<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1996
REGISTRATION NO. 333-13827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FACTORY CARD OUTLET CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5943 36-3652087
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
745 BIRGINAL DRIVE
BENSENVILLE, ILLINOIS 60106-1212
(630) 238-0010
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
CHARLES R. CUMELLO, PRESIDENT
FACTORY CARD OUTLET CORP.
745 BIRGINAL DRIVE
BENSENVILLE, ILLINOIS 60106-1212
(630) 238-0010
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
LORI J. BRAENDER, ESQ. WILLIAM J. GRANT, JR., ESQ.
PITNEY, HARDIN, KIPP & SZUCH WILLKIE FARR & GALLAGHER
200 CAMPUS DR. ONE CITICORP CENTER
FLORHAM PARK, N.J. 07932-0950 153 E. 53RD ST.
(201) 966-6300 NEW YORK, N.Y. 10022-4677
(212) 821-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
NOVEMBER 21, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,750,000 SHARES
[LOGO]
COMMON STOCK
-----------
Of the 2,750,000 shares of Common Stock of Factory Card Outlet Corp.
("Factory Card" or the "Company") offered hereby, 2,550,000 shares are being
offered by the Company and 200,000 shares are being offered by certain
stockholders of the Company (the "Selling Stockholders"). The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders." Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $10.00 and $12.00 per
share. See "Underwriting" for the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"FCPY."
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share................................. $ $ $ $
Total(2).................................. $ $ $ $
</TABLE>
(1) Before deducting expenses of this offering payable by the Company, estimated
at $800,000.
(2) The Company and the Selling Stockholders have granted to the Underwriters a
30-day option to purchase up to 412,500 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
ALEX. BROWN & SONS PIPER JAFFRAY INC.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
[PHOTOS SHOWING THE EXTERIOR AND INTERIOR OF FACTORY CARD STORES FROM VARIOUS
ANGLES]
[MAP OF THE CONTINENTAL UNITED STATES SHOWING LOCATIONS OF FACTORY CARD STORES]
--------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and unaudited quarterly reports for the first three quarters of
each fiscal year.
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, (II) REFLECTS A 4.016-FOR-1 STOCK SPLIT EFFECTIVE
IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING AND (III) REFLECTS THE
CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A PREFERRED STOCK
("SERIES A PREFERRED"), SERIES B PREFERRED STOCK ("SERIES B PREFERRED"), AND
SERIES C PREFERRED STOCK ("SERIES C PREFERRED"), EACH WITH A PAR VALUE OF $0.01
PER SHARE (COLLECTIVELY, THE "CONVERTIBLE PREFERRED STOCK"), INTO AN AGGREGATE
OF 3,134,674 SHARES OF THE COMPANY'S COMMON STOCK, NO PAR VALUE (WHICH PAR VALUE
WILL BE REDESIGNATED AS $0.01 PER SHARE IN CONNECTION WITH THIS OFFERING) (THE
"COMMON STOCK"), WHICH WILL OCCUR UPON THE EFFECTIVENESS OF THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART. IN THIS PROSPECTUS, WHERE A
REFERENCE IS MADE TO A PARTICULAR FISCAL YEAR, IT IS A REFERENCE TO THE
COMPANY'S 52-WEEK FISCAL YEAR, WHICH ENDS ON THE SATURDAY CLOSEST TO JUNE 30 OF
THAT YEAR, EXCEPT FOR YEARS PRIOR TO FISCAL 1995, ALL OF WHICH ENDED ON JUNE 30.
THE COMPANY
Factory Card Outlet Corp. is a rapidly growing chain of company-owned
superstores offering a vast assortment of party supplies, greeting cards, gift
wrap and other special occasion merchandise at everyday value prices. As of
November 15, 1996, the Company operated 122 stores in 14 states, primarily in
the Midwest and mid-Atlantic regions of the United States. To maintain the
quality and consistency of its retail presentation, the Company operates all of
its stores, which comprise the largest chain of company-operated superstores
within the party supply and special occasion merchandise category. The Company
opened 15, 25 and 32 superstores in fiscal 1994, 1995 and 1996, respectively,
and plans to open 30 to 35 superstores in fiscal 1997, including 15 opened
through November 15, 1996, and at least 40 superstores in fiscal 1998.
The Company's superstores provide customers with a value-oriented,
"one-stop" shopping destination for party and special occasion merchandise for
all major holidays and celebratory events, including birthdays, graduations,
weddings, baby showers and other family, religious and special occasions. The
Company's superstore prototype ranges in size from 10,000 to 12,000 square feet,
with approximately 80% devoted to selling space, and is designed to provide ease
of shopping within an attractive, spacious and festive environment. To enhance
the look of its superstores and encourage multiple purchases, merchandise is
displayed in assortments that emphasize themes and colors associated with
holidays, special occasions and other seasonal events. To reinforce its emphasis
on providing value, the Company since fiscal 1993 has offered multiple lines of
high quality greeting cards, all at the everyday low price of 39 CENTS.
The United States market for party and special occasion merchandise,
comprised of party supplies, greeting cards, gift wrap and related items, has
estimated annual retail sales of approximately $8.8 billion. Historically, this
market has been served by traditional retail channels such as card shops, mass
merchandisers, discount retailers, drugstores and supermarkets, which generally
offer a limited selection of party supply and special occasion products.
Superstores have become the fastest growing retail format within this category.
The Company believes that, through the expansion of its superstore base, it is
well-positioned to capture an increasing share of this large and fragmented
market and to capitalize on the increasing amount of products available within
this industry.
The key elements of the Company's business strategy are outlined below:
EXTENSIVE MERCHANDISE OFFERING. The Company believes its everyday and
seasonal merchandise offering, which includes approximately 23,000 stock keeping
units ("SKUs") at its superstores, provides the solution, in a single
destination, for a customer's complete product needs to create, enhance and
celebrate special occasions. The Company offers a full line of party supplies in
a wide variety of festive and distinctive patterns, colors and styles, including
tableware, tablecovers, invitations, party favors, pinatas, banners and other
decor items. The Company also offers a broad selection of high quality greeting
cards for all occasions, consisting of approximately 4,000 everyday and seasonal
titles. The Company carries an extensive selection of gift wrap, including a
broad array of gift bags, gift boxes, ribbons, bows and related items in
coordinated and complementary displays. In addition, the Company offers many
other special occasion items such as balloons, stationery, gifts, novelty items
and seasonal products.
3
<PAGE>
EVERYDAY VALUE PRICING. The Company's strategy of everyday value pricing is
designed to provide customers with consistent value on all purchases. The
Company typically sells its merchandise at discounts of 20% to 60% off
manufacturers' suggested retail prices. In addition, the Company's superstores
feature a "power aisle" offering a wide selection of opportunistic buys and
manufacturers' seasonal over-runs, all priced at deep discounts and frequently
changed to create continued customer interest. To build customer traffic and
loyalty, the Company's high quality greeting cards are all sold for 39 CENTS
each.
ATTRACTIVE, SPACIOUS AND FESTIVE SUPERSTORE FORMAT. The Company creates an
attractive and festive atmosphere within a spacious "easy to shop" superstore,
encouraging browsing and repeat visits by customers. The Company's superstores
are designed to provide a comfortable shopping experience, with bright lighting,
wide carpeted aisles and fixtures that offer customers easy access to
merchandise. The interiors of the Company's superstores are festively decorated
with arrays of colorful merchandise to emphasize everyday and seasonal themes.
The size of the Company's superstore prototype enables the Company to offer an
extensive selection of merchandise and increase store-level efficiencies.
TARGETED ADVERTISING. In the spring of 1996, the Company broadened its
advertising program to include a Company-wide direct mail campaign designed to
educate targeted consumers about the breadth and value of the Company's product
offerings. The Company intends to support major holiday selling seasons with
direct mail marketing and to continue radio advertising in order to complement
its direct mail program and increase its name recognition within new and
existing markets.
DEVELOPMENT OF MANAGEMENT TEAM AND INFRASTRUCTURE. The Company has
recruited a management team whose members have an average of 21 years of retail
experience. The Company believes it benefits from operating its own distribution
facilities, which enable it to make opportunistic purchases, import products
directly and achieve operating efficiencies. In fiscal 1996, the Company
completed installation of a fully integrated retail management software package
that automated the areas of finance, merchandising and distribution and
successfully tested a point of sale ("POS") system that is expected to be
operational in all stores by the end of fiscal 1997.
The Company has developed a rapid expansion plan designed to build on its
position as the largest chain of company-owned superstores in the party supply
and special occasion industry. The Company plans to open 30 to 35 superstores in
fiscal 1997, including 15 opened through November 15, 1996, and at least 40
superstores in fiscal 1998. The Company plans to focus its expansion in existing
and contiguous markets. The Company may also consider acquisitions of other
retail chains in the industry.
The Company's executive offices are located at 745 Birginal Drive,
Bensenville, Illinois 60106-1212 and its telephone number is (630) 238-0010. The
Company was incorporated in 1989 in Delaware. As used in this Prospectus, the
"Company" and "Factory Card" refer to Factory Card Outlet Corp., a Delaware
corporation, as well as Factory Card Outlet of America Ltd., an Illinois
corporation, the Company's wholly-owned operating subsidiary.
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock offered by the Company..... 2,550,000 shares
Common Stock offered by the Selling
Stockholders.......................... 200,000 shares
Common Stock to be outstanding after the
offering.............................. 6,618,394 shares (1)
Use of proceeds......................... Repayment of debt, opening new superstores and
general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol................................ FCPY
</TABLE>
- ------------------------
(1) Excludes (i) 1,064,641 shares issuable upon the exercise of outstanding
options under the Company's 1989 Stock Option Plan, with a weighted average
exercise price of $2.36, (ii) 195,594 shares issuable upon exercise of
outstanding warrants, with a nominal exercise price, and (iii) 191,601
shares reserved for future option grants under the Company's 1989 Stock
Option Plan. The options under the Company's 1989 Stock Option Plan vest
generally on an annual basis over three or four years and must be exercised
within ten years from the date of grant. The warrants described above are
immediately exercisable. See "Management--Incentive Stock Program--1989
Stock Option Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
13 WEEKS ENDED
FISCAL YEAR ------------------------
----------------------------------------------------- SEPT. 30, SEPT. 28,
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $17,330 $24,333 $37,341 $63,174 $94,589 $16,817 $25,032
Gross profit........................ 6,215 9,174 14,114 23,417 35,450 5,792 8,036
Net store contribution(1)........... 1,965 3,165 4,609 7,922 11,772 995 1,345
Income (loss) from operations(2).... 716 1,108 1,238 1,101 1,717 (1,808 ) (1,629 )
Interest expense.................... 340 311 497 411 1,529 190 597
Net income (loss)................... 368 865 449 368 70 (1,238 ) (1,291 )
Net income (loss) per common and
common equivalent share........... $ 0.11 $ 0.25 $ 0.13 $ 0.08 $ 0.01 $ (0.24 ) $ (0.25 )
Weighted average common and common
equivalent shares outstanding..... 3,315 3,408 3,428 4,879 5,101 5,101 5,101
Supplementary net income (loss) per
common and common equivalent
share(3).......................... $ 0.14 $ (0.16 )
OPERATING DATA:
Number of stores:
Opened during period.............. 5 11 15 25 32 10 5
Closed/relocated during period.... 1 2 0 2 3 0 0
Open at end of period............. 31 40 55 78 107 88 112
Average sales per selling square
foot(4)........................... $ 133 $ 130 $ 139 $ 146 $ 133 $ 28 $ 29
Comparable store sales
increase(5)....................... 22.2% 9.6% 12.3% 22.2% 6.0% 7.4% 14.1%
Average sales per store(4).......... $589,000 $645,000 $734,000 $941,000 $997,000 $204,000 $229,000
<CAPTION>
SEPT. 28, 1996
------------------------
PRO
ACTUAL FORMA(6)
----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................................ $ 30,019 $ 37,578
Total assets............................................................................... 70,570 77,591
Total debt(7).............................................................................. 18,164 300
Total stockholders' equity................................................................. 26,033 50,917
</TABLE>
- ------------------------------
(1) Represents gross profit less store operating expenses, which include labor,
advertising, depreciation and other store expenses. This computation
excludes store preopening and general and administrative expenses.
(2) Income (loss) from operations for the 13 weeks ended September 28, 1996
includes nonrecurring compensation expense of approximately $146,000 related
to stock options granted to directors, one of whom is an employee.
(3) Assumes the line of credit, term loan and subordinated debentures have been
repaid in full as of the beginning of the period (if the balances of such
debt were higher later in the period, then the higher balances were assumed
to have been repaid) using proceeds from the sale of shares of Common Stock
in this offering.
(4) Includes only stores open during the entire period.
(5) Includes stores open 13 or 14 months after their opening date. If the
opening date of a store falls in the first 14 days of a period, it is
included in the comparable store calculation in its 13th month of operation;
otherwise, a store is included in the comparable store calculation in its
14th month of operation.
(6) Adjusted to reflect the sale by the Company of the 2,550,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(7) Total debt is defined as total current and long-term debt. See
"Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
RISKS ASSOCIATED WITH EXPANSION. The Company's ability to increase its net
sales and earnings will depend in part on its ability to open new superstores
and to operate such superstores on a profitable basis. The Company's continued
growth will also depend on its ability to increase sales in its existing stores.
The Company opened 32 superstores (and relocated one store and closed two other
stores) in fiscal 1996 and presently anticipates opening 30 to 35 superstores
(and closing one store) in fiscal 1997 in both existing and new geographic
markets. The opening of additional stores in an existing market could result in
lower net sales from the Company's existing stores in that market. Opening
superstores in new geographic markets may present competitive and merchandising
challenges that are different from those currently faced by the Company in its
existing geographic markets. The Company may incur higher costs related to
advertising and distribution in connection with entering new markets. If the
Company opens superstores that do not perform to the Company's expectations or
if superstore openings are delayed, the Company's financial condition and
results of operations could be materially adversely affected. The success of the
Company's planned expansion will be dependent upon many factors, including the
identification of suitable markets, the availability and leasing of suitable
sites on acceptable terms, the availability of acceptable financing, the hiring,
training and retention of qualified management and other store personnel and
general economic conditions. In addition, the Company must ensure the continuing
adequacy of its existing systems and procedures, including its distribution
facilities, store management, financial controls and information systems, which
may place significant demands on the Company's management, resources, operations
and information systems. There can be no assurance that the Company will be
successful in any of these areas, and, as a result, there can be no assurance
that the Company will achieve its planned expansion, or that new superstores
will be effectively integrated into the Company's existing operations or be
profitable. See "Business--Growth Strategy."
QUARTERLY FLUCTUATIONS. Due to the importance of the spring selling season,
which includes Easter, graduation and Mother's Day, and the fall selling season,
which includes Halloween, Thanksgiving, Hanukkah, Kwanzaa and Christmas, the
second and fourth fiscal quarters have historically contributed, and the Company
expects they will continue to contribute, disproportionately to the Company's
profitability for the entire fiscal year. As a result, any factors negatively
affecting the Company during the second and fourth fiscal quarters of any year,
including adverse weather and unfavorable economic conditions, could have a
material adverse effect on the Company's financial condition and results of
operations for the entire year. The Company's quarterly results of operations
also may fluctuate based upon such factors as the timing of certain holiday
seasons, the number and timing of new superstore openings, the amount of store
preopening expenses, the amount of net sales contributed by new and existing
stores, the mix of products sold, the timing and level of markdowns, store
closings, refurbishments and relocations, competitive factors and weather and
general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results and
Seasonality."
DEPENDENCE ON KEY PERSONNEL; NEW MANAGEMENT TEAM; TURNOVER OF STORE
MANAGERS. The success of the Company and its growth strategy is dependent upon
the active involvement of senior management personnel, particularly William E.
Freeman, Chairman of the Board of Directors of the Company, and Charles R.
Cumello, the President of the Company. The loss of the services of any of these
persons could have a material adverse effect on the Company. The Company
maintains key-person life insurance on Mr. Cumello. Many of the individuals in
key management positions, including Mr. Cumello, joined the
6
<PAGE>
Company during the past 18 months. Certain members of the management team have
been with the Company for six months or less. Accordingly, there can be no
assurance that these individuals will function effectively together as a
management team, and the failure of these individuals to so function effectively
could have a material adverse effect on the Company's results of operations and
its financial condition. From May to August 1996, the Company experienced an
unusually high rate of turnover of its store managers. A continued high rate of
turnover among the Company's store managers could significantly increase the
cost of the Company's recruiting and training efforts and may result in a
material adverse effect on the Company's results of operations and its financial
condition. The Company's success in the future will be dependent upon its
ability to attract and retain quality personnel, including store managers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management."
COMPETITION. The party supplies and greeting cards retailing business is
highly competitive. The Company currently competes against a diverse group of
retailers, ranging from other party supply and greeting card retailers
(including Party City Corporation) to designated departments in drug stores,
general mass merchandisers, supermarkets and department stores of local,
regional and national chains. In addition, a trend toward discounting party
supplies and greeting cards is developing and the Company may encounter
additional competition from new entrants in the future. Some of the Company's
competitors have substantially greater financial resources and experience than
the Company. See "Business-- Competition."
RISKS ASSOCIATED WITH ACQUISITIONS. The Company will consider strategic
acquisitions of other retail chains in the party supply and special occasion
industry. The Company has no experience in acquiring other businesses and there
can be no assurance that suitable acquisition candidates will be identified,
that acquisitions can be consummated or that new stores acquired through such
acquisitions can be operated profitably or integrated successfully into the
Company's operations. Further, growth through acquisition entails certain risks
in that the acquired stores could be subject to unanticipated business
uncertainties or legal liabilities. The Company intends to minimize these risks
through an appropriate due diligence process. Nevertheless, there can be no
assurance that such liabilities will not have a material adverse effect on the
Company.
RISKS ASSOCIATED WITH MERCHANDISING. The Company's success depends, in
part, on its ability to anticipate and respond, in a timely manner, to changing
merchandise trends and consumer demands. Accordingly, any delay or failure by
the Company in identifying and responding to emerging trends could adversely
affect consumer acceptance of the merchandise in the Company's stores. In
addition, the Company makes decisions regarding merchandise well in advance of
each of the seasons in which such merchandise will be sold. Significant
deviations from projected demand for products could have a material adverse
effect on the Company's financial condition and results of operations, either
from lost sales due to insufficient inventory or lost margin due to the need to
mark down excess inventory. See "Business-- Merchandising."
RISKS ASSOCIATED WITH PRODUCT SOURCING. The Company purchases its
merchandise from more than 300 suppliers. No supplier represents more than 14%
of the Company's purchases and ten suppliers account for approximately 46% of
the Company's purchases. The Company purchases its greeting cards from
approximately ten publishers, all but one of which are located in the United
States. The Company recently entered into a supply agreement (the "Fine Art
Agreement") expiring on December 1, 1998 (with automatic one-year renewals
unless the parties are unable to agree on price or certain other terms) with
Fine Art Developments, p.l.c., a publicly-owned United Kingdom company and a
stockholder of the Company ("Fine Art"). The Fine Art Agreement requires that
the Company purchase a minimum of 42% of its greeting card purchases from Fine
Art each year. During fiscal 1995 and 1996, the Company purchased 64% and 52%,
respectively, of its aggregate greeting card purchases from Fine Art. The
Company's future success is dependent upon its ability to maintain good
relationships with its principal
7
<PAGE>
suppliers, including Fine Art. There can be no assurance that the Company will
in the future be able to negotiate successfully extensions of the Fine Art
Agreement or maintain good relationships with its other suppliers. The failure
by the Company to extend the term of the Fine Art Agreement beyond December 1,
1998 or maintain good relationships with its other principal suppliers could
have a material adverse effect on the Company's financial condition and results
of operations. See "Business--Product Sourcing and Distribution."
MANAGEMENT INFORMATION SYSTEMS. In late fiscal 1996, the Company completed
the testing phase and began the implementation of its POS system. Each store
operating on the Company's POS system transmits daily SKU level sales to the
corporate office. Management believes that the POS system will result in
improvements in central office operations, particulary in the areas of
merchandise planning and automated replenishment, inventory control and
performance measurement. The POS system was implemented in 20 stores as of
November 15, 1996, and is anticipated to be operational in all of the Company's
stores by the end of fiscal 1997. The implementation of the POS system is
dependent on various factors, including acceptance by store personnel and
technological contingencies, and there can be no assurance that the POS system
will be implemented effectively on a Company-wide basis by the end of fiscal
1997, if at all. The failure to complete, or delays or problems in completing,
the implementation of the POS system could have a material adverse effect on the
Company's financial condition and results of operations. See "Business--The
Company--Development of Management Team and Infrastructure" and "Business--
Management Information Systems."
CONSOLIDATION AND EXPANSION OF DISTRIBUTION FACILITIES. The Company has
determined that larger distribution facilities will be required by the end of
fiscal 1998 in order to serve efficiently all of its superstores planned to be
in operation at that time. Consequently, the Company has entered into a lease
for a new and larger distribution center near its current Bensenville, Illinois
location, into which the Company plans to consolidate its two existing
distribution facilities by April 1998. Upon completion of such proposed
consolidation and relocation, the Company's distribution functions for all of
its existing and currently proposed new stores will be handled from a single
location. There can be no assurance that the Company will be able to integrate
successfully a new distribution center into the Company's operations. The
failure to do so, or any significant delays in the consolidation and relocation
of the Company's distribution facilities, or interruption in the operation of
the new facility during or after consolidation, would have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Product Sourcing and Distribution" and "Business--Properties."
INVENTORY SHRINKAGE. The Company experienced a high level of inventory
shrinkage in fiscal 1995 (6.9% at retail value compared to 1.7% at retail value
in fiscal 1994), resulting from a lack of consistent store-level compliance with
price markdown and receiving procedures at certain stores, and the lack of a
loss prevention department. The Company implemented measures to address this
problem and inventory shrinkage in fiscal 1996 returned to historic levels.
However, there can be no assurance that the Company will not experience higher
shrinkage in the future, which would have a corresponding material adverse
effect on the Company's financial condition and results of operations. In
addition, in accordance with generally accepted accounting principles, quarterly
results are based on an accrual for estimated shrinkage and, therefore, fourth
quarter results may be subject to adjustment based on actual physical
inventories. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FUTURE CAPITAL NEEDS. The Company currently intends to finance new
superstores with cash from operations, borrowings under its Line of Credit (see
"Use of Proceeds" for the definition of "Line of Credit") and the net proceeds
of this offering. The Company plans to open 30 to 35 superstores in fiscal 1997,
including 15 opened through November 15, 1996, and at least 40 superstores in
fiscal 1998. The Company expects that the average cash investment required to
open one of the Company's prototype superstores will be approximately $413,000.
There can be no assurance that the actual cost of opening the Company's
prototype superstores will not be significantly greater than that expected by
the Company. The
8
<PAGE>
Company may be required to seek additional debt and/or equity financing in order
to fund its continued expansion, which may include acquisitions. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company, if at all. In addition, the Company's ability to incur
additional indebtedness or issue equity or debt securities could be limited by
covenants in present and future loan agreements and debt instruments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
GOVERNMENT REGULATION. Each of the Company's stores must comply with
regulations adopted by federal agencies and with licensing and other regulations
enforced by state and local health, sanitation, safety, fire and other
departments. More stringent and varied requirements of local governmental bodies
with respect to zoning, land use and environmental factors, and difficulties or
failures in obtaining the required licenses or approvals, can delay and
sometimes prevent, the opening of a new store. In addition, the Company must
comply with the federal Fair Labor Standards Act of 1938, as amended (the "Fair
Labor Standards Act") and various state laws governing various matters such as
the minimum wage, overtime and other working conditions. The Company also must
comply with the federal Americans with Disabilities Act of 1990, as amended (the
"ADA"), which generally requires that employers provide reasonable accommodation
for employees with disabilities and that stores be accessible to customers with
disabilities. Material increases in the cost of compliance with any applicable
law or regulation and similar matters could have a material adverse effect on
the Company's financial condition and results of operations. See
"Business--Government Regulation."
CONTROL BY CERTAIN EXISTING STOCKHOLDERS. Upon completion of the offering,
the Company's current stockholders will own or have the right to vote and
control the disposition of approximately 58.5% of the Company's outstanding
shares of Common Stock. As a result, those stockholders, if acting together,
will have the ability to elect the Company's directors and to determine the
outcome of corporate actions requiring stockholder approval, irrespective of the
vote of other stockholders of the Company. See "Principal and Selling
Stockholders."
NO PRIOR PUBLIC TRADING MARKET; VOLATILITY. Prior to this offering, there
has been no public market for the Common Stock, and there can be no assurance
that an active public market for the Common Stock will develop or be sustained
after the offering. The initial public offering price of the Common Stock will
be determined by negotiations between the Company and the representatives of the
Underwriters. The initial public offering price may not necessarily be
indicative of the market price of the Common Stock after the offering, which may
be highly volatile. Factors including, without limitation, announcements of
fluctuations in the Company's or its competitors' operating results, and market
conditions for retail industry stocks in general, could have a significant
impact on the future price of the Common Stock. See "Underwriting."
DILUTION. Investors purchasing shares of Common Stock in this offering will
incur immediate and substantial dilution in the net tangible book value per
share of the Common Stock from the initial public offering price as compared to
the increase in net tangible book value per share that will accrue to existing
stockholders of the Company. See "Dilution."
EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER
MATTERS. Certain provisions of the Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") and the Amended and
Restated By-Laws (the "By-Laws") of the Company, as well as Delaware corporate
law, may delay, defer or prevent a tender offer or takeover attempt that a
stockholder of the Company might consider in the best interest of such
stockholder, including an attempt that might result in the receipt of a premium
over the then-current market price for the Common Stock. Certain of these
provisions allow the Company to issue, without stockholder approval, preferred
stock, par value $0.01 per share (the "Preferred Stock"), of which 10.0 million
shares have been authorized, having rights senior to those of the Common Stock.
Other provisions impose various procedural and other requirements that could
make it more difficult for stockholders to effect corporate actions. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which under certain circumstances can make it
9
<PAGE>
more difficult for a third party to gain control of the Company without the
approval of the Board of Directors. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. The Company and each of its directors,
executive officers and consultants and all of its existing stockholders have
agreed with the Underwriters not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus (the "Lock-Up Period"), without the prior written consent of
Alex. Brown & Sons Incorporated. Holders of warrants and options to purchase an
aggregate of 838,154 shares of Common Stock have also agreed to enter into a
similar arrangement. Following this offering, the Company will have outstanding
6,618,394 shares of Common Stock. Of such shares, the 2,750,000 shares of Common
Stock offered hereby will be freely tradable by persons who are not affiliates
of the Company and 3,868,394 shares of Common Stock will be subject to 180-day
lock-up agreements with the Underwriters. Following the expiration of the
Lock-Up Period, such 3,868,394 shares may be sold pursuant to a registration
statement or an exemption from registration, including under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The Company, its
stockholders and holders of warrants to purchase Common Stock (the "Registration
Rights Holders") have entered into registration rights agreements under which
each of the Registration Rights Holders has certain rights to have the shares of
Common Stock owned by such Registration Rights Holder (or the shares of Common
Stock into which such warrant is exercisable, as the case may be) registered by
the Company under the Securities Act in order to permit the public sale of such
shares. Sales of substantial amounts of Common Stock in the public market
following the offering, or the perception that such sales could occur, could
have a material adverse effect on the price of the Common Stock. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,550,000 shares of
Common Stock offered hereby by the Company are estimated to be $25.3 million,
assuming an initial public offering price of $11.00 per share, after deduction
of the underwriting discounts and commissions and estimated expenses payable by
the Company. The Company intends to use approximately $18.2 million of the net
proceeds from this offering to repay approximately $10.2 million of outstanding
indebtedness under the Business Loan Agreement between the Company and Bank One,
Chicago, NA ("Bank One"), dated as of November 1, 1996 (the "Business Loan
Agreement"), and $8.0 million outstanding under its secured subordinated
debentures (collectively the "Subordinated Debentures"). The balance of the net
proceeds of this offering will be used for the Company's expansion program,
including opening new superstores, for working capital requirements and for
other general corporate purposes. Pending such use by the Company, the net
proceeds of this offering will be invested in short-term investment grade,
interest bearing instruments. The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholders.
The Business Loan Agreement provides for a term loan (the "Term Loan") in
the principal amount of up to $1.5 million and a revolving line of credit (the
"Line of Credit") not to exceed the lesser of $25.0 million or 50% of
merchandise inventories. The Term Loan, which matures on June 30, 1998, bears
interest at the rate of 8.08% per annum. The Line of Credit, which expires on
October 1, 1998, bears interest at Bank One's prime rate or, at the Company's
option, 2.75% over the London Interbank Offered Rate ("LIBOR"). The Subordinated
Debentures may be prepaid at any time, with $4.0 million maturing in November
2000, $1.0 million maturing in June 2001 and $3.0 million maturing in July 2001.
The Subordinated Debentures bear interest at the rate of 12.5% per annum, $7.0
million of which has interest that is currently payable at a rate of 7.5%, with
the remaining 5.0% interest accruing until February 1, 1997 and May 1, 1997, on
$3.0 million and $4.0 million, respectively.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends for the foreseeable future. The Company expects
that earnings will be retained for the continued growth and development of the
Company's business. In addition, the Business Loan Agreement restricts the
ability of the Company to pay cash dividends on its capital stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 28, 1996, (i) the pro forma
capitalization of the Company to reflect the conversion of the Convertible
Preferred Stock and (ii) the pro forma capitalization of the Company further
adjusted to reflect the sale of 2,550,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $11.00 per share
and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
------------------------
<S> <C> <C>
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current debt......................................................................... $ 702 $ 133
----------- -----------
----------- -----------
Long-term debt, less current portion:
Line of credit..................................................................... 9,200 --
Subordinated debt, net of discount................................................. 7,567 --
Term loan.......................................................................... 477 --
Capital lease obligation and notes payable......................................... 218 167
----------- -----------
Total long-term debt, less current portion....................................... 17,462 167
----------- -----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized; no shares
issued and outstanding...........................................................
Common Stock, par value $0.01 per share(1), 50,000,000 shares authorized; 4,068,394
shares issued and outstanding pro forma; 6,618,394 shares issued and outstanding
pro forma as adjusted............................................................ 41 66
Additional paid-in capital......................................................... 27,666 52,928
Accumulated deficit................................................................ (1,674) (2,077)(2)
----------- -----------
Total stockholders' equity....................................................... 26,033 50,917
----------- -----------
Total capitalization........................................................... $ 43,495 $ 51,084
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Assumes redesignation of the Common Stock from no par value per share to
$0.01 par value per share in connection with this offering.
(2) Includes $403,087 (net of income taxes) for the write-off of deferred
financing costs and unamortized discounts related to the Subordinated
Debentures.
12
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of September
28, 1996 was $26,033,000 or approximately $6.40 per share. Net tangible book
value per share represents the amount of the Company's stockholders' equity,
less intangible assets, divided by 4,068,394 shares of Common Stock outstanding
as of the date of this Prospectus.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in this
offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of this offering. After giving effect to the sale
of 2,550,000 shares of Common Stock in this offering at an assumed offering
price of $11.00 per share and the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of September
28, 1996 would have been $50,917,000 or $7.69 per share. This represents an
immediate increase in net tangible book value of $1.29 per share to existing
stockholders and an immediate dilution in net tangible book value of $3.31 per
share to purchasers of Common Stock in this offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................................... $ 11.00
Net tangible book value per share at September 28, 1996, as adjusted....... $ 6.40
Increase per share attributable to new investors........................... 1.29
Pro forma net tangible book value per share after the offering.......................... 7.69
---------
Dilution per share to new investors..................................................... $ 3.31
---------
---------
</TABLE>
The following table sets forth as of September 28, 1996 the difference
between the existing stockholders and the purchasers of shares of Common Stock
in this offering (at an assumed offering price of $11.00 per share) with respect
to the number of shares purchased from the Company, the total consideration paid
and the average price per share paid:
<TABLE>
<CAPTION>
SHARES OWNED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 4,068,394 61.5% $ 26,631,349 48.7% $ 6.55
New investors....................................... 2,550,000 38.5 28,050,000 51.3 11.00
---------- ----- ------------- -----
Total........................................... 6,618,394 100.0% $ 54,681,349 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing assumes no exercise of the Underwriters' over-allotment option
or stock options or warrants outstanding as of September 28, 1996. As of
September 28, 1996, there were 1,064,641 shares of Common Stock issuable upon
exercise of outstanding stock options under the Company's 1989 Stock Option Plan
at a weighted average exercise price of $2.36 per share and 195,594 shares
issuable upon the exercise of outstanding warrants, at a nominal exercise price.
If all of the shares available for issuance upon exercise of outstanding options
and warrants were issued at September 28, 1996, dilution per share to new
investors would have been $4.22 per share. See "Management--Incentive Stock
Program" and Note (7) to Consolidated Financial Statements.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated financial and operating data presented below under
the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as
of the end of, each of the years in the five-year period ended June 29, 1996 are
derived from consolidated financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The consolidated financial statements as of July 1, 1995 and
June 29, 1996, and for each of the years in the three-year period ended June 29,
1996, and the report thereon, are included elsewhere in this Prospectus. The
consolidated financial data for the 13 week periods ended September 30, 1995 and
September 28, 1996 are derived from unaudited consolidated financial statements
of the Company and reflect all adjustments that the Company considers necessary
for a fair presentation of the consolidated financial position and consolidated
results of operations for these periods. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $17,330 $24,333 $37,341 $63,174 $94,589
Cost of sales and occupancy....................... 11,115 15,159 23,227 39,757 59,139
------------ ------------ ------------ ------------ -------------
Gross profit........................................ 6,215 9,174 14,114 23,417 35,450
Selling, general and administrative expenses........ 5,499 8,066 12,876 22,316 33,733
------------ ------------ ------------ ------------ -------------
Income (loss) from operations..................... 716 1,108 1,238 1,101 1,717
Interest expense.................................... 340 311 497 411 1,529
------------ ------------ ------------ ------------ -------------
Income (loss) before taxes........................ 376 797 741 690 188
Income tax (benefit)................................ 8 (68) 292 322 118
------------ ------------ ------------ ------------ -------------
Net income (loss)................................. $ 368 $ 865 $ 449 $ 368 $ 70
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Net income (loss) per common
and common equivalent share....................... $ 0.11 $ 0.25 $ 0.13 $ 0.08 $ 0.01
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Weighted average common and common equivalent shares
outstanding....................................... 3,315 3,408 3,428 4,879 5,101
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Supplementary net income (loss) per common and
common equivalent share(2)........................ $0.14
-------------
-------------
OPERATING DATA:
Number of stores:
Opened during period.............................. 5 11 15 25 32
Closed/relocated during period.................... 1 2 0 2 3
Open at end of period............................. 31 40 55 78 107
Average sales per selling square foot(3)............ $ 133 $ 130 $ 139 $ 146 $ 133
Comparable store sales increase(4).................. 22.2% 9.6% 12.3% 22.2% 6.0%
Net store contribution(5)........................... $ 1,965,000 $ 3,165,000 $ 4,609,000 $ 7,922,000 $ 11,772,000
Average sales per store(3).......................... $ 589,000 $ 645,000 $ 734,000 $ 941,000 $ 997,000
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 2,399 $ 2,479 $ 6,704 $ 15,625 $ 23,605
Total assets........................................ 9,239 15,029 21,888 36,801 59,080
Total debt(6)....................................... 3,145 3,587 7,251 7,161 19,326
Total stockholders' equity.......................... 2,942 3,807 4,257 16,640 17,124
<CAPTION>
13 WEEKS ENDED
---------------------------
SEPT. 30, SEPT. 28,
1995 1996
---------- ---------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $16,817 $25,032
Cost of sales and occupancy....................... 11,025 16,996
---------- ---------------
Gross profit........................................ 5,792 8,036
Selling, general and administrative expenses........ 7,600 9,665(1)
---------- ---------------
Income (loss) from operations..................... (1,808) (1,629)
Interest expense.................................... 190 597
---------- ---------------
Income (loss) before taxes........................ (1,998) (2,226)
Income tax (benefit)................................ (760) (935)
---------- ---------------
Net income (loss)................................. $(1,238) $(1,291)
---------- ---------------
---------- ---------------
Net income (loss) per common
and common equivalent share....................... $ (0.24) $ (0.25)
---------- ---------------
---------- ---------------
Weighted average common and common equivalent shares
outstanding....................................... 5,101 5,101
---------- ---------------
---------- ---------------
Supplementary net income (loss) per common and
common equivalent share(2)........................ $(0.16)
---------------
---------------
OPERATING DATA:
Number of stores:
Opened during period.............................. 10 5
Closed/relocated during period.................... 0 0
Open at end of period............................. 88 112
Average sales per selling square foot(3)............ $ 28 $ 29
Comparable store sales increase(4).................. 7.4% 14.1%
Net store contribution(5)........................... $ 995,000 $ 1,345,000
Average sales per store(3).......................... $ 204,000 $ 229,000
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital..................................... $ 16,203 $ 30,019
Total assets........................................ 44,431 70,570
Total debt(6)....................................... 10,334 18,164
Total stockholders' equity.......................... 15,402 26,033
</TABLE>
- ------------------------
(1) Selling, general and administrative expenses for the 13 weeks ended
September 28, 1996 includes nonrecurring compensation expense of
approximately $146,000 related to stock options granted to directors, one of
whom is an employee.
(2) Assumes the line of credit, term loan and subordinated debentures have been
repaid in full as of the beginning of the period (if the balances of such
debt were higher later in the period, then the higher balances were assumed
to have been repaid) using proceeds from the sale of shares of Common Stock
in this offering.
(3) Includes only stores open during the entire period.
(4) Includes stores open 13 or 14 months after their opening date. If the
opening date of a store falls in the first 14 days of a period, then it will
be included in the comparable store calculation in its 13th month of
operation; otherwise, a store is included in the comparable store
calculation in its 14th month of operation.
(5) Represents gross profit less store operating expenses, which include labor,
advertising, depreciation and other store expenses. This computation
excludes store preopening and general and administrative expenses.
(6) Total debt is defined as total current and long-term debt. See
"Capitalization."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE REFERRED TO IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
BELOW AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Factory Card is a rapidly growing chain of company-owned superstores
offering a vast assortment of party supplies, greeting cards, gift wrap and
other special occasion merchandise at everyday value prices. The Company's first
store was opened in 1985 in the Chicago area by its prior owner, Viking
Enterprises, Inc. ("Viking"), as a showroom for greeting cards produced by
Viking's subsidiary, Gallant Greetings Corporation ("Gallant"). Mr. J. Bayard
Kelly, a current Director of the Company and President of the Company's
operating subsidiary until September 1995, served as President of Gallant until
1989, when the Company's current Chairman of the Board of Directors, Mr. William
E. Freeman, formed and led an investor group in the acquisition of the Company
from Viking. The Company, under Mr. Kelly's direction, had grown by 1989 to a
chain of ten stores in the greater Chicago area offering a broad assortment of
greeting cards at 50% off manufacturers' suggested retail prices, as well as a
limited selection of party supplies, gift wrap and other special occasion
products at discounted prices, in stores averaging approximately 5,000 square
feet. While serving as the President of the Company from 1989 to 1994, and later
as its Chief Executive Officer from 1994 to September 1996, Mr. Freeman, along
with Mr. Kelly, led the Company through a strategic phase of its development.
Between fiscal years 1990 and 1993, the Company increased its store
prototype to 6,000 to 8,000 square feet, began to broaden its merchandise
offering to include a wider selection of party supplies, gift wrap and other
special occasion products and implemented its current 39 CENTS everyday price
for all greeting cards. During fiscal 1994, the Company began to implement a
strategic plan to build upon its position as the largest chain of company-owned
superstores in the industry. The key components of the plan included: (i) the
recruitment of a team of senior retail executives to effect a management
transition from the Company's founder; (ii) the enlargement of its merchandise
offering to include a wider selection of party supplies, gift wrap and other
special occasion products; (iii) the expansion of the size of the Company's
superstore prototype to 10,000 to 12,000 square feet; and (iv) the development
of systems and infrastructure to support the Company's growth strategy.
In April 1995, the Company hired as its President Mr. Charles R. Cumello, a
senior retail executive with over 26 years of experience and the Chief Executive
Officer of Waldenbooks since 1991. Since that time, Mr. Cumello has led the
recruitment of key senior management personnel in the areas of merchandising,
store operations, marketing, finance, real estate, distribution, human resources
and loss prevention, many of whom have experience in rapidly growing retail
companies. Since his hiring, Mr. Cumello has also led an expansion of the
Company's merchandise offering and significant enhancements to the Company's
systems and corporate infrastructure.
In fiscal 1996, the Company completed installation of a fully integrated
retail management software package which automated the areas of finance,
merchandising and distribution. The Company is currently implementing a POS
system which was successfully tested in late fiscal 1996 and is expected to be
implemented in all stores by the end of fiscal 1997. The Company has entered
into a lease for an approximately 440,000 square foot distribution center and
home office facility, which the Company expects to occupy by April 1998. This
new facility will allow the Company to consolidate its two existing distribution
centers into a single, larger facility, which will substantially increase the
Company's distribution capacity and result in greater operating efficiencies.
See "Business--Product Sourcing and Distribution" and "Business--Properties."
15
<PAGE>
The Company increased the number of superstores opened in each of the last
three fiscal years and plans to open 30 to 35 superstores in fiscal 1997,
including 15 opened through November 15, 1996, and at least 40 superstores in
fiscal 1998. The Company has 13 signed store leases and has capital leases
related to POS equipment for future store openings as of November 15, 1996. The
Company will focus its expansion on the opening of prototype superstores. The
Company intends to continue its strategy of opening Company-owned superstores
and does not anticipate opening any franchised units.
Since fiscal 1993, the Company has experienced declining net income. In
fiscal 1994, 1995 and 1996, general and administrative expenses increased
related to the hiring of management personnel and to enhancements to corporate
infrastructure and systems. Due to the new store expansion strategy, aggregate
new store preopening costs also increased each year, although such costs on a
per-store basis declined from fiscal 1995 to fiscal 1996. In fiscal 1995, the
Company experienced a high level of inventory shrinkage compared to prior years,
resulting from a lack of consistent store-level compliance with price markdown
and receiving procedures at certain stores, and the lack of a loss prevention
department. During fiscal 1996, inventory shrinkage returned to near historical
levels as store compliance with markdown procedures improved and a loss
prevention department was established. Finally, interest expense increased in
fiscal 1996 in connection with the incurrence of debt to fund new superstores.
The Company's objective is to increase operating leverage through the continued
expansion and maturation of its superstore base (62 superstores were less than
two years old as of November 15, 1996).
The Company's 46 superstores open for all of fiscal 1996 averaged net sales
of $1,082,000 and store-level contribution (before pre-opening expenses,
depreciation and amortization and allocated corporate overhead and interest, but
including advertising) of $151,000, or 14.0% of net sales. The Company expects
that its new superstores will require a cash investment of approximately
$413,000, including $63,000 in preopening expenses (consisting of $38,000
primarily for labor and $25,000 for preopening advertising expenses), $175,000
in leasehold improvements and equipment (including implementation of the POS
system) and $175,000 in inventory net of payables.
The Company intends to use approximately $8.0 million of net proceeds from
this offering to repay the Subordinated Debentures. In connection with such
repayment, deferred financing costs and discounts related to the Subordinated
Debentures will be written off, resulting in an expected extraordinary charge to
net income of approximately $313,000 in the second fiscal quarter of fiscal
1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales and the
number of stores open at the end of each such period:
<TABLE>
<CAPTION>
FISCAL YEAR 13 WEEKS ENDED
------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
SEPT. 30, SEPT. 28,
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
Net sales............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and occupancy........................................... 62.2 62.9 62.5 65.6 67.9
--------- --------- --------- ----- -----
Gross profit........................................................ 37.8 37.1 37.5 34.4 32.1
Selling, general and administrative expenses.......................... 34.5 35.3 35.7 45.2 38.6
--------- --------- --------- ----- -----
Income (loss) from operations....................................... 3.3 1.8 1.8 (10.8) (6.5)
Interest expense...................................................... 1.3 0.7 1.6 1.1 2.4
--------- --------- --------- ----- -----
Income (loss) before taxes.......................................... 2.0 1.1 0.2 (11.9) (8.9)
Income tax (benefit).................................................. 0.8 0.6 0.1 (4.5) (3.7)
--------- --------- --------- ----- -----
Net income (loss)................................................... 1.2% 0.5% 0.1% (7.4)% (5.2 )%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
Number of stores open at end of period................................ 55 78 107 88 112
</TABLE>
16
<PAGE>
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 30, 1995
NET SALES. Net sales increased $8.2 million, or 48.8%, to $25.0 million for
the 13-week period ended September 28, 1996 from $16.8 million for the 13-week
period ended September 30, 1995. The increase resulted from (i) net sales of
approximately $547,000 from five new stores opened during the 13-week period,
(ii) net sales of $5.5 million from stores opened prior to fiscal 1997 not
included in the comparable store base and (iii) a comparable store sales
increase of $2.2 million, or 14.1%. The Company includes stores opened 13 or 14
months after their opening date in the calculation of comparable sales. If the
opening date of a store falls in the first 14 days of a period, the store is
included in the comparable store calculation on its 13th month of operation;
otherwise, a store is included in the comparable store calculation in its 14th
month of operation.
GROSS PROFIT. Cost of sales and occupancy includes merchandise, store
occupancy, purchasing and distribution costs. Gross profit increased $2.2
million, or 37.9%, to $8.0 million for the 13-week period ended September 28,
1996 from $5.8 million for the 13-week period ended September 30, 1995,
primarily as a result of operating 24 more stores. As a percentage of net sales,
gross profit was 32.1% for the 13-week period ended September 28, 1996 compared
to 34.4% for the same period in the prior year. Gross profit as a percentage of
net sales decreased resulting from a reduction in inventory overhead costs that
were capitalized (115 basis points) and a higher shrinkage allowance (82 basis
points at cost) compared to actual fiscal 1996 results. The 1997 shrinkage
allowance approximates the average shrinkage results experienced by the Company
over the last three years. In addition, gross profit as a percentage of net
sales decreased as a result of higher distribution costs (52 basis points)
resulting from the operation of a second distribution facility for the entire
13-week period ended September 28, 1996, compared to approximately six weeks
during the same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include labor, advertising, depreciation and other store
operating and corporate administrative expenses. Selling, general and
administrative expenses increased $2.1 million, or 27.2%, to 9.7 million for the
13-week period ended September 28, 1996 from $7.6 million for the 13-week period
ended September 30, 1995. Approximately $1.4 million of this increase resulted
from the operation of 24 additional new superstores. The remainder of the
increase in selling, general and administrative expenses resulted from higher
salaries and benefits for additional corporate management and administrative
personnel, including approximately $146,000 from nonrecurring compensation
expense. Compensation expense of approximately $15,000 will be recognized each
quarter until certain options granted under the 1989 Stock Option Plan fully
vest in August 2000. As a percentage of net sales, selling, general and
administrative expenses decreased to 38.6% in the 13-weeks ended September 28,
1996 from 45.2% in the 13 weeks ended September 30, 1995, primarily due to the
leveraging of store and other general and administrative expenses against the
increase in comparable store sales.
INTEREST EXPENSE. Interest expense was approximately $597,000 in the 13
weeks ended September 28, 1996 compared to approximately $190,000 in the first
13 weeks ended September 30, 1995. This increase resulted from increased
borrowings related to the opening of new superstores.
INCOME TAX BENEFIT. The income tax benefit recognized for the 13-week
period ended September 28, 1996 was approximately $175,000 higher than the
benefit recognized during the 13-week period ended September 30, 1995 due to a
higher net loss for the period and a higher effective tax rate estimated at 42%
for the 1997 fiscal year.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
NET SALES. Net sales increased $31.4 million, or 49.7%, to $94.6 million in
fiscal 1996 from $63.2 million in fiscal 1995. The increase resulted from (i)
net sales of $18.1 million from 32 new stores opened during the year, (ii) net
sales of $9.9 million from stores opened prior to fiscal 1996 not included in
the
17
<PAGE>
comparable store base, and (iii) a comparable store sales increase of $3.4
million, or 6.0%. Fiscal 1996 was the first year since fiscal 1993 that the
Company did not achieve double-digit comparable store sales growth. This
resulted from lower inventory levels in stores during much of the first nine
months of the fiscal year due to management transitions in the merchandising
area and late receipt of merchandise related to the Company's expansion of its
product offering during the third quarter.
GROSS PROFIT. Gross profit increased $12.0 million, or 51.3%, to $35.4
million in fiscal 1996 from $23.4 million in fiscal 1995. As a percentage of net
sales, gross profit was 37.5% in fiscal 1996 compared to 37.1% in fiscal 1995.
Gross profit as a percentage of net sales increased due to higher inventory
overhead costs that were capitalized (76 basis points) and due to a decrease to
near historical levels of inventory shrinkage in fiscal 1996 compared with
fiscal 1995 (230 basis points at cost). Partially offsetting these improvements
were increases in distribution costs (164 basis points) associated with serving
new market areas and operating a second distribution facility for most of fiscal
1996. In addition, store occupancy costs increased (82 basis points) as the rate
of new store openings increased.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.4 million, or 51.2%, to $33.7 million in
fiscal 1996 from $22.3 million in fiscal 1995. Approximately $8.4 million of
this increase resulted from the opening and operation of 32 new superstores in
fiscal 1996. The remaining increase resulted primarily from (i) $1.8 million to
develop the current management team (including recruitment, relocation, partial
year salaries and benefits, and other associated expenses) and (ii)
approximately $878,000 for systems improvements to support the Company's
continued expansion strategy (including consulting fees related to systems,
distribution, and improvements in store backroom operations, and increases in
depreciation related to systems). As a percentage of net sales, selling, general
and administrative expenses increased to 35.7% in fiscal 1996 from 35.3% in
fiscal 1995.
INTEREST EXPENSE. Interest expense was $1.5 million in fiscal 1996 compared
to approximately $412,000 in fiscal 1995. This increase resulted from increased
borrowings related to the opening of new superstores.
PROVISION FOR INCOME TAXES. The Company's effective tax rate in fiscal 1996
was 62.7% compared to 46.7% in fiscal 1995, resulting from increases in
nondeductible expenses relative to taxable income.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
NET SALES. Net sales increased $25.8 million, or 69.2%, to $63.2 million in
fiscal 1995 from $37.3 million in fiscal 1994. The increase resulted from (i)
net sales of $12.7 million from 25 new superstores opened during the year, (ii)
net sales of $5.0 million from stores opened prior to fiscal 1995 not included
in the comparable store base, and (iii) a comparable store sales increase of
$8.1 million, or 22.2%. The increase in comparable store sales related primarily
to the Company's expansion of its product offering in fiscal 1995.
GROSS PROFIT. Gross profit increased $9.3 million, or 66.0%, to $23.4
million in fiscal 1995 from $14.1 million in fiscal 1994. As a percentage of net
sales, gross profit was 37.1% in fiscal 1995 compared to 37.8% in fiscal 1994.
Gross profit decreased as a percentage of net sales, primarily due to higher
inventory shrinkage experienced in fiscal 1995 compared to fiscal 1994. This
increase in inventory shrinkage (230 basis points at cost) resulted from a lack
of consistent store-level compliance with price markdown and receiving
procedures at certain stores, and the lack of a loss prevention department
during fiscal 1995. Partially offsetting this increase in inventory shrinkage
was a decrease in store occupancy costs (140 basis points), resulting from more
new store openings during the first half of fiscal 1994 compared to the first
half of fiscal 1995 and the leveraging of occupancy costs against higher
comparable store sales increases during fiscal 1995 compared to fiscal 1994.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.4 million, or 72.9%, to $22.3 million in
fiscal 1995 from $12.9 million in fiscal 1994. Approximately $7.2 million of
this increase resulted from the opening and operation of 25 new superstores. The
remaining $2.2 million resulted from $1.0 million associated with the hiring of
regional management and new store development staff and approximately $926,000
in new administrative positions, increases in depreciation for new systems and
consulting fees. As a percentage of net sales, selling, general and
administrative expenses increased to 35.3% in fiscal 1995 from 34.5% in fiscal
1994.
INTEREST EXPENSE. Interest expense was approximately $412,000 in fiscal
1995 compared to approximately $497,000 in fiscal 1994. This decrease resulted
from a decrease in borrowings primarily as a result of proceeds received from
the issuance of the Series B Preferred on July 15, 1994.
PROVISION FOR INCOME TAXES. The Company's effective tax rate in fiscal 1995
was 46.7% compared to 39.4% in fiscal 1994, resulting from increases in
nondeductible expenses relative to taxable income.
19
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth the Company's unaudited quarterly operating
results for its nine most recent quarterly periods.
<TABLE>
<CAPTION>
THREE FISCAL MONTHS ENDED
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 30, MAR. 30, JUNE 29, SEPT. 28
1995 1995 1996 1996 1996
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................................. $ 16,817 $ 25,109 $ 21,707 $ 30,956 $ 25,032
Cost of sales and occupancy................................ 11,025 15,599 13,988 18,527 16,996
--------- --------- --------- --------- ---------
Gross profit............................................. 5,792 9,510 7,719 12,429 8,036
Selling, general and administrative expenses............... 7,600 8,774 7,972 9,387 9,665
--------- --------- --------- --------- ---------
Income (loss) from operations............................ (1,808) 736 (253) 3,042 (1,629)
Interest expense........................................... 190 300 480 559 597
--------- --------- --------- --------- ---------
Income (loss) before taxes............................... (1,998) 436 (733) 2,483 (2,226)
Income tax (benefit)....................................... (760) 180 (272) 970 (935)
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (1,238) $ 256 $ (461) $ 1,513 $ (1,291)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Stores open at end of period............................... 88 100 104 107 112
</TABLE>
<TABLE>
<CAPTION>
THREE FISCAL MONTHS ENDED(1)
------------------------------------------
<S> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JULY 1,
1994 1994 1995 1995
--------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................................. $ 10,428 $ 17,152 $ 14,208 $ 21,386
Cost of sales and occupancy................................ 6,885 10,709 9,159 13,004
--------- --------- --------- ---------
Gross profit............................................. 3,543 6,443 5,049 8,382
Selling, general and administrative expenses............... 4,393 5,536 5,788 6,599
--------- --------- --------- ---------
Income (loss) from operations............................ (850) 907 (739) 1,783
Interest expense........................................... 54 54 124 179
--------- --------- --------- ---------
Income (loss) before taxes............................... (904) 853 (863) 1,604
Income tax (benefit)....................................... (422) 398 (403) 749
--------- --------- --------- ---------
Net income (loss)........................................ $ (482) $ 455 $ (460) $ 855
--------- --------- --------- ---------
--------- --------- --------- ---------
Stores open at end of period............................... 56 66 72 78
</TABLE>
- ------------------------
(1) Fiscal 1995 was on a calendar month end quarterly reporting basis.
Due to the importance of the spring selling season, which includes Easter,
graduation and Mother's Day, and the fall selling season, which includes
Halloween, Thanksgiving, Hanukkah, Kwanzaa and Christmas, the second and fourth
fiscal quarters have historically contributed, and the Company expects they will
continue to contribute, disproportionately to the Company's profitability for
the entire fiscal year. As a result, any factors negatively affecting the
Company in any year during the second and fourth fiscal quarters, including
adverse weather and unfavorable economic conditions, could have a material
adverse effect on the Company's financial condition and results of operations
for the entire year.
The Company's quarterly results of operations also may fluctuate based upon
such factors as the timing of certain holiday seasons, the number and timing of
new superstore openings, the amount of store preopening expenses, the amount of
net sales contributed by new and existing stores, the mix of products
20
<PAGE>
sold, the timing and level of markdowns, store closings, refurbishments and
relocations, competitive factors and weather and general economic conditions.
RECENT ACCOUNTING PRONOUNCEMENTS
During October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." The Company will adopt this
Standard during fiscal 1997, electing the disclosure method of accounting.
Additionally, the Company will adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
during fiscal 1997. The adoption of these standards is not expected to
materially effect fiscal 1997 earnings.
INFLATION
Management does not believe that inflation has had a material effect on its
financial condition or results of operations during the past three fiscal years.
However, there can be no assurance that inflation will not have a material
adverse effect on the Company's future financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily for working capital to support its
opening of new superstores and its inventory requirements. In recent years, the
Company has financed its operations primarily with borrowings under the Business
Loan Agreement, proceeds from issuances of the Convertible Preferred Stock and
the Subordinated Debentures and internally generated funds. At September 30,
1995 and September 28, 1996, the Company's working capital was $16.2 million and
$30.0 million, respectively. Cash used in operations for the 13 weeks ended
September 30, 1995 and September 28, 1996 was $1.7 million and $5.3 million,
respectively. In these two periods, $5.5 million and $8.8 million, respectively,
of cash from operations was used to increase inventory levels to support both
new and existing stores. At the end of fiscal 1995 and 1996, the Company's
working capital was $15.6 million and $23.6 million, respectively. During fiscal
1994, 1995 and 1996, cash used in operations was $1.2 million, $4.1 million and
$5.1 million, respectively. In each of these three periods, $5.1 million, $9.1
million and $16.8 million, respectively, of cash from operations was used to
increase inventory levels to support both new and existing stores.
Net cash used in investing activities during the 13-week periods ended
September 30, 1995 and September 28, 1996 was $1.9 million and $2.0 million,
respectively. Net cash used in investing activities during fiscal 1994, 1995 and
1996, respectively, was $2.2 million, $6.9 million and $7.1 million. These costs
were primarily a result of opening new superstores and investing in systems. In
fiscal 1997, the Company expects to spend approximately $11.0 million on capital
expenditures, which includes approximately $4.6 million for new superstore
openings and approximately $3.9 million for the Company-wide implementation of
the POS system.
Net cash provided from financing activities during the 13-week periods ended
September 30, 1995 and September 28, 1996 was $3.2 million and $7.5 million,
respectively. Net cash provided by financing activities during fiscal 1994,
1995, and 1996 was $3.6 million, $11.1 million and $11.9 million, respectively.
For fiscal 1995 and 1996, the outstanding balance under the Company's business
loan agreement with Bank One (the "Prior Business Loan Agreement") at year end
was $5.8 million and $13.1 million, respectively. At October 31, 1996, $9.6
million was available under the revolving credit facility of the Prior Business
Loan Agreement. At September 28, 1996, the outstanding balance under the Prior
Business Loan Agreement was $9.2 million (which included such revolving credit
facility and the Term Loan). On November 1, 1996, the Company entered into the
Business Loan Agreement, which provides for the Line of Credit and allows for
borrowings by the Company in an amount not to exceed the lesser of $25.0 million
or 50% of merchandise inventories. The Line of Credit expires on October 1,
1998. Borrowings outstanding under the Line of Credit bear interest on the
average daily outstanding balance, paid monthly, at Bank One's prime rate or, at
the Company's option, at 2.75% over LIBOR. The Company is required to pay an
21
<PAGE>
annual commitment fee of 0.25% on the unused portion of the Line of Credit
(except that if the unused portion exceeds $20.0 million the fee increases to
0.40% on the unused portion) and to comply with certain covenants. The Line of
Credit is secured by a senior lien on substantially all of the Company's assets.
The Prior Business Loan Agreement provided for, and the Business Loan
Agreement currently provides for, the Term Loan in an amount up to $1.5 million
with an outstanding balance of $1.1 million at the end of fiscal 1996 and
approximately $980,000 at September 28, 1996. The Term Loan is secured by a lien
on substantially all of the Company's assets, has certain covenants and matures
on June 30, 1998.
At the end of fiscal 1996, the Company had outstanding $5.0 million of
Subordinated Debentures, which, net of the unamortized discount, totaled $4.7
million. Subsequent to fiscal 1996, the Company issued an additional $3.0
million of Subordinated Debentures. At September 28, 1996, the outstanding
balance of the Subordinated Debentures, net of the unamortized discount, totaled
$7.6 million. The Subordinated Debentures may be prepaid at any time, with $4.0
million maturing in November 2000, $1.0 million maturing in June 2001 and $3.0
million maturing in July 2001. The Subordinated Debentures bear interest at the
rate of 12.5% per annum, $7.0 million of which has interest that is currently
payable at a rate of 7.5%, with the remaining 5.0% interest accruing until
February 1, 1997 and May 1, 1997, on $3.0 million and $4.0 million,
respectively. In connection with the Subordinated Debentures, the Company issued
warrants to lenders representing the right to acquire 195,594 shares of Common
Stock at an exercise price of $0.0025 per share. The Subordinated Debentures are
secured by a lien on substantially all of the Company's assets that is junior to
the liens securing the Line of Credit and the Term Loan.
The Company has issued and outstanding Series A Preferred, Series B
Preferred and Series C Preferred, which raised net proceeds in the aggregate
amount of $2.0 million, $11.4 million and $9.7 million, respectively. The Series
C Preferred was issued in August 1996, subsequent to the end of fiscal 1996. The
Company intends to convert all outstanding shares of the Convertible Preferred
Stock into shares of Common Stock upon the effectiveness of the Registration
Statement of which this Prospectus is a part.
In October 1996, the Company entered into two capital lease agreements for
point-of-sale computer equipment and related software having a total cost of
$2.1 million. These leases have terms of four and five years.
The Company believes that the net proceeds it will receive from this
offering, together with cash generated from operations and available borrowings
under the New Line of Credit, will be sufficient to finance its working capital
and capital expenditure requirements for at least the next 12 months. See "Use
of Proceeds."
22
<PAGE>
BUSINESS
THE COMPANY
Factory Card is a rapidly growing chain of company-owned superstores
offering a vast assortment of party supplies, greeting cards, gift wrap and
other special occasion merchandise at everyday value prices. As of November 15,
1996, the Company operated 122 stores in 14 states, primarily in the Midwest and
mid-Atlantic regions of the United States. To maintain the quality and
consistency of its retail presentation, the Company operates all of its stores,
which comprise the largest chain of company-operated superstores within the
party supply and special occasion category. The Company opened 15, 25 and 32
superstores in fiscal 1994, 1995 and 1996, respectively, and plans to open 30 to
35 superstores in fiscal 1997, including 15 opened through November 15, 1996.
The Company's superstores provide customers with a value-oriented,
"one-stop" shopping destination for party and special occasion merchandise for
all major holidays and celebratory events, including birthdays, graduations,
weddings, baby showers and other family, religious and special occasions. The
Company's superstore prototype ranges in size from 10,000 to 12,000 square feet,
with approximately 80% devoted to selling space, and is designed to provide ease
of shopping within an attractive, spacious and festive environment. To enhance
the look of its superstores and encourage multiple purchases, merchandise is
displayed in assortments that emphasize themes and colors associated with
holidays, special occasions and other seasonal events. To reinforce its emphasis
on providing value, since fiscal 1993, the Company has offered multiple lines of
high quality greeting cards, all at the everyday low price of 39 CENTS.
MARKET OVERVIEW
The United States market for party and special occasion merchandise,
comprised of party supplies, greeting cards, gift wrap and related items, had
estimated retail sales in excess of $8.0 billion in 1995. Consumers purchase
party and special occasion merchandise frequently throughout the year in order
to create, enhance and celebrate a wide range of major holidays, including
Valentine's Day, St. Patrick's Day, Passover, Easter, Mother's Day, Father's
Day, Grandparent's Day, Secretary's Day, Fourth of July, Rosh Hashanah,
Halloween, Thanksgiving, Christmas, Hanukkah, Kwanzaa and New Year's, and
celebratory events, including birthdays, graduations, weddings, baby showers and
other family, religious and special occasions. The Company believes that the
consumable and occasion-specific nature of party supplies and special occasion
merchandise results in multiple and repeat purchases by consumers.
The Company believes the party supply and special occasion market will
continue to grow based on demographic and other factors. For example, the
Company believes that the aging of the baby boom generation, and the increasing
number of their school-age children, offers an opportunity for retailers to
further expand their sale of party supplies and greeting cards. The Company
believes this segment of the population creates an increasing demand for the
Company's products as a result of greater at-home entertaining and demand for
party supplies for children.
Larger format superstores have become the fastest growing retail format
within the fragmented market for party and special occasion merchandise.
Historically, this market has been served by traditional retail channels such as
card shops, mass merchandisers, discount retailers, drugstores and supermarkets,
which generally offer a limited selection within many of the party supply and
special occasion product categories. Industry statistics indicate that
superstores have increased their share of the market in the past two years. The
Company believes that the broader product selection, "one-stop" shopping
solution and value pricing offered by superstores will continue to make them the
preferred choice of consumers.
23
<PAGE>
BUSINESS STRATEGY
The key elements of the Company's business strategy are as follows:
EXTENSIVE MERCHANDISE OFFERING. The Company believes its everyday and
seasonal merchandise offering, which includes approximately 23,000 SKUs at its
superstores, provides the solution, in a single destination, for a customer's
complete product needs to create, enhance and celebrate special occasions. The
Company offers a full line of party supplies in a wide variety of festive and
distinctive patterns, colors and styles, including tableware, tablecovers,
invitations, party favors, pinatas, banners and other decor items. The Company
also offers a broad selection of high quality greeting cards for all occasions,
consisting of approximately 4,000 everyday and seasonal titles. The Company
carries an extensive selection of gift wrap, including a broad array of gift
bags, gift boxes, ribbons, bows and related items in coordinated and
complementary displays. In addition, the Company offers many other special
occasion items such as balloons, stationery, gifts, novelty items and seasonal
products.
EVERYDAY VALUE PRICING. The Company's strategy of everyday value pricing is
designed to provide customers with consistent value on all purchases. The
Company typically sells its merchandise at discounts of 20% to 60% off
manufacturers' suggested retail prices. In addition, the Company's superstores
feature a "power aisle" offering a wide selection of opportunistic buys and
manufacturers' seasonal over-runs, all priced at deep discounts and frequently
changed to create continued customer interest. To distinguish the Company's
superstores from those of its competitors and build customer traffic and
loyalty, the Company's high quality greeting cards are all sold for 39 CENTS
each.
ATTRACTIVE, SPACIOUS AND FESTIVE SUPERSTORE FORMAT. The Company creates an
attractive and festive atmosphere within a spacious "easy to shop" superstore,
encouraging browsing and repeat visits by customers. The Company's superstores
are designed to provide a comfortable shopping experience, with bright lighting,
wide carpeted aisles and fixtures that offer customers easy access to
merchandise. The interiors of the Company's superstores are festively decorated
with arrays of colorful merchandise to emphasize everyday and seasonal themes.
The size of the Company's superstore prototype enables the Company to offer an
extensive selection of merchandise and increase store-level efficiencies.
TARGETED ADVERTISING. In the spring of 1996, the Company broadened its
advertising program to include a Company-wide direct mail campaign designed to
educate targeted consumers about the breadth and value of the Company's product
offering. The Company intends to support major holiday selling seasons with
direct mail marketing and continue radio advertising in order to complement its
direct mail program and increase its name recognition within new and existing
markets.
DEVELOPMENT OF MANAGEMENT TEAM AND INFRASTRUCTURE. The Company has
recruited a management team whose members have an average of 21 years of retail
experience. The Company believes it benefits from operating its own distribution
facilities, which enable it to make opportunistic purchases, import products
directly and achieve operating efficiencies. In fiscal 1996, the Company
completed installation of a fully integrated retail management software package
that automated the areas of finance, merchandising and distribution and
successfully tested a POS system that is expected to be operational in all
stores by the end of fiscal 1997.
GROWTH STRATEGY
The Company has developed a rapid expansion plan designed to build on its
position as the largest chain of company-owned superstores in the party supply
and special occasion industry. The Company's growth strategy is to open stores
in existing and contiguous markets that can support multiple stores and enable
the Company to achieve operating, distribution and advertising efficiencies. The
Company may also selectively enter small and mid-size markets capable of
supporting one or more superstores that the Company believes meet its
profitability criteria. The Company plans to open 30 to 35 superstores in fiscal
1997, including 15 opened through November 15, 1996, and at least 40 superstores
in fiscal 1998. The
24
<PAGE>
Company has entered into 13 leases for superstores and has seven more leases
under current review, all of which are expected to open in fiscal 1997.
In addition to opening new stores, the Company's growth strategy involves
increasing sales in existing stores through continued expansion of its
merchandise offering, coordinated party goods presentation and advertising and
in-store marketing to encourage multiple purchases and to increase customer
awareness of its broad merchandise offering. The Company may also take advantage
of opportunities to exploit the fragmented nature of the industry by considering
the acquisition of other retail chains in the industry. See "Risk Factors--Risks
Associated with Expansion" and "Risk Factors--Risks Associated with
Acquisitions."
MERCHANDISING
The Company believes its merchandise offering provides the solution, in a
single destination, for a customer's complete product needs to create, enhance
and celebrate special occasions. The Company's stores offer a vast assortment of
party supplies, greeting cards, gift wrap and other special occasion merchandise
at everyday value prices. The Company's superstores carried approximately 23,000
SKUs of everyday and seasonal merchandise in fiscal 1996. In fiscal 1996, the
average number of transactions per store for stores open the entire fiscal year
was approximately 171,500, and the average store transaction was approximately
$5.80. In addition, the Company believes that the consumable and
occasion-specific nature of its merchandise selection results in multiple and
repeat visits by its customers.
The Company's stores offer product selections for all major holidays and
seasonal events, such as Valentine's Day, St. Patrick's Day, Passover, Easter,
Mother's Day, Father's Day, Grandparent's Day, Secretary's Day, Fourth of July,
Rosh Hashanah, Halloween, Thanksgiving, Christmas, Hanukkah, Kwanzaa and New
Year's, and celebratory events, including birthdays, graduations, weddings and
baby showers, and other family, religious and special occasions. The Company's
merchandise offering consists of four major product categories: party supplies,
greeting cards, gift wrap and other special occasion items.
PARTY SUPPLIES. The Company stocks a broad selection of party supply
merchandise for everyday and special occasions in a wide variety of attractive
patterns and distinctive colors. Party supplies include tableware, tablecovers,
cutlery, invitations, party favors, milestone birthday items, pinatas, banners,
decorations, candles, decor and other related party items. By offering a full
line of coordinated and complementary patterns and designs, the Company seeks to
meet all of a customer's party needs, from children's birthdays and holiday
celebrations to at-home entertainment.
GREETING CARDS. The Company's stores feature approximately 4,000 titles of
high quality everyday and seasonal greeting cards for all occasions, all sold at
the everyday low price of 39 CENTS each. In addition to traditional lines of
greeting cards, the Company's stores also carry an extensive selection of
contemporary and humorous greeting cards. Boxed everyday greeting cards are
regularly sold at deep discounts, and boxed holiday cards (Christmas, Hanukkah
and Kwanzaa) are sold at 50% off manufacturers' suggested retail prices.
GIFT WRAP. The Company believes that it offers one of the largest
assortments of gift wrap of any retailer in the United States. This extensive
selection of gift wrap is combined with bows, ribbons and related accessories in
a large cascading waterfall display of complementary colors and distinctive
patterns. Items included in this category are gift wrap, including glossy,
printed, solid and foil, solid and printed ribbons, bows, gift bags, gift boxes,
tissue paper, shred and gift tags. The Company believes that its stores have
become a destination for shoppers seeking a wide selection of gift wrap and gift
wrap accessories and that most of these items are sold at lower prices than the
Company's competition.
OTHER SPECIAL OCCASION MERCHANDISE. The Company complements its major
product lines by offering many other special occasion items in order to provide
a "one-stop" shopping destination for its customers. These items include
balloons, candy, bridal and wedding items (such as cake decorations, place
setting
25
<PAGE>
cards and confetti), candles and candle holders (and other related accessories),
stationery, gifts, novelty items and seasonal products.
The Company's strategy of everyday value pricing is designed to provide
customers consistent value on all purchases. The Company typically sells its
merchandise at discounts of 20% to 60% off manufacturers' suggested retail
prices. In addition, the Company's superstores feature a "power aisle" offering
a wide selection of opportunistic buys and manufacturers' seasonal over-runs,
all priced at deep discounts and frequently changed to create continued customer
interest. To build customer traffic and loyalty, the Company's high quality
greeting cards are all sold for 39 CENTS each.
The Company currently offers certain party and special occasion items under
its proprietary "Partymania-Registered Trademark-" label, including invitations,
candles and decor items. Although the Company does not maintain a significant
amount of private label merchandise at present, the Company plans to explore new
opportunities to expand its Partymania-Registered Trademark- products in order
to provide customers with additional savings while realizing higher margins
typically accompanying private label products.
The Company has a centralized purchasing department comprised of five buyers
who are responsible for establishing the assortment of inventory within the
merchandise categories each selling season. The Company's merchandising mix is
achieved by considering a number of factors including the price-value
relationship, customer demand and product availability, as well as input from
regional and store managers. The Company believes that its purchasing volume
allows it to acquire quality products at competitive prices.
FACTORY CARD'S STORES
FORMAT AND PRESENTATION. The Company's current prototype superstore, which
ranges in size from 10,000 to 12,000 square feet, with approximately 80% devoted
to selling space, allows the store to carry an extensive selection of party
supplies, greeting cards and other special occasion merchandise in an easy-to-
shop visually appealing atmosphere. Approximately 75% of the Company's store
base are superstores (stores of at least 8,000 gross square feet).
The Company believes that the presentation of its merchandise is critical to
communicating value and excitement to its customers. The Company's stores are
attractively designed with the use of vibrant colors, creative merchandise
displays and decorative signage in order to create a fun shopping experience and
encourage browsing throughout the stores. Stores have bright, wide carpeted
aisles, lined with pinatas and other colorful decorations, creating an inviting
and festive atmosphere for shoppers. The Company's balloon selection, consisting
of approximately 240 designs of everyday balloons and up to an additional 30
seasonal designs, is displayed at the store entrance, providing immediate visual
appeal as customers enter the store.
The Company uses a variety of adaptable merchandising fixtures, including
gondolas and adjustable displays, that enable the Company to shift its
merchandise mix frequently to feature new and seasonal merchandise. Such
adaptable fixtures are typically located in prominent areas in the stores to
create customer interest and encourage browsing. The Company's "power aisle" and
seasonal items are centrally located in the stores and lead the customer through
the store into different merchandise areas. Store signage, including permanent
and promotional signs, is utilized to enhance the festive appeal of stores.
STORE OPERATIONS AND TRAINING. The Company's typical store is staffed with
a store manager, one to two assistant managers and a varying number of full-time
and part-time sales associates, depending on the store size and selling season.
The Company has established bonus plans for all store managers and assistant
managers. Awards are based on meeting or exceeding quarterly sales projections
to reward individual and store performance. Store managers report to one of the
Company's district managers, each of whom is responsible for approximately 10 to
12 stores. The Company's stores are typically open from 10:00 a.m. to 9:00 p.m.
on weekdays and most Saturdays, with shorter hours on Sunday. Stores typically
extend their opening and closing hours during the Christmas season.
26
<PAGE>
The Company employs three full-time new store training managers and has
developed a complete set of employee training manuals covering aspects of
operating a specialty retail store, including product information, systems
information and cash management programs. The Company has developed a one and a
half-day in-store training program for all new store employees and a three-day
in-store training program for all new store managers covering product knowledge,
customer service and the Company's systems. In addition, the Company has an
ongoing manager-in-training program within each district in which it hires a
prospective manager or advances an assistant manager for placement in a store
and later transfers them to the new store in preparation for its opening.
Finally, the Company regularly conducts store manager meetings to review store
policies and practices and reinforce management training practices.
SITE SELECTION; STORE LOCATIONS
SITE SELECTION. The Company's stores are located primarily in regional
strip or power shopping centers with co-tenants appealing to value-oriented
female customers of various ranges of age and income. Sites are selected on the
basis of several factors, including physical location, demographics, anchor and
other tenants, location within the center, parking and available lease terms.
The Company looks for co-tenants who draw customers with similar characteristics
and generate a high rate of shopping traffic, such as specialty value-oriented
women's retailers, leading chain supermarkets, arts and crafts stores, chain
drug stores and family restaurants. The Company believes its stores are
attractive to developers because they sell non-apparel goods, offer everyday
value pricing and attract high rates of female customer traffic.
STORE LOCATIONS. As of November 15, 1996, the Company operated 122 stores
in 14 states, all of which are leased. The Company's store leases typically have
an average initial term of 10 years with two five year renewal options. As of
November 15, 1996, the average unexpired term of the Company's 122 existing
store leases was approximately seven years (not including renewal options).
27
<PAGE>
Set forth below is a list of the Company's store locations by state as of
November 15, 1996:
<TABLE>
<CAPTION>
NUMBER OF
LOCATION STORES
- -------------------------------------------- -------------
<S> <C>
DELAWARE (1)
Wilmington................................ 1
ILLINOIS (40)
Chicago Metro............................. 32
Mt. Vernon................................ 1
Bloomington............................... 1
Rockford.................................. 1
Fairview Heights.......................... 1
Moline.................................... 1
Champaign................................. 1
Kankakee.................................. 1
Springfield............................... 1
INDIANA (15)
Indianapolis.............................. 6
Highland.................................. 1
Merrillville.............................. 1
Evansville................................ 2
Ft. Wayne................................. 1
Mishawaka................................. 1
LaFayette................................. 1
Clarksville............................... 1
Bloomington............................... 1
IOWA (5)
Des Moines Metro.......................... 2
Cedar Rapids.............................. 1
Waterloo.................................. 1
Davenport................................. 1
KENTUCKY (4)
Louisville Metro.......................... 2
Florence.................................. 1
Owensboro................................. 1
MARYLAND (12)
Baltimore Metro........................... 7
Washington, D.C. Metro (Md.).............. 4
Annapolis................................. 1
<CAPTION>
NUMBER OF
LOCATION STORES
- -------------------------------------------- -------------
<S> <C>
MINNESOTA (1)
Rochester................................. 1
MISSOURI (6)
St. Louis Metro........................... 4
Springfield............................... 1
Cape Girardeau............................ 1
NEBRASKA (5)
Omaha Metro............................... 3
Lincoln................................... 1
Grand Island.............................. 1
OHIO (11)
Cincinnati Metro.......................... 4
Columbus Metro............................ 3
Cleveland Metro........................... 2
Mansfield................................. 1
Akron..................................... 1
PENNSYLVANIA (2)
Hanover................................... 1
Erie...................................... 1
TENNESSEE(1)
Chattanooga............................... 1
VIRGINIA (6)
Washington, D.C. Metro (Va.).............. 4
Fredericksburg............................ 1
Richmond.................................. 1
WISCONSIN (13)
Milwaukee Metro........................... 6
Madison Metro............................. 2
Appleton.................................. 1
Oshkosh................................... 1
Eau Claire................................ 1
Janesville................................ 1
Wausau.................................... 1
</TABLE>
ADVERTISING AND PROMOTION
In the spring of 1996, the Company broadened its advertising program to
include a Company-wide direct mail campaign designed to educate targeted
consumers about the breadth and value of the Company's product offering.
Historically, the Company's marketing efforts consisted of radio advertising on
a seasonal basis, reinforced by newspaper advertisements. The Company intends to
support major holiday selling seasons with direct mail marketing and continue
radio advertising in order to complement its direct mail program and increase
its name recognition within new and existing markets. With the expected
implementation of its POS system in all stores, the Company expects to capture
customer ZIP code information which will enable it to better target its direct
mail program. In addition, Grand Opening events will continue to be a major
element of the Company's marketing program. Grand Openings typically last four
days and consist of "4 for a $1.00" greeting card promotions, special purchases,
prize drawings and other fun events. The Company intends to supplement its
traditional Grand Opening marketing program with additional post-opening
advertising and public relations campaigns in the local trading area.
28
<PAGE>
PRODUCT SOURCING AND DISTRIBUTION
The Company purchases most of its inventory through its central purchasing
system, which allows it to take advantage of volume purchase discounts and
implement system controls over its inventory and merchandise selection. The
Company purchases its inventory from more than 300 vendors world-wide, with the
largest supplier, Creative Expressions, Inc., representing less than 14%, and
the largest ten suppliers representing approximately 46%, of the Company's
aggregate purchases in fiscal 1996. A portion of the Company's merchandise is
imported from foreign manufacturers or their agents, principally from the Far
East. See "Certain Transactions." As is customary in its industry, the Company
does not have long term contracts with any suppliers except Fine Art.
In order to ensure a consistent supply of first-run high quality greeting
cards, the Company entered into the Fine Art Agreement, which expires on
December 1, 1998 (with automatic one-year renewals after the initial 2 1/2 year
term unless the parties cannot agree on pricing and other terms). Under the Fine
Art Agreement, the Company is required to purchase from Fine Art a minimum of
42% of the Company's total annual requirement of greeting cards, which
percentage is subject to modification upon the consent of the parties. Fine Art
is a publicly-owned U.K. corporation and a stockholder of the Company. See "Risk
Factors--Risks Associated with Product Sourcing" and "Certain Transactions."
The Company believes that its well-established relationships with overseas
suppliers provide it with an advantage over many of its competitors because the
Company is able to offer an extensive selection of distinctive products at
higher gross margins. The Company also believes that it benefits from the
significant buying power resulting from its size and that, by operating its own
distribution facilities, it can make opportunistic purchases, import products
directly and achieve greater operating efficiencies.
The Company's stores are currently serviced from two distribution centers
located near the Company's headquarters which total an aggregate of 237,000
square feet. Approximately 80% of the Company's purchases are shipped through
the Company's distribution centers and the remaining 20% is drop-shipped
directly from the vendors to the stores. The distribution centers handle basic
items, seasonal items, imports and opportunistic purchases. Approximately 1,200
SKUs of basic goods are stocked in the distribution centers and distributed to
the stores weekly based upon store orders. The remaining inventory is allocated
to the stores by the Company's buying group based on sales history, size of
store, geography and demographic profiles. The Company has entered into an
agreement to lease a new distribution center and office facility, which the
Company expects to be operational by April 1998. This new facility will consist
of approximately 440,000 square feet, including office space, and will have
40-foot ceilings, compared to the 20- and 24-foot ceilings in the existing
facilities. See "--Properties."
MANAGEMENT INFORMATION SYSTEMS
The Company uses a management information and control system, which is based
on the JDA Merchandise Management System software package ("JDA") acquired by
the Company in 1994 and supports the complete range of retail cycle functions in
the areas of finance, merchandising and distribution. All stores are linked to
the Company's headquarters through personal computers which interface with an
IBM AS/400 and provide the stores with the ability to enter store orders and
payroll information and send and receive electronic mail. These personal
computers will also be tied into the Company's new POS system and will allow
managers to review their stores' merchandising performance by product category
and SKU.
The Company believes that its management information systems will be an
important factor in supporting its continued expansion and enhancing its
competitive position in the industry. In fiscal 1996, the Company began the
implementation of its new POS system. As of November 15, 1996 the Company had
installed the POS system in 20 stores, with Company-wide implementation
anticipated by the end of fiscal 1997. The POS system will provide critical
sales information to the Company's stores and central office and will be
utilized in the Company's business operations and controls, performance
monitoring programs, decision support and business planning. Management believes
that the POS system will result in improvements in central office operations,
particularly in the areas of merchandise planning and automated replenishment,
inventory control and performance measurement.
29
<PAGE>
COMPETITION
The party supplies and greeting cards retailing business is highly
competitive. The Company currently competes against a diverse group of
retailers, ranging from other party supply and greeting card retailers
(including Party City Corporation) to designated departments in drug stores,
general mass merchandisers, supermarkets and department stores of local,
regional and national chains. In addition, a trend toward discounting party
supplies and greeting cards is developing and the Company may encounter
additional competition from new entrants in the future. Some of the Company's
competitors have substantially greater financial resources and experience than
the Company. See "Risk Factors--Competition."
EMPLOYEES
The Company had 2,001 employees as of November 15, 1996, comprised of 475
full-time and 1,526 part-time employees. The number of store employees increases
during peak selling seasons. None of the Company's employees are covered by
collective bargaining agreements. While the Company believes its relations with
its employees are generally good, the Company has been experiencing an unusually
high rate of turnover of its store managers. The Company is implementing new
pay, incentive and hours planning programs to address the conditions which led
to this high rate of turnover. See "Risk Factors--Dependence on Key Personnel;
New Management Team; Turnover of Store Managers."
TRADEMARKS
The Company has registered a trademark under the name of
"Partymania"-Registered Trademark- and its design on the Principal Register of
the United States Patent and Trademark Office. The Company has applied for
registration of the "Factory Card Outlet"-TM- trademark on the Principal
Register of the United States Patent and Trademark Office.
PROPERTIES
In addition to the Company's stores, all of which are leased, the Company
also leases two distribution center and corporate office facilities in
Bensenville, Illinois and Elk Grove Village, Illinois, with the lease terms
expiring in September 2002 and July 1998, respectively. The Company has recently
entered into a 10-year lease for an office and distribution center in
Naperville, Illinois which will integrate and replace the Company's existing
headquarters and distribution centers. The estimated commencement date under
this lease is October 1, 1997. The Company expects to be operating this new
distribution center, which consists of approximately 440,000 square feet,
including office space, by April 1998. See "Risk Factors--Consolidation and
Expansion of Distribution Facilities."
GOVERNMENT REGULATION
Each of the Company's stores must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire and other departments. More stringent and
varied requirements of local governmental bodies with respect to zoning, land
use and environmental factors, and difficulties or failures in obtaining the
required licenses or approvals, can delay and sometimes prevent, the opening of
a new store. In addition, the Company must comply with the Fair Labor Standards
Act and various state laws governing various matters such as the minimum wage,
overtime and other working conditions. The Company also must comply with the
provisions of the ADA, which requires generally that employers provide
reasonable accommodation for employees with disabilities and that stores be
accessible to customers with disabilities. See "Risk Factors-- Government
Regulation."
LITIGATION
From time to time, the Company is involved in ordinary litigation, none of
which, in the opinion of management, is likely to have a material adverse effect
on the Company's results of operations or financial condition.
30
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(1)
- ------------------------------------------------ --- ----------------------------------------------------------
<S> <C> <C>
William E. Freeman(2)(3)........................ 54 Chairman of the Board
Charles R. Cumello(3)........................... 51 President and Director
Glen J. Franchi................................. 43 Executive Vice President and Treasurer
Carol A. Travis................................. 45 Vice President and Secretary
Martin J. Merksamer............................. 48 Vice President and General Merchandising Manager
Leonard F. Rucker............................... 45 Vice President, Retail Store Operations
Thomas W. Stoltz................................ 35 Vice President, Finance
Robert Krentzman................................ 47 Vice President, MIS
Vincent G. Brown................................ 55 Vice President, Real Estate
Joseph M. Cabon................................. 50 Vice President, Distribution
Robert J. Kendzior.............................. 44 Vice President, Marketing
Matthew F. Ellis................................ 46 Vice President, Human Resources
J. Bayard Kelly................................. 64 Director
Dr. Robert C. Blattberg(4)...................... 54 Director
Michael I. Barach(4)............................ 38 Director
Bart A. Brown, Jr.(3)(4)........................ 64 Director
Richard A. Doppelt(2)........................... 41 Director
Stewart M. Kasen................................ 57 Director
James L. Nouss, Jr.............................. 42 Director
</TABLE>
- ------------
(1) All the Vice Presidents, other than Mr. Franchi and Ms. Travis, hold their
respective positions in the Company's operating subsidiary.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Audit Committee.
Mr. Freeman has been Chairman of the Board of Directors of the Company since
April 1994. From May 1994 to October 1995, Mr. Freeman was Chief Executive
Officer of the Company's operating subsidiary, and, from May 1994 to September
1996, he was Chief Executive Officer of the Company. From 1989 to 1994, Mr.
Freeman was President of the Company. Mr. Freeman has been a director of the
Company since forming the investor group that acquired it in July 1989. Since
1989, Mr. Freeman has also performed various management consulting assignments,
primarily involving the marketing and distribution of consumer products. Mr.
Freeman, as Chairman of the Executive Committee and a member of the Compensation
Committee, remains active in management of the Company.
Mr. Cumello has been President of the Company since October 1995 and has
been a director of the Company since May 1995. From April 1995 to October 1995,
Mr. Cumello was the Chief Operating Officer of the Company's operating
subsidiary. Prior to joining the Company, from 1991 to 1994, Mr. Cumello was
President and Chief Executive Officer of Waldenbooks, a division of Kmart
Corporation, and from 1986 to 1991, he was President of Reader's Market, a
division of Waldenbooks. From 1980 to 1986, Mr. Cumello served as Executive Vice
President and Chief Financial Officer of Waldenbooks. Mr. Cumello is a member of
the Executive Committee.
Mr. Franchi has been Executive Vice President and Treasurer of the Company
since March 1995. From November 1990 to March 1995, Mr. Franchi served as the
Chief Operating Officer of the Company's operating subsidiary. Prior to joining
the Company, from 1977 to 1989, Mr. Franchi held various management and senior
financial positions with Carson Pirie Scott Co., a chain of retail department
stores.
31
<PAGE>
Ms. Travis has been with the Company since it was originally founded in
1985, serving as Secretary of the Company since May 1994 and as Vice President
since June 1994.
Mr. Merksamer has been Vice President and General Merchandise Manager since
May 1996. From September 1995 to May 1996, Mr. Merksamer was the Senior Vice
President for Merchandising and Marketing for Handy Andy Home Improvement
Centers, Inc. ("Handy Andy"). From February 1995 to September 1995, Mr.
Merksamer served as Vice President, Merchandising, for Handy Andy. In November
1995, Handy Andy accepted an involuntary petition for bankruptcy under chapter
11 of the United States Bankruptcy Code ("Chapter 11"). Prior to joining Handy
Andy in 1995, from April 1993 to September 1995, Mr. Merksamer was involved in
the planning of a start-up business venture and, from 1991 to 1993, he was Vice
President of Merchandising and Marketing of The Business Super Store. From 1987
to 1991, Mr. Merksamer was Vice President, Merchandising, for The Office Club,
Inc.
Mr. Rucker has been Vice President, Store Operations since July 1996. From
1990 to 1996, Mr. Rucker served as Vice President, Director of Operations, of
Geoffrey Beene/Izod, a division of Phillips-Van Heusen Corporation.
Mr. Stoltz has been Vice President, Finance since August 1996. From 1994 to
1996, Mr. Stoltz served as Corporate Comptroller of Dollar General Corporation,
a specialty retailer. Mr. Stoltz also served as Interim Chief Financial Officer
of Dollar General from 1995 to 1996. Prior to his tenure with Dollar General,
Mr. Stoltz served as Director of Operations Accounting with Food Lion, Inc. from
1989 to 1994. Mr. Stoltz is a Certified Public Accountant.
Mr. Krentzman has been Vice President, MIS since September 1995. Prior to
that, from 1994 to September 1995, Mr. Krentzman served as Director of MIS. From
1990 to 1994, Mr. Krentzman was Director, MIS, for Reader's Market, a division
of Waldenbooks.
Mr. Vincent Brown has been Vice President, Real Estate since September 1995.
From April until September 1995, Mr. Brown was Director of Franchising for A&W
Restaurants, Inc. Prior to that, from 1989 to 1995, Mr. Brown was Vice
President, Real Estate for Fayva, a division of J. Baker, Inc. Before joining J.
Baker, Inc., Mr. Brown spent 21 years with Dunkin' Donuts, Inc., a unit of
Allied Domecq plc, in various management positions, most recently as Vice
President, Corporate Development.
Mr. Cabon has been Vice President, Distribution since April 1995. From
December 1993 to January 1995, Mr. Cabon was employed as a consultant in retail
distribution. Prior to that, from October 1992 through December 1993, Mr. Cabon
was Vice President, Logistics for One Price Clothing, a specialty retailer. From
August 1990 to April 1992, Mr. Cabon was Vice President, Logistics for
Rent-a-Center, and from April 1990 to August 1990, Mr. Cabon was Vice President,
Logistics for E&B Marine. In January 1995, Mr. Cabon filed a petition for
bankruptcy under chapter 7 of the United States Bankruptcy Code, and that same
month received a discharge from indebtedness in connection therewith.
Mr. Kendzior has been Vice President, Marketing, since November 1995. From
1978 to 1995, Mr. Kendzior was employed by Dunkin' Donuts of America, serving
from 1993 to 1995 as Vice President, Marketing and, from 1991 to 1993, as
Director of Field Marketing.
Mr. Ellis has been Vice President, Human Resources since August 1996. Prior
to that, from 1989 to 1996, Mr. Ellis was Vice President, Human Resources of
Today's Man, Inc., which, in February 1996, filed a voluntary petition for
bankruptcy under Chapter 11.
Mr. Kelly has been a director since 1989. Since October 1995, Mr. Kelly has
served as a merchandise consultant to the Company's operating subsidiary. Mr.
Kelly was the founder of the Company's operating subsidiary and its President
from 1989 to 1995. Prior to that, from 1985 to 1989, Mr. Kelly was Chief
Executive Officer and President of Gallant, a creator and publisher of greeting
cards and a subsidiary of Viking Enterprises, Inc.
32
<PAGE>
Dr. Blattberg has been a director since September 1994. Dr. Blattberg has
been a Polk Brothers Distinguished Professor of Retailing at The J.L. Kellogg
Graduate School of Management at Northwestern University since September 1991.
Dr. Blattberg is also a director of First Tennessee National Bank and Director
of The Center for Retail Management at Northwestern University, and a partner in
Blattberg, Chaney and Associates, a consulting firm that provides services to
several leading retailers primarily in the supermarket and retail drug store
industries. Dr. Blattberg is a member of the Audit Committee.
Mr. Barach has been a director since July 1994. Since October 1990, Mr.
Barach has been an associate and general partner of Bessemer Venture Partners
FCOA. Prior to that, from January 1988 to October 1990, he was President and
co-founder of Cartoon Corner Corporation and, from January 1985 to October 1987,
he was Vice President, Merchandising of Scandinavian Design. Mr. Barach is a
member of the Audit Committee.
Mr. Bart Brown has been a director since May 1996. He is a corporate
executive of Investcorp International, Inc., an international investment banking
firm. Since June 1994, he has been Chairman of the Board of Spreckels
Industries, Inc., a manufacturing and processing company, serving as its Chief
Executive Officer from June 1994 to May 1995. From August 1995 to April 1996, he
was Chairman of the Board and Chief Executive Officer of Color Tile, Inc., a
retailer of specialty flooring and wall covering. Mr. Brown led Color Tile, Inc.
through a petition for bankruptcy under Chapter 11, the plan for which was filed
in January 1996. From June 1990 to August 1995, he was Chairman of the Board of
The Circle K Corporation, an operator of convenience stores. Serving as its
Chief Executive Officer from June 1991 through July 1993, Mr. Brown successfully
led The Circle K Corporation through a restructuring under Chapter 11, the plan
for which was confirmed in 1993. Mr. Brown is also a director of Edison Brothers
Stores, Inc., Yale International, Barry's Jewelers and FirstCity Financial Corp.
Mr. Brown is a member of the Executive Committee and the Audit Committee.
Mr. Doppelt has been a director since July 1994. Mr. Doppelt has been a
member of Allstate Venture Capital, a division of Allstate Insurance Company
("Allstate"), since 1987 and is currently the Venture Group Manager of Allstate
Venture Capital. Prior to joining Allstate, Mr. Doppelt was a corporate attorney
associated with the law firm of Morrison & Foerster. Mr. Doppelt is a director
of Sunrise Assisted Living, a company providing assisted living services to the
elderly, as well as several privately held companies. Mr. Doppelt is a member of
the Compensation Committee.
Mr. Kasen became a director in September 1996. From 1989 to May 1996, Mr.
Kasen was an officer of Best Products Co., Inc., a chain of catalog showrooms,
serving as its Chairman, President and Chief Executive Officer from 1991 to 1996
and its President and Chief Operating Officer from 1989 to 1991. Mr. Kasen
assisted Best Products through a petition in bankruptcy under Chapter 11 which
was filed in January 1991. Best Products' plan of reorganization was confirmed
in June 1994, and it filed a petition for bankruptcy under Chapter 11 again on
September 24, 1996. Mr. Kasen also serves as a director of Markel Corporation,
O'Sullivan Industries Holdings Inc., The Bibb Company and Spreckels Industries,
Inc. The Bibb Company filed a petition in bankruptcy under Chapter 11 in July
1996.
Mr. Nouss became a director in September 1996. For the past five years, Mr.
Nouss has been a partner at the law firm of Bryan Cave LLP.
The Board of Directors has established a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of, and consultants to, the Company and administers the 1989 Stock
Option Plan and the 1996 Employee Stock Purchase Plan. The current members of
the Compensation Committee are Messrs. Freeman and Doppelt.
The Board of Directors has also established an Audit Committee, which
reviews the results and scope of the annual audit of the Company's financial
statements conducted by the Company's independent accountants, proposed changes
in the Company's financial and accounting standards and principles and the
Company's policies and procedures with respect to its internal accounting,
auditing and financial
33
<PAGE>
controls. The Audit Committee also makes recommendations to the Board of
Directors on the engagement of the Company's independent accountants as well as
other matters which may come before the Committee or at the direction of the
Board of Directors. The current members of the Audit Committee are Messrs.
Blattberg, Barach and Brown.
In addition, the Board of Directors has established an Executive Committee
of the Company, which reviews and provides recommendations concerning strategic
planning, acquisitions, financing and shareholder relations. The current members
of the Executive Committee are Messrs. Freeman (Chairman), Cumello and Brown.
DIRECTOR COMPENSATION
Directors who are not officers, employees or consultants of the Company
receive $1,000 cash compensation for each board of directors meeting and $500
for each committee meeting (except for committee meetings held in conjunction
with regular board meetings) at which they are present, not to exceed $2,000 per
director in any calendar year with respect to committee meetings. In addition,
all such directors are reimbursed for their reasonable expenses in connection
with the performance of their duties. Mr. Freeman receives $2,000 each month as
Chairman of the Board of Directors of the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
earned by the Company's former Chief Executive Officer, President and each of
the other four most highly compensated officers of the Company and its operating
subsidiary (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company during fiscal 1996:
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------------------------
ALL OTHER
NAME AND POSITION SALARY BONUS COMPENSATION
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
William E. Freeman.......................................................... -- -- $ 24,000(1)
Chairman of the Board
Chief Executive Officer until Sept. 1996
Charles R. Cumello.......................................................... $ 220,200 $ 28,000 76,969
President
J. Bayard Kelly............................................................. 189,423 10,000 6,513
Founder and President until Sept. 1995;
Consultant and Chairman Emeritus from Sept. 1995
Glen J. Franchi............................................................. 148,462 8,000 5,604
Executive Vice President and Treasurer
Michael Powell.............................................................. 123,462 -- 4,076
Vice President, Store Operations
Joseph M. Cabon............................................................. 117,539 5,000 4,524
Vice President, Distribution
Robert Krentzman............................................................ 110,154 5,000 4,744
Vice President, MIS
</TABLE>
- ------------------------
(1) Represents compensation for services rendered as a director and the Chairman
of the Board of Directors of the Company. Mr. Freeman received no
compensation for services rendered in his capacity as Chief Executive
Officer.
34
<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS
FISCAL 1997 OPTION GRANTS. The following table sets forth certain
information regarding options granted to the Named Executive Officers from June
30, 1996 to the date of this Prospectus:
OPTION GRANTS IN CURRENT FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---------------------------------- ----------- ----------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William E. Freeman................ 40,160 11.2% $ 2.49 7/12/06 $ 585,316 $ 941,649
40,160 11.2% 2.49 8/3/06 585,316 941,649
Charles R. Cumello................ -- -- -- -- -- --
J. Bayard Kelly................... 20,080 5.6% 2.49 7/12/06 292,658 470,824
Glen J. Franchi................... 20,080 5.6% 2.49 7/12/06 292,658 470,824
Michael Powell.................... -- -- -- -- -- --
Joseph M. Cabon................... -- -- -- -- -- --
</TABLE>
FISCAL 1996 OPTION GRANTS. No options were granted to any of the Named
Executive Officers during fiscal 1996.
FISCAL 1996 OPTION EXERCISES AND HOLDINGS. The following table sets forth
certain information regarding options held at June 29, 1996. No options were
exercised during fiscal 1996 by the Named Executive Officers.
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William E. Freeman........................................ 40,160(2) -- $ 107,629 --
Charles R. Cumello........................................ 35,140 105,420 28,462 $ 85,386
J. Bayard Kelly........................................... 66,866 27,510 140,102 17,077
Glen J. Franchi........................................... 33,734 18,474 19,517 9,758
Michael Powell............................................ 12,048 -- 3,253 --
Joseph M. Cabon........................................... 5,020 15,060 4,066 12,198
</TABLE>
- ------------------------
(1) Calculated based on fair market value of the Common Stock at June 29, 1996,
determined by the Board of Directors to be $3.30 per share, less the
exercise price.
(2) Members of Mr. Freeman's family also hold options to purchase an additional
40,160 shares of Common Stock, of which Mr. Freeman disclaims beneficial
ownership.
35
<PAGE>
INCENTIVE STOCK PROGRAM
The Company believes that fostering an ownership culture encourages superior
performance by the Company's management and key store employees. To that end,
the Company has adopted a program to provide to officers, employees,
consultants, sponsors and directors of the Company equity incentives that are
designed to create such an ownership culture and to encourage these officers,
employees and directors to remain with Company. The components of such program
are as follows:
1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
approved by the Company's stockholders in September 1996 and will be effective
as of the date of this offering. The Purchase Plan has a term of ten years and
is administered by the Compensation Committee of the Board of Directors. Not
more than 1,000,000 shares of Common Stock (subject to certain recapitalization
adjustments) shall be made available for purchase under the Purchase Plan. The
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code") and is designed to be implemented through
consecutive calendar quarter offering periods during its term. Under the
Purchase Plan, any employee who is employed by the Company for at least 20 hours
per week and more than five months in any calendar year, and who has worked for
the Company for at least 1,000 hours as of the first day of the offering period,
is eligible to participate in the Purchase Plan; however, such 1,000 hour
requirement does not apply to any employee employed on the date of this
offering. An eligible employee may purchase shares of Common Stock from the
Company through payroll deductions of up to 10% of compensation (including all
base straight time, gross earnings, overtime and shift premiums, sales
commissions, incentive compensation and bonuses, but excluding other
compensation) at a price per share equal to 90% of the fair market value (as
defined in the Purchase Plan) of the Common Stock as of the last day of any
offering period. For each employee, the aggregate total of all payroll
deductions accumulated under the Purchase Plan during any offering period may
not exceed $5,500. The first offering period commences on the effective date of
this offering, and ends on the last trading day of the fiscal quarter in which
the offering occurs. Each subsequent offering period begins on the first trading
day after the end of the preceding offering period and continues until the last
trading day of that fiscal quarter. An eligible employee may withdraw from the
Purchase Plan by providing written notice of the withdrawal to the Company. Upon
written notice of withdrawal, or whenever an employee ceases to meet the
eligibility requirements for the Purchase Plan, the employee's credited payroll
deductions and other payments that have not been used to exercise options under
the Purchase Plan will be paid to the employee at the end of the offering
period. An employee's withdrawal from the Purchase Plan will not affect the
employee's eligibility to participate in the Purchase Plan in subsequent
offering periods. The Purchase Plan may be amended or terminated by the Board of
Directors, provided that approval of stockholders will be obtained to the extent
that applicable law (including, without limitation, the Securities Exchange Act
of 1934, as amended, and the Code) so requires.
1989 STOCK OPTION PLAN. The Company's 1989 Stock Option Plan (the "1989
Option Plan") was adopted by the Board of Directors and approved by the
Company's stockholders on July 7, 1989 and has been amended from time to time
solely to reserve additional shares for future awards. At September 24, 1996 a
total of 191,601 shares of Common Stock were reserved for future issuance under
the 1989 Option Plan. The 1989 Option Plan is administered by the Compensation
Committee. Under the 1989 Option Plan, options may be granted to employees,
consultants, and directors. Only employees may receive incentive stock options,
which are intended to qualify for certain favorable tax treatment. The exercise
price of incentive stock options under the 1989 Option Plan must equal the fair
market value (as defined in the 1989 Option Plan) of the Common Stock on the
date of grant. Options granted under the 1989 Option Plan generally vest on an
annual basis over three or four years, and must be exercised within ten years.
Certain outstanding options granted to directors and consultants under the 1989
Option Plan vest and become fully exercisable upon the closing of this offering.
The 1989 Option Plan will terminate on the earlier to occur of July 6, 1999 or
the date on which all shares available for issuance under the 1989 Option Plan
shall have been issued pursuant to the exercise or cancellation of options
thereunder.
36
<PAGE>
INCENTIVE SAVINGS PLAN. The Company has in effect an Incentive Savings Plan
(the "Savings Plan"),
which is a tax-qualified defined contribution plan for employees meeting certain
eligibility requirements. The Savings Plan permits employees to elect to
contribute up to 13% of their compensation to the Savings Plan. The Company
makes a matching contribution of one-third of the participant's before-tax
contribution for each calendar year, up to the lesser of 6% of such
participant's compensation for such calendar year, or the statutory maximum
(adjusted annually). Participants are vested in contributions to the Incentive
Savings Plan in proportions of 20%, 40%, 60%, 80% and 100% after completion of
one, two, three, four and five years of service, respectively. Benefits are
generally distributed after termination of employment in the form of a lump sum.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
In fiscal 1996, the Compensation Committee of the Company was comprised of
William E. Freeman and Richard A. Doppelt. During such period, Mr. Freeman also
served as Chairman of the Board of Directors and Chief Executive Officer of the
Company.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
The Company has an employment agreement with Charles R. Cumello (the
"Cumello Agreement"), dated as of April 10, 1995, which provides for Mr.
Cumello's employment as President and Chief Operating Officer at an annual base
salary of $175,000 effective through December 31, 1995 and $280,000, effective
as of January 1, 1996 (which amount was subsequently increased by the Board of
Directors to $295,000). In addition, pursuant to the Cumello Agreement, Mr.
Cumello was awarded a cash bonus of $28,000 for fiscal 1996, and is eligible for
future annual cash bonuses of up to $140,000. Furthermore, Mr. Cumello has been
awarded options to purchase 140,560 shares of Common Stock exercisable at $2.49
which vest in four equal annual installments commencing on April 10, 1996. In
the event the Cumello Agreement is terminated other than for "cause" (as defined
in the Cumello Agreement), Mr. Cumello is entitled to receive his then-in-effect
base salary and any applicable bonus for the 12 calendar months following
termination. In the event the Cumello Agreement is terminated for "cause," or if
Mr. Cumello terminates the Cumello Agreement, Mr. Cumello shall be entitled to
receive any unpaid salary (and, if terminated by Mr. Cumello, any unpaid bonus)
accrued as of the date of such termination, together with reimbursements for
certain expenses. The initial term of the Cumello Agreement was automatically
renewed on March 31, 1996, and will automatically renew for successive one-year
periods thereafter without further action on the part of the Company or Mr.
Cumello unless notice of non-renewal is given by either of them to the other at
least 30 days prior to the end of the then current term. Finally, the Cumello
Agreement contains a covenant not to compete on the part of Mr. Cumello for a
period of one calendar year commencing as of the termination of Mr. Cumello's
employment.
The Company entered into an agreement with Mr. J. Bayard Kelly dated as of
July 30, 1996 (the "Kelly Agreement") pursuant to which Mr. Kelly will serve as
a consultant to the Company through March 31, 1998. Pursuant to the terms of the
Kelly Agreement, until March 31, 1997, Mr. Kelly serves the Company as a
full-time consultant, receives an annual salary of $200,000 and remains eligible
for an annual performance bonus of up to a maximum of $50,000. From April 1997
until March 31, 1998, pursuant to the Kelly Agreement, Mr. Kelly will perform
consulting services to the Company on an "as needed" basis and will receive a
$100,000 fee and receive all Company benefits for which he is currently eligible
(without bonus). In addition, Mr. Kelly was granted 5,000 stock options under
the Kelly Agreement for the successful transition of his position with the
Company.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Restated Certificate of Incorporation provides that a director
of the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of such director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not taken in good faith or which
involve intentional misconduct
37
<PAGE>
or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for
any transaction from which such director derived any improper personal benefit.
The Company's Restated Certificate of Incorporation and By-Laws also provide
that the Company shall indemnify its directors and officers to the fullest
extent permitted by Delaware law.
The Company believes that these provisions will assist it in attracting and
retaining qualified individuals to serve as directors and officers.
CERTAIN TRANSACTIONS
In October 1995, the Company made a bridge loan to Charles R. Cumello,
President of the Company, in the original principal amount of $175,000, bearing
interest per annum at the prime rate of Bank One, to assist with relocation
expenses. The full amount of the loan was paid by Mr. Cumello in August 1996.
In October 1996, the Company made a bridge loan to Thomas W. Stoltz, Vice
President, Finance of the Company in the original principal amount of $100,000,
bearing no interest, to assist with relocation expenses. The full amount of the
loan is currently outstanding and is due no later than October 25, 1997.
Since 1990, the Company has, from time to time, purchased merchandise from
overseas suppliers through TRIWEF Corporation/Triad Sales International
("Triad"), an import/export firm which operates overseas buying offices, in
which Mr. Freeman retains a beneficial interest. Mr. Freeman was an officer and
director of Triad until he resigned as an officer in 1985 and as a director in
1992. Mr. Freeman performs consulting services on occasion to Triad on matters
unrelated to the Company's business. The aggregate annual merchandise purchased
by the Company from or through Triad amounted to $3,246,000 (representing 8.6%
of total purchases) for fiscal 1995 and $3,548,000 (representing 6.2% of total
purchases) for fiscal 1996. The Board of Directors (acting without Mr. Freeman)
determined that the services provided by Triad are on terms at least as
favorable to the Company as those which could have been obtained from
unaffiliated third parties.
The Company and its stockholders are currently parties to certain
stockholder agreements, which, among other things, provide for voting
arrangements among the stockholders with respect to the election of the Board of
Directors. See "Management--Executive Officers and Directors." Upon the
conversion of the Convertible Preferred Stock into Common Stock in connection
with this offering, the voting provisions of these stockholders agreements will
terminate and the rights of the stockholders of the Company in connection
therewith shall cease.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of November 19, 1996, and as
adjusted to reflect the sale of Common Stock offered hereby, by (i) each person
or entity who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each Named Executive
Officer, (iv) all directors and executive officers as a group and (v) each
Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(1)(2) SHARES OFFERING(1)(2)(3)
--------------------- BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------------------- ---------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Garlen Investments Limited...................................... 1,131,708 27.8% 67,340 1,064,368 16.1%
c/o Jarir Investments
Post Office Box 3196
Riyadh 11471
Saudi Arabia
Allstate Insurance Company(4)................................... 873,356 21.5% -- 873,357 13.2%
3075 Sanders Road
Allstate Plaza
Northbrook, IL 60062
Jasmine Trustees Ltd. .......................................... 381,398 9.4% -- 381,398 5.8%
Post Office Box 675
Vine Street Chambers
Vine Street, St. Helier
Jersey, Channel Islands
United Kingdom
Bessemer Venture Partners FCOA.................................. 374,250 9.2% -- 374,250 5.7%
83 Walnut Street
Wellesley Hills, MA 02181
Othman M. Al Rasheed............................................ 286,501 7.0% 16,470 270,031 4.1%
c/o Jarir Investments
Post Office Box 3196
Riyadh 11471
Saudi Arabia
Sirrom Capital Corporation(5)................................... 119,371 2.9% 50,000 76,571 *
Richard E. Bruce................................................ 46,786 1.1% 12,000 34,786 *
William E. Freeman(6)........................................... 221,683 5.3% -- 221,683 3.3%
J. Bayard Kelly(7).............................................. 188,109 4.6% 40,160 147,949 2.2%
Michael I. Barach(8)............................................ 20,080 * -- 20,080 *
Richard A. Doppelt(8)........................................... 20,080 * -- 20,080 *
Bart A. Brown, Jr.(8)........................................... 20,080 * -- 20,080 *
Robert C. Blattberg(8).......................................... 20,080 * -- 20,080 *
Stewart M. Kasen(8)............................................. 20,080 -- -- 20,080 *
James L. Nouss, Jr.(8).......................................... 20,080 * -- 20,080 *
Charles R. Cumello(9)........................................... 40,360 * -- 40,360 *
Glen J. Franchi(10)............................................. 33,734 * -- 33,734 *
Michael Powell(11).............................................. 12,048 * -- 12,048 *
Joseph M. Cabon(12)............................................. 5,020 * -- 5,020 *
Robert Krentzman(13)............................................ 9,236 * -- 9,236 *
All directors and officers
as a group (19 persons)(14)................................... 656,873 14.5% 40,160 616,713 8.7%
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(1)(2) SHARES OFFERING(1)(2)(3)
--------------------- BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------------------- ---------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Other Selling Stockholders:
Richard E. Betke(15).......................................... 20,080 * 8,030 12,050 *
Lynda Davey(16)............................................... 8,032 * -- 8,032 *
Gerald L. Gitner(16).......................................... 8,032 * -- 8,032 *
Robin C. Freeman(15).......................................... 20,080 * 4,000 16,080 *
Robin C. Freeman(17).......................................... 20,080 * 2,000 18,080 *
</TABLE>
- ------------------------
* Less than one percent
(1) Based on 4,068,394 shares of Common Stock outstanding prior to this
offering.
(2) In computing the number of shares beneficially owned by an organization or
individual and the percentage ownership of that organization or individual
shares of Common Stock subject to options or warrants held by that
organization or individual which are currently exercisable, exercisable
within 60 days of November 19, 1996 or exercisable upon an underwritten
initial public offering (an "IPO") are deemed outstanding. However, such
shares are not deemed outstanding for the purposes of computing the
percentage ownership of each other organization or individual.
(3) Based on the additional 2,550,000 shares of Common Stock to be issued by the
Company in this offering.
(4) Allstate Insurance Company is the beneficial owner of 873,356 shares of the
Common Stock which are held by the following owners of record: Allstate
Insurance Company--560,552, Allstate Life Insurance Company--225,498,
Continental Trust Company as Trustee for the Allstate Retirement
Plan--49,878 and Continental Trust Company as Trustee for the Agents Pension
Plan--37,428.
(5) Consists of warrants to purchase 119,371 shares.
(6) Includes options to purchase 80,320 shares which are immediately exercisable
and an additional 80,320 shares which will be exercisable upon an IPO.
(7) Includes options to purchase 64,256 shares which are immediately exercisable
and an additional 50,200 shares which will be exercisable upon an IPO. All
of the Common Stock and options to purchase Common Stock are held in the
Revocable Living Trust for J. Bayard Kelly, of which Mr. Kelly is the
beneficial owner.
(8) Consists of options to purchase 20,080 shares which are immediately
exercisable.
(9) Includes options to purchase 35,140 shares which are immediately
exercisable.
(10) Consists of options to purchase 4,016 shares which are immediately
exercisable and an additional 29,718 shares which will be exercisable upon
an IPO.
(11) Consists of options to purchase 12,048 shares which are immediately
exercisable.
(12) Consists of options to purchase 5,020 shares which are immediately
exercisable.
(13) Consists of options to purchase 2,008 shares which are immediately
exercisable and an additional 7,228 shares which will be exercisable upon an
IPO.
(14) Includes options to purchase 298,087 shares which are immediately
exercisable and an additional 173,891 shares which will be exercisable upon
an IPO.
(15) Consists of options to purchase 20,080 shares which will be exercisable
upon an IPO.
(16) Consists of options to purchase 4,016 shares which are immediately
exercisable.
(17) As Custodian under NJUGMA for Andrea St. John Freeman; consists of options
to purchase 20,080 shares which are immediately exercisable.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this Prospectus, the authorized capital stock of the
Company consists of (i) 1,600,000 shares of Common Stock, of which 232,500
shares are issued and outstanding, (ii) 205,000 shares of Non-Voting Common
Stock, none of which are issued and outstanding, and (iii) 84,750 shares of
Convertible Preferred Stock, of which 78,550 shares are issued and outstanding.
Upon the effectiveness of the Registration Statement, each share of Convertible
Preferred Stock will be converted into ten shares of Common Stock, or an
aggregate of 780,550 shares of Common Stock, and each share of Non-Voting Common
Stock will be converted into one share of Common Stock. Immediately prior to the
consummation of this offering, the capital stock of the Company will
automatically split on a one to 4.016 basis and there will be issued and
outstanding 4,068,394 shares of Common Stock. Upon conversion of the Convertible
Preferred Stock and Non-Voting Common Stock, all of the rights and designations
of the Convertible Preferred Stock and Non-Voting Common Stock, respectively,
will be automatically cancelled. Simultaneously therewith, the Company will file
a Restated Certificate of Incorporation with the Secretary of State of Delaware
providing for authorized capital stock of (i) 50,000,000 shares of Common Stock
and (ii) 10,000,000 shares of Preferred Stock. In addition, the Restated
Certificate of Incorporation will provide for the redesignation of the Common
Stock from no par value per share to $0.01 par value per share.
The following description provides a summary of the material rights and
limitations relating to ownership of the Company's capital stock. For a complete
legal description of the Company's capital stock, reference should be made to
the Restated Certificate of Incorporation and Amended and Restated By-Laws (the
"By-Laws"), copies of which are included as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Upon consummation of the offering of the shares of Common Stock offered
hereby, there will be 6,618,394 shares of Common Stock outstanding. An aggregate
of 1,064,641 shares of Common Stock are issuable upon exercise of outstanding
stock options and 191,601 shares of Common Stock are reserved for issuance under
the 1989 Stock Option Plan and the Purchase Plan. All outstanding shares of
Common Stock are, and the shares to be issued in this offering will be, fully
paid and non-assessable. Each share of Common Stock is entitled to one vote on
matters for which a vote is required or allowed, and the Common Stock does not
have cumulative voting rights. Subject to preferences that may be applicable to
any outstanding Preferred Stock upon its designated issuance, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities and the liquidation preference of the Preferred Stock, if
any, then outstanding. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of
holders of shares of any Preferred Stock that the Company may designate and
issue in the future. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemptive or sinking fund provisions
applicable to the Common Stock.
PREFERRED STOCK
Upon consummation of this offering, under the Restated Certificate of
Incorporation, the Board of Directors will have the authority, without any
further vote or action by the stockholders, to provide for the issuance of up to
10,000,000 shares of Preferred Stock from time to time in one or more series
with such designations, powers, rights, preferences, qualifications, limitations
and restrictions as the Board of Directors may determine, including dividend
rates and priority redemption provisions, liquidation preferences, sinking fund
provisions, conversion rights, voting rights and the number of shares
constituting any series of Preferred Stock. Although it is not possible to state
the effect that any issuance of Preferred Stock might have on the rights of
holders of Common Stock, the issuance of Preferred Stock may have one or more of
the following effects: (i) restriction of Common Stock dividends if Preferred
Stock dividends have
41
<PAGE>
not been paid, (ii) dilution of the voting power and equity interest of holders
of Common Stock to the extent that any series of Preferred Stock has voting
rights or is convertible into Common Stock or (iii) prevention of current
holders of Common Stock from participating in the Company's assets upon
liquidation until any liquidation preferences granted to holders of Preferred
Stock are satisfied. In addition, the issuance of Preferred Stock may, under
certain circumstances, have the effect of discouraging a change in control of
the Company by, for example, granting voting rights to holders of Preferred
Stock that require approval by the separate vote of the holders of Preferred
Stock for any amendment to the Restated Certificate of Incorporation or for any
reorganization, consolidation, merger or other similar transaction involving the
Company. As a result, the issuance of such Preferred Stock may discourage bids
for the Common Stock at a premium over the market price therefor and could have
the effect of delaying, deferring or preventing a change of control of the
Company.
CERTAIN ANTI-TAKEOVER MATTERS
The Company is subject to the provisions of Section 203 of the DGCL
("Section 203"). Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with any person (together with affiliates
and associates) acquiring 15% or more of the voting stock of the Company (an
"interested stockholder") for a period of three years following the date of such
acquisition, unless (i) the corporation has elected in its original certificate
of incorporation not to be governed by Section 203, (ii) the business
combination was approved by the Board of Directors of the corporation before the
other party to the business combination became an interested stockholder, (iii)
upon consummation of the transaction that made such person an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction (excluding
voting stock owned by directors who are also officers or held in employee
benefit plans in which the employees do not have a confidential right to tender
or vote stock held by the plan) or (iv) the business combination was approved by
the Board of Directors of the corporation and ratified by two-thirds of the
voting stock which is not owned by the interested stockholder. The three-year
prohibition also does not apply to certain business combinations proposed by an
interested stockholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who was not an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an interested stockholder involving the assets
or stock of the corporation or its majority owned subsidiaries and transactions
that increase an "interested stockholder's" percentage ownership of stock.
Section 203 could prohibit or delay a merger, takeover or other change in
control of the Company and therefore could discourage attempts to acquire the
Company.
Under the Restated Certificate of Incorporation, special meetings of the
stockholders may only be called by resolution of the Board of Directors or by
the Chairman of the Board of Directors or President; provided, however, special
meetings of the stockholders shall also be called by the Chairman of the Board
of Directors, President or Secretary upon the written request (stating the
purpose or purposes of the meeting) of a majority of the members of the Board of
Directors or a majority of the stockholders.
The Restated Certificate of Incorporation also provides that no action
required to be taken or which may be taken at any annual or special meeting of
stockholders of the Company may be taken except at a duly called meeting of the
stockholders of the Company, or upon the unanimous written consent of the
stockholders entitled to vote at such meeting. Further, stockholders may only
propose actions to be taken by the Company and nominate members of the Board of
Directors upon 90 days' prior written notice to the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company of Cranford, New Jersey.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,618,394 shares of
Common Stock outstanding. All shares of Common Stock being sold hereby will be
freely tradable without restriction or further registration under the Securities
Act, except for shares purchased by "affiliates" of the Company which will be
subject to the resale limitations under Rule 144 under the Securities Act ("Rule
144"). All remaining shares were issued and sold by the Company in private
transactions and are "restricted" stock within the meaning of Rule 144.
Consequently, such shares may not be resold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, such as Rule 144 or Rule 144A under the Securities Act ("Rule
144A").
The Company, and each of its executive officers, directors and consultants
and all stockholders of the Company and certain key employees who hold options
to purchase 642,560 shares of Common Stock, and holders of the Subordinated
Debentures who hold warrants to purchase 195,594 shares of Common Stock, have
agreed not to offer, sell, contract to sell, grant any option to sell, or
otherwise dispose of any shares of Common Stock (or any securities convertible
into or exchangeable for Common Stock or warrants or other rights to purchase
Common Stock) until the end of the Lock-Up Period without the prior written
consent of Alex. Brown & Sons Incorporated, except with respect to the Company
and the Selling Stockholders, for the sale of shares of Common Stock offered
hereby. Following the expiration of the Lock-Up Period, 3,868,394 shares of
Common Stock may be sold pursuant to a registration statement or an exemption
from registration, including Rule 144 under the Securities Act. See
"Underwriting."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned
"restricted" shares (as defined under Rule 144) for at least two years, and any
affiliate who owns shares that are not "restricted" shares, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock reported through the
Nasdaq Stock Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. In addition, a stockholder who is not deemed an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned his shares for at least three years, is entitled to sell
such shares under Rule 144(k) without regard to volume limitations, manner of
sale provisions, notice requirements or the availability of current public
information concerning the Company. Rule 144A under the Securities Act permits
the immediate sale by the current holders of "restricted" shares of all or a
portion of their shares to certain qualified institutional buyers, as defined in
Rule 144A.
The Commission has proposed certain amendments to Rule 144 that would reduce
by one year the holding periods required for shares subject to Rule 144 to
become eligible for resale in the public market. This proposal, if adopted,
would accelerate by one year the dates on which shares of Common Stock will
become eligible for resale described above. No assurance can be given concerning
whether or when the proposal will be adopted by the Commission.
Any employee, officer or director of or consultant to the Company who was
granted options or purchased his or her shares upon exercise of such options
pursuant to a written compensatory plan or contract ("Rule 701 Shares") is
entitled to rely upon the resale provisions of Rule 701. Rule 701 permits
non-affiliates to sell their Rule 701 Shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 Shares without having to
comply with the holding period restrictions of Rule 144, in each case commencing
90 days after the date of this Prospectus.
The Company has granted options to purchase 1,064,641 shares of Common Stock
to certain sponsors, directors, officers, consultants and key employees pursuant
to the Company's 1989 Stock Option Plan.
After this offering, subject to the lock-up agreements described herein,
holders of 3,868,394 shares of Common Stock and the holders of the Subordinated
Debentures, who hold warrants to acquire 195,594
43
<PAGE>
shares of Common Stock, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of such registration. See "Description of Capital
Stock--Registration Rights."
The Company intends to file a Registration Statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved for issuance
under the 1989 Stock Plan and the 1996 Stock Purchase Plan. Shares of Common
Stock issued under either plan after the effective date of such Registration
Statement generally will be available for sale in the open market by holders who
are not affiliates of the Company.
Holders of 3,868,394 shares of Common Stock (the "Registrable Securities")
are entitled to certain rights with respect to the registration of such shares
under Securities Act. In the event that the Company proposes to register any of
its securities under the Securities Act, other than pursuant to a Demand
Registration (as defined below) and the form used to register such securities
may be used for the registration of Registrable Securities, the holders of
Registrable Securities are entitled, subject to certain conditions and
limitations, to include such Registrable Securities in such registration. All
holders of Registrable Securities have agreed to not exercise any registration
rights in connection with this offering and until the expiration of the Lock-Up
Period without the prior written consent of Alex. Brown & Sons Incorporated. In
addition, holders of a majority of each class (representing each series of
Convertible Preferred Stock which was converted into Common Stock) of
Registrable Securities (representing an aggregate of at least $7.5 million
Registrable Securities) are entitled to request (on two occasions) subject to
certain conditions, that the Company register under the Securities Act on a
registration statement on Form S-1 (or any similar long form) all or a portion
of their Registrable Securities (a "Long Form Demand Registration"). The holders
of a majority of each class of Registrable Securities may also request an
unlimited number of registrations under the Securities Act on a registration
statement on Form S-2 or S-3 (or any similar short form) (a "Short Form Demand
Registration" and together with a Long Form Demand Registration, a "Demand
Registration").
Holders of the Subordinated Debentures also hold warrants to acquire 195,594
shares of Common Stock and are entitled to certain rights with respect to the
registration of such shares. In the event that the Company proposes to register
any of its securities under the Securities Act, other than pursuant to a Demand
Registration, and the form used to register such securities may be used for the
registration of the shares of Common Stock underlying such warrants, such
holders are entitled, subject to certain conditions and limitations, to include
such shares of Common Stock in such registration. The holders of the
Subordinated Debentures have agreed to not exercise any registration rights in
connection with this offering and until the expiration of the Lock-Up Period
without the prior written consent of Alex. Brown & Sons Incorporated.
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurances with respect to the effect, if any, that public
sales of shares or the availability of shares will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market following this offering, or the perception that such sales may
occur, could adversely affect the market price. See "Risk Factors--Shares
Eligible for Future Sale."
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Underwriters named below (the "Underwriters"),
through their representatives, Alex. Brown & Sons Incorporated and Piper Jaffray
Inc. (the "Representatives"), have severally agreed to purchase from the Company
and the Selling Stockholders the following respective numbers of shares of
Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Alex. Brown & Sons Incorporated..................................................
Piper Jaffray Inc................................................................
Total........................................................................ 2,750,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus, to
purchase, pro rata, up to 412,500 additional shares of Common Stock at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. To the extent that the Underwriters
exercise such options, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to 2,750,000,
and the Company and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 2,750,000 shares are
being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and each of its directors, executive officers and consultants
and all of its stockholders and certain key employees who hold options to
purchase 642,560 shares of Common Stock and holders of
45
<PAGE>
warrants to purchase 195,594 shares of Common Stock have agreed not to offer,
sell, contract to sell, grant any option to sell, or otherwise dispose of any of
shares of Common Stock (or any securities convertible into or exchangeable for
Common Stock or warrants or other rights to purchase Common Stock) for a period
of 180 days after the date of this Prospectus without the prior consent of the
Alex. Brown & Sons Incorporated. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
At the request of the Company, the Underwriters have reserved up to 258,000
shares of Common Stock for sale at the initial public offering price to certain
employees and other persons designated by the Company. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiation between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies that the
Company and the Representatives believed to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Pitney, Hardin, Kipp & Szuch, Morristown,
New Jersey. Certain legal matters will be passed upon for the Underwriters by
Willkie Farr & Gallagher, New York, New York.
EXPERTS
The financial statements and schedule as of July 1, 1995 and June 29, 1996,
and for each of the years in the three-year period ended June 29, 1996, have
been included herein in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
46
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act relating to
the Common Stock offered hereby has been filed by the Company with the
Commission in Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions having been omitted from this Prospectus in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus concerning the contents of any contract or any
other document referred to are not necessarily complete; reference is made in
each instance to the copy of such contract or document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement,
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof. The Registration Statement may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
in New York at Seven World Trade Center, New York, N.Y. 10007 and in Chicago at
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such materials, including the Registration Statement, can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
World Wide Web site that contains reports, proxy and information statements, and
other information regarding registrants that file electronically with the
Commission. The site and this Registration Statement may be accessed at
http: //www.sec.gov. Copies of the Registration Statement may also be inspected
at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C.
20006.
47
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
ANNUAL
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of July 1, 1995 and June 29, 1996......................................... F-3
Consolidated Statements of Income for the fiscal years ended June 30, 1994, July 1, 1995 and June 29,
1996................................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1994, July 1, 1995
and June 29, 1996...................................................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1994, July 1, 1995 and June 29,
1996................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
INTERIM
Consolidated Balance Sheets as of June 29, 1996 and September 28, 1996 (unaudited)....................... F-19
Consolidated Statements of Income for the 13-week periods ended September 30, 1995 and September 28, 1996
(unaudited) F-20
Consolidated Statements of Cash Flows for the 13-week periods ended September 30, 1995 and September 28,
1996 (unaudited)....................................................................................... F-21
Notes to Consolidated Financial Statements (unaudited)................................................... F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Factory Card Outlet Corp.
We have audited the consolidated balance sheets of Factory Card Outlet Corp.
and subsidiary as of July 1, 1995 and June 29, 1996, and the related statements
of income, stockholders' equity and cash flows for each of the years in the
three-year period ended June 29, 1996. These consolidated financial statements
are the responsibility of the management of Factory Card Outlet Corp. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Factory Card
Outlet Corp. and subsidiary as of July 1, 1995 and June 29, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 29, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
September 30, 1996, except as to Note 12,
"Subsequent Events--Stock Split," which
is as of November 19, 1996
F-2
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 1, JUNE 29,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 515,212 $ 202,344
Accounts receivable.............................................................. 29,152 248,888
Due from related parties......................................................... 92,844 187,711
Inventories...................................................................... 25,013,222 41,803,820
Prepaid expenses................................................................. 388,490 603,647
Deferred income taxes............................................................ 147,132 302,490
------------- -------------
Total current assets....................................................... 26,186,052 43,348,900
Fixed assets, net.................................................................. 10,178,726 14,923,891
Deferred financing costs........................................................... -- 244,405
Deferred income taxes.............................................................. 318,579 312,052
Other assets....................................................................... 117,758 250,594
------------- -------------
Total assets............................................................... $ 36,801,115 $ 59,079,842
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations...................................... $ 534,036 $ 676,012
Accounts payable................................................................. 6,125,670 12,125,070
Due to related parties........................................................... 2,017,990 3,679,887
Income taxes payable............................................................. 41,699 282,771
Accrued expenses................................................................. 1,842,098 2,980,656
------------- -------------
Total current liabilities.................................................. 10,561,493 19,744,396
Revolving credit note payable...................................................... 5,800,000 13,127,155
Secured subordinated debentures, net of discount................................... -- 4,720,865
Long-term debt..................................................................... 751,661 664,223
Capital lease obligations.......................................................... 74,854 137,561
Deferred rent liabilities.......................................................... 2,973,018 3,561,851
------------- -------------
Total liabilities.......................................................... 20,161,026 41,956,051
------------- -------------
Stockholders' equity:
Preferred stock Series A and B convertible, $.01 par value. Authorized: Series
A--20,000 shares and Series B--34,750. Issued and outstanding shares: Series
A--20,000 shares and Series B--32,416 shares................................... 14,456,506 14,456,506
Common stock, no par value, Voting class--1,600,000 shares authorized; 933,720
shares issued and outstanding; non-voting class--205,000 shares authorized, no
shares issued or outstanding................................................... 2,636,750 3,050,211
Accumulated deficit.............................................................. (453,167) (382,926)
------------- -------------
Total stockholders' equity................................................. 16,640,089 17,123,791
------------- -------------
Total liabilities and stockholders' equity................................. $ 36,801,115 $ 59,079,842
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
<S> <C> <C> <C>
JUNE 30, JULY 1, JUNE 29,
1994 1995 1996
------------- ------------- -------------
Net sales........................................................... $ 37,341,134 $ 63,174,091 $ 94,589,013
Cost of sales and occupancy....................................... 23,227,058 39,756,651 59,139,402
------------- ------------- -------------
Gross profit........................................................ 14,114,076 23,417,440 35,449,611
Selling, general and administrative expenses........................ 12,875,949 22,316,263 33,732,517
------------- ------------- -------------
Income from operations............................................ 1,238,127 1,101,177 1,717,094
Interest expense.................................................... 496,929 411,553 1,528,969
------------- ------------- -------------
Income before taxes............................................... 741,198 689,624 188,125
Income taxes........................................................ 292,093 322,100 117,884
------------- ------------- -------------
Net income........................................................ $ 449,105 $ 367,524 $ 70,241
------------- ------------- -------------
------------- ------------- -------------
Net income per common and common equivalent share................. $ 0.13 $ 0.08 $ 0.01
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding..................................................... 3,428,100 4,879,326 5,100,556
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
------------------------ ----------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
--------- ------------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993................ 20,000 $ 2,823,163 803,200 $ 2,000,000 $ (1,015,711) $ 3,807,452
Net income.............................. -- -- -- -- 449,105 449,105
Series A convertible preferred stock
accreted redemption................... -- 254,085 -- -- (254,085) --
--------- ------------- --------- ------------ ------------- -------------
Balance at June 30, 1994................ 20,000 3,077,248 803,200 2,000,000 (820,691) 4,256,557
Net income.............................. -- -- -- -- 367,524 367,524
Issuance of Series B convertible
preferred stock....................... 32,416 11,379,258 -- -- -- 11,379,258
Common stock issued in lieu of
interest.............................. -- -- 66,264 236,750 -- 236,750
Acquisition of subsidiary minority
interest.............................. -- -- 64,256 400,000 -- 400,000
--------- ------------- --------- ------------ ------------- -------------
Balance at July 1, 1995................. 52,416 14,456,506 933,720 2,636,750 (453,167) 16,640,089
Net income.............................. -- -- -- -- 70,241 70,241
Additional paid in capital attributable
to common stock warrants.............. -- -- -- 413,461 -- 413,461
--------- ------------- --------- ------------ ------------- -------------
Balance at June 29, 1996................ 52,416 $ 14,456,506 933,720 $ 3,050,211 $ (382,926) $ 17,123,791
--------- ------------- --------- ------------ ------------- -------------
--------- ------------- --------- ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
<S> <C> <C> <C>
JUNE 30, JULY 1, JUNE 29,
1994 1995 1996
------------ ------------ -------------
Cash flows from operating activities:
Net income......................................................... $ 449,105 $ 367,524 $ 70,241
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization of fixed assets.................... 808,164 1,446,370 2,544,310
Amortization of deferred financing costs and debt discount....... -- -- 221,948
Amortization of organization costs............................... 76,578 7,393 6,644
Accrual of stock on subordinated debentures and bridge loan...... 91,568 11,849 --
Deferred income taxes............................................ (131,752) (55,266) (148,831)
Loss (gain) on the disposal of equipment and vehicles............ 18,304 (2,210) 37,439
Change in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable.......................................... 136,024 48,600 (314,603)
Inventories.................................................. (5,132,846) (9,131,663) (16,790,598)
Prepaid expenses............................................. (188,547) (78,267) (215,157)
Other assets................................................. (796) 21,390 (139,480)
Increase (decrease) in liabilities:
Accounts payable............................................. 1,414,275 1,823,227 7,661,297
Accrued expenses............................................. 539,786 790,944 1,138,558
Deferred rent liabilities.................................... 609,803 917,606 588,833
Income taxes payable......................................... 128,292 (287,109) 241,072
------------ ------------ -------------
Net cash used in operating activities................................ (1,182,042) (4,119,612) (5,098,327)
------------ ------------ -------------
Net cash used in investing activities--purchase of fixed assets...... (2,224,332) (6,864,952) (7,071,427)
------------ ------------ -------------
Cash flows from financing activities:
Borrowings under revolving credit note............................. 3,879,980 7,550,000 36,976,955
Repayment of borrowings under revolving credit note................ (1,500,000) (6,550,000) (29,649,800)
Proceeds (payment) of bridge loan.................................. 1,500,000 (1,500,000) --
Payments of long-term debt......................................... (276,230) (432,447) (538,242)
Proceeds from issuance of subordinated debentures.................. -- -- 4,667,973
Payment of subordinated debentures................................. (50,000) (450,000) --
Proceeds from issuance of Series B convertible preferred stock..... -- 11,379,258 --
Proceeds from term loan............................................ -- 1,100,000 400,000
------------ ------------ -------------
Net cash provided by financing activities............................ 3,553,750 11,096,811 11,856,886
------------ ------------ -------------
Net increase (decrease) in cash...................................... 147,376 112,247 (312,868)
Cash at beginning of year............................................ 255,589 402,965 515,212
------------ ------------ -------------
Cash at end of year.................................................. $ 402,965 $ 515,212 $ 202,344
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Factory Card
Outlet Corp. (the "Company") and its wholly owned subsidiary, Factory Card
Outlet of America, Ltd. ("FCO"). FCO is a chain of company-owned superstores
offering an extensive selection of party supplies, greeting cards, gift wrap,
and other special occasion merchandise at everyday value prices in 13 states,
primarily in the Midwest and mid-Atlantic regions of the United States.
All intercompany balances have been eliminated in consolidation.
FISCAL YEARS
In 1995, the Company adopted a policy in which its fiscal year ends on the
Saturday closest to June 30. The years ended July 1, 1995 and June 29, 1996,
referred to as fiscal 1995 and 1996, respectively, each reflect a 52-week
period. The year ended June 30, 1994 was a 365-day fiscal year.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period and related disclosures. Actual results
could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of average cost or net realizable value.
All inventory is merchandise inventory. Cost has been determined by the retail
method of accounting for inventories. In determining the cost of inventory, the
Company includes costs incurred to purchase, store and distribute goods prior to
sale.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets is computed as follows:
<TABLE>
<CAPTION>
METHOD ESTIMATED USEFUL LIFE
-------------- ------------------------------------------------
<S> <C> <C>
Fixtures and equipment.......................... Straight-line 3 to 10 years
Leasehold improvements.......................... Straight-line Remaining initial term of the leases
</TABLE>
Amortization related to capital leases is included in depreciation and
amortization. Software costs are capitalized and amortized on a straight-line
basis over a three- or five-year period. Unamortized software costs included in
fixtures and equipment were $974,017 and $1,310,047 as of July 1, 1995 and June
29, 1996, respectively. Amortization of these software costs was $45,201 and
$337,187 for the fiscal years ended July 1, 1995 and June 29, 1996,
respectively.
ORGANIZATION COSTS
Organization costs were amortized using the straight-line method over a
five-year period. Accumulated amortization was $368,366 and $375,010 as of July
1, 1995 and June 29, 1996, respectively. At June 29, 1996, all organization
costs were fully amortized.
F-7
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its wholly owned subsidiary, FCO, file a consolidated
Federal income tax return. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that are expected to be in effect when the differences are
expected to reverse.
DEFERRED RENT LIABILITIES
Certain of the Company's operating leases provide for scheduled increases in
base rentals over their terms. For these leases, the Company recognizes the
total rental amounts due over the lease terms on a straight-line basis and,
accordingly, has established corresponding deferred rent liabilities for the
differences between the amounts recognized and the amounts paid. The Company
also receives certain lease incentives, primarily construction allowances. These
allowances have been deferred and are amortized on a straight-line basis over
the life of the lease as reductions of rent expense.
STORE PREOPENING EXPENSES
Store preopening costs, which include advertising, labor and supply costs,
are expensed within the fiscal year in which the related store is opened.
Prepaid expenses at July 1, 1995 and June 29, 1996, include $61,489 and $57,242,
respectively, of preopening costs for stores which have not yet been opened.
ADVERTISING EXPENSES
The Company expenses advertising costs when the advertising occurs.
Advertising production costs incurred before the advertising takes place are
recorded as prepaid assets. At July 1, 1995 and June 29, 1996, no amounts were
reported as prepaid. For the fiscal years ended June 30, 1994, July 1, 1995, and
June 29, 1996, advertising costs were $982,027, $1,464,354, and $2,471,996,
respectively.
EARNINGS PER SHARE
Earnings per share were computed by dividing net income by the weighted
average number of common shares and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
common shares issuable upon the conversion of the preferred stock and the
exercise of warrants and common stock options. Stock options issued during the
twelve-month period prior to the Company's initial public offering have been
included in the calculation as if they were outstanding for all periods
presented, even if antidilutive using the treasury stock method and the initial
public offering price.
F-8
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FIXED ASSETS
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Equipment and vehicles......................................... $ 10,452,017 $ 16,337,565
Leasehold improvements......................................... 3,389,984 4,578,763
------------- -------------
Total fixed assets............................................. 13,842,001 20,916,328
Less accumulated depreciation and amortization................. 3,663,275 5,992,437
------------- -------------
Fixed assets, net.............................................. $ 10,178,726 $ 14,923,891
------------- -------------
------------- -------------
</TABLE>
(3) DEBT
REVOLVING CREDIT AGREEMENT
The Company has a revolving credit agreement with its bank which permits the
Company to borrow up to a maximum $20,000,000. Advances under the agreement,
which expires December 31, 1996, are limited based on inventory levels as
defined in the agreement. Amounts outstanding under this and preceding
agreements totaled $13,127,155 and $5,800,000 at June 29, 1996 and July 1, 1995,
respectively. Interest is payable monthly at an annual rate equal to the bank's
prime rate on the first $15,000,000 of borrowings and the bank's prime rate plus
2 1/2% on the next $5,000,000. The bank's prime rate was 8.25% at June 29, 1996
and 9% at July 1, 1995. A fee of 1/4% per year is assessed on the unused portion
of the first $15,000,000 of the line. Borrowings under the revolving credit term
note are secured by all business assets of the Company. This agreement contains
restrictive covenants, the more significant of which require the maintenance of
minimum ratios of total liabilities to net worth and minimum levels of tangible
net worth and net working capital.
In September 1996, the Company entered into a new revolving credit agreement
with its bank which permits the Company to borrow up to a maximum $25,000,000.
Advances under the agreement, which expires October 1, 1998, are limited based
on inventory levels as defined in the agreement. Interest is payable monthly at
an annual rate equal to the bank's prime rate. A fee of 0.25% per year is
assessed on the unused portion of the line, except that if the unused portion
exceeds $20,000,000 the fee increases to 0.4%. Borrowings under the revolving
credit term note are secured by all business assets of the Company. This
agreement contains restrictive covenants, the more significant of which require
the maintenance of minimum ratios of total liabilities to net worth and minimum
levels of tangible net worth and net working capital.
SECURED SUBORDINATED DEBENTURES
On November 15, 1995, the Company entered into a $4,000,000 subordinated
debt agreement bearing interest at 12.5%. The debt is scheduled to mature on
November 15, 2000. For the first 18 months of the agreement, interest is payable
at a rate of 7.5% with the remaining 5% interest accruing until May 1, 1997,
when all unpaid interest is due and payable. At the time of issuance, the lender
received a warrant for the right to purchase 95,010 shares of the Company's
nonvoting common stock exercisable until November 30, 2000, at $0.0025 per
share. The number of shares available under the warrant increases over the term
of the debt. If the debt remains outstanding until maturity, the lender will
have the right to purchase a total of 215,659 shares.
F-9
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) DEBT (CONTINUED)
In June, 1996, the subordinated debt agreement was amended to increase the
borrowings by $1,000,000. The additional borrowings bear interest at 12.5%,
which is payable monthly. The lender also received a warrant to puchase 24,361
shares of the Company's nonvoting common stock exercisable until July 31, 2001,
at $.0025 per share. The additional borrowing is scheduled to mature June 27,
2001.
The fair market value of the warrants issued under the agreement was
$413,461 and was recorded as additional paid in capital on common stock and as a
discount on the face amount of the debt. The total amortization of the discount
and the related financing costs were $134,326 and $87,622, respectively, for the
fiscal year ended June 29, 1996.
LONG-TERM DEBT
Long-term debt consists principally of a term loan agreement and motor
vehicle and equipment loans.
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Term loan......................................................... $ 1,100,000 $ 1,099,152
Various installment notes payable, due in monthly installments
through fiscal 2000, each including interest at rates ranging
from 2.9% to 11.36%, secured by motor vehicles.................. 148,273 118,276
------------ ------------
Total long-term debt.............................................. 1,248,273 1,217,428
Less current maturities of long-term debt......................... 496,612 553,205
------------ ------------
Long-term portion................................................. $ 751,661 $ 664,223
------------ ------------
------------ ------------
</TABLE>
On May 1, 1995 the Company entered into a term loan agreement with a bank
for $1,500,000. The term loan is secured by computer equipment and software.
Interest on the amount borrowed is calculated at a fixed rate of 8.08%. Payments
of principal and interest began July 31, 1995 and continue through June 30,
1998.
Maturities of long-term debt for each of the next five years are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 553,205
1998............................................................................ 649,288
1999............................................................................ 11,620
2000............................................................................ 3,315
2001............................................................................ --
------------
Total........................................................................... $ 1,217,428
------------
------------
</TABLE>
On April 20, 1994, the Company entered into a term loan agreement for
$1,500,000 with one of the Company's shareholders. This term loan matured and
was repaid on July 20, 1994. Interest on this loan accrued at a rate of 12% on
the outstanding and unpaid principal amount and was paid in common stock. In
addition, the Company paid a facility fee at maturity, as specified in the term
loan agreement.
F-10
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) DEBT (CONTINUED)
Subordinated debentures issued during fiscal year 1991, held by shareholders
and directors of the Company, matured on July 20, 1994. Interest on the
debentures accrued at the rate of 8.032 shares of common stock per quarter for
each $1,000 of debentures. Common stock totaling $236,750 was issued upon
maturity of the debentures in fiscal 1995.
(4) LEASE COMMITMENTS
The Company, through its FCO subsidiary, conducts substantially all of its
operations using leased premises. Store and office leases provide that real
estate taxes, insurance, maintenance, and operating expenses are obligations of
FCO and/or the Company. Certain store leases also provide for contingent rentals
based on sales in excess of specified minimums.
The cost of fixed assets held under capital leases and included in fixed
assets was $166,841 and $416,879 at July 1, 1995 and June 29, 1996,
respectively. Accumulated amortization related to such fixed assets was $34,513
and $77,628 at July 1, 1995 and June 29, 1996, respectively. Fixed assets held
under capital leases consists principally of office and warehouse equipment.
The following is a schedule of future minimum lease payments for capital and
operating leases with initial or remaining terms in excess of one year as of
June 29, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- ------------------------------------------------------------------------------------- ---------- --------------
<S> <C> <C>
1997................................................................................. $ 145,129 $ 12,174,062
1998................................................................................. 89,372 12,918,620
1999................................................................................. 42,508 12,167,600
2000................................................................................. 21,080 11,739,569
Thereafter........................................................................... -- 52,973,872
---------- --------------
Total minimum lease payments......................................................... 298,089 101,973,723
Less amount representing interest.................................................... 37,721 --
---------- --------------
Present value of net minimum lease payments (including long-term obligations of
$137,561........................................................................... $ 260,368 $ --
---------- --------------
---------- --------------
</TABLE>
Rent expense charged to operations under operating leases was $3,930,191,
$5,904,484 and $10,213,885 in fiscal years 1994, 1995 and 1996, respectively.
F-11
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Year ended June 30, 1994:
U.S. Federal.............................................................. $ 331,526 $ (113,489) $ 218,037
State and local........................................................... 92,319 (18,263) 74,056
---------- ----------- ----------
$ 423,845 $ (131,752) $ 292,093
---------- ----------- ----------
---------- ----------- ----------
Year ended July 1, 1995:
U.S. Federal.............................................................. $ 321,114 $ (52,958) $ 268,156
State and local........................................................... 56,252 (2,308) 53,944
---------- ----------- ----------
$ 377,366 $ (55,266) $ 322,100
---------- ----------- ----------
---------- ----------- ----------
Year ended June 29, 1996:
U.S. Federal.............................................................. $ 257,675 $ (155,355) $ 102,320
State and local........................................................... 9,040 6,524 15,564
---------- ----------- ----------
$ 266,715 $ (148,831) $ 117,884
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
Federal income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
DOLLAR PERCENT DOLLAR PERCENT DOLLAR PERCENT
---------- ----------- ---------- ----------- ---------- -----------
Computed "expected" tax expense........................ $ 252,007 34.00% $ 234,472 34.00% $ 63,963 34.00%
Increase in income taxes resulting from:
State and local income taxes, net of Federal income
tax benefit........................................ 26,406 3.56 37,126 5.38 8,570 4.56
Non-deductible meals and entertainment............... 5,459 0.74 14,792 2.15 29,729 15.80
Non-deductible life insurance premiums............... -- -- 12,246 1.78 12,774 6.79
Non-deductible penalty............................... -- -- 11,751 1.70 -- --
Other, net........................................... 8,221 1.11 11,713 1.70 2,848 1.51
---------- ----- ---------- ----- ---------- -----
Income tax expense..................................... $ 292,093 39.41% $ 322,100 46.71% $ 117,884 62.66%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
F-12
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Alternative minimum tax credit........................................... $ 115,854 $ 158,393 $ 382,682
Deferred rent liabilities................................................ 360,650 444,325 542,593
Accrued expenses......................................................... 147,552 149,634 209,652
Inventory shortage reserve............................................... -- -- 92,837
Debt discount and deferred financing costs............................... -- -- 60,211
---------- ---------- ------------
Total gross deferred tax assets............................................ 624,056 752,352 1,287,975
---------- ---------- ------------
Deferred tax liabilities:
Fixed assets............................................................. 156,563 284,140 673,433
Overhead capitalized in inventories...................................... 57,048 2,501 --
---------- ---------- ------------
Total gross deferred tax liabilities....................................... 213,611 286,641 673,433
---------- ---------- ------------
Net deferred tax asset..................................................... $ 410,445 $ 465,711 $ 614,542
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Management believes that, with respect to deferred tax assets, no valuation
allowance was necessary at July 1, 1995 and June 29, 1996. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon these criteria, management has
determined that it is more likely than not the Company will realize the benefits
of these deductible differences.
(6) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK--SERIES A AND B
Series A Convertible Preferred Stock, $.01 par value, was issued on July 10,
1989. Each share of this stock is convertible at the holders' discretion into
40.16 shares of common stock. Prior to the Series B Convertible Preferred Stock
offering outlined below, the Series A Convertible Preferred Stock was redeemable
at the holders' election at a price equal to the liquidation amount defined in
the stock purchase agreement plus 9% compounded annually from July 10, 1989,
reduced by any prior distribution amounts. Upon issuance of the Series B
Convertible Preferred Stock, accretion related to the Series A Convertible
Preferred Stock ceased and the redemption amount was fixed at $3,077,248.
Effective as of July 15, 1994, the Company entered into a stock purchase
agreement whereby it issued its Series B Convertible Preferred Stock, $.01 par
value per share. Each share of Series B Convertible Preferred Stock is
convertible at the holder's discretion into 40.16 shares of common stock. The
Company
F-13
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
may require the conversion of all of the outstanding shares of Series B
Convertible Preferred Stock into shares of the Company's common stock in the
event of an underwritten public offering of shares of the Company's common stock
within the guidelines set forth in the stock purchase agreement.
At any time on or after June 15, 1999 and by majority vote, the Series B
Convertible Preferred stockholders have the option to elect to be redeemed as a
class. Upon such election, the Company will redeem all Series B Convertible
Preferred Stock in two equal installments, the first of which is payable 120
days following such election and the second payable one year thereafter. The
redemption provisions in place for the Series A Convertible Preferred Stock were
changed in conjunction with the issuance of the Series B Convertible Preferred
Stock so that the dates and terms are substantially identical to those of the
Series B Convertible Preferred Stock.
The Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock (collectively, the "preferred stock") are structured as "participating"
preferred stock. That is, in the event of liquidation, dissolution, or winding
up of the Company, each holder of preferred stock will be entitled to be paid,
before any distribution or payment is made upon any junior securities, an amount
in cash equal to the aggregate liquidation value of all such holders' shares of
preferred stock, as determined in accordance with the terms of the Company's
Certificate of Incorporation, plus all accrued and unpaid dividends thereon.
The holders of preferred stock are entitled to vote with the holders of the
Company's common stock on each matter submitted to a vote of the Company's
stockholders, with each share of preferred stock having a number of votes equal
to the number of votes possessed by the number of shares of common stock into
which such share of preferred stock is convertible as of the record date for the
determination of stockholders entitled to vote on such matter.
ACQUISITION OF SUBSIDIARY'S MINORITY INTEREST
In September 1992, the Company entered into an agreement with The Card Mart
("Card Mart"), an entity in which a former director of the Company had a
partnership interest, to form FCOA-Baltimore. FCO managed the operations of
FCO-Baltimore, a chain of specialty stores in the Baltimore-Washington
metropolitan area offering a discount price format consistent with that of FCO's
other stores. Because FCOA-Baltimore was a controlled subsidiary, the
consolidated financial statements of the Company include the accounts of
FCOA-Baltimore.
In October 1994, FCOA-Baltimore was merged with and into FCO. In connection
with the merger, Card Mart, the holder of all of the FCOA-Baltimore preferred
stock, received 64,256 shares of the Company's common stock in exchange for its
interest in FCOA-Baltimore. The acquisition of this interest was accounted for
as a purchase. No goodwill was recognized for this transaction as the book value
of the net assets acquired approximated their fair market value.
PREFERRED STOCK
Preferred stock may be issued from time to time in one or more series at the
discretion of the Company's Board of Directors. Different series of preferred
stock shall not be construed to constitute different classes of shares for the
purposes of voting by classes unless expressly provided. All preferred stock
rights are granted at the discretion of the Board of Directors.
F-14
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The voting, dividend, and liquidation rights of the holders of common stock
are subject to the rights of the holders of preferred stock of any series. The
holders of common stock are entitled to one vote for each share, except for the
holders of the non-voting class.
At June 29, 1996 shares of common stock were reserved for the following
purposes:
<TABLE>
<S> <C>
Conversion of Series A Convertible Preferred Stock............... 803,199
Conversion of Series B Convertible Preferred Stock............... 1,301,821
Exercise of outstanding stock options............................ 739,345
Granting of additional stock options............................. 212,446
Warrants convertible to nonvoting common stock................... 119,371
---------
3,176,182
---------
---------
</TABLE>
DIVIDEND RESTRICTIONS
The Company must obtain written consent from the holder of the revolving
credit note, the holders of the secured subordinated debentures and the consent
of a majority of the holders of the outstanding shares of Series A and Series B
Convertible Preferred Stock prior to declaring or paying dividends at any time.
(7) STOCK OPTION PLAN
A stock option plan was approved by the stockholders of the Company in July
1989 to provide additional incentives and opportunities through stock ownership
to employees, outside directors and consultants of the Company. Under the plan,
incentive stock options may be granted for the purchase of the Company's common
stock at an exercise price not less than 100% for the fair market value at the
time of grant as determined by the Board of Directors. The term of each option
is also determined by the Board of Directors, but shall not be more than ten
years from the date of grant. Options are exercisable in accordance with the
plan and generally vest at the rate of 20% to 25% per year from the date of
grant.
<TABLE>
<CAPTION>
1994 1995 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OPTION PRICE NUMBER OPTION PRICE NUMBER OPTION PRICE
OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE
--------- ------------ --------- ------------ --------- ------------
Outstanding at beginning of year....... 261,040 $0.62-2.49 391,560 $0.62-6.23 707,217 $0.62-6.23
Options repurchased by Company......... -- -- (30,120) 6.23 -- --
Options forfeited...................... -- -- -- -- (40,160) 2.49-6.23
Granted................................ 130,520 6.23 345,777 2.49-6.23 72,288 2.49
--------- ------------ --------- ------------ --------- ------------
Outstanding at end of year............. 391,560 $0.62-6.23 707,217 $0.62-6.23 739,345 $0.62-6.23
--------- ------------ --------- ------------ --------- ------------
--------- ------------ --------- ------------ --------- ------------
Vested at end of year.................. 283,128 $0.62-6.23 303,208 $0.62-6.23 394,672 $0.62-6.23
Available for future grants at end of
year................................. 279,112 244,574 212,446
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCENTIVE SAVINGS PLAN
The Incentive Savings Plan (the Plan) is a defined contribution plan
sponsored by the Company for all eligible employees. Participants of the Plan
may elect to contribute between 2% and 13% of their pre-tax base salary, subject
to limitations imposed by the Internal Revenue Service.
The Company makes a discretionary matching contribution to the Plan at the
rate of 33% of the first 6% of the participant's contribution. For fiscal years
ended 1994, 1995 and 1996, the Company's discretionary matching contributions to
the Plan were $34,704, $53,661 and $86,043, respectively. The Plan also allows
for a discretionary base contribution to be made by the Company only if it has
current or accumulated net profits. No discretionary base contributions have
been made by the Company to date.
(9) RELATED-PARTY TRANSACTIONS
FCO made inventory purchases of $3,246,082 and $3,548,388 in fiscal 1995 and
1996, respectively, from a company which is beneficially owned by a stockholder
of the Company who is also a director of the Company. These purchases
represented approximately 8.6% and 6.2% of FCO's total inventory purchases in
fiscal 1995 and 1996, respectively. At July 1, 1995, FCO had no outstanding
amounts payable related to these purchases. At June 29, 1996, FCO owed $186,167
for these purchases.
During fiscal 1996, FCO entered into a 30-month supply agreement with Fine
Art Developments, p.l.c. (Fine Art), a publically owned United Kingdom company,
requiring FCO to purchase a minimum of 42% of its greeting card purchases from
Fine Art each year. During fiscal 1995 and 1996, FCO purchased $4,700,544 and
$4,927,014 of its greeting card purchases from Fine Art. At July 1, 1995 and
June 29, 1996, FCO owed $2,017,990 and $3,493,720 to Fine Art for these
purchases. In August 1996, Fine Art purchased 2,600 shares of convertible
preferred stock of the Company.
FCO also made wholesale sales of merchandise to Card Mart of approximately
$200,370 in fiscal 1994 and $282,246 in fiscal 1995. Included in the accounts
receivable balance at July 1, 1995 is approximately $41,325, relating to these
sales. FCOA-Baltimore engaged Card Mart to provide management and consulting
services, which subsequent to the merger of FCO and FCOA-Baltimore have been
discontinued. Management fees for fiscal years 1994, 1995 and 1996 were
$270,723, $168,929 and $30,000, respectively.
During fiscal 1996, the Company made a loan in the amount of $175,000 to its
President and Chief Executive Officer to assist with relocation expenses. The
loan bears interest at the prime rate of the Company's bank. The principal
balance of the loan was repaid in August 1996.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Cash paid during the fiscal year for:
Interest................................................................. $ 403,799 $ 634,910 $ 1,173,344
Income taxes............................................................. 125,864 688,574 26,276
</TABLE>
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred and notes payable on vehicle purchases
were $188,748, $191,938 and $255,487 in fiscal years 1994, 1995 and 1996,
respectively.
F-16
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
The Company incurred charges of $91,568 in fiscal 1994 and $11,849 in fiscal
1995 in lieu of interest on the subordinated debentures and the bridge loan.
Accrued interest of $236,750 was repaid through the issuance of $236,750 of
common stock in fiscal 1995.
Additional paid in capital of $413,461 was recognized for the common stock
warrants issued during fiscal 1996.
The Company exchanged FCOA-Baltimore preferred stock of $400,000 to the
Company's common stock of $400,000 in fiscal 1995.
Accretion on Series A convertible preferred stock was $254,085 in fiscal
1994.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments at July 1, 1995 and June 29, 1996
include trade accounts receivable, trade accounts payable, revolving credit term
note payable, subordinated debentures, capital lease obligation and long-term
debt. The carrying value of trade accounts receivable, trade accounts payable
and revolving credit term note payable approximates fair value because of the
short maturity of these instruments. The fair value of the Company's
subordinated debentures, capital lease obligations and long-term debt has been
determined based on discounted cash flows using current interest rates of
similar instruments and are not materially different from their financial
statement carrying values.
(12) SUBSEQUENT EVENTS
SECURED SUBORDINATED DEBT
On July 2, 1996, the Company issued $3,000,000 of secured subordinated debt
bearing annual interest at 12.5%. The debt is scheduled to mature on July 2,
2001. For the first six months of the agreement, interest will be payable at a
rate of 7.5% with the remaining 5% interest accruing until February 1, 1997,
when all unpaid interest is due and payable. At the time of issuance, the lender
received a warrant for the right to purchase 76,223 shares of non-voting common
stock exercisable until July 1, 2001 at $0.0025 per share. The number of shares
available under the warrant increases over the term of the debt. If the debt
remains outstanding until maturity, the lender will have the right to purchase a
total of 167,688 shares.
SERIES C CONVERTIBLE PREFERRED STOCK
On August 2, 1996, 25,639 shares of Series C Convertible Preferred Stock,
$0.01 par value, were issued in the amount of $9,730,000. The conversion,
redemption and other provisions of this series of preferred stock are identical
to that of the Series A and Series B Convertible Preferred Stock.
CONSTRUCTION OF NEW DISTRIBUTION AND OFFICE FACILITY
The Company is currently negotiating a lease for a new and larger
distribution center which is expected to begin operating in fiscal 1998. The new
center will be approximately 325,000 square feet and will provide for the
consolidation of the Company's administrative and distribution functions.
F-17
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SUBSEQUENT EVENTS (CONTINUED)
STOCK SPLIT
Common stock and stock options reflect the one for 4.016 stock split of the
Company's common stock as approved by the Company's Board of Directors on
November 15, 1996.
F-18
<PAGE>
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 29, SEPTEMBER 28,
1996 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash............................................................................. $ 202,344 $ 338,686
Accounts receivable.............................................................. 248,888 279,702
Due from related parties......................................................... 187,711 115,780
Inventories...................................................................... 41,803,820 50,610,129
Prepaid expenses................................................................. 603,647 768,426
Deferred income taxes............................................................ 302,490 1,303,153
------------- -------------
Total current assets........................................................... 43,348,900 53,415,876
Fixed assets, net.................................................................. 14,923,891 16,302,969
Deferred financing costs........................................................... 244,405 344,503
Deferred income taxes.............................................................. 312,052 312,052
Other assets....................................................................... 250,594 195,046
------------- -------------
Total assets................................................................... $ 59,079,842 $ 70,570,446
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations...................................... $ 676,012 $ 702,018
Accounts payable................................................................. 12,125,070 15,079,530
Due to related parties........................................................... 3,679,887 4,102,733
Income taxes payable............................................................. 282,771 --
Accrued expenses................................................................. 2,980,656 3,512,357
------------- -------------
Total current liabilities...................................................... 19,744,396 23,396,638
Revolving credit note payable...................................................... 13,127,155 9,200,000
Subordinated debentures, net of discount........................................... 4,720,865 7,566,571
Long-term debt..................................................................... 664,223 527,797
Capital lease obligations.......................................................... 137,561 167,416
Deferred rent liabilities.......................................................... 3,561,851 3,678,895
------------- -------------
Total liabilities.............................................................. 41,956,051 44,537,317
------------- -------------
Stockholders' equity:
Preferred stock--Series A, B and C convertible, $.01 par value. Authorized,
issued and outstanding shares:
Series A--20,000 shares and Series B--32,416 shares at June 29, 1996 and
September 28, 1996.
Series C--30,000 authorized shares, 25,639 issued and outstanding at September
28, 1996. ................................................................... 14,456,506 24,228,943
Common stock, no par value. Voting class--1,600,000 shares authorized; 933,720
shares issued and outstanding; non-voting class-205,000 shares authorized; no
shares issued or outstanding................................................... 3,050,211 3,478,578
Accumulated deficit.............................................................. (382,926) (1,674,392)
------------- -------------
Total stockholders' equity..................................................... 17,123,791 26,033,129
------------- -------------
Total liabilities and stockholders' equity..................................... $ 59,079,842 $ 70,570,446
------------- -------------
------------- -------------
</TABLE>
statements.
F-19
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------------
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Net sales.......................................................................... $ 16,816,662 $ 25,031,848
Cost of sales and occupancy........................................................ 11,023,795 16,996,375
------------- -------------
Gross profit..................................................................... 5,792,867 8,035,473
Selling, general and administrative expenses....................................... 7,600,492 9,664,842
------------- -------------
Loss from operations............................................................. (1,807,625) (1,629,369)
Interest expense................................................................... 190,373 597,297
------------- -------------
Loss before taxes................................................................ (1,997,998) (2,226,666)
Income tax benefit................................................................. (759,835) (935,200)
------------- -------------
Net loss......................................................................... $ (1,238,163) $ (1,291,466)
------------- -------------
------------- -------------
Net loss per common and common equivalent share.................................. $ (0.24) $ (0.25)
------------- -------------
------------- -------------
Weighted average common and common equivalent shares
outstanding.................................................................... 5,100,556 5,100,556
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss......................................................................... $(1,238,163) $(1,291,466)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of fixed assets.................................. 548,124 752,590
Amortization of deferred financing costs and debt discount..................... -- 181,890
Amortization of organization costs............................................. 1,650 --
Deferred income taxes.......................................................... (759,835) (935,200)
Loss (gain) on the disposal of equipment and vehicles.......................... -- 1,382
Compensation expense related to stock options.................................. -- 164,355
Change in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable........................................................ (141,675) 156,897
Inventories................................................................ (5,503,373) (8,806,309)
Prepaid expenses........................................................... (250,270) (164,779)
Other assets............................................................... (51,930) (27,558)
Increase (decrease) in liabilities:
Accounts payable........................................................... 5,143,136 4,362,626
Accrued expenses........................................................... 699,762 531,700
Deferred rent liabilities.................................................. 10,712 117,044
Income taxes payable....................................................... (117,100) (348,233)
------------- -------------
Net cash used in operating activities.............................................. (1,658,962) (5,305,061)
------------- -------------
Net cash used in investing activities--purchase of fixed assets.................... (1,891,772) (2,046,642)
------------- -------------
Cash flows from financing activities:
Borrowings under revolving credit note........................................... 3,350,000 15,336,737
Repayment of borrowings under revolving credit note.............................. (450,000) (19,263,892)
Proceeds from term loan.......................................................... 400,000 --
Payments of long-term debt....................................................... (126,911) (112,719)
Proceeds from issuance of subordinated debentures................................ -- 2,910,836
Proceeds from issuance of Series C convertible preferred stock................... -- 8,617,083
------------- -------------
Net cash provided by financing activities.......................................... 3,173,089 7,488,045
------------- -------------
Net increase (decrease) in cash.................................................... (377,645) 136,342
Cash at beginning of the period.................................................... 515,212 202,344
------------- -------------
Cash at end of the period.......................................................... $ 137,567 $ 338,686
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
management without audit and should be read in conjunction with the consolidated
financial statements and notes thereto for the fiscal year 1996 included in this
document. Due to the seasonality of the Company's business, the results for the
interim periods are not necessarily indicative of the results for the year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, although management believes that the disclosures are
adequate to fairly present the information. The accompanying consolidated
financial statements reflect, in the opinion of management, all such adjustments
necessary for a fair presentation of the interim financial statements. In the
opinion of management, all such adjustments are of a normal recurring nature,
except for the accrual of approximately $164,000 in the three month period ended
September 28, 1996 representing compensation expense, some of which is
nonrecurring, relating to certain individuals, including certain directors and
employees of the Company.
(2) USE OF ESTIMATES
The preparation of these consolidated 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 at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period and related disclosures.
Significant estimates made as of and for the thirteen weeks ended September 28,
1996 include provisions for shrinkage and promotional markdowns of merchandise
inventories. Actual results could differ from those estimates.
(3) DEBT
SECURED SUBORDINATED DEBT
On July 2, 1996, the Company issued $3,000,000 of secured subordinated debt
bearing annual interest at 12.5%. The debt is scheduled to mature on July 2,
2001. For the first six months of the agreement, interest will be payable at a
rate of 7.5% with the remaining 5% interest accruing until February 1, 1997 when
all unpaid interest is due and payable. At the time of issuance, the lender
received a warrant for the right to purchase 76,223 shares of non-voting common
stock exercisable until July 1, 2001, at $0.0025 per share. The number of shares
available under the warrant increases over the term of the debt. If the debt
remains outstanding until maturity, the lender will have the right to purchase a
total of 167,688 shares.
REVOLVING CREDIT AGREEMENT
In September 1996, the Company entered into a new revolving credit agreement
with its bank which permits the Company to borrow up to a maximum of
$25,000,000. Advances under the new agreement, which expires October 1, 1998,
are limited based on inventory levels as defined in the agreement. Interest is
payable monthly at an annual rate equal to the bank's prime rate. A fee of 0.25%
per year is assessed on the unused portion of the line, except if the unused
portion exceeds $20,000,000 the fee increases to 0.40%. Borrowings under the
revolving credit term note are secured by all business assets of the Company.
This agreement contains restrictive covenants, the more significant of which
require the maintenance of minimum ratios of total liabilities to net worth and
minimum levels of tangible net worth and net working capital.
F-22
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LEASE COMMITMENTS
The Company entered into two capital lease agreements for computer equipment
and related software in October 1996. The cost of the equipment under these
leases totalled $2,113,000. Payments under these leases will be made over the
next four years.
In October 1996, the Company completed the negotiation of a ten-year lease
for a new distribution and administrative center commencing in October 1997.
Future minimum lease payments under this lease will total $19,727,400.
(4) STOCKHOLDERS' EQUITY
SERIES C PREFERRED STOCK
On August 2, 1996, 25,639 shares of Series C Convertible Preferred Stock,
$0.01 par value, were issued in the amount of $9,730,000. Each share of this
preferred stock is convertible at the holder's discretion into 40.16 shares of
voting common stock of the Company. The redemption and other provisions of this
series of preferred stock are identical to that of Series A and B Convertible
Preferred Stock.
STOCK OPTIONS
In July 1996, the Company granted options to purchase 351,400 shares of
common stock to certain individuals, including employees and directors, at an
option price of $2.49 per share. Options to purchase 190,760 shares which were
granted to employees vest over four years, and all other options were fully
vested in September 1996. Based on the estimated fair value of the Company's
common stock at the time of grant of these options of $3.30 per share, the
Company recognized compensation expense in the quarter ended September 28, 1996
of approximately $164,000. Of this amount, approximately $146,000 related to
options which were fully vested in September 1996. The estimated fair value of
the Company's common stock used in accounting for these options was based on
information from various sources which included a valuation prepared by Avalon
Group Ltd. (Avalon). The chairman and president of Avalon each own 100 shares of
the Company's Series B preferred stock (or 0.3% of issued and outstanding Series
B preferred stock) and each has options to purchase 4,016 shares of the
Company's common stock (or 0.8% of weighted average common shares).
(5) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
------------- -------------
<S> <C> <C>
Cash paid during the thirteen week period for:
Interest.......................................................................... $ 134,547 $ 397,277
Income taxes...................................................................... 112,600 371,750
</TABLE>
Supplemental disclosure of non-cash financing activities:
Capital lease obligations incurred and notes payable on vehicle purchases
were $86,408 in the 13-week period ended September 28, 1996. There were no
obligations incurred or notes payable in the 13-week period ended September
30, 1995.
In August, 1996, the Company exchanged Series C Preferred Stock for
consideration of trade accounts payable of $1,101,100.
Additional paid-in capital of $264,012 was recognized for the common stock
warrants issued in July, 1996.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Selected Consolidated Financial and Operating Data........................ 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 15
Business.................................................................. 23
Management................................................................ 31
Certain Transactions...................................................... 38
Principal and Selling Stockholders........................................ 39
Description of Capital Stock.............................................. 41
Shares Eligible for Future Sale........................................... 43
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,750,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
PIPER JAFFRAY INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, all of which will be
paid solely by the Company. All amounts shown are estimates, except the
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee:
<TABLE>
<S> <C>
Commission registration fee....................................... $ 11,500
NASD filing fee................................................... 4,295
Nasdaq Stock Market listing fee................................... 34,046
Accounting fees and expenses...................................... 200,000
Legal fees and expenses........................................... 425,000
Blue sky fees and expenses (including fees and expenses of
counsel)........................................................ 12,500
Printing, engraving and mailing expenses.......................... 100,000
Transfer agent and registrar fees and expenses.................... 3,000
Miscellaneous..................................................... 9,659
---------
Total......................................................... $ 800,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and By-Laws provide that the
Registrant shall indemnify each person who is or was a director or officer of
the Registrant to the fullest extent permitted under Section 145 of the DGCL
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation shall indemnify such person against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful, provided that the Registrant under the By-Laws may only indemnify
a person initiating such an action, suit, or proceeding if such action, suit or
proceeding was authorized by the Board of Directors of the Company. In addition,
pursuant to the By-Laws, the Registrant shall, in advance of the final
disposition of any civil, criminal, administrative or investigative action, suit
or proceeding, pay the expenses (including attorney's' fees) incurred by any
officer or director in defending such action, provided that the director or
officer undertakes to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation.
Under Section 145 of the DGCL, a Delaware corporation may also indemnify
officers and directors in an action by or in the right of the corporation to
procure a judgment in its favor under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's by-laws, agreements, vote or
otherwise.
Article Eight of the Restated Certificate of Incorporation provides that a
director of the Registrant will not be personally liable to the Registrant or
its stockholders for monetary damages for breach of
II-1
<PAGE>
fiduciary duty as a director, except for liability (i) for an breach of the
director's duty or loyalty to the Registrant or its stockholders, (ii) for acts
of omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
While the Restated Certificate of Incorporation provides directors with
protection from awards for monetary damages for breaches of their duty of care,
it does not eliminate such duty. Accordingly, the Restated Certificate of
Incorporation will have no effect on the availability of equitable remedies such
as an injunction or rescission based on a director's breach of his or her duty
of care.
Reference is made to the Underwriting Agreement (Exhibit 1.1) which provides
for indemnification of the Registrant, its directors, officers and controlling
persons. The Registrant has also agreed to provide indemnification to certain
stockholders and holders of warrants to purchase shares of Common Stock in
connection with the registration of such shares, including the shares underlying
the warrants (Exhibits 10.8.1, 10.9.2, 10.9.7 and 10.10).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Registrant has sold the following
securities which were not registered under the Securities Act:
On August 2, 1996, the Registrant sold 25,639 shares of Series C Convertible
Preferred Stock in a private placement to 18 accredited investors for an
aggregate price of $9,871,015 based upon an exemption from registration under
Section 4(2) of the Securities Act. Fine Art Developments, p.l.c. ("Fine Art"),
one of the aforementioned accredited investors, purchased 2,600 shares of Series
C Convertible Preferred Stock for a price of $1,001,000 and agreed to satisfy
this price by providing the Company with credits against trade payables. To
date, $630,000 has been credited against Fine Art's purchase price and it is
expected that the entire purchase price will be satisfied by September 30, 1996.
On July 2, 1996, the Registrant issued a warrant for the right to purchase
18,980 shares of the Company's non-voting Common Stock to Petra Capital, L.L.C.
("Petra") in connection with the issuance of $3,000,000 of subordinated
debentures to Petra, in each case, based upon an exemption from registration
under Section 4(2) of the Securities Act.
On June 28, 1996, the Registrant issued a warrant for the right to purchase
6,066 shares of the Company's non-voting Common Stock to Sirrom Capital
Corporation ("Sirrom") in connection with the issuance of $1,000,000 of
subordinated debentures to Sirrom, in each case, based upon an exemption from
registration under Section 4(2) of the Securities Act.
On November 15, 1995, the Registrant issued a warrant for the right to
purchase 23,658 shares of the Company's non-voting Common Stock to Sirrom in
connection with the issuance of $4,000,000 of subordinated debentures to Sirrom,
in each case, based upon an exemption from registration under Section 4(2) of
the Securities Act.
On October 6, 1994, the Registrant issued 16,000 shares of Common Stock to
The Card Mart in exchange for shares of preferred stock of FCOA-Baltimore, which
merged with and into the Registrant's operating subsidiary based upon an
exemption from registration under Section 4(2) of the Securities Act.
On July 15, 1994, the Registrant sold 32,416 shares of Series B Convertible
Preferred Stock in a private placement to 13 accredited investors for an
aggregate price of $12,123,584 based upon an exemption from registration under
Section 4(2) of the Securities Act.
On July 15, 1994, the Registrant sold 16,500 shares of Common Stock to the
following: (i) 15,000 shares of Common Stock were issued to three accredited
investors in lieu of interest on their investment in the Subordinated Debentures
Due 1993; and (ii) 1,500 shares of Common Stock were issued to one
II-2
<PAGE>
accredited investor in lieu of interest on a Bridge Loan, in each case, based
upon an exemption from registration under Section 4(2) of the Securities Act.
At various times within the past three years, the Registrant has issued to
certain officers, directors, employees and consultants, options to purchase an
aggregate of 548,586 shares of Common Stock at varying exercise prices. These
options were granted pursuant to the 1989 Stock Option Plan based on an
exemption from registration under Rule 701 of the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen of Registrant's Common Stock Certificate.
* 5.1 Opinion of Pitney, Hardin, Kipp & Szuch.
10.1 Employment Agreement, dated as of April 6, 1995, by and between the Company and
Charles R. Cumello.
10.1.1 Loan Agreement, dated as of October 1, 1995, between FCO and Charles R. Cumello.
10.2 Consulting Agreement, dated July 30, 1996 by and between the Company and J. Bayard
Kelly.
+10.3 Supply Agreement, dated as of August 2, 1996, by and between the Company and Fine
Art Developments, p.l.c.
+10.4 Lease Agreement between the Company and Prudential Insurance Company of America,
dated September 25, 1992.
+10.5 Lease Agreement between the Company and Elk Grove Village Industrial Park Ltd.,
dated July 17, 1995.
10.5.1 Industrial Building Lease dated as of October 28, 1996 by and between Centerpoint
Realty Services Corporation and FCO.
+10.6.1 1989 Stock Option Plan of the Company, as amended.
10.6.2 1996 Employee Stock Purchase Plan of the Company.
10.6.3 Incentive Savings Plan of the Company.
+10.7 Business Loan Agreement dated as of November 10, 1995 among the Company, FCO and
Bank One, Chicago, N.A. ("Bank One"), as amended.
10.7.1 Business Purpose Revolving Promissory Note dated November 1, 1996 from the Company
and FCO to Bank One.
10.7.2 Promissory Note dated as of May 1, 1995 from the Company and FCO to Bank One.
10.7.3 Business Loan Agreement dated as of November 1, 1996 among the Company, FCO and
Bank One.
+10.8 Loan Agreement dated as of July 2, 1996 by and between FCO and Petra Capital,
L.L.C. ("Petra").
+10.8.1 Stock Purchase Warrant dated July 2, 1996 by and between the Company and Petra, as
amended.
+10.8.2 Secured Promissory Note dated July 2, 1996 by and between FCO and Petra.
+10.8.3 Security Agreement dated July 2, 1996 by and between FCO and Petra.
+10.8.4 Guaranty Agreement dated July 2, 1996 by and between the Company and Petra.
+10.9.1 Loan Agreement dated November 15, 1995 by and between FCO and Sirrom Capital
Corporation ("Sirrom").
+10.9.2 Stock Purchase Warrant dated November 15, 1995 by and between the Company and
Sirrom.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.9.3 Secured Promissory Note dated November 15, 1995 by and between FCO and Sirrom.
+10.9.4 Security Agreement dated November 15, 1995 by and between FCO and Sirrom.
+10.9.5 Guaranty Agreement dated November 15, 1995 by and between the Company and Sirrom.
+10.9.6 First Amendment to Loan Agreement and Loan Documents dated June 28, 1996 by and
between FCO and Sirrom.
+10.9.7 Stock Purchase Warrant dated June 28, 1996 by and between the Company and Sirrom.
+10.9.8 Secured Promissory Note dated June 28, 1996 by and between FCO and Sirrom.
+10.9.9 Amended and Restated Stock Purchase Warrant dated July 30, 1996 by and between the
Company and Sirrom.
+10.9.10 Amendment to Stock Purchase Warrant dated July 30, 1996 by and between the Company
and Sirrom.
10.10.1 Term Lease Master Agreement dated October 28, 1996 by and between FCO and IBM
Credit Corporation.
10.10.2 Master Lease Agreement dated August 19, 1996 by and between FCO and SymboLease,
Inc.
+21.1 List of the subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
* 23.2 Consent of Pitney, Hardin, Kipp & Szuch (included as part of Exhibit 5.1).
+24.1 Power of Attorney (contained on the signature page of this Registration
Statement).
+27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment
+ Filed previously
(B) FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Schedule I Condensed Financial Information of Factory Card Outlet Corp.
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
November 21, 1996.
FACTORY CARD OUTLET CORP.
By: /s/ WILLIAM E. FREEMAN
-----------------------------------------
WILLIAM E. FREEMAN
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
TITLE DATE
-------------------------- -------------------
Chairman of the Board
/s/ WILLIAM E. FREEMAN of Directors
- ------------------------------ (principal executive November 21, 1996
William E. Freeman officer)
/s/ CHARLES R. CUMELLO
- ------------------------------ President and Director November 21, 1996
Charles R. Cumello
Executive Vice President
* and Treasurer
- ------------------------------ (principal financial and November 21, 1996
Glen J. Franchi accounting officer)
*
- ------------------------------ Director November 21, 1996
Michael I. Barach
*
- ------------------------------ Director November 21, 1996
Dr. Robert C. Blattberg
*
- ------------------------------ Director November 21, 1996
Bart A. Brown, Jr.
*
- ------------------------------ Director November 21, 1996
Richard A. Doppelt
*
- ------------------------------ Director November 21, 1996
J. Bayard Kelly
*
- ------------------------------ Director November 21, 1996
James L. Nouss, Jr.
*
- ------------------------------ Director November 21, 1996
Stewart M. Kasen
*By/s/ CHARLES R. CUMELLO
Charles R. Cumello, as
attorney-in-fact
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Factory Card Outlet Corp.
On September 30, 1996, except as to Note 12 of the Notes to the Consolidated
Financial Statements "Subsequent Events -- Stock Split," which is as of November
19, 1996, we reported on the consolidated balance sheets of Factory Card Outlet
Corp. and subsidiary as of July 1, 1995 and June 29, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended June 29, 1996, which are included in
the prospectus. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
in the registration statement. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/S/ KPMG PEAT MARWICK LLP
Chicago, Illinois
September 30, 1996, except as to Note 12
of the Notes to the Consolidated Financial Statements
"Subsequent Events--Stock Split," which
is as of November 19, 1996
S-1
<PAGE>
SCHEDULE I
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 1, JUNE 29,
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 16,706 $ 17,069
Due from subsidiary.............................................................. 11,576,008 11,989,469
------------- -------------
Total current assets............................................................... 11,592,714 12,006,538
Investment in subsidiary........................................................... 5,047,375 5,117,253
------------- -------------
Total assets..................................................................... 16,640,089 17,123,791
------------- -------------
------------- -------------
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock--Series A and B convertible, $.01 par value. Authorized: Series
A--20,000 shares and Series B--34,750. Issued and outstanding shares: Series
A--20,000 shares and Series B-- 32,416 shares.................................. 14,456,506 14,456,506
Common stock no par value. Voting class--authorized 1,600,000 shares; 933,720
shares issued and outstanding; non-voting class--authorized 205,000 shares, no
shares issued or outstanding................................................... 2,636,750 3,050,211
Accumulated deficit.............................................................. (453,167) (382,926)
------------- -------------
Total stockholders' equity....................................................... $ 16,640,089 17,123,791
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed financial information.
S-2
<PAGE>
FACTORY CARD OUTLET CORP.
AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
JUNE 30, JULY 1, JUNE 29,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income.............................................................. $ 352 342 363
Equity in net earnings of subsidiaries....................................... 448,753 367,182 69,877
---------- ---------- ----------
Net income................................................................. $ 449,105 367,524 70,240
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to condensed financial information.
S-3
<PAGE>
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
JUNE 30, JULY 1, JUNE 29,
1994 1995 1996
----------- ------------- ---------
Cash flows from operating activities:
Net income............................................................... $ 449,105 367,524 70,240
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in net earnings of subsidiary................................... (448,753) (367,182) (69,877)
Increase in due from subsidiary........................................ -- (11,379,258) --
----------- ------------- ---------
Net cash provided by (used in) operating activities........................ 352 (11,378,916) 363
----------- ------------- ---------
Cash flows from financing activities:
Proceeds from issuance of Series B convertible preferred stock........... -- 11,379,258 --
----------- ------------- ---------
Net increase in cash and cash equivalents.................................. 352 342 363
Cash and cash equivalents at beginning of year............................. 16,012 16,364 16,706
----------- ------------- ---------
Cash and cash equivalents at end of year................................... $ 16,364 16,706 17,069
----------- ------------- ---------
Supplemental disclosures of cash flow information:
Noncash financing activities--
Accretion on Series A convertible preferred stock...................... 254,085 -- --
Exchange of FCOA--Baltimore preferred stock to the Company's common
stock................................................................ -- 400,000 --
Accrued interest repaid through the issuance of common stock........... -- 236,750 --
Additional paid in capital recognized for the common stock warrants
issued............................................................... -- -- 413,461
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
See accompanying notes to condensed financial information
S-4
<PAGE>
FACTORY CARD OUTLET CORP. AND SUBSIDIARY
NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD OUTLET CORP.
(1) BASIS OF ACCOUNTING
The Condensed Financial Information of Factory Card Outlet Corp. ("the
Company") has been prepared pursuant to Securities and Exchange Commission rules
and regulations and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto as of July 1, 1995 and June 29, 1996 and
for each of the years in the three year period ended June 29, 1996. The
Condensed Financial Information of the Company has been prepared on an
unconsolidated basis. The Company's investments in its subsidiaries are recorded
on the equity basis.
(2) GUARANTEES
The Company has guaranteed the credit and debt agreements between its
subsidiaries and various lenders. For information related to the agreements, see
Note 3 of "Notes to Consolidated Financial Statements."
S-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------------------------- -----------
<S> <C> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen of Registrant's Common Stock Certificate.
10.1 Employment Agreement, dated as of April 6, 1995, by and between the Company and Charles
R. Cumello.
10.1.1 Loan Agreement, dated as of October 1, 1995, between FCO and Charles R. Cumello.
10.2 Consulting Agreement, dated July 30, 1996 by and between the Company and J. Bayard
Kelly.
10.5.1 Industrial Building Lease dated as of October 28, 1996 by and between Centerpoint Realty
Services Corporation and FCO
10.6.2 1996 Employee Stock Purchase Plan of the Company.
10.6.3 Incentive Savings Plan of the Company.
10.7.1 Business Purpose Revolving Promissory Note dated November 1, 1996 from the Company and
FCO to Bank One, Chicago, N.A. ("Bank One").
10.7.2 Promissory Note dated as of May 1, 1995 from the Company and FCO to Bank One.
10.7.3 Business Loan Agreement dated as of November 1, 1996 among the Company, FCO and Bank
One.
10.10.1 Term Lease Master Agreement dated October 28, 1996 by and between FCO and IBM Credit
Corporation.
10.10.2 Master Lease Agreement dated August 19, 1996 by and between FCO and SymboLease, Inc.
23.1 Consent of KPMG Peat Marwick LLP.
</TABLE>
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
FACTORY CARD OUTLET CORP.
The undersigned, in order to form a corporation pursuant to the provisions
of the General Corporation Law of Delaware, hereby certifies:
FIRST: The name of the Corporation is Factory Card Outlet Corp.
SECOND: The address of the Corporation's registered agent in Delaware is
1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The name
of its registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH:
Section 1. Authorized Shares.
The Corporation has authority to issue 50,000,000 shares of Common
Stock, $.01 par value per share (the "Common Stock"), and 10,000,000 shares of
Preferred Stock, $.01 par value per share (the "Preferred Stock").
Section 2. Preferred Stock.
a) The Board of Directors is authorized, subject to limitations by
law and the provisions of this Article FOURTH, to provide for the issuance of
the shares of Preferred Stock in series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to
<PAGE>
establish from time to time out of the number of shares to be included in each
such series, and to fix the designation, powers, rights, preferences,
qualifications, limitations and restrictions of the shares of each such series.
b) The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provisions for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date
or date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and conditions
of such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of that
series; and
(8) Any other powers, rights, preferences, qualifications,
limitations and restrictions of that series.
<PAGE>
FIFTH: The name and mailing address of the incorporator is Joseph H.
Kott, 163 Madison Avenue, CN 1945, Morristown, N.J. 07960.
SIXTH: The powers of the incorporator shall terminate upon the filing of
the Certificate of Incorporation and the names and mailing addresses of the
persons who are to serve as directors until the first annual meeting of
stockholders or until their successors are elected and qualified are:
William E. Freeman - 316 Beacon Light Rd.
Califon, N.J. 07630
George C. Betke, Jr. - P.O. Box 295
Essex Fells, N.J. 07021
SEVENTH: The Corporation may indemnify every corporation agent as defined
in, and to the full extent permitted by, Section 145 of the General Corporation
Law of Delaware, and to the full extent otherwise permitted by law. The power
to make, alter, or repeal By-Laws is conferred upon the directors. Meetings of
stockholders may be held within or without the State of Delaware as the law may
provide. Subject to the By-Laws, the election of directors need not be by
written ballot.
EIGHTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after the
filing of the Certificate of Incorporation of which this article is a part to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of the director of the Corporation
shall be
<PAGE>
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
NINTH: The directors shall have the right to amend, alter, change or
repeal any provision in this Certificate of Incorporation or in the
Corporation's By-Laws, in the manner now or hereafter prescribed by statute, and
all rights conferred upon stockholders herein are granted subject to such
reservation.
TENTH: Pursuant to Section 103(d) of the General Corporation Law of
Delaware, this Certificate of Incorporation is to be effective upon its filing
date.
ELEVENTH:
Section 1. Special Meetings.
Notwithstanding anything to the contrary in the Corporation's By-Laws,
special meetings of the stockholders may only be called by resolution of the
Board of Directors or by the Chairman of the Board or President or by the
Chairman, President or Secretary upon the written request (stating the purpose
or purposes of the meeting) of a majority of the members of the Board of
Directors or a majority of the stockholders of the Corporation.
Section 2. Actions by Stockholders.
Notwithstanding anything to the contrary in the Corporation's By-Laws, no
action required to be taken or which may be taken at any annual or special
meeting of stockholders of the Corporation may be taken except at a duly called
meeting of the stockholders of the Corporation, or upon the unanimous written
consent of the stockholders entitled to vote thereat.
<PAGE>
Section 3. Stockholder Nominations and Other Proposals.
Notwithstanding anything to the contrary in the Corporation's By-Laws,
stockholders of the Corporation may only propose actions to be taken by the
Corporation and nominate members of the Board of Directors upon ninety (90) days
prior written notice to the Corporation.
IN WITNESS WHEREOF, the undersigned incorporator has executed this
Certificate of Incorporation and has certified this as his act and deed and the
facts herein stated are true, this ____day of ____, 1996.
----------------------
<PAGE>
RESTATED BY-LAWS
of
FACTORY CARD OUTLET CORP.
As of November 15, 1996
ARTICLE I
OFFICES
The corporation may have offices, in addition to its principal office
at such places as from time to time may be determined by the Board of Directors
(the "Board").
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the shareholders may be
held at the principal office of the corporation or at such other place within or
without the State of Delaware as may be designated by the Board and stated in
the notice of the meeting.
Section 2. ANNUAL MEETING. The annual meeting of shareholders for
the election of directors and the transaction of such other business as may come
before the shareholders for action shall be held on the third Monday of
September in each year, or on such other date as may be designated by the Board,
at such hour as may be designated by the Board and specified in the notice of
meeting.
Section 3. SPECIAL MEETINGS. Special Meetings of the shareholders
may be called by resolution of the Board or by the Chairman of the Board or
President and shall be called by the President or Secretary upon the written
request (stating the purpose or purposes of the meeting) of a majority of the
Board or a majority of the shareholders of the Corporation. Only business
related to the purposes set forth in the notice of the meeting may be transacted
at a special meeting.
Section 4. NOTICE. Written notice of each meeting of the
shareholders shall be mailed or delivered to each shareholder entitled to vote
thereat not less than 10 nor more than 60
<PAGE>
days before such meeting, at his or her last-known address as shown by the
corporate records. Each notice of meeting shall state the time and place of the
meeting, at whose direction the meeting is called and the purposes for which it
is called.
No notice of an adjourned meeting need be given except when required
by law. Notice of a meeting need not be given to any shareholder who signs a
waiver of such notice, in person or by proxy, whether before or after the
meeting. The attendance of any shareholder at a meeting, in person or by proxy,
without protesting before the end of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him or her.
Section 5. SHAREHOLDER LIST. The officer having charge of the stock
ledger of the corporation shall make, at least 10 days before every meeting of
the shareholders, a complete list of the shareholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each shareholder
and the number of shares registered in the name of each shareholder. Such list
shall be open to the examination of any shareholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder who is present.
Section 6. QUORUM. The holders of a majority of the shares entitled
to vote, represented in person or by proxy, shall constitute a quorum for the
transaction of business. The shareholders present in person or by proxy at a
duly organized meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Less than a quorum may adjourn. In the absence of a quorum a majority
in voting interest of those present, or in the absence of all the shareholders,
any officer entitled to preside at or act as Secretary of the meeting, may
adjourn the meeting until a quorum is present. At any adjourned meeting at
which a quorum is present any action may be taken which might have been taken at
the original meeting.
2
<PAGE>
Whenever the holders of any class or series or shares are entitled to
vote separately on a specified item of business, the provisions of this section
shall apply in determining the presence of a quorum of such class or series for
the transaction of such specified item of business.
Section 7. VOTING; PROXIES. Except as otherwise provided by law or
in the certificate of incorporation, each shareholder of record shall be
entitled to one vote for every share registered in his or her name and may
attend meetings and vote or express consent or dissent without a meeting either
in person or by proxy. Corporate action to be taken by shareholder vote, other
than the election of directors, shall be authorized by a majority of the votes
cast at a meeting of shareholders, except as otherwise provided by law or in the
certificate of incorporation. Directors shall be elected in the manner provided
in Section 1 of Article III of these By-Laws. Voting need not be by ballot
unless requested by a shareholder at the meeting or ordered by the chairman of
the meeting. Every proxy must be signed by the shareholder or his or her
attorney-in-fact. No proxy shall be valid after 11 months from its date unless
it provides otherwise.
Section 8. ACTIONS BY SHAREHOLDERS. No action required to be taken
or which may be taken at any annual or special meeting of shareholders of the
Corporation may be taken except at a duly called meeting of the shareholders of
the Corporation, or upon unanimous written consent of the shareholders entitled
to vote thereat. Shareholders of the Corporation may only propose actions to be
taken by the Corporation and nominate members of the Board of Directors upon
ninety (90) days prior written notice to the Corporation.
ARTICLE III
BOARD OF DIRECTORS
Section 1. NUMBER, QUALIFICATION AND ELECTION. The business, affairs
and property of the corporation shall be conducted and managed by its Board,
which may exercise all the powers of the corporation, except such as are by
statute, or by the certificate of incorporation
3
<PAGE>
or by these By-Laws expressly conferred upon, reserved to, or required to be
exercised by the shareholders. The number of directors which shall constitute
the Board shall be nine (9). The number of directors shall thereafter be
established from time to time by resolution of the Board. Subject to the
provisions of the certificate of incorporation, the persons receiving the
greatest number of votes at an election of the directors at an annual meeting of
shareholders shall be the directors and shall hold office until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal as hereinafter provided.
Section 2. PLACE OF MEETINGS. The Board may hold meetings, have one
or more offices, and keep the books of the corporation, except as otherwise may
be provided by law, within or without the State of Delaware, at such places as
the Board may determine from time to time.
Section 3. VACANCIES. In case of a vacancy on the Board resulting
from death, resignation, disqualification, increase in the number of directors
or other cause, such vacancy shall be filled for the unexpired term by the vote
of a majority of the remaining directors, though less than a quorum, unless
otherwise required by law or by the certificate of incorporation.
Section 4. QUORUM. At all meetings of the Board, a majority of the
entire Board shall constitute a quorum for the transaction of business. In the
absence of a quorum, a majority of the directors present may adjourn the meeting
from time to time until a quorum is present. The vote of a majority of
directors present at a meeting at which a quorum is present shall be the act of
the Board.
Section 5. ANNUAL MEETINGS. Annual meetings of the Board shall be
held for the election of officers and the transaction of other business. Such
meetings shall be held without notice either immediately after the annual
meeting of shareholders and at the same place, or as soon as practicable within
20 days after the final adjournment of the annual meeting of shareholders, upon
notice as hereinafter provided in Section 8 of this Article III, at such time
and place as shall be determined by the Chairman of the Board or President.
4
<PAGE>
Section 6. REGULAR MEETINGS. In addition to the annual meeting,
regular meetings of the Board shall be held at such times and places as may be
fixed, from time to time, by the Board.
Section 7. SPECIAL MEETINGS. Special meetings of the Board shall be
held whenever called by the Chairman of the Board, the President, or by any two
directors.
Section 8. NOTICE OF MEETINGS; WAIVER OF NOTICE. Notice of the time
and place of each special meeting of the Board, and of each annual meeting not
held immediately after the annual meeting of shareholders and at the same place,
shall be given to each director by mailing it to him or her at his or her
residence or usual place of business at least 3 days before the meeting, or by
delivering or telephoning or telegraphing it to him or her at least 2 days
before the meeting. Notice of any meeting need not be given to any director who
submits a signed waiver of notice before or after the meeting, or who attends
the meeting without protesting the lack of notice to him or her, either before
the meeting or when it begins. Notice of any adjourned meeting need not be
given, other than by announcement at the meeting at which the adjournment is
taken, if the period of adjournment does not exceed 10 days in any one
adjournment.
Section 9. RESIGNATION AND REMOVAL OF DIRECTORS. Any director or the
entire Board may be removed at any time, with or without cause, by the holders
of a majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the corporation's certificate of incorporation,
the provisions of this section shall apply, in respect to the removal without
cause of a director or directors so elected, to the vote of the holders of the
outstanding shares of
5
<PAGE>
that class or series and not to the vote of the outstanding shares as a whole.
Any director may resign at any time upon written notice to the corporation.
Section 10. COMPENSATION. Directors shall receive such compensation
as the Board determines, together with reimbursement of their reasonable
expenses in connection with the performance of their duties. A director may also
be paid for serving the corporation, its affiliates or subsidiaries in other
capacities.
ARTICLE IV
COMMITTEES
Section 1. EXECUTIVE COMMITTEE. The Board by resolution adopted by a
majority of the entire Board, may designate the Board by resolution adopted by a
majority of the entire Board, may designate an Executive Committee of one or
more directors which shall have all the authority of the Board, except as
otherwise provided in the resolution or by law, and which shall serve at the
pleasure of the Board. All action of the Executive Committee shall be reported
to the Board at its next meet meeting. The Executive Committee shall adopt
rules of procedure and shall meet as provided by those rules or by resolutions
of the Board.
Section 2. OTHER COMMITTEES. The Board may by resolution provide for
such other standing or special committees as it deems desirable and discontinue
the same at its pleasure. Each such committee shall have such powers and
perform such duties, not inconsistent with law, as may be assigned to it by the
Board.
Section 3. ALTERNATE MEMBERS. The Board may by resolution appoint
one or more directors to serve as alternate members of any such committee or to
act in the absence or disability of members of any such committee with all the
powers of such absent or disabled members. The Board may by resolution appoint
one or more directors to serve as alternate members of any such committee or to
act in the absence or disability of members of any such committee with all the
powers of such absent or disabled members.
6
<PAGE>
Section 4. ACTION BY WRITTEN CONSENT. Any action required or
permitted to be taken at any meeting of the Board, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
ARTICLE V
OFFICERS
Section 1. EXECUTIVE OFFICERS. The executive officers of the
corporation shall be the Chairman of the Board, the President, such number of
Vice Presidents as the Board may determine (one or move of whom may, in the
discretion of the Board, be designated as Executive Vice President or Senior
Vice President), a Secretary, and a Treasurer. The executive officers shall be
elected by the Board at its annual meeting and each such officer shall serve,
except as hereinafter provided in Section 2 of this Article V, until the next
annual meeting and until the election and qualification of his or her successor.
The same person may hold two or more offices, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument be required by law, by the certificate of incorporation, or by the
By-Laws to be executed, acknowledged or verified by any two or more officers.
Section 2. REMOVAL OF OFFICERS. Any officer elected or appointed by,
or pursuant to authority conferred by, the Board may be removed, with or without
cause, at any time by the affirmative vote of a majority of the entire Board.
Section 3. SUBORDINATE OFFICERS AND AGENTS. The Board may appoint
subordinate officers (including Assistant Secretaries and Assistant Treasurers),
agents and employees as it may deem advisable, who shall hold their positions
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board.
7
<PAGE>
Section 4. VACANCIES. If any vacancy shall occur among the officers
of the corporation, the Board shall have the power to fill such vacancy.
Section 5. PRESIDENT. Unless otherwise determined by the Board, the
President shall be the chief executive officer of the corporation and, in the
absence of the Chairman of the Board, shall preside at all meetings of the
shareholders and the Board. The President shall perform all duties incident to
the office of the chief executive of a corporation, and such other duties as
from time to time may be assigned to him or her by the Board.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of shareholders and the Board and shall have such other
powers and duties as the Board assigns to him or her.
Section 7. VICE PRESIDENT. Each Vice President shall have such
powers and duties as the Board or President assigns to him or her.
Section 8. TREASURER. The Treasurer shall be the chief accounting
officer of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
]and duties as the Board or the President assigns to him or her.
Section 9. SECRETARY. The Secretary shall be the secretary of, and
keep the minutes of, all meetings of the, Board and of the shareholders, shall
be responsible for giving notice of all meetings of shareholders and of the
Board, shall keep the seal and, when authorized by the Board, shall apply it to
any instrument requiring it. Subject to the control of the Board, he shall have
such other powers and duties as the Board or the President assigns to him or
her. In the absence of the Secretary from any meeting, the minutes shall be
kept by the person appointed for the purpose by the presiding officer.
Section 10. SALARIES. The Board may fix the of officers' salaries,
if any, or it may authorize the President to fix the salary of any other
officer.
Section 11. RESIGNATIONS. Any officer may resign as such at any time
by giving written notice to the Board or to the President or the Secretary of
the corporation. Any such
8
<PAGE>
resignation shall take effect at the time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 12. DELEGATION OF DUTIES OF OFFICERS. In the case of the
absence or disability of an officer of the corporation, or in case the office is
vacant, or for any other reason that the Board may deem sufficient, the Board or
any officer designated by it may, except as otherwise provided by law, delegate
the powers or duties of such officer to any other person.
ARTICLE VI
SHARES
Section 1. CERTIFICATES. The shares of the corporation shall be
represented by certificates in the form approved by the Board. Each certificate
shall be signed by the Chairman of the Board or President or a Vice President,
and by the Secretary or an Assistant Secretary or Treasurer or an Assistant
Treasurer, and shall be sealed with the corporation's seal or a facsimile of the
seal.
Section 2. TRANSFERS. Shares shall be transferable only on the
corporation's books, upon surrender of the certificate for the shares, properly
endorsed. The Board may require satisfactory surety before issuing a new
certificate to replace a certificate claimed to have been lost or destroyed.
Section 3. DETERMINATION OF SHAREHOLDERS OF RECORD. The Board shall
fix, in advance, a date as the record date for the determination of shareholders
entitled to notice of or to vote at any meeting of the shareholders, or to
express consent to or dissent from any proposal without a meeting, or to receive
payment of any dividend or the allotment of any rights, or for the purpose of
any other action. The record date may not be more than 60 nor less than 10 days
before the date of the meeting, nor more than 60 days before any other action.
In no event shall the transfer books with respect to the corporation's shares be
closed for such purpose.
9
<PAGE>
ARTICLE VII
MISCELLANEOUS -PROVISIONS
Section 1. SEAL. The Board shall adopt a corporate seal, which shall
be in the form of a circle and shall bear the corporation's name and the year
and state in which it was incorporated.
Section 2. FISCAL YEAR. The Board may determine the corporation's
fiscal year. Unless changed by the Board, the corporation's fiscal year shall
be the year ended June 30.
Section 3. VOTING OF SHARES IN OTHER CORPORATIONS. Shares in other
corporations which are held by the corporation may be represented and voted by
the Chairman of the Board, President or an Executive Vice President of this
corporation or by proxy or proxies appointed by one of them. The Board may,
however, appoint some other person to vote the shares.
Section 4. AMENDMENTS. By-Laws may be amended, repealed or adopted
by the shareholders or by a majority of the entire Board, but any By-Law adopted
by the Board may be amended or repealed by the shareholders.
Section 5. DEFINITIONS. The term "entire Board" shall mean that
number of directors from time to time fixed pursuant to Section 1 of Article
III.
Section 6. INCONSISTENT PROVISIONS. In the event that any provision
of these By-Laws is or becomes inconsistent with any provision of the
certificate of incorporation, the General Corporation Law of the State of
Delaware, any other applicable law, the provision of these By-Laws shall not be
given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VIII
INDEMNIFICATION
Section 1. NATURE OF INDEMNITY. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil,
10
<PAGE>
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, is or was a director or officer, of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended against all expense, liability and loss (including, without
limitation, attorneys' fees) actually and reasonably incurred by such person in
connection with such proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Such
indemnification shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in Section 2 hereof,
the corporation shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by such person only if such proceeding
was authorized by the Board. The right to indemnification conferred in this
Article VIII shall be a contract right and, subject to Sections 2 and 5 hereof,
shall include the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final disposition. The
corporation may, be action of the Board, provide indemnification to employees,
agents and fiduciaries of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Section 2. PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Any indemnification of a director, officer, employee, fiduciary or agent of the
corporation under Section 1 of this Article VIII or advance of expenses under
Section 5 of this Article VIII shall be made promptly, and in any event the
corporation shall use its best efforts to make such
11
<PAGE>
indemnification or advance within sixty (60) days, upon the written request of
the director, officer, employee, fiduciary or agent. Notwithstanding the
preceding sentence, if a determination (as defined in the General Corporation
Law of the State of Delaware) by the corporation that the director, officer,
employee, fiduciary or agent is entitled to indemnification pursuant to this
Article VIII is required, and the corporation fails to respond within sixty (60)
days to a written request for indemnity, the corporation shall be deemed to have
approved the request. If the corporation denies a written request for
indemnification or advancing of expenses, in whole or in part, or if payment in
full pursuant to such request is not made within sixty (60) days after receipt
of a written request and delivery of an undertaking required by the General
Corporation Law of the State of Delaware, if any, the right to indemnification
or advances as granted by this Article VIII shall be enforceable by the
director, officer, employee, fiduciary or agent in any court of competent
jurisdiction. Such person's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be indemnified by the corporation in
accordance with this Article VIII. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the corporation to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
corporation. Neither the failure of the corporation (including the Board, its
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware shall
be a defense to the action for indemnification or create a presumption that the
claimant has not met the applicable standard of conduct nor shall an actual
determination by the corporation (including the Board, its independent legal
counsel, or its shareholders) that the claimant has not met such
12
<PAGE>
applicable standard of conduct, or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 3. ARTICLE NOT EXCLUSIVE. The rights to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article VIII shall not be exclusive of any
other right which any person may have or hereafter acquire under any stature,
provision of the certificate of incorporation, by-law, agreement, vote of
shareholders or disinterested directors or otherwise.
Section 4. INSURANCE. The corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the corporation or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, whether or not the corporation would have the power
to indemnify such person against such liability under this Article VIII.
Section 5. EXPENSES. Expenses incurred by any person described in
Section 1 of this Article VIII in defending a proceeding shall be paid by the
corporation in advance of such proceeding's final disposition upon receipt of
any undertaking by or on behalf of the director or officer to repay such amount
if it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board deems
appropriate.
Section 6. EMPLOYEES AND AGENTS. Persons who are not covered by the
foregoing provisions of this Article VIII and who are or were employees or
agents of the corporation, or who are or were serving at the request of the
corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may be indemnified to the extent authorized
at any time or from time to time by the Board.
Section 7. CONTRACT RIGHTS. The provisions of this Article VIII
shall be deemed to be a contract right between the corporation and each director
or officer who serves in any such
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<PAGE>
capacity at any time while this Article VIII and the relevant provisions of the
General Corporation Law of the State of Delaware or other applicable law are in
effect, and any repeal or modification of this Article VIII or any such law
shall not affect any rights or obligations then existing with respect to any
state of facts or proceeding then existing.
Section 8. MERGER OR CONSOLIDATION. For purposes of this Article
VIII, references to "the corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee, fiduciary or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under this
Article VIII with respect to the resulting or surviving corporation as he or she
would have with respect to such constituent corporation if its separate
existence had continued.
Section 9. SEVERABILITY. Whenever possible, each provision of this
Article VIII shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Article VIII is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the other provisions of this Article VIII.
14
<PAGE>
Exhibit 4.1
- --------------- ---------------
NUMBER SHARES
FC FC
- --------------- ---------------
CUSIP 141400 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS,
LIMITATIONS AND RESTRICTIONS
ON TRANSFER
FACTORY
CARD OUTLET [LOGO]
FACTORY CARD OUTLET CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 par value per
share, OF
FACTORY CARD OUTLET CORP.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. The holder hereof
by accepting this certificate expressly assents to and is bound by the Amended
and Restated Certificate of Incorporation, and any amendments thereto, and the
By-Laws of the Corporation, copies of which are on file with the Secretary of
the Corporation and the Transfer Agent. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Countersigned and Registered:
REGISTRAR AND TRANSFER COMPANY
Transfer Agent
and Registrar
By:______________________________________________
Authorized Signature
Dated:
Secretary Chairman
<PAGE>
FACTORY CARD OUTLET CORP.
The Corporation will furnish without charge to each stockholder who so
requests the designations, powers, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Any such requests may be addressed to the Corporation
or its Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ___________ Custodian ____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act_______________________________
(State)
Additional abbreviations may also be used through not in the above list.
For value received, ___________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the written Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the written named Corporation with
full power of substitution in the premises.
Dated_____________________
NOTICE:_________________________________________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By_____________________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stockbrokers,
Savings and Loan Associations and
Credit Unions) WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
- --------------------------------------------------
/home/larry/inprogress/home12/FACTORY47626
- --------------------------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of April 10, 1995 is by and between FACTORY
CARD OUTLET OF AMERICA LTD., an Illinois corporation with offices at 745
Birginal Drive, Bensenville, Illinois 60106-1212 (the "Corporation"), and
CHARLES R. CUMELLO, residing at 5614 Park Avenue, Hinsdale, Illinois 60521 (the
"Employee").
WHEREAS, the Corporation desires to employ the Employee as its
President and Chief Operating Officer and the Employee desires to accept
employment as President and Chief Operating Officer of the Corporation;
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and agreements contained herein, the parties to this Agreement
intending to be legally bound hereby agree as follows:
1. DEFINITIONS.
(a) "AFFILIATE" shall mean any entity now or hereafter controlled
by, controlling or under common control with, the Corporation.
(b) "BASE SALARY" shall mean a base salary (exclusive of bonuses,
incentive compensation and other additional remuneration) at the annual rate of
$175,000 effective through December 31, 1995, and at the annual rate of
$280,000, effective as of January 1, 1996, subject to such increases as the
Board, or the Compensation Committee of the Board, if any, with the approval of
the Board, shall from time to time determine.
(c) "BOARD" shall mean the Board of Directors of FCOA Acquisition
Corp.
(d) "BONUS" shall mean, in addition to Base Salary, any incentive
compensation and bonuses which the Employee is entitled to receive, as approved
by the Board,
<PAGE>
or the Compensation Committee of the Board, if any, with the approval of the
Board, from time to time.
(e) "CAUSE" shall mean (A) the failure by the Employee to
substantially perform the Employee's duties as President and Chief Operating
Officer of the Corporation, or such other senior executive offices to which the
Employee may be appointed by the Board from time to time consistent with Section
3 hereof, as such duties shall be assigned to the Employee from time to time by
the Board, in the Board's reasonable discretion, and such other usual and
customary duties and obligations as are generally performed by such offices
(other than such failure resulting from the Employee's Disability) and the
continuance of such failure for a period of twenty (20) days after a written
demand for substantial performance is delivered to the Employee by the Board
which specifically identifies the manner in which the Board believes that the
Employee has not substantially performed such duties, or (B) the engaging by the
Employee in gross misconduct, such as embezzlement, theft or similar criminal
conduct or fraud, materially injurious to the Corporation, or (C) the willful
violation of the Employee of the provisions of Sections 13 or 14 of this
Agreement. For purposes of this Section l(e), no act, or failure to act, on the
Employee's part shall be considered "willful" if done, or omitted to be done, by
him in good faith and with a reasonable belief that his action or omission was
in the best interest of the Corporation. Any termination for Cause shall be
based on a determination of such Cause by a vote of the Board exclusive of the
Employee if the Employee is a member of the Board.
(f) "DATE OF TERMINATION" shall mean (i) if the Employee's employment
is terminated by reason of the Employee's death, the date of such death, (ii) if
the Employee's employment is terminated for Disability, ninety (90) days after
the Notice of Termination is given, (iii) if the Employee's employment is
terminated for any other reason, the date on which a Notice of Termination is
given; PROVIDED, that, (A) the date specified in any Notice of Termination shall
not be earlier than the date on which the Notice of Termination is given, and
(B) if Notice of Termination is given by the Corporation for Cause or Disability
and such basis for termination is subsequently finally determined, whether by
agreement, award,
2
<PAGE>
order, judgment, decree or otherwise, not to have been a valid basis for such
termination by the Corporation, the Date of Termination shall be the earlier of
(X) the date on which the basis of such termination is finally determined,
either by mutual written agreement of the parties or by a final award, judgment,
order or decree of a court of competent jurisdiction (the time for appeal
therefrom having expired and no appeal having been perfected), or (Y) ninety
(90) days from the date on which the Notice of Termination is given.
(g) "DISABILITY" shall mean the substantial impairment of the
Employee, as a result of substantial incapacity due to mental or physical
condition, such that the Employee is unable to perform the Employee's usual and
customary duties and obligations for a continuous period of ninety (90) or more
consecutive days as determined by a vote of the Board (exclusive of the
Employee) after the Board's receipt of written findings on the Employee's
condition by a qualified licensed physician appointed by the Board; PROVIDED,
that, any such written findings shall be sent to the Employee prior to any such
determination by the Board and, if the Employee within five (5) business days
after receipt of such written findings disputes the findings of such
Board-appointed physician, the Board determination of Disability shall be made
only after receiving written findings of a qualified licensed physician
appointed by (A) the Board-appointed physician and (B) the Employee's personal
physician, which appointment shall be made within ten (10) days after the
Corporation' s receipt of written notice of such dispute by the Employee. The
Employee hereby consents to reasonable medical examinations by the
Board-appointed physicians for the purposes of this Agreement.
(h) "NOTICE OF TERMINATION" shall mean a notice which shall indicate
in reasonable detail the facts and circumstances claimed by the Corporation to
provide a basis for termination of the Employee's employment with the
Corporation or shall indicate that the Corporation is terminating the Employee's
employment with the Corporation without Cause.
2. Employment Subject to Section 10 of this Agreement, the Corporation
hereby agrees to employ the Employee, and the Employee hereby agrees to serve
the Corporation, upon the terms and conditions set forth in this Agreement, for
the period
3
<PAGE>
commencing as of the date hereof and expiring on March 31, 1996, which term
shall be extended for successive one year periods thereafter without further
action on the part of either party, unless notice of non-renewal is given by
either party to the other party at least thirty (30) days prior to the end of
the then current term.
3. POSITION AND DUTIES.
(a) The Employee shall serve the Corporation as its President and
Chief Operating Officer.
(b) The Employee shall have supervision over, and responsibility for
and shall perform, such duties and exercise such powers as from time to time may
be assigned to or vested in the Employee by the Board and such other usual and
customary duties and obligations as are generally performed by the offices of
the president and chief operating officer, or such other senior executive
offices to which the Employee may be appointed by the Board from time to time.
(c) The Employee shall, without further remuneration therefor, serve
as director of the Corporation and/or any Affiliate, and carry out such other
duties on behalf of any Affiliate, as the Corporation may from time to time
reasonably direct.
(d) The Employee shall devote the whole of his working time and
attention and the whole of his skills to, and faithfully and diligently perform,
his duties under this Agreement and use his best efforts to promote the business
and interests of the Corporation and the Affiliates and to expand their
respective businesses.
(e) The Employee shall obey all rules, and all laws, regulations and
special instructions applicable to him in the performance of his duties
(including, without limitation, legal and proper rules established and special
instructions given to the Employee by the Board).
4
<PAGE>
4. COMPENSATION.
(a) During the term of this Agreement, the Corporation shall pay to
the Employee for his services hereunder the Base Salary. The Employee's Base
Salary shall be payable to the Employee from time to time but not less
frequently than monthly. Such Base Salary is inclusive of compensation received
or receivable by the Employee in respect of any other office, employment or
service by or in the Corporation or the Affiliates.
(b) The Employee agrees to the deduction from his Base Salary or
other sums payable to him all statutory deductions, all contributions payable by
him under any employee benefit plan in which he participates or is deemed to
participate, and all other amounts that may be owed by him on any account to the
Corporation or an Affiliate.
(c) The Corporation agrees that the Board or the Compensation
Committee of the Board shall review the terms of the Employee's compensation set
forth under this Agreement not later than July 1, 1996; provided, however, that
nothing contained herein shall be deemed to impose any obligation on the
Corporation to increase the Employee's Base Salary or pay the Employee any bonus
except as specifically set forth herein.
5. BONUSES. In addition to the Employee's Base Salary, the Employee shall
be entitled to receive such Bonuses as the Board may from time to time determine
based on commercially reasonable performance objectives consistent with
standards within the discount greeting card and party goods industry.
Notwithstanding the foregoing, the Employee shall be entitled to receive, in
addition to his Base Salary, a Bonus for the Corporation's fiscal year ended
June 30, 1996 up to an amount equal to $140,000 based on the Corporation's
current management incentive compensation plan approved by the Board on December
6, 1995.
6. STOCK OPTIONS. In addition to the employee's Base Salary, the Employee
shall be entitled to receive options to purchase 35,000 shares of common stock
of FCOA Acquisition Corp. ("FCOA"), no par value per share, exercisable at a
price of $10.00 per share,
5
<PAGE>
vesting in four equal annual installments, with the first such installment
vesting on the first anniversary of the date of this Agreement (the "Options").
The options shall be subject to the provisions of an Employee Stock Option
Agreement to be delivered by the Corporation to the Employee containing such
terms and conditions to be determined in its sole discretion by the Board, or
the Compensation Committee of the Board, if any, with the approval of the Board,
consistent with terms of the FCOA Acquisition Corp. 1989 Stock Option Plan
approved by the Board of Directors of FCOA on July 7, 1989.
7. BENEFITS. During the period that the Employee is employed by the
Corporation hereunder, the Corporation shall:
(a) Permit the Employee such paid holidays of such duration (not
being less than 15 business days of paid vacation in any one year in addition
to the usual public holidays) and at such time or times as may be mutually
agreed between the Employee and the Corporation.
(b) Reimburse the Employee in accordance with the Corporation's
policy for employees generally, upon his submission of such documentation as is
reasonably required by the Corporation, for all reasonable travel,
entertainment, and other ordinary, reasonable and necessary out-of-pocket
business expenses incurred by the Employee as part of and in connection with the
performance of his duties specified herein.
(c) Provide to the Employee life insurance, pension and other fringe
benefit plans and arrangements to the same extent, and subject to the same
terms, conditions and overall general administration of such plans and
arrangements, as the Corporation provides, if any, during the term of this
Agreement to its employees generally.
(d) Provide to the Employee a car of luxury class or equivalent cash
allowance to cover this expense at the Corporation's discretion.
6
<PAGE>
(e) In conjunction with the Employee's commencement of employment
with the Corporation, provide payment to Employee of reasonable expenses
incurred by the Employee in connection with his relocation from Connecticut to
Illinois up to a maximum aggregate amount of $100,000.00, including the
following: packers, movers, storage (up to six months), legal fees and real
estate commissions for the purchase and/or sale of the Employee's primary
residence, moving expenses for a boat, and other usual relocation expenses.
Prior to payment of such expenses, the Employee shall deliver to the Corporation
such invoices, receipts or quotations covering such expenses in form and
substance reasonable acceptable to the Corporation.
(f) In addition to the relocation expenses to be paid to the Employee
pursuant to Section 7(e) above, in conjunction with the Employee's commencement
of employment with the Corporation, provide payment for reasonable temporary
living expenses incurred by the Employee up to a maximum period of six (6)
months and for a reasonable number of return trips during such six (6) month
period between the State of Connecticut and the City of Chicago, Illinois. Prior
to payment of such expenses, the Employee shall deliver to the Corporation such
invoices, receipts or quotations covering such expenses in form and substance
reasonable acceptable to the Corporation.
8. INFORMATION. Throughout the period of his employment by the
Corporation, the Employee shall make available to the Corporation any and all
information of which he has knowledge that is relevant to the business of the
Corporation or any Affiliate and shall make to the Corporation all suggestions
and recommendations which he feels will be of benefit to the Corporation or any
Affiliate.
9. BUSINESS OPPORTUNITIES. Throughout the period of his employment by the
Corporation, the Employee shall make all business opporturnities of which he
becomes aware pertaining to the business of the Corporation or the Affiliates
(as engaged in now or hereafter) available promptly to the Chairman of the Board
of the Corporation and the Board and not to any other person or entity or to
himself individually.
7
<PAGE>
10. TERMINATION.
(a) DEATH. The Employee's employment hereunder shall automatically
terminate upon the Employee's death.
(b) DISABILITY. The Corporation may terminate the Employee's
employment hereunder upon the Employee's Disability.
(c) CAUSE. The Employer may terminate the Employee's employment
hereunder for Cause.
(d) TERMINATION BY THE EXECUTIVE. The Employee may terminate the
Employee's employment hereunder for any reason upon thirty (30) days prior
written notice to the Board.
(e) NOTICE OF TERMINATION. Any termination by the Corporation for
Cause or Disability or any other reason other than death shall be communicated
by written Notice of Termination to the Employee.
11. COMPENSATION UPON TERMINATION OTHER THAN FOR CAUSE.
If the Employee's employment with the Corporation is terminated
by the Corporation for any reason other than Cause at any time during the term
of this Agreement, the Employee shall be entitled to receive for a period of
twelve (12) calendar months following the Date of Termination (the "Severance
Period"), the following:
(i) an amount equal to the Employee's current monthly Base
Salary; and
(ii) in addition to the payment set forth in Section 11(a)(i)
above, an amount equal to the Bonus, if any, which the Employee would have
otherwise earned
8
<PAGE>
during the Severance Period had the Employee continued to be employed with the
Corporation, regardless of whether or not the Corporation is meeting the
Corporation's business plan approved by the Board for such Severance Period
("Severance Bonus").
(b) Payment under Sections 11(a)(i) and (ii) above shall be made
in twelve (12) equal consecutive monthly payments of Base Salary, and Severance
Bonus, if any, commencing on the first business day of the calendar month
following the Date of Termination, subject to mitigation resulting from the
Employee's employment with any company, firm or person during the Severance
Period.
12. COMPENSATION UPON TERMINATION FOR CAUSE.
If the Employee's employment with the Corporation shall terminate
for Cause by the Corporation, or for any reason by the Employee, all rights of
the Employee as employee, officer or director of the Corporation shall cease
immediately, except that the Employee shall be entitled to receive any unpaid
Base Salary (and, with respect to a termination for any reason by the Employee,
the Employee's Bonus, if any) accrued as of the Date of Termination and
reasonable expenses incurred by the Employee in performing services for the
benefit of the Corporation prior to the Date of Termination for which the
Employee is entitled to reimbursement under any policy or plan generally
maintained by the Corporation for its executive employees or otherwise approved
in writing by an authorized officer of the Corporation other than the Employee,
and the Corporation shall have no further obligations to the Employee under this
Agreement. The amounts payable to the Employee under this Section 12 shall be
paid to the Employee in accordance with the Corporation's regularly scheduled
salary and bonus payment policy established by the Board prior to such
termination.
13. UNAUTHORIZED DISCLOSURE.
a) The Employee acknowledges and agrees that his employment by
the Corporation under this Agreement necessarily involves him understanding of
and access to
9
<PAGE>
certain trade secrets and other confidential information pertaining to the
business of the Corporation and the Affiliates. Accordingly, the Employee agrees
that at all times during the period of the Employee's employment with the
Corporation, the Employee shall not, without the express written consent of the
Board or a person authorized thereby, directly or indirectly, disclose to any
person, corporation or entity other than an employee of the Corporation or a
person to whom disclosure is reasonably necessary or appropriate in connection
with the performance by the Employee of the Employee's duties as an executive of
the Corporation (an "Authorized Person"), or use or knowingly permit to be so
disclosed or used, for the benefit of any person, corporation or entity, or
himself, any material confidential information obtained by the Employee while in
the employ of the Corporation with respect to any of the Corporations or any of
the Affiliates' products, customers, or current or future plans, the disclosure
of which the Employee knows or should reasonably believe will be damaging to the
Corporation; PROVIDED, however, that such confidential information shall not
include any information known or available generally to the public (other than
as a result of unauthorized disclosure by the Employee). For the period ending
two (2) years following the termination of the Employee's employment with the
Corporation (whether or not for Cause or for any other reason), except as
permitted under the provisions of this Section 13(a), the Employee shall not
disclose any such confidential information of the type described above. This
provision is intended only to prevent unauthorized disclosure of material
confidential information and is not intended to preclude the Employee from
securing other employment following the termination of the Employee's employment
with the Corporation except as subject to such restrictions on such other
employment as set forth in Section 14 of this Agreement.
(b) The foregoing provisions of Section 13 (a) above shall be binding
upon the Employees heirs, successors and legal representatives.
14. COVENANT NOT TO COMPETE.
(a) The Employee hereby agrees that during the term of the Employee's
employment with the Corporation and for a period of one (1) calendar year
10
<PAGE>
thereafter (the "Restriction Period"), the Employee will not, singly, jointly,
or as a partner, member, consultant, or agent of any partnership, or as an
agent, consultant, or stockholder of any other corporation or entity, or as an
investor of more than five percent (5%) of the voting stock of any entity, or in
any other capacity, directly, indirectly or otherwise beneficially:
(i) Own, manage, operate, join in, control, or participate in
the ownership, management, operation, or control of, or work for (as an
employee, consultant, independent contractor or otherwise), or permit the use of
his name by, or provide financial or other assistance to, or be connected in any
manner with, any of the following (each a "Competitive Business"): (1) any drug
store, drug store chain or other retailer which offers pharmaceutical drugs for
sale in stores located anywhere in the Restricted Area (as hereinafter defined)
which generates thirty-five percent (35%) or more of its gross revenues from the
sale, anywhere in the Restricted Area, of greeting cards, party goods, gift wrap
accessories, stationery and/or any other products or services which materially
reproduce, incorporate or copy any of the products or services which are offered
or developed for marketing by the Corporation during the term of the Employee's
employment with the Corporation ("Competitive Products") or which offers
greeting cards for sale in the Restricted Area under a "one price" strategy at a
price per card of $.39 or less or under a "half-off" strategy at a price per
card of 2/$1.00 or less, or (2) any retailer which generates thirty-five percent
(35%) or more of its gross revenue from the sale of Competitive Products
anywhere in the Restricted Area;
(ii) Induce or attempt to induce any person who, during the term
of the Employee's employment with the Corporation, is an employee,
representative, consultant, agent or supplier of the Corporation, to terminate
his, her or its employment or relationship with the Corporation or to violate
the terms of any agreement between said representative, agent, consultant,
employee or supplier and the Corporation, or hire or attempt to hire any
employee of the Corporation who has left the employment of the Corporation
within sixty (60) days after the termination of such employee's employment with
the Corporation or
11
<PAGE>
(iii) Induce or attempt to induce any person, business or entity
which is or was a customer of the Corporation at any time during the term
preceding the effective date of this Agreement to terminate any written or oral
agreement or understanding with the Corporation or to become a customer of any
person, corporation, partnership or other entity which engages in any
Competitive Business.
(b) For purposes of Section 14 (a) hereof, "Restricted Area" means
the United States (and any of its territories), Canada and Mexico.
(c) If the Employee violates any of the restrictions contained in
Section 14 (a) above, the Restriction Period automatically shall be increased by
the period of time from the commencement of any such violation until such time
as the Employee has cured such violation.
15. CONDUCT OF THE EMPLOYEE UPON TERMINATION. Upon the termination of the
Employee's employment, whether under this Agreement or otherwise:
(a) to the extent within his possession or control, the Employee shall
surrender and deliver to the Corporation or its authorized representative all
files, figures, calculations, letters, papers, records, proposals, listings,
brochures, manuals, instruments, drawings, designs, programs, plans or
statistics, or any copies thereof, any information or instruments derived
therefrom, or any other similar documents or information of any type or
description, however such information might be obtained or recorded and on
whatever medium such information may be contained, arising out of or in any way
relating to the business or affairs of the Corporation or any Affiliate or
obtained as a result of or in connection with the Employee's employment by the
Corporation or any Affiliate; and
(b) the Employee shall not be entitled to retain a copy of any
document or information referred to in section 15 (a) above; and
12
<PAGE>
(c) the Employee shall not represent himself as being in any way
connected with, or interested in the business of, the Corporation or any
Affiliate.
16. CERTAIN REMEDIES. The Employee agrees and acknowledges that the
Corporation does not have any adequate remedy at law for the breach or
threatened breach by the Employee of any of the provisions of Sections 13, 14,
or 15 of this Agreement and agrees that the Corporation will be entitled to
injunctive relief (without proof of monetary or immediate damage and without any
bond or other security being required) to bar the Employee from such breach or
threatened breach in addition to any other remedies which might be available to
the Corporation at law or in equity. Moreover, and in addition to such remedies,
in the event of a breach by the Employee of any of the provisions of Sections
13, 14, or 15 of this Agreement or any other breach that would permit the
Corporation to terminate the Employee's employment for Cause, the Employee will
return to the Corporation all monies and other benefits paid to him pursuant to
this Agreement following the date of such breach.
17. PARACHUTE PAYMENTS. Notwithstanding anything in this a Agreement to
the contrary, if the aggregate amounts payable or benefits provided under this
Agreement would constitute "parachute payments" as set forth in Section 28OG of
the Internal Revenue Code of 1986, as amended form time to time, then the
amounts otherwise so payable or benefits otherwise so provided shall be adjusted
by the Corporation to be payable at such later dates, and over such longer
periods of time, to the extent necessary (but only to the extent necessary) for
the amounts so payable or benefits so provided not to constitute such "parachute
payments".
18. SUCCESSORS: BINDING AGREEMENT.
(a) This Agreement shall be binding on the Corporation and on its
successors and assigns. Without limiting the generality of the foregoing, the
Corporation will require any successor to or assignee of all or substantially
all of the business and/or assets of the Corporation, whether direct or
indirect, by purchase, consolidation or merger (whether or not the Corporation
is the surviving corporation), or otherwise, to expressly assume and agree to
perform
13
<PAGE>
this Agreement in the same manner and to the same extent that the Corporation
would be required to perform if no such succession had taken place.
(b) The duties and obligations of the Employee hereunder are not
assignable by him without the express written consent of the Board. This
Agreement and all the rights of the Employee hereunder shall inure to the
benefit of and be enforceable by the Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to him under this Agreement if the Employee had continued to live,
all such amounts shall be paid in accordance with the terms of this Agreement to
the Employee's devisee, legatee, or other designee or, if there be no such
designee, to the Employee's estate.
19. CONTINUING OBLIGATIONS; SEVERABILITY. The termination of this
Agreement or of the employment of the Employee (hereunder or otherwise) shall
not operate to terminate the provisions of Sections 13, 14 and 15 of this
Agreement which remain in full force and effect and binding on the Employee
notwithstanding any such termination. In addition, the provisions of Sections
13, 14 and 15 of this Agreement shall be read and construed and shall have
effect an separate, severable and independent provisions or restrictions, and
shall be enforceable accordingly.
20. NOTICES. For the purposes of this Agreement, any notice, consent,
offer, demand, request or other instrument (hereinafter collectively referred to
as "Notice") required or authorized to be given or served upon a party pursuant
to this Agreement shall be in writing and may be given by telex, telegram,
cable, post or hand addressed as follows:
If to the Employee: Charles R. Cumello
5614 Park Avenue
Hinsdale, Illinois 60521
14
<PAGE>
If to the Corporation: FCOA Acquisition Corp.
745 Birginal Drive
Bensenville, Illinois 60106-1212
Attention: Chairman of the Board
with a copy to: Pitney, Hardin, Kipp & Szuch
200 Campus Drive
Florham Park, New Jersey 07932
Attention: Lori J. Braender, Esq.
or at such other or additional address as either party may have furnished to the
other in writing in accordance herewith, except that Notices of change of or
additional address shall be effective only upon receipt and, PROVIDED that in
the event that (i) there is a vacancy in the office of the Chairman of the
Board, or (ii) the Chairman of the Board does not maintain a regular office at
the address of the Corporation set forth above, in each case at the time any
such Notice is given or served, such Notice shall only be effective upon receipt
by the party designated by the Corporation to receive copies of Notices to the
Corporation.
21. INTEGRATION. This Agreement represents the entire understanding
of the parties with respect to the subject matter hereof and supersedes all
prior agreements, contracts, understandings, negotiations and other arrangements
between the parties, including without limitation any employment contracts,
agreements or understandings in effect as of the date hereof. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party hereto which are not set
forth expressly in this Agreement.
22. AMENDMENTS; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by the Employee and by the Chairman of the Board
or such other officer or director of the Corporation as may be specifically
designated by the Board. No waiver by either party hereto
15
<PAGE>
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a continuing waiver or a waiver of any similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
23. GOVERNING LAW; JURISDICTION. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
Illinois without giving effect to the principles of conflict of laws. The Courts
of Illinois have exclusive jurisdiction to entertain any action in respect of
this Agreement. Without prejudice to any other mode of service, service of
summons, statement of claim or any third party notice, or any notice thereof,
any action may be effected on any party by the same being delivered to or left
for that party at its address appearing in this Agreement or at such other
address as it may have specified as its address for service by notice in writing
given to the other party in accordance with Section 20 hereof.
24. VALIDITY. The invalidity or unenforceabililty of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
25. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
26. SECTION HEADINGS. The section headings contained in this Agreement are
inserted for reference purposes only and shall not effect the meaning or
interpretation of this Agreement.
27. APPROVAL OF AGREEMENT BY THE BOARD. This Agreement has been ratified
and approved by the Board.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
Attested: FACTORY CARD OUTLET OF AMERICA LTD.
/s/ Carol A. Travis By: /s/ William E. Freeman
- --------------------------- ---------------------------
Name: Carol A. Travis William E. Freeman,
Title: Corporate Secretary Chairman of the Board
WITNESS: EMPLOYEE:
/s/ *Illegible signatory /s/ Charles R. Cumello
- --------------------------- ---------------------------
Name: CHARLES R. CUMELLO
17
<PAGE>
FACTORY CARD OUTLET OF AMERICA LTD.
745 Birginal Drive
Bensenville, Illinois 60106-1212
August 1. 1996
Charles R. Cumello
5614 Park Avenue
Hinsdale, Illinois 60521
Dear Charles:
This will confirm the agreement by and between Factory Card Outlet of
America Ltd. ("FCOA") and you concerning amounts to be paid, advanced or loaned,
or already paid, advanced or loaned, to you by FCOA.
In connection therewith, you and FCOA leave agreed as follows:
1. In consideration of any loss incurred by you as a result of
reducing the sale price of your home located at 10 Bates Farm Lane, Darien,
Connecticut (the "Connecticut Home") in connection with your relocation to the
Bensenville, Illinois area for the purpose of assuming your position as Chief
Executive Officer and President of FCOA (the "Relocation"), FCOA shall pay to
you an amount equal to such loss, based upon the original purchase price paid by
you for the Connecticut Home, plus permanent improvements, less the final sale
price in connection with such sale.
2. In addition to the payment referred to in paragraph 1 above, FCOA
shall pay to you an amount equal to any and all reasonable realty transfer taxes
and fees, costs and expenses (including attorneys' fees and commissions)
incurred by you related to the closing of the sale of the Connecticut Home.
3. In addition, FCOA shall loan, or has loaned, to you the amount of
$175,000 (the "Loan Amount") in order to finance the purchase of your primary
residence located at 5614 Park Avenue, Hinsdale, Illinois (the "Illinois Home")
in connection with the Relocation. Your repayment to FCOA of the Loan Amount
shall be secured by a Promissory Note, in form and substance acceptable to FCOA,
providing for the accrual of interest on the Loan Amount at the prime rate and
further providing for the repayment of all principal and interest upon the
earlier to occur of:
<PAGE>
Mr. Charles Cumello
August 1, 1996
Page 2
(a) July 31, 2001; or
(b) The sale of either the Connecticut Home or the
Illinois Home; or
(c) A public offering of securities of FCOA, provided you
participate in such offering, but the amount of principal and interest
outstanding under the Promissory Note as of the date of such offering which you
will be required to pay under this subparagraph (c) shall be limited to the
market value, on the date of such offering, of the securities held by you and
registered pursuant to such offering; or
(d) Your exercise of any stock options granted to you by FCOA,
but the amount of principal and interest outstanding under the Promissory Note
as of the date of such exercise which you will be required to pay under this
subparagraph (d) shall be limited to the fair value, on the date of such
exercise, of the common stock of FCOA ("Common Stock") into which such options
convert, which fair value shall equal the greater of (i) the purchase price of
shares of Common Stock in the immediately preceding sale of shares of Common
Stock by FCOA or (ii) if no such sale has occurred within twelve (12) months
after the date of such exercise, the fair value of shares of Common Stock as
reasonably determined by the board directors of FCOA in its sole discretion.
4. As collateral security for the full and prompt payment of the Loan
Amount, together with interest thereon, pursuant to paragraph 3 hereof, you
shall grant FCOA a mortgage, in form and substance deductible to FCOA, on each
of the Connecticut Home and the Illinois Home, and you shall execute such
Mortgages, Promissory Notes, UCC-1 Financing Statements and other instruments,
agreements and documents as FCOA shall deem necessary or advisable to give
effect to the provisions of this letter agreement and to perfect and protect
FCOA's security interests in the Connecticut Home and the Illinois Home.
<PAGE>
Mr. Charles Cumello
August 1, 1996
Page 3
Kindly indicate your acceptance of the terms and conditions set forth
herein by signing and dating the enclosed copy of this letter in the space
indicated below.
Thank you.
Sincerely,
FACTORY CARD OUTLET OF AMERICA LTD.
By: /s/ William E. Freeman
-----------------------------------------
William E. Freeman, Chairman of the Board
ACCEPTED AND AGREED TO
as of this 1st day of August, 1996:
/s/ Charles R. Cumello
-----------------------------------
CHARLES R. CUMELLO
<PAGE>
FCOA ACQUISITION CORP.
TEL: (708) 238-0010 FAX: (708) 238-9547
July 30, 1996
CONFIDENTIAL
Mr. J. Bayard Kelly
Founder and Chairman Emeritus
745 Birginal Drive
Bensenville, IL 60106-1212
Dear Kelly,
Following up on our luncheon meeting earlier this month and further
discussions with Charlie Cumello and Rick Doppelt, I am pleased to confirm
Charlie's recent talks with you regarding extending your consulting status
with the operating company.
Last September it was agreed that you would continue with the firm on a
full-time basis as a consultant to the company with particular emphasis on
assisting Charlie, the buyers and the new Vice President and General
Merchandise Manager in the area of merchandising. You would report directly
to Charlie and receive an annual salary of $200,000. In addition, you would
be eligible for an annual performance bonus of up to a maximum of $50,000.
Following this 12-month period, it was agreed that while it is anticipated
that you would stand for re-election as a Director of the Company and
continue to serve in that capacity at the discretion of the shareholders,
your full-time employment would cease but you would continue to serve the
company in the same capacity as a consultant with particular emphasis on
merchandising. However, it would be on an "on call, as needed" basis
whereupon you would begin transition towards eventual retirement.
Charlie Cumello's recommendation has received the support of the Board of
Directors to extend your full-time consulting arrangement with the company
through March 31, 1997 at the same $200,000 per annum salary and you would
remain eligible for the pro-rata $50,000 bonus.
From April 1, 1997 and for the following 12 months, you would continue to
receive all eligible benefits that you currently receive from the company.
You would retain the use of your automobile during the entire length of
your consulting assignment and we will look into the possibility of
transferring your company automobile to you upon the completion of your
assignment.
During this phase of your consulting agreement, you would receive a
$100,000 fee per annum with no provisions for any bonus.
<PAGE>
Letter to J. Bayard Kelly
July 30, 1996
Page 2
In addition, Charlie Cumello and I have discussed your proposal to retain the
insurance policies carded on you which were transferred to the company at the
time that it was acquired from Viking Enterprises. Glen Franchi will consult
with the KPMG tax people to determine any potential ramifications to either the
company or you if such a transfer were to occur. Following the advice and
counsel of KPMG, the company will discuss the matter with you and a final
determination will be made.
Further, it has been agreed that at the end of your full-time assignment and
upon completion of a successful transition of the operating company's CEO
position and the transfer of your experience, knowledge and advice to Charlie
Cumello and the new Vice President and General Merchandise Manager, you will be
awarded a further grant of 5,000 stock options.
Kelly, as you are well aware, Charlie, the other members of the Board and I in
particular, are deeply indebted to you for the services you have provided to our
company. Without you, Factory Card Outlet would not exist. Your concept,
perseverance, drive and determination combined with a strong "get it done"
entrepreneurial style and attitude have been key elements to the growth, success
and expansion of the company.
I expect that you will find this complies in all respects to our prior
discussions but if you, for any reason find it does not, please contact me at
once.
In the meantime, Charlie, Marty, the Board of Directors and I look forward to
your assistance and advice to aid in the efforts to keep those sales figures
flying.
With kindest personal regards to you and Margie, I remain your partner,
supporter and friend for life.
Sincerely yours,
/s/ William E. Freeman
- -------------------------
William E. Freeman
Chairman
cc: Michael I. Barach, Director AGREED TO AND UNDERSTAND
Dr. Robert C. Blattberg, Director as of July 30, 1996:
Bart A. Brown, Jr., Director
Charles R. Cumello, President /s/ J. Bayard Kelly
Richard A. Doppelt, Director -------------------------
Glen J. Franchi, Executive Vice President/CAO J BAYARD KELLY
Carol A. Travis, Vice President and Secretary
WEF/cat
<PAGE>
Exhibit 10.5.1
INDUSTRIAL BUILDING LEASE
LANDLORD:
CENTERPOINT REALTY SERVICES CORPORATION,
an Illinois corporation
TENANT:
FACTORY CARD OUTLET OF AMERICA LTD.,
an Illinois corporation
<PAGE>
TABLE OF CONTENTS
ARTICLE I Lease Terms .......................................... 1
Section 1.1. Definitions .......................................... 1
Section 1.2. Significance of Definitions .......................... 3
Section 1.3. Enumeration of Exhibits .............................. 3
ARTICLE II Premises ............................................. 4
Section 2.1. Lease ................................................ 4
ARTICLE III Term ................................................. 4
Section 3.1. Term ................................................. 4
Section 3.2. Memorandum of Lease Term ............................. 4
ARTICLE IV Construction of Improvements ......................... 4
Section 4.1. Landlord's Construction Obligation ................... 4
Section 4.2. Plans Approval ....................................... 5
Section 4.3. Completion ........................................... 5
Section 4.4. Tenant's Inspection Rights ........................... 5
Section 4.5. Changes .............................................. 5
Section 4.6. Punchlist ............................................ 6
Section 4.7. Representatives ...................................... 6
Section 4.8. Warranty ............................................. 6
Section 4.9. Late Completion ...................................... 7
ARTICLE V Rent ................................................. 7
Section 5.1. Base Rent ............................................ 7
Section 5.2. Interest and Late Charges on Late Payments ........... 7
Section 5.3. Rent Abatement ....................................... 7
ARTICLE VI Taxes and Impositions ................................ 8
Section 6.1. Taxes ................................................ 8
Section 6.2. Utilities ............................................ 8
Section 6.3. Additional Tenant Obligations ........................ 9
Section 6.4. Deposits ............................................. 9
Section 6.5. Adjustment Statement ................................. 9
Section 6.6. Payments ............................................. 9
Section 6.7. Payment Adjustments .................................. 10
Section 6.8. Right to Pay ......................................... 10
Section 6.9. Landlord's Contest of Taxes .......................... 10
ARTICLE VII Use .................................................. 10
Section 7.1. Use .................................................. 10
Section 7.2. Prohibited Uses ...................................... 10
Section 7.3. No Implied Permission ................................ 10
Section 7.4. Adverse Claims ....................................... 11
ARTICLE VIII Maintenance of Premises .............................. 11
Section 8.1. Maintenance .......................................... 11
Section 8.2. Governmental Requirements ............................ 11
Section 8.3. Tenant's Responsibilities ............................ 12
i
<PAGE>
Section 8.4. Maintenance Contract ................................. 12
ARTICLE IX Insurance ............................................ 12
Section 9.1. Coverage Required .................................... 12
Section 9.2. Policies ............................................. 13
Section 9.3. Subrogation .......................................... 14
Section 9.4. Miscellaneous Insurance Provisions ................... 14
Section 9.5. Kinds and Amounts .................................... 15
Section 9.6. Insurance Appraisals ................................. 16
Section 9.7. Tenant Payments ...................................... 16
ARTICLE X Damage or Destruction ................................ 16
Section 10.1. Property Demise ...................................... 16
Section 10.2. Insurance Deductible ................................. 16
ARTICLE XI Liens 16
Section 11.1. Lien Claims .......................................... 16
Section 11.2. Landlord's Right to Cure ............................. 17
ARTICLE XII Tenant Alterations ................................... 17
Section 12.1. Alterations .......................................... 18
Section 12.2. Ownership of Alterations ............................. 18
Section 12.3. Signs ................................................ 18
ARTICLE XIII Condemnation ......................................... 18
Section 13.1. Taking: Lease to Terminate ........................... 18
Section 13.2. Taiting: Lease to Continue ........................... 19
Section 13.3. Tenant's Claim ....................................... 19
ARTICLE XIV Assignment -- Subletting by Tenant ................... 19
Section 14.1. No Assignment, Subletting or Other Transfer .......... 19
Section 14.2. Operation of Law ..................................... 19
Section 14.3. Excess Rental ........................................ 20
Section 14.4. Merger or Consolidation .............................. 20
Section 14.5. Unpermitted Transaction .............................. 20
ARTICLE XV Financial Statements ................................. 20
Section 15.1. Financial Statements ................................. 21
ARTICLE XVI Indemnity for Litigation ............................. 21
Section 16.1. Indemnity for Litigation ............................. 21
Section 16.2. Landlord's Indemnity ................................. 21
ARTICLE XVII Estoppel Certificates ................................ 21
Section 17.1. Estoppel Certificate ................................. 21
ARTICLE XVIII Inspection of Premises ............................... 21
Section 18.1. Inspections .......................................... 21
Section 18.2. Signs ................................................ 21
ARTICLE XIX Fixtures ............................................. 22
Section 19.1. Building Fixtures .................................... 22
ii
<PAGE>
Section 19.2. Tenant's Equipment ................................... 22
Section 19.3. Removal of Tenant's Equipment ........................ 22
ARTICLE XX Default .............................................. 22
Section 20.1. Events of Default .................................... 22
Section 20.2. Waivers .............................................. 24
Section 20.3. Bankruptcy ........................................... 24
Section 20.4. Re-entry ............................................. 25
Section 20.5. No Waiver ............................................ 25
ARTICLE XXI Landlord's Performance of Tenant's Covenants ......... 26
Section 21.1. Landlord's Right to Perform Tenant's Obligations ..... 26
ARTICLE XXII Exercise of Remedies ................................. 26
Section 22.1. Cumulative Remedies .................................. 26
Section 22.2. No Waiver ............................................ 27
Section 22.3. Equitable Relief ..................................... 27
ARTICLE XXIII Subordination to Mortgages ........................... 27
Section 23.1. Subordination ........................................ 27
Section 23.2. Mortgage Protection .................................. 27
ARTICLE XXIV Indemnity and Waiver ................................. 28
Section 24.1. Indemnity ............................................ 28
Section 24.2. Waiver of Claims ..................................... 29
ARTICLE XXV Surrender ............................................ 29
Section 25.1. Condition ............................................ 29
Section 25.2. Removal of Tenant's Equipment ........................ 29
Section 25.3. Holdover ............................................. 30
ARTICLE XXVI Covenant of Quiet Enjoyment .......................... 30
Section 26.1. Covenant of Quiet Enjoyment .......................... 30
ARTICLE XXVII Recording ............................................ 30
Section 27.1. Recording ............................................ 30
ARTICLE XXVIII Notices .............................................. 30
Section 28.1. Notices .............................................. 31
ARTICLE XXIX Covenants Run with Land .............................. 31
Section 29.1. Covenants ............................................ 31
Section 29.2. Release of Landlord .................................. 31
ARTICLE XXX Environmental Matters ................................ 31
Section 30.1. Defined Terms ........................................ 32
Section 30.2. Tenant's Covenants with Respect to Environmental
Matters .............................................. 33
Section 30.3. Conduct of Tenant .................................... 34
Section 30.4. Exacerbation ......................................... 34
Section 30.5. Rights of Inspection ................................. 34
Section 30.6. Copies of Notices .................................... 34
Section 30.7. Tests and Reports .................................... 35
iii
<PAGE>
Section 30.8. Indemnification ...................................... 35
Section 30.9. Tenant Representations with respect to
Environmental Matters ................................ 36
ARTICLE XXXI Security Deposit ..................................... 37
ARTICLE XXXII Renewal Options ...................................... 37
Section 32.1. First Renewal Option ................................. 37
Section 32.2. Second Renewal Option ................................ 38
Section 32.3. "As Is" Condition .................................... 39
Section 32.4. Amendment ............................................ 39
Section 32.5. Termination .......................................... 39
ARTICLE XXXIII Expansion of Improvements ............................ 39
Section 33.1. Construction of Addition ............................. 39
Section 33.2. Addition Plans ....................................... 39
Section 33.3. Addition Rent ........................................ 40
Section 33.4. Extension Term ....................................... 40
Section 33.5. Further Definitions .................................. 40
ARTICLE XXIV Miscellaneous ........................................ 40
Section 34.1. Captions ............................................. 40
Section 34.2. Severability ......................................... 40
Section 34.3. Applicable Law ....................................... 41
Section 34.4. Amendments in Writing ................................ 41
Section 34.5. Relationship of Patties .............................. 41
Section 34.6. Brokerage ............................................ 41
Section 34.7. No Accord and Satisfaction ........................... 41
Section 34.8. Joint Effort ......................................... 41
Section 34.9. Waiver of Jury Trial ................................. 41
Section 34.10. Time ................................................. 41
Section 34.11. Consent .............................................. 41
Section 34.12. No Partnership ....................................... 41
Section 34.13. Landlord's Liability ................................. 42
Section 34.14. Landlord Rights ...................................... 42
Section 34.15. Rent Absolute ........................................ 42
Section 34.16. Authority ............................................ 42
Section 34.17. Entire Agreement ..................................... 42
Section 34.18. Purchase Contingency ................................. 42
iv
<PAGE>
INDUSTRIAL BUILDING LEASE
THIS LEASE, made as of this 28th day of October, 1996 between CENTERPOINT
REALTY SERVICES CORPORATION, an Illinois corporation (hereinafter referred to as
"Landlord"), and FACTORY CARD OUTLET OF AMERICA LTD. an Illinois corporation
(hereinafter referred to as "Tenant").
ARTICLE I
Lease Terms
Section 1.1. Definitions. In addition to the other terms, which are
elsewhere defined in this Lease, the following terms and phrases, whenever used
in this Lease shall have the meanings set forth in this Subsection, and only
such meanings, unless such meanings are expressly contradicted, limited or
expanded elsewhere herein.
A. Area of the Premises: 440,343 square feet.
B. Base Rent Schedule:
Period Annual Base Rent
------ ----------------
Commencement Date - Lease Year 5 $1,836,230.28
Lease Years - 6-l0 $2,109,242.76
C. Estimated Commencement Date: October 1, 1997.
D. Estimated Termination Date: September 30, 2007.
E. Force Majeure: any event or circumstance which is beyond the control
of Landlord including, without limitation, any delay in securing a
building permit or in obtaining all required approvals from any
Governmental Authority, strikes, lockouts, picketing (legal or
illegal), acts of God or the public enemy, governmental restrictions
or actions, fire or other casualty, accidents, unavailability of
fuel, power, supplies or materials, unusual adverse weather
conditions, acts or omissions of any labor or material contractor or
the passage or application of any Legal Requirements or moratorium
of any Governmental Authority which is not now in effect which has
the effect of preventing or delaying progress on the Initial
Improvements and Tenant Delay.
F. Force Majeure Delay: any interruption or delay in the progress of
the Initial Improvements which is the result of Force Majeure. Any
delay which is the result of Force Majeure shall be deemed to be a
Force Majeure Delay notwithstanding that Landlord or its contractor
with respect to the time period for which the Force Majeure Delay is
being claimed is concurrently delayed by events within its control.
G. Governmental Authority: any federal, regional, state, county or
municipal government (including, without limitation, any agency,
authority, subdivision, department or bureau thereof.
<PAGE>
H. Initial Improvements: collectively, the improvements contemplated in
the Plans, consisting of (i) the Building containing approximately
440,343 square feet of space and related Improvements to be
constructed on the Land approximately as depicted on the site plan
attached hereto as Exhibit "A" and by this reference incorporated
herein.
I. Initial Monthly Rent Adjustment Deposit: $25,990.00
(i) Initial Tax Deposit: $24,890.00
(ii) Initial Insurance Deposit: $1,100.00
J. Initial Term: the period commencing as of the Commencement Date and
ending on the last day of the tenth (10th) Lease Year thereafter
which will result in an Initial Term of approximately ten (10) years
and three (3) months.
K. Landlord's Broker: None.
L. Landlord's Mailing Address:
c/o 401 North Michigan Avenue
Chicago, Illinois 60611
Attn: Mr. Robert L. Stovall
Chief Operations Officer
M. Legal Requirements: (i) any and all laws, codes, ordinances,
requirements, standards, plats, plans, criteria, orders, directives,
rules and regulations of any Governmental Authority affecting the
improvement, alteration, use, maintenance, operation, occupancy,
security, health, safety and environmental condition of the Premises
or any part thereof (or any occupants therein, as the context
requires), including, without limitation any Environmental Laws (as
hereinafter defined), and (ii) provided copies of same have been
given to Tenant or Tenant has knowledge of same any and all
covenants, restrictions, conditions, easements and other agreements
of record affecting the Premises and the Reciprocal Easement
Agreement, as amended from time to time, and any documents, rules,
regulations, standards or criteria set forth or referenced therein
or promulgated by the Landlord or any governing body or entity
exercising jurisdiction over the Premises, in any case, whether in
force at the Commencement Date or passed, enacted or imposed at some
time in the future, and shall include all permits, licenses,
certificates, authorizations and approvals required in connection
with any of the foregoing.
N. Plans: the plans and specifications to be prepared by the Project
Architect for the construction of the Building.
O. Project Architect:
P. Reciprocal Easement Agreement: such easements over, upon and across
the Premises as are reasonably required to provide for ingress,
egress, drainage, detention, access to utilities and services,
maintenance of secured common elements and services and the sharing
of expenses thereof, existence of immaterial encroachment and
similar rights customary among several parcels comprising a single
commercial development.
Q. Rental Rate: the amount of $4.17 for the period commencing on the
Commencement Date and ending on the last day of Lease Year 5 and the
amount of $4.79 for the period commencing on the first day of Lease
Year 6 and ending on the last day of Lease Year 10.
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R. Specifications: the Preliminary Specifications dated October 25,
1996 attached hereto as Exhibit "D" and by this reference made a
part hereof.
S. Substantial Completion or Substantial Completion Date: the earlier
to occur of (i) the date on which Landlord receives a permanent,
temporary or conditional certificate of occupancy from the Village
permitting the use of the Premises for the Use; provided, however,
if such certificate is not issued solely due to the failure to
complete any work not a part of the Plans or the Landlord's
obligation under this Lease, such certificate shall be deemed to
have issued, (ii) the date the Project Architect states in writing
that the Initial Improvements are substantially completed in
accordance with the Plans (as such Plans may be revised from time to
time in accordance with the terms of this Lease), or (iii) the date
on which Tenant occupies the Premises or any portion thereof for the
conduct of its business. In the event there is a dispute as to
Substantial Completion, the Project Architect shall determine, in
the exercise of its reasonable judgment, whether or not the Initial
Improvements are substantially completed as required herein, and the
parties hereto agree to be bound by such decision.
T. Tenant Delay: any interruption or delay in the progress of the
Initial Improvements which is the result of: (i) the failure of
Tenant to approve or comment on the Plans or any portion thereof
within the required time limits; (ii) changes in construction
requested by Tenant or any member of the Tenant Group; (iii) the
performance or non-performance by Tenant of any work at, or services
with respect to, the Premises; or (iv) any other act or omission of
Tenant, any member of the Tenant Group or any person, firm or entity
claiming by, through or under any of them.
U. Tenant Group: any or all of Tenant's agents, employees,
representatives, contractors, workmen, mechanics, suppliers,
customers, guests, licensees, invitees, sublessees, assignees and
all of their respective successors and assigns or any party acting
by, through or under any of them.
V. Tenant's Broker: Podolsky and Associates.
W. Tenant's Mailing Address:
745 Birginal Drive
Bensenville, Illinois 60106
Attention: Mr. Joe Cabon
Vice President of Distribution
X. Term: The Initial Term as same may be extended or sooner terminated.
Y. Use: Storage and distribution of greeting cards, gifts and related
items and related office use.
Z. Village: The Village of Naperville, Illinois.
Section 1.2. Significance of Definitions. Each reference in this Lease to
any of the Definitions contained in Section 1.1 of this Article shall be deemed
and construed to incorporate all of the terms provided under each such
Definitions.
Section 1.3. Enumeration of Exhibits. The exhibