resulting from, or incidental to, any of the
following, nor shall any of the following be an actual or constructive eviction
of Tenant, nor shall the Rent be abated by reason of: (i) failure to furnish or
delay in furnishing any of the services described in this Section when such
failure or delay is caused by accident or any condition beyond the reasonable
control of Landlord, including the making of necessary repairs or improvements
to the Premises or to the Building, (ii) any electrical surges or spikes, or
(iii) failure to make any repair or to perform any maintenance, unless such
failure shall persist for an unreasonable time after notice of the need for such
repair or maintenance is given to Landlord by Tenant. Landlord shall use
reasonable efforts to remedy any interruption in the furnishing of such
services.
(f) GOVERNMENTAL REGULATIONS. Any other provisions of this Section
notwithstanding, if any governmental authority or utility supplier imposes any
laws, controls, conditions, or other restrictions upon Landlord, Tenant, or the
Building, relating to the use or conservation of energy or utilities, mandated
changes in temperatures to be maintained in the Premises or the Building or the
reduction of automobile or other emissions (collectively, the "Controls"), or in
the event Landlord is required or elects to make alterations to the Building in
order to comply with the Controls, Landlord may, in its reasonable discretion,
comply and may require Tenant to comply with the Controls or make such
alterations to the Building in order to comply with the Controls. Such
compliance and the making of such alterations shall not constitute an actual or
constructive eviction of Tenant, impose on Landlord any liability whatsoever, or
entitle Tenant to any abatement of Rent.
17. INDEMNITY.
(a) GENERALLY. Tenant shall hold Landlord harmless from and against any
and all damages arising out of any damage to any persons or property occurring
in, on or about the Premises or the Property resulting from the acts or
omissions of Tenant or its authorized representatives. Landlord shall hold
Tenant harmless from and against any and all damages arising out of any damage
to any persons or property occurring in, on or about the Premises or the
Property resulting from the acts or omissions of Landlord or its authorized
representatives. A party's obligation under this Section to indemnify and hold
the other party harmless shall be limited to the sum that exceeds the amount of
insurance proceeds, if any, received by the party being indemnified.
(b) CONCURRENT NEGLIGENCE OF LANDLORD AND TENANT. Notwithstanding
Section 17(a) above, in the event of concurrent negligence of Tenant, or its
authorized representatives, on the one hand, and that of Landlord, or its
authorized representatives, on the other hand, which concurrent negligence
results in damage to any persons or property occurring in, on or about the
Premises or the Property, either party's obligation to indemnify the other party
as set forth in Section 17(a) shall be limited to the extent of the negligence
of the indemnifying party, or its authorized representatives, including the
indemnifying party's proportional share of costs and attorneys' fees incurred in
connection with any claims, actions or proceedings brought with respect to such
damage.
(c) WAIVER OF WORKER'S COMPENSATION IMMUNITY. The indemnification
obligations contained in this Section shall not be limited by any worker's
compensation, benefit or disability laws, and each indemnifying party hereby
waives (solely for the benefit of the indemnified party) any immunity that said
indemnifying party may have under the Industrial Insurance Act, Title 51 RCW and
similar worker's compensation, benefit or disability laws.
(d) PROVISIONS SPECIFICALLY NEGOTIATED. LANDLORD AND TENANT ACKNOWLEDGE
BY THEIR EXECUTION OF THIS LEASE THAT EACH OF THE INDEMNIFICATION PROVISIONS OF
THIS LEASE (SPECIFICALLY INCLUDING BUT NOT LIMITED TO THOSE RELATING TO WORKER'S
COMPENSATION BENEFITS AND LAWS) WERE SPECIFICALLY NEGOTIATED AND AGREED TO BY
LANDLORD AND TENANT.
18. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord and Landlord's Agent
shall not be liable for injury to Tenant's business or loss of income therefrom
or for damage which may be sustained by the person, goods, wares, merchandise or
property of Tenant, its authorized representatives, or any other person in or
about the Premises, caused by or resulting from fire, steam, electricity, gas,
water or rain, which may leak or flow from or into any part of the Premises, or
from the breakage, leakage, obstruction or other defects of the pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures
of the same, whether the said damage or injury resulting from conditions arising
upon the Premises or upon other portions of the Building or the Property unless
such injury or damage is caused by the negligence or willful misconduct of
Landlord or its authorized representatives.
19. COMMERCIAL GENERAL LIABILITY AND PROPERTY DAMAGE INSURANCE. Tenant, at
its cost, shall maintain commercial general liability insurance (including
contractual liability and products and completed operations liability) with
liability limits of not less than $1,000,000 per occurrence and $2,000,000
annual aggregate, insuring against all liability of Tenant and its authorized
representatives arising out of or in connection with Tenant's use and occupancy
of the Premises and property damage insurance with liability limits of not less
than $500,000. All such commercial general liability and property damage
insurance shall insure performance by Tenant of the indemnity provisions of
Section 17 captioned "Indemnity". Landlord and Landlord's Agent shall be
additional named insureds on such insurance policy.
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20. TENANT'S FIRE INSURANCE. Tenant, at its cost, shall maintain on all of
Tenant's Alterations, Trade Fixtures and Personal Property in, on or about the
Premises, a policy of standard All Risk fire insurance, in an amount equal to at
least their full replacement cost. The proceeds of any such policy shall be used
by Tenant for the restoration of Tenant's Alterations and Trade Fixtures and the
replacement of its Personal Property. Any portion of such proceeds not used for
such restoration shall belong to Tenant.
21. WAIVER OF SUBROGATION. Landlord and Tenant release each other, and
their respective authorized representatives, from any claims for damage to any
person or to the Premises and the Building and to Tenant's Alterations, Trade
Fixtures and Personal Property that are caused by or result from risks insured
against under any insurance policies carried by the parties, in force at the
time of any such damage and collectible. Landlord and Tenant shall cause each
insurance policy obtained by it to provide that the insurance company waives all
right of recovery by way of subrogation against either party in connection with
any damage covered by any insurance policy. Neither party shall be liable to the
other for any damage caused by fire or any of the risks insured against under
any insurance policy required by this Lease.
22. OTHER INSURANCE MATTERS. All insurance required to be carried by Tenant
under this Lease shall: (i) be issued by insurance companies authorized to do
business in the State of Washington with a rating of A/VI or better as rated in
the most recent edition of Best's Insurance Reports; (ii) be issued as a primary
policy, and (iii) contain an endorsement requiring thirty (30) days' prior
written notice from the insurance company to both parties, to Landlord's Agent,
and, if requested by Landlord, to Landlord's lender, before cancellation or
change in the coverage, scope, or amount of any policy. Each policy or a
certificate of the policy, together with evidence of payment of premiums, shall
be deposited with Landlord on or before the Commencement Date, and on renewal of
the policy not less than ten (10) days before expiration of the term of the
policy.
23. DESTRUCTION.
(a) INSURED DAMAGE. If during the Term the Premises or the Building are
partially or totally destroyed by any casualty that is covered by any insurance
carried by Landlord covering the Building, rendering the Premises partially or
totally inaccessible or unusable, Landlord shall restore the Premises or the
Building to substantially the same condition as they were in immediately before
such destruction, if (i) the insurance proceeds available to Landlord equal or
exceed the cost of such restoration, (ii) in the opinion of a registered
architect or engineer appointed by Landlord such restoration can be completed
within one hundred eighty (180) days after the date of destruction, and (iii)
such restoration is permitted under then existing laws to be done in such a
manner as to return the Premises, or the Building, as the case may be, to
substantially the same condition as they were in immediately before such
destruction. To the extent that the insurance proceeds must be paid to a
mortgagee under, or must be applied to reduce any debt secured by, a mortgage
covering the Property, the insurance proceeds shall be deemed not to be
available to Landlord unless such mortgagee permits Landlord to use the
insurance proceeds for such restoration. Such destruction shall not terminate
this Lease.
(b) MAJOR OR UNINSURED DAMAGE. If during the Term the Premises or the
Building are partially or totally destroyed by any casualty and Landlord is not
obligated under Section 23(a) captioned "Insured Damage" to restore the Premises
or the Building, as the case may be, then (i) Landlord may, at its election,
restore the Premises or the Building to substantially the same condition as they
were in immediately before such destruction, or (ii) either party may terminate
this Lease effective as of the date of such destruction on notice to the other
party within sixty (60) days after the date of destruction. If Landlord does not
give Tenant notice within sixty (60) days after the date of such destruction of
its election to restore the Premises or the Building, as the case may be,
Landlord shall be deemed to have elected to terminate this Lease. If Landlord
elects to restore the Premises or the Building, as the case may be, Landlord
shall use commercially reasonable efforts to complete such restoration within
one hundred eighty (180) days after the date on which Landlord obtains all
permits necessary for such restoration, provided, however, that such one hundred
eighty (180) day period shall be extended by a period equal to any delays caused
by Force Majeure, and such destruction shall not terminate this Lease.
(c) DAMAGE TO THE BUILDING. If during the Term the Building is
partially destroyed by any casualty and if in the opinion of Landlord the
Building should be restored in such a way as to materially alter the Premises,
then Landlord may, at Landlord's election, terminate this Lease by giving notice
to Tenant of Landlord's election to do so within sixty (60) days after the date
of such destruction.
(d) EXTENT OF LANDLORD'S OBLIGATION TO RESTORE. If Landlord is required
or elects to restore the Premises as provided in this Section, Landlord shall
not be required to restore alterations made by Tenant, Tenant's trade fixtures
and Tenant's personal property, such excluded items being the sole
responsibility of Tenant to restore.
(e) ABATEMENT OR REDUCTION OF RENT. In case of damage to, or
destruction of, the Premises or the Building the Rent shall be abated or
reduced, between the date of destruction and the date of completion of
restoration, by an amount that is in the same ratio to the Rent as the total
number of square feet of the Premises that are so damaged or destroyed bears to
the total number of square feet in the Premises.
24. CONDEMNATION. If during the Term there is any taking of part or all of
the Premises or the Building by condemnation, then the rights and obligations of
the parties shall be as follows:
(a) MINOR TAKING. If there is a taking of less than ten percent (10%)
of the Premises, this Lease shall remain in full force and effect.
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(b) MAJOR TAKING. If there is a taking of ten percent (10%) or more of
the Premises and if the remaining portion of the Premises is of such size or
configuration that Tenant is unable to conduct its business in the Premises,
then the Term shall terminate as of the date of taking.
(c) TAKING OF PART OF THE BUILDING. If there is a taking of a part of
the Building other than the Premises and if in the opinion of Landlord the
Building should be restored in such a way as to materially alter the Premises,
then Landlord may terminate the Term by giving notice to such effect to Tenant
within sixty (60) days after the date of vesting of title in the condemnor and
the Term shall terminate as of the date specified in such notice, which date
shall not be less than sixty (60) days after the giving of such notice.
(d) AWARD. The entire award for the Premises, the Building and the
Property, shall belong to and be paid to Landlord, Tenant hereby assigning to
Landlord Tenant's interest therein, if any, provided, however, that Tenant shall
have the right to claim and recover from the condemnor compensation for the loss
of any alterations made by Tenant, Tenant's trade fixtures, Tenant's personal
property, moving expenses and business interruption.
(e) ABATEMENT OF RENT. If any part of the Premises is taken by
condemnation and this Lease remains in full force and effect, on the date of
taking the Rent shall be reduced by an amount that is in the same ratio to the
Rent as the total number of square feet in the Premises taken bears to the total
number of square feet in the Premises immediately before the date of taking.
25. ASSIGNMENT AND SUBLETTING.
(a) LANDLORD'S CONSENT; DEFINITIONS. Tenant acknowledges that the
Building is a multi-tenant office building, occupied by tenants specifically
selected by Landlord, and that Landlord has a legitimate interest in the type
and quality of such tenants, the location of tenants in the Building and in
controlling the leasing of space in the Building so that Landlord can better
meet the particular needs of its tenants and protect and enhance the relative
image, position and value of the Building in the office building market. Tenant
further acknowledges that the rental value of the Premises may fluctuate during
the Term in accordance with market conditions, and, as a result, the Rent paid
by Tenant under the Lease at any particular time may be higher or lower than the
then market rental value of the Premises. Landlord and Tenant agree, and the
provisions of this Section are intended to so provide, that, if Tenant
voluntarily assigns its interest in this Lease or in the Premises or subleases
any part or all of the Premises, one-half (1/2) of the net profits from any
increase in the market rental value of the Premises shall belong solely to
Landlord. Tenant acknowledges that, if Tenant voluntarily assigns this Lease or
subleases any part or all of the Premises, Tenant's investment in the subject
portion of the Premises (specifically including, but not limited to, tenant
improvements, good will or other assets) may be lost or reduced as a result of
such action.
(b) CONSENT REQUIRED. Tenant shall not voluntarily assign or encumber
its interest in this Lease or in the Premises, or sublease any part or all of
the Premises, without Landlord's prior consent, which consent shall not be
unreasonably withheld. Any assignment, encumbrance or sublease without
Landlord's consent shall be voidable and, at Landlord's election, shall
constitute a default by Tenant under this Lease. In determining whether to
approve a proposed assignment or sublease, Landlord shall place primary emphasis
on the proposed transferee's reputation and creditworthiness, the character of
the business to be conducted by the proposed transferee at the Premises and the
affect of such assignment or subletting on the tenant mix in the Building. In
addition, Landlord shall have the right to approve the specific form of any
assignment or sublease agreement. In no event shall Landlord be obligated to
consent to any assignment or subletting which increases (i) the Operating Costs,
(ii) the burden on the Building services, or (iii) the foot traffic, elevator
usage or security concerns in the Building, or creates an increased probability
of the comfort and/or safety of the Landlord and other tenants in the Building
being unreasonably compromised or reduced (for example, but not exclusively,
Landlord may deny consent to an assignment or subletting where the space will be
used for a school or training facility, an entertainment, sports or recreation
facility, retail sales to the public (unless Tenant's permitted use is retail
sales), a personnel or employment agency, a medical office, or an embassy or
consulate or similar office. Landlord shall not be obligated to approve an
assignment or subletting to (x) a current tenant of the Building or (y) a
prospective tenant of the Building with whom Landlord is then negotiating.
Landlord's foregoing rights and options shall continue throughout the entire
term of this Lease. No consent to any assignment, encumbrance or sublease shall
constitute a waiver of the provisions of this Section and no other or subsequent
assignment, encumbrance or sublease shall be made without Landlord's prior
consent. Neither an assignment or subletting nor the collection of Rent by
Landlord from any person other than Tenant, nor the application of any such Rent
as provided in this Section shall be deemed a waiver of any of the provisions of
this Section or release Tenant from its obligation to comply with the terms and
provisions of this Lease and Tenant shall remain fully and primarily liable for
all of Tenant's obligations under this Lease, including the obligation to pay
Rent under this Lease. Any personal guarantee(s) of Tenant's obligations under
this Lease shall remain in full force and effect following any such assignment
or subletting. Landlord may condition approval of an assignment or subletting
hereunder on an increase in the amount of the Security Deposit or on receipt of
personal guarantees of the assignee's or sublessee's obligations under this
Lease. If Landlord approves of an assignment or subletting hereunder and this
Lease contains any renewal options, expansion options, rights of first refusal,
rights of first negotiation or any other rights or options pertaining to
additional space in the Building, such rights and/or options shall not run to
the assignee or subtenant, it being agreed by the parties hereto that any such
rights and options are personal to Tenant named herein and may not be
transferred.
(c) CONDITIONS TO ASSIGNMENT OR SUBLEASE. Tenant agrees that any
instrument by which Tenant assigns or sublets all or any portion of the Premises
shall expressly provide that the assignee or subtenant may not further assign or
sublet the assigned or sublet space without Landlord's prior consent (which
consent shall not, subject to Landlord's rights under Section 25(b), be
unreasonably withheld or delayed), and that the
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assignee or subtenant will comply with all of the provisions of this Lease and
that Landlord may enforce the Lease provisions directly against such assignee or
subtenant. If this Lease is assigned, whether or not in violation of the terms
and provisions of this Lease, Landlord may collect Rent from the assignee. If
the Premises, or any part thereof, is sublet, Landlord may, upon a default under
this Lease, collect rent from the subtenant. In either event, Landlord may apply
the amount collected from the assignee or subtenant to Tenant's obligation to
pay Rent under this Lease.
(d) EVENTS CONSTITUTING AN ASSIGNMENT OR SUBLEASE. For purposes of this
Section, the following events shall be deemed an assignment or sublease, as
appropriate:(i) the issuance of equity interests (whether stock, partnership
interests or otherwise) in Tenant, or any assignee or subtenant, if applicable,
or any entity controlling any of them, to any person or group of related
persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant, or any assignee or subtenant, if
applicable; or (ii) a transfer of Control of Tenant, or any assignee or
subtenant, if applicable, or any entity controlling any of them, in a single
transaction or a series of related or unrelated transactions (including, without
limitation, by consolidation, merger, acquisition or reorganization), except
that the transfer of outstanding capital stock or other listed equity interests
by persons or parties other than "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, through the "over-the-counter" market or any
recognized national or international securities exchange, shall not be included
in determining whether Control has been transferred. "Control" shall mean direct
or indirect ownership of fifty percent (50%) or more of all the legal and
equitable interest in any business entity.
Notwithstanding anything to the contrary in this Section, Tenant may
assign this Lease or sublet the whole or any part of the Premises, including the
Right of First Offer granted to Tenant by Landlord as set forth in Section 43 of
the Rider, to: (a) any corporation in whom or with which Tenant may be merged or
consolidated, provided that the net worth of the resulting corporation is at
least equal to the greater of (i) the net worth of Tenant on the date hereof, or
(ii) the net worth of Tenant immediately prior to such merger or consolidation,
or (b) any entity to whom Tenant sells all of its assets; provided that such
corporation or such entity described in (a) and (b) above expressly assumes all
of Tenant's obligation hereunder and otherwise complies with the provisions of
Subsection 25(c) entitled "Conditions to Assignment or Sublease".
(e) PROCESSING EXPENSES. Tenant shall pay to Landlord the amount of
Landlord's cost of processing each proposed assignment or subletting, including
without limitation, attorneys' and other professional fees, and the cost of
Landlord's administrative, accounting and clerical time (collectively,
"Processing Costs"), and the amount of all direct and indirect expense incurred
by Landlord arising from the assignee or sublessee taking occupancy of the
subject space, including without limitation, costs of freight elevator operation
for moving of furnishings and trade fixtures, security service, janitorial and
cleaning service, rubbish removal service, costs of changing signage, and costs
of changing locks and making new keys (collectively, "Occupancy Costs").
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and the Occupancy Costs.
(f) CONSIDERATION TO LANDLORD. In the event of any assignment or
sublease, whether or not requiring Landlord's consent, Landlord shall be
entitled to receive, as Additional Rent, one-half (1/2) of any net
consideration, including without limitation, payment for leasehold improvements
owned by Landlord, paid by the assignee or subtenant for the assignment or
sublease and, in the case of sublease, one-half (1/2) of the excess of the
amount of rent paid for the sublet space by the subtenant over the total amount
of Minimum Monthly Rent under Section 5 and Additional Rent under Sections 7 and
9. Upon Landlord's request, Tenant shall assign to Landlord all amounts to be
paid to Tenant by the assignee or subtenant and shall direct such assignee or
subtenant to pay the same directly to Landlord. If there is more than one
sublease under this Lease, the amounts (if any) to be paid by Tenant to Landlord
pursuant to the preceding sentence shall be separately calculated for each
sublease and amounts due Landlord with regard to any one sublease may not be
offset against rental and other consideration pertaining due under any other
sublease.
With regard to an approved assignment or subletting, Tenant
acknowledges that Landlord's agreement to deal directly with the assignee or
subtenant with regard to such party's occupancy of the Premises and the
administration of the Lease, without requiring Tenant to monitor or become
directly involved in such matters, constitutes appropriate and acceptable
consideration for the capture by Landlord of any rent or consideration paid by
the assignee or subtenant in excess of that required to be paid by Tenant under
the Lease.
(g) PROCEDURES. If Tenant desires to assign this Lease or any interest
therein or sublet all or part of the Premises, Tenant shall give Landlord
written notice thereof designating the space proposed to be sublet and the terms
proposed. Landlord shall have the prior right and option (to be exercised by
written notice to Tenant given within fifteen (15) days after receipt of
Tenant's notice) (i) to sublet from Tenant any portion of the Premises proposed
by Tenant to be sublet, for the term for which such portion is proposed to be
sublet, but at the same Rent (including Additional Rent as provided for in
Sections 7 and 9) as Tenant is required to pay to Landlord under this Lease for
the same space, computed on a pro rata square footage basis, and during the term
of such sublease Tenant shall be released of its obligations under the Lease
with regard to the subject space, (ii) if the term of the sublease (including
any renewal terms) will expire during the final eighteen (18) months of the Term
(or if Tenant has exercised a renewal option, if any, then during the final
eighteen (18) months of the subject renewal period), to terminate this Lease as
it pertains to the portion of the Premises so proposed by Tenant to be sublet,
or (iii) to approve Tenant's proposal to sublet conditional upon Landlord's
subsequent written approval of the specific sublease obtained by Tenant and the
specific subtenant named therein. If Landlord exercises its option in (i) above,
then Landlord may, at Landlord's sole cost, construct improvements in the
subject space and, so long as the improvements are suitable for general office
purposes, Landlord shall have no obligation to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, Tenant shall submit to Landlord
for
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Landlord's written approval Tenant's proposed sublease agreement (in which the
proposed subtenant shall be named) together with a current reviewed or audited
financial statement prepared by a certified public accountant for such proposed
subtenant and a credit report on such proposed subtenant prepared by a
recognized credit reporting agency. If Landlord fails to exercise any aforesaid
option to sublet or to terminate, this shall not be construed as or constitute a
waiver of any of the provisions of this Section. If Landlord exercises any such
option to sublet or to terminate, Landlord shall not have any liability for any
real estate brokerage commission(s) or with respect to any of the costs and
expenses that Tenant may have incurred in connection with its proposed
subletting, and Tenant agrees to hold Landlord harmless from and against any and
all claims (including, without limitation, claims for commissions) arising from
such proposed subletting. Landlord's foregoing rights and options shall continue
throughout the Term. For purposes of this Section, a proposed assignment of this
Lease in whole or in part shall be deemed a proposed subletting of such space.
(h) DOCUMENTATION. No permitted subletting by Tenant shall be effective
until there has been delivered to Landlord a counterpart of the sublease in
which the subtenant agrees to be and remain jointly and severally liable with
Tenant for the payment of Rent pertaining to the sublet space and for the
performance of all of the terms and provisions of this Lease; provided, however,
that the subtenant shall be liable to Landlord for rent only in the amount set
forth in the sublease. No permitted assignment shall be effective unless and
until there has been delivered to Landlord a counterpart of the assignment in
which the assignee assumes all of Tenant's obligations under this Lease arising
on or after the date of the assignment. The failure or refusal of a subtenant or
assignee to execute any such instrument shall not release or discharge the
subtenant or assignee from its liability as set forth above.
(i) NO MERGER. Without limiting any of the provisions of this Section,
if Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
26. DEFAULT. The occurrence of any of the following shall constitute a
default by Tenant under this Lease:
(a) FAILURE TO PAY RENT. Failure to pay Rent when due, if the failure
continues for a period of three (3) days after notice of such default has been
given by Landlord to Tenant.
(b) FAILURE TO COMPLY WITH RULES AND REGULATIONS. Failure to comply
with the Rules and Regulations, if the failure continues for a period of ten
(10) days after notice of such default is given by Landlord to Tenant. If the
failure to comply cannot reasonably be cured within ten (10) days, then Tenant
shall not be in default under this Lease if Tenant commences to cure the failure
to comply within ten (10) days and diligently and in good faith continues to
cure the failure to comply.
(c) OTHER DEFAULTS. Failure to perform any other provision of this
Lease, if the failure to perform is not cured within thirty (30) days after
notice of such default has been given by Landlord to Tenant. If the default
cannot reasonably be cured within thirty (30) days, then Tenant shall not be in
default under this Lease if Tenant commences to cure the default within thirty
(30) days and diligently and in good faith continues to cure the default.
(d) APPOINTMENT OF TRUSTEE OR RECEIVER. The appointment of a trustee or
receiver to take possession of substantially all of the Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within sixty (60) days.
27. REMEDIES. If Tenant commits a default, Landlord shall have the
following alternative remedies, which are in addition to any remedies now or
later allowed by law:
(a) MAINTAIN LEASE IN FORCE. Maintain this Lease in full force and
effect and recover the Rent and other monetary charges as they become due,
without terminating Tenant's right to possession, irrespective of whether Tenant
shall have abandoned the Premises. If Landlord elects to not terminate the
Lease, Landlord shall have the right to attempt to re-let the Premises at such
rent and upon such conditions and for such a term, and to do all acts necessary
to maintain or preserve the Premises as Landlord deems reasonable and necessary
without being deemed to have elected to terminate the Lease including removal of
all persons and property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant. In the event any such re-letting occurs, this Lease shall terminate
automatically upon the new Tenant taking possession of the Premises.
Notwithstanding that Landlord fails to elect to terminate the Lease initially,
Landlord at any time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant.
(b) TERMINATE LEASE. Terminate Tenant's right to possession by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default including without limitation thereto, the
following: (i) The worth at the time of award of any unpaid Rent which had been
earned at the time of such termination; plus (ii) the worth at the time of award
of the amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus (iii) the worth at the
time of award of the amount by which the unpaid Rent for the balance of the Term
after the time of award exceeds the amount of such rental loss that is proved
could be reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to
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perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, including without limitation, any
costs or expenses incurred by Landlord in (A) retaking possession of the
Premises, including reasonable attorney fees therefor, (B) maintaining or
preserving the Premises after such default, (C) preparing the Premises for
reletting to a new tenant, including repairs or necessary alterations to the
Premises for such reletting, (D) leasing commissions, and (E) any other costs
necessary or appropriate to relet the Premises; plus (v) at Landlord's election,
such other amounts in addition to or in lieu of the foregoing as may be
permitted from time to time by applicable state law. Upon any such re-entry
Landlord shall have the right to make any reasonable repairs, alterations or
modifications to the Premises, which Landlord in its sole discretion deems
reasonable and necessary. As used in Subsection 27(b)(i) the "worth at the time
of award" is computed by allowing interest at the rate of eighteen percent (18%)
per year from the date of default. As used in Subsections 27(b)(ii) and
27(b)(iii) the "worth at the time of award" is computed by discounting such
amounts at the discount rate of eight percent (8%) per year.
28. BANKRUPTCY.
(a) ASSUMPTION OF LEASE. If Tenant becomes a Debtor under Chapter 7 of
the Bankruptcy Code ("Code") or a petition for reorganization or adjustment of
debts is filed concerning Tenant under Chapters 11 or 13 of the Code, or a
proceeding is filed under Chapter 7 of the Code and is transferred to Chapters
11 or 13 of the Code, the Trustee or Tenant, as Debtor and as
Debtor-In-Possession, may not elect to assume this Lease unless, at the time of
such assumption, the Trustee or Tenant has:
(i) Cured all defaults under the Lease and paid all sums due and
owing under the Lease or provided Landlord with "Adequate Assurance" (as defined
below) that:(i) within ten (10) days from the date of such assumption, the
Trustee or Tenant will completely pay all sums due and owing under this Lease
and compensate Landlord for any actual pecuniary loss resulting from any
existing default or breach of this Lease, including without limitation,
Landlord's reasonable costs, expenses, accrued interest, and attorneys' fees
incurred as a result of the default or breach; (ii) within twenty (20) days from
the date of such assumption, the Trustee or Tenant will cure all non-monetary
defaults and breaches under this Lease, or, if the nature of such non-monetary
defaults is such that more than twenty (20) days are reasonably required for
such cure, that the Trustee or Tenant will commence to cure such non-monetary
defaults within twenty (20) days and thereafter diligently prosecute such cure
to completion; and (iii) the assumption will be subject to all of the provisions
of this Lease.
(ii) For purposes of this Section, Landlord and Tenant acknowledge
that, in the context of a bankruptcy proceeding involving Tenant, at a minimum,
"Adequate Assurance" shall mean:(i) the Trustee or Tenant has and will continue
to have sufficient unencumbered assets after the payment of all secured
obligations and administrative expenses to assure Landlord that the Trustee or
Tenant will have sufficient funds to fulfill the obligations of Tenant under
this Lease; (ii) the Bankruptcy Court shall have entered an Order segregating
sufficient cash payable to Landlord and/or the Trustee or Tenant shall have
granted a valid and perfected first lien and security interest and/or mortgage
in or on property of Trustee or Tenant acceptable as to value and kind to
Landlord, to secure to Landlord the obligation of the Trustee or Tenant to cure
the monetary and/or non-monetary defaults and breaches under this Lease within
the time periods set forth above; and (iii) the Trustee or Tenant, at the very
minimum, shall deposit a sum equal to two (2) month's Minimum Monthly Rent to be
held by Landlord (without any allowance for interest thereon) to secure Tenant's
future performance under the Lease.
(b) ASSIGNMENT OF LEASE. If the Trustee or Tenant has assumed the Lease
pursuant to the provisions of this Section for the purpose of assigning Tenant's
interest hereunder to any other person or entity, such interest may be assigned
only after the Trustee, Tenant or the proposed assignee have complied with all
of the terms, covenants and conditions of this Lease, including, without
limitation, those with respect to Additional Rent. Landlord and Tenant
acknowledge that such terms, covenants and conditions are commercially
reasonable in the context of a bankruptcy proceeding of Tenant. Any person or
entity to which this Lease is assigned pursuant to the provisions of the Code
shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such assignment.
Any such assignee shall upon request execute and deliver to Landlord an
instrument confirming such assignment.
(c) ADEQUATE PROTECTION. Upon the filing of a petition by or against
Tenant under the Code, Tenant, as Debtor and as Debtor-In-Possession, and any
Trustee who may be appointed agree to adequately protect Landlord as follows:(i)
to perform each and every obligation of Tenant under this Lease until such time
as this Lease is either rejected or assumed by Order of the Bankruptcy Court;
(ii) to pay all monetary obligations required under this Lease, including
without limitation, the payment of Minimum Monthly Rent, Tenant's Share of Real
Property Taxes, Tenant's Share of Operating Costs and any other sums payable by
Tenant to Landlord under this Lease which is considered reasonable compensation
for the use and occupancy of the Premises; (iii) provide Landlord a minimum of
thirty (30) days prior written notice, unless a shorter period is agreed to in
writing by the parties, of any proceeding relating to any assumption of this
Lease or any intent to abandon the Premises, which abandonment shall be deemed a
rejection of this Lease; and (iv) to perform to the benefit of Landlord as
otherwise required under the Code. The failure of Tenant to comply with the
above shall result in an automatic rejection of this Lease.
29. LIMITATION OF ACTIONS. Any claim, demand, right or defense of any kind
by Tenant which is based upon or arises in connection with this Lease or the
negotiations prior to its execution, shall be barred unless Tenant commences an
action thereon, or interposes in a legal proceeding a defense by reason thereof,
within one (1) year after the date of the act or omission on which such claim,
demand, right or defense is based.
30. LIMITATION ON LANDLORD'S LIABILITY. Anything in this Lease to the
contrary notwithstanding, covenants, undertakings and agreements herein made on
the part of Landlord are made and intended not as personal
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covenants, undertakings and agreements or for the purpose of binding Landlord
personally or the assets of Landlord except Landlord's interest in the Property,
but are made and intended for the purpose of binding only the Landlord's
interest in the Property. No personal liability or personal responsibility is
assumed by, nor shall at any time be asserted or enforceable against Landlord or
its partners and their respective heirs, legal representatives, successors and
assigns on account of this Lease or on account of any covenant, undertaking or
agreement of Landlord contained in this Lease.
31. SIGNS. Tenant shall not have the right to place, construct or maintain
any sign, advertisement, awning, banner or other exterior decoration without
Landlord's consent, which shall not be unreasonably withheld. Any sign that
Tenant has Landlord's consent to place, construct and maintain shall comply with
all laws, and Tenant shall obtain any approval required by such laws. Landlord
makes no representation with respect to Tenant's ability to obtain such
approval.
32. LANDLORD'S RIGHT TO ENTER THE PREMISES. Landlord and its authorized
representatives shall have the right to enter the Premises at reasonable times
and upon reasonable prior notice (except in an emergency when no such notice
shall be required) for any of the following purposes:(i) to determine whether
the Premises are in good condition and whether Tenant is complying with its
obligations under this Lease, (ii) to do any maintenance; to make any
restoration to the Premises or the Building that Landlord has the right or the
obligation to perform, and to make any improvements to the Premises or the
Building that Landlord deems necessary, (iii) to serve, post or keep posted any
notices required or allowed under the provisions of this Lease, (iv) to post any
ordinary "For Sale" signs at any time during the Term and to post any ordinary
"For Lease" signs during the last ninety (90) days of the Term, and (v) to show
the Premises to prospective brokers, agents, purchasers, tenants or lenders, at
any time during the Term.
Landlord shall not be liable in any manner for any inconvenience,
annoyance, disturbance, loss of business, nuisance, or other damage arising out
of Landlord's entry on the Premises as provided in this Section, except damage
resulting from the negligent or willful acts of Landlord or its authorized
representatives. Tenant shall not be entitled to an abatement or reduction of
Rent if Landlord exercises any right reserved in this Section. Landlord shall
conduct its activities on the Premises as allowed in this Section in a
reasonable manner so as to cause minimal inconvenience, annoyance or disturbance
to Tenant.
33. SUBORDINATION. This Lease is and shall be prior to any mortgage
recorded after the date of this Lease affecting the Property. If, however, a
lender requires that this Lease be subordinate to any mortgage, this Lease shall
be subordinate to that mortgage if Landlord first obtains from the lender a
written agreement that provides substantially the following:
"As long as Tenant performs its obligations under this Lease,
no foreclosure of, deed given in lieu of foreclosure of, or sale under
the mortgage, and no steps or procedures taken under the mortgage,
shall affect Tenant's rights under this Lease. "
Tenant shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure.
Tenant shall execute the written agreement and any other documents required by
the lender to accomplish the purposes of this Section.
34. RIGHT TO ESTOPPEL CERTIFICATES. Tenant, within ten (10) days after
notice from Landlord, shall execute and deliver to Landlord, in recordable form,
a certificate stating that this Lease is unmodified and in full force and
effect, or in full force and effect as modified and stating the modifications.
The certificate shall also state the amount of Minimum Monthly Rent, the dates
to which Rent has been paid in advance, and the amount of any Prepaid Rent or
Security Deposit and such other matters as Landlord may reasonably request.
Failure to deliver the certificate within such ten (10) day period shall be
conclusive upon Tenant for the benefit of Landlord and any successor to
Landlord, that this Lease is in full force and effect and has not been modified
except as may be represented by Landlord requesting the certificate.
35. TRANSFER OF LANDLORD'S INTEREST. If Landlord sells or transfers the
Property, Landlord, on consummation of the sale or transfer, shall be released
from any liability thereafter accruing under this Lease if Landlord's successor
has assumed in writing, for the benefit of Tenant, Landlord's obligations under
this Lease. If any Security Deposit or Prepaid Rent has been paid by Tenant,
Landlord shall transfer such Security Deposit or Prepaid Rent to Landlord's
successor and on such transfer Landlord shall be discharged from any further
liability with respect to such Security Deposit or Prepaid Rent.
36. ATTORNEYS' FEES. If either party shall bring any action for relief against
the other party, declaratory or otherwise, arising out of this Lease, including
any action by Landlord for the recovery of Rent or possession of the Premises,
the losing party shall pay the successful party a reasonable sum for attorneys'
fees which shall be deemed to have accrued on the commencement of such action
and shall be paid whether or not such action is prosecuted to judgment.
37. SURRENDER; HOLDING OVER.
(a) SURRENDER. On expiration or ten (10) days after termination of the
Term, Tenant shall surrender the Premises and all Tenant's improvements and
alterations to Landlord broom clean and in good condition. Tenant shall remove
all of its trade fixtures and personal property within the time period stated in
this Section. Tenant, at its cost, shall perform all restoration made necessary
by, and repair any damage to the Premises caused by, the removal of its trade
fixtures, personal property and signs to Landlord's reasonable satisfaction
within the time period stated in this Section. Landlord may, at its election,
retain or dispose of in any manner any of Tenant's trade fixtures or personal
property that Tenant does not remove from the Premises on expiration or within
ten (10) days after termination of the Term as allowed or required by the
provisions of this
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Lease by giving ten (10) days notice to Tenant. Title to any such trade fixtures
and personal property that Landlord elects to retain or dispose of on expiration
of such ten (10) day period shall vest in Landlord. Tenant waives all claims
against Landlord for any damage to Tenant resulting from Landlord's retention or
disposition of any such trade fixtures and personal property. Tenant shall be
liable to Landlord for Landlord's costs for storing, removing and disposing of
Tenant's trade fixtures and personal property. If Tenant fails to surrender the
Premises to Landlord on expiration or ten (10) days after termination of the
Term as required by this Section, Tenant shall pay Landlord Rent in an amount
equal to one and one-half (1-1/2) times the Minimum Monthly Rent applicable for
the month immediately prior to the expiration or termination of the Term for the
entire time Tenant thus remains in possession and Tenant shall hold Landlord
harmless from all damages resulting from Tenant's failure to timely surrender
the Premises, including without limitation, (i) any Rent payable by, or any
damages claimed by, any prospective tenant of any part or all of the Premises,
and (ii) Landlord's damages resulting from such prospective tenant rescinding or
refusing to enter into the prospective lease of part or all of the Premises by
reason of Tenant's failure to timely surrender the Premises. If Tenant, without
Landlord's prior consent, remains in possession of the Premises after expiration
or termination of the Term, or after the date in any notice given by Landlord to
Tenant terminating this Lease, such possession by Tenant shall be deemed to be a
tenancy at sufferance terminable at any time by either party.
(b) HOLDING OVER WITH LANDLORD'S CONSENT. If Tenant, with Landlord's
prior consent, remains in possession of the Premises after expiration or
termination of the Term, or after the date in any notice given by Landlord to
Tenant terminating this Lease, such possession by Tenant shall be deemed to be a
month-to-month tenancy terminable by Landlord by a notice given to Tenant at
least twenty (20) days prior to the end of any such monthly period or by Tenant
by a notice given to Landlord at least thirty (30) days prior to the end of any
such monthly period. During such month-to-month tenancy, Tenant shall pay Rent
in the amount then agreed to in writing by Landlord and Tenant. All provisions
of this Lease, except those pertaining to term, shall apply to the
month-to-month tenancy.
38. AGENCY DISCLOSURE; BROKER.
(a) AGENCY DISCLOSURE. Martin Smith Inc hereby discloses that it
represents the Landlord in this transaction.
(b) BROKER. Landlord and Tenant each represent to the other that
neither is represented by any broker, agent or finder with respect to this Lease
in any manner, except the Broker(s). The commission due to the Broker(s) shall
be paid by Landlord pursuant to a separate agreement. Each party agrees to
indemnify and hold the other party harmless from and against any and all
liability, costs, damages, causes of action or other proceedings instituted by
any broker, agent or finder, licensed or otherwise, claiming through, under or
by reason of the conduct of the indemnifying party in any manner whatsoever in
connection with this Lease. If Tenant engages a broker, agent or finder other
than Washington Partners, Inc. to represent Tenant in connection with any
renewal of this Lease, then the commission or any fee of such broker, agent or
finder shall be paid by Tenant.
39. INTEREST ON UNPAID RENT. In addition to the Late Charge as provided in
Section 5(b), Rent not paid when due shall bear interest from the date due until
paid at the rate of eighteen percent (18%) per year, or the maximum legal rate
of interest, whichever is less.
40. CONSENT. Whenever the consent of either Landlord or Tenant is required
under this Lease, such consent shall not be effective unless given in writing
and shall not be unreasonably withheld or delayed, provided, however, that such
consent may be conditioned as provided in this Lease.
41. DEFINITIONS. As used in this Lease, the following words and phrases,
whether or not capitalized, shall have the following meanings:
(a) "Additional Rent" means pass-throughs of increases in Operating
Costs and Taxes, as defined in this Lease, and other monetary sums to be paid by
Tenant to Landlord under the provisions of this Lease.
(b) "Alteration" means any addition or change to, or modification of,
the Premises made by Tenant, including without limitation, fixtures, but
excluding trade fixtures as defined in this Section.
(c) "Authorized representatives" means any officer, agent, employee,
independent contractor or invitee of either party.
(d) "Award" means all compensation, sums or anything of value awarded,
paid or received on a total or partial condemnation.
(e) "Common Areas" means all areas outside the Premises and within the
Building or on the Land that are provided and designated by Landlord from time
to time for the general, non-exclusive use of Landlord, Tenant and other tenants
of the Building and their authorized representatives, including without
limitation, common entrances, lobbies, corridors, stairways and stairwells,
elevators, escalators, public restrooms and other public portions of the
Building.
(f) "Condemnation" means the exercise of any governmental power,
whether by legal proceedings or otherwise, by a condemnor and a voluntary sale
or transfer by Landlord to any condemnor, either under threat of condemnation or
while legal proceedings for condemnation are pending.
(g) "Condemnor" means any public or quasi-public authority or entity
having the power of condemnation.
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(h) "Damage" means any injury, deterioration, or loss to a person,
property, the Premises or the Building caused by another person's acts or
omissions or by Acts of God. Damage includes death.
(i) "Damages" means a monetary compensation or indemnity that can be
recovered in the courts by any person who has suffered damage to his person,
property or rights through another's acts or omissions.
(j) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(k) "Encumbrance" means any mortgage, deed of trust or other written
security device or agreement affecting the Premises, and the note or other
obligation secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(l) "Expiration" means the coming to an end of the time specified in
the Lease as its duration, including any extension of the Term.
(m) "Force majeure" means strikes, lockouts, labor disputes, shortages
of labor or materials, fire or other casualty, Acts of God or any other cause
beyond the reasonable control of a party.
(n) "Good condition" means the good physical condition of the Premises
and each portion of the Premises, including without limitation, all of the
Tenant Improvements, Tenant's alterations, Tenant's trade fixtures, Tenant's
Personal Property, all as defined in this Section, signs, walls, interior
partitions, windows, window coverings, glass, doors, carpeting and resilient
flooring, ceiling tiles, plumbing fixtures and lighting fixtures, all of which
shall be in conformity with building standard finishes, ordinary wear and tear,
damage by fire or other casualty and taking by condemnation excepted.
(o) "Hazardous substances" means any industrial waste, toxic waste,
chemical contaminant or other substance considered hazardous, toxic or lethal to
persons or property or designated as hazardous, toxic or lethal to persons or
property under any laws, including without limitation, asbestos material or
materials containing asbestos.
(p) "Hold harmless" means to defend and indemnify from all liability,
losses, penalties, damages as defined in this Section, costs, expenses
(including without limitation, attorneys' fees), causes of action, claims or
judgments arising out of or related to any damage, as defined in this Section,
to any person or property.
(q) "Law" means any constitution, statute, ordinance, regulation, rule,
resolution, judicial decision, administrative order or other requirement of any
federal, state, county, municipal or other governmental agency or authority
having jurisdiction over the parties or the Property, or both, in effect either
at the time of execution of this Lease or at any time during the Term, including
without limitation, any regulation or order of a quasi-official entity or body
(e. g. board of fire examiners or public utilities) and any legally effective
conditions, covenants or restrictions affecting the Property.
(r) "Lender" means the mortgagee, beneficiary, secured party or other
holder of an encumbrance, as defined in this Section.
(s) "Lien" means a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security for the performance of an act.
(t) "Maintenance" means repairs, replacement, repainting and cleaning.
(u) "Mortgage" means any deed of trust, mortgage or other written
security device or agreement affecting the Premises, and the note or other
obligation secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
(v) "Mortgagee" means the beneficiary under a deed of trust or
mortgagee under a mortgage.
(w) "Mortgagor" means the grantor or trustor under a deed of trust or
mortgagor under a mortgage.
(x) "Operating Costs" means all costs of any kind incurred by Landlord
in operating, cleaning, equipping, protecting, lighting, repairing, replacing,
heating, air-conditioning, maintaining and insuring the Property. Operating
Costs shall include, without limitation, the following costs:(i) salaries,
wages, bonuses and other compensation (including hospitalization, medical,
surgical, retirement plan, pension plan, union dues, life insurance, including
group life insurance, welfare and other fringe benefits, and vacation, holidays
and other paid absence benefits) relating to employees of Landlord or its agents
directly engaged in the operation, repair, or maintenance of the Property; (ii)
payroll, social security, workers' compensation, unemployment and similar taxes
with respect to such employees of Landlord or its authorized representatives,
and the cost of providing disability or other benefits imposed by law or
otherwise, with respect to such employees; (iii) uniforms (including the
cleaning, replacement and pressing thereof) provided to such employees; (iv)
premiums and other charges incurred by Landlord with respect to fire,
earthquake, other casualty, all risk, rent loss and liability insurance, any
other insurance as is deemed necessary or advisable in the reasonable judgment
of Landlord and, after the Base Year, costs of repairing an insured casualty to
the extent of the deductible amount under the applicable insurance policy; (v)
water charges and sewer rents or fees; (vi) license, permit and inspection fees;
(vii) sales, use and excise taxes on goods and services purchased by Landlord in
connection with the operation, maintenance or repair of the Property and
Building systems and equipment; (viii) telephone, facsimile, messenger, express
delivery service, postage, stationery supplies and other expenses incurred in
16
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connection with the operation, management, maintenance, or repair of the
Property; (ix) property management fees and expenses; (x) repairs to and
physical maintenance of the Property, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent provided in (xvi) and (xvii) below); (xi)
janitorial, window cleaning, security, extermination, water treatment, rubbish
removal, plumbing and other services and inspection or service contracts for
elevator, electrical, HVAC, mechanical and other building equipment and systems
or as may otherwise be necessary or proper for the operation or maintenance of
the Property; (xii) supplies, tools, materials, and equipment used in connection
with the operation, maintenance or repair of the Property; (xiii) accounting,
legal and other professional fees and expenses; (xiv) painting the exterior or
the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Property; (xv) all costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Property; (xvi) the cost of any improvements which Landlord elects to
capitalize made by Landlord to the Property during the Term in compliance with
the requirements of any laws or regulation or insurance requirement with which
the Property was not required to comply during the Base Year, as reasonably
amortized by Landlord, with interest on the unamortized balance at the rate of
twelve percent (12%) per year, or the maximum legal rate of interest, whichever
is less; (xvii) the cost of any improvements which Landlord elects to capitalize
made by Landlord to the Property during the term of this Lease for the
protection of the health and safety of the occupants of the Property or that are
intended to reduce other Operating Costs, as reasonably amortized by Landlord,
with interest on the unamortized balance at the rate of twelve percent (12%) per
year, or the maximum legal rate of interest, whichever is less; (xviii) a
reasonable reserve for repair or replacement of equipment used in the
maintenance or operation of the Property; (xix) the cost of furniture,
draperies, carpeting, landscaping and other customary and ordinary items of
personal property (excluding paintings, sculptures and other works of art)
provided by Landlord for use in common areas of the Building or in the Building
office (to the extent that such Building office is dedicated to the operation
and management of the Property), such costs to be amortized over the useful life
thereof; (xx) any such expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
such additional work, labor, services or material resulting from compliance with
any laws or orders applicable to the Property; (xxi) Building office rent or
rental value; and (xxii) all other costs which, in accordance with generally
accepted accounting principles used by Landlord, as applied to the maintenance
and operation of office and/or retail buildings, are properly chargeable to the
operation and maintenance of the Property.
Operating Costs shall not include the following:(i) depreciation on the
Building; (ii) debt service; (iii) capital improvements, except as otherwise
provided in clauses (xvi) and (xvii) above, (iv) rental under any ground or
underlying leases; (v) Real Property Taxes, (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective tenants; (vii)
the cost of tenant improvements; (viii) advertising expenses; or (ix) real
estate broker's or other leasing commissions.
(y) "Parties" means Landlord and Tenant.
(z) "Party" means Landlord or Tenant.
(aa) "Person" means one or more human beings, or legal entities or
other artificial persons, including without limitation, partnerships,
corporations, trusts, estates, associations and any combination of human beings
and legal entities.
(bb) "Property" means the Premises, Building and Land.
(cc) "Provision" means any term, agreement, covenant, condition,
clause, qualification, restriction, reservation, or other stipulation in the
Lease that defines or otherwise controls, establishes, or limits the performance
required or permitted by either party.
(dd) "Real Property Taxes" means any form of tax, assessment, general
assessment, special assessment, lien, levy, bond obligation, license fee,
license tax, tax or excise on rent, or any other levy, charge or expense,
together with any statutory interest thereon, (individually and collectively,
the "Impositions"), now or hereafter imposed or required by any authority having
the direct or indirect power to tax, including any federal, state, county or
city government or any school, agricultural, lighting, drainage or other
improvement or special assessment district thereof, (individually and
collectively, the "Governmental Agencies") on any interest of Landlord or Tenant
or both (including any legal or equitable interest of Landlord or its mortgagee,
if any) in the Premises or the Property, including without limitation:
(i) any Impositions upon, allocable to or measured by the area
of the Premises or the Property, or the rental payable hereunder, including
without limitation, any gross income tax or excise tax levied by any
Governmental Agencies with respect to the receipt of such rental; or
(ii) any Impositions upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair or use or
occupancy by Tenant of the Premises or any portion thereof; or
(iii) any Impositions upon or with respect to the building
equipment and personal property used in connection with the operation and
maintenance of the Property or upon or with respect to the furniture, fixtures
and decorations in the common areas of the Property.
(iv) any Impositions upon this Lease or this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises; or
17
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(v) any Impositions by Governmental Agencies (whether or not
such Impositions constitute tax receipts) in substitution, partially or totally,
of any impositions now or previously included within the definition of real
property taxes, including those calculated to increase tax increments to
Governmental Agencies and to pay for such services as fire protection, water
drainage, street, sidewalk and road maintenance, refuse removal or other
governmental services formerly provided without charge to property owners or
occupants; or
(vi) any and all costs, including without limitation, the fees of
attorneys, tax consultants and experts, incurred by Landlord should Landlord
elect to negotiate or contest the amount of such real property taxes in formal
or informal proceedings before the Governmental Agency imposing such real
property taxes; provided, however, that real property taxes shall in no event
include Landlord's general income, inheritance, estate, gift or franchise taxes.
(ee) "Rent" means Minimum Monthly Rent, as adjusted from time to time
under this Lease, Additional Rent, Prepaid Rent, Security Deposit, all as
defined in this Section, payments of Tenant's Share of increases in Real
Property Taxes and Operating Costs, insurance, utilities and other charges
payable by Tenant to Landlord.
(ff) "Rentable square feet of space" as to the Premises or the
Building, as the case may be, means the number of usable square feet of space
times the applicable R/U Ratio(s) as defined in this Section.
(gg) "Restoration" means the reconstruction, rebuilding, rehabilitation
and repairs that are necessary to return damaged portions of the Premises and
the Building to substantially the same physical condition as they were in
immediately before the damage.
(hh) "R/U Ratio" means the rentable area of a floor of the Building
divided by the usable area of such floor, both of which shall be computed in
accordance with American National Standard Z65.1-1996 Method of Measuring Floor
Space in Office Buildings as published by the Building Owners and Managers
Association, as amended from time to time.
(ii) "Substantially complete" or "substantially completed" or
"substantial completion" means the completion of Landlord's construction
obligation, subject to completion or correction of "punch list" items, that is,
minor items of incomplete or defective work or materials or mechanical
maladjustments that are of such a nature that they do not materially interfere
with or impair Tenant's use of the Premises for the Permitted Use.
(jj) "Successor" means assignee, transferee, personal representative,
heir, or other person or entity succeeding lawfully, and pursuant to the
provisions of this Lease, to the rights or obligations of either party.
(kk) "Tenant Improvements" means (i) the improvements and alterations
set forth in Exhibit C, (ii) window coverings, lighting fixtures, plumbing
fixtures, cabinetry and other fixtures installed by either Landlord or Tenant at
any time during the Term, and (iii) any improvements and alterations of the
Premises made for Tenant by Landlord at any time during the Term.
(ll) "Tenant's personal property" means Tenant's equipment, furniture,
and movable property placed in the Premises by Tenant.
(mm) "Tenant's trade fixtures" means any property attached to the
Premises by Tenant.
(nn) "Termination" means the ending of the Term for any reason before
expiration, as defined in this Section.
(oo) "Work" means the construction of any improvements or alterations
or the performance of any repairs done by Tenant or caused to be done by Tenant
on the Premises as permitted by this Lease.
42. MISCELLANEOUS PROVISIONS.
(a) ENTIRE AGREEMENT. This Lease sets forth the entire agreement of the
parties as to the subject matter hereof and supersedes all prior discussions and
understandings between them. This Lease may not be amended or rescinded in any
manner except by an instrument in writing signed by a duly authorized officer or
representative of each party hereto.
(b) GOVERNING LAW. This Lease shall be governed by, and construed and
enforced in accordance with, the laws of the State of Washington.
(c) SEVERABILITY. Should any of the provisions of this Lease be found
to be invalid, illegal or unenforceable by any court of competent jurisdiction,
such provision shall be stricken and the remainder of this Lease shall
nonetheless remain in full force and effect unless striking such provision shall
materially alter the intention of the parties.
(d) JURISDICTION. In the event any action is brought to enforce any of
the provisions of this Lease, the parties agree to be subject to exclusive in
personam jurisdiction in the Superior Court, King County, for the State of
Washington or in the United States District Court for the Western District of
Washington and agree that in any such action venue shall lie exclusively at
Seattle, Washington.
(e) WAIVER. No waiver of any right under this Lease shall be effective
unless contained in a writing signed by a duly authorized officer or
representative of the party sought to be charged with the waiver and no
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<PAGE> 19
waiver of any right arising from any breach or failure to perform shall be
deemed to be a waiver of any future right or of any other right arising under
this Lease.
(f) CAPTIONS. Section captions contained in this Lease are included for
convenience only and form no part of the agreement between the parties.
(g) NOTICES. All notices or requests required or permitted under this
Lease shall be in writing. If given by Landlord such notices or requests may be
personally delivered or sent by certified mail, return receipt requested,
postage prepaid. If given by Tenant such notices or requests may be personally
delivered or sent by certified mail, return receipt requested, postage prepaid.
Such notices or requests shall be deemed given when so delivered or mailed,
irrespective of whether such notice or request is actually received by the
addressee. All notices or requests to Landlord shall be sent to Landlord at
Landlord's Address for Notice and all notices or requests to Tenant shall be
sent to Tenant at Tenant's Address for Notice. Either party may change the
address to which notices shall be sent by notice to the other party.
(h) BINDING EFFECT. Subject to the provisions of Section 25 captioned
"Assignment and Subletting", this Lease shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns. No
permitted assignment of this Lease or Tenant's rights hereunder shall be
effective against Landlord unless and until an executed counterpart of the
instrument of assignment shall have been delivered to Landlord and Landlord
shall have been furnished with the name and address of the assignee. The term
"Tenant" shall be deemed to include the assignee under any such permitted
assignment.
(i) EFFECTIVENESS. This Lease shall not be binding or effective until
properly executed and delivered by Landlord and Tenant.
(j) GENDER AND NUMBER. As used in this Lease, the masculine shall
include the feminine and neuter, the feminine shall include the masculine and
neuter, the neuter shall include the masculine and feminine, the singular shall
include the plural and the plural shall include the singular, as the context may
require.
(k) TIME OF THE ESSENCE. Time is of the essence in the performance of
all covenants and conditions in this Lease for which time is a factor.
DATED the date first above written.
LANDLORD: TENANT:
Pacific NW Title Building, Inc., a Amazon.com, Inc., a Delaware corporation
Washington corporation
/s/ Pete Murphy /s/ Oswaldo Fernando Duenas
By________________________________ By______________________________________
President Vice President - Operations
Its_______________________________ Its_____________________________________
By________________________________ By______________________________________
Its_______________________________ Its_____________________________________
This Lease has been prepared for submission to you and your attorney. Martin
Smith Inc is not authorized to give legal or tax advice. Neither Landlord nor
Martin Smith Inc makes any representations or recommendations as to the legal
sufficiency, legal effect or tax consequences of this document or any
transaction relating thereto. These are questions for your attorney with whom
you should consult before signing the document to determine whether your legal
rights are adequately protected.
[Notary attached]
19
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (Form S-8 No. 333-28763) pertaining to the 1997 Stock
Option Plan and the Amended and Restated 1994 Stock Option Plan of Amazon.com,
Inc. of our report dated January 19, 1998, with respect to the financial
statements and schedule of Amazon.com, Inc. included in the Annual Report (Form
10-K) of Amazon.com, Inc. for the year ended December 31, 1997.
ERNST & YOUNG LLP
Seattle, Washington
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AMAZON.COM, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, THE AMAZON.COM,
INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND THE AMAZON.COM, INC.
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 DEC-31-1996
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<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
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<DEPRECIATION> 3,634 2,307 1,332 730 310
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<SALES> 147,758 81,747 43,860 16,005 15,746
<TOTAL-REVENUES> 147,758 81,747 43,860 16,005 15,746
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<INCOME-CONTINUING> (27,590) (18,253) (9,743) (3,038) (5,777)
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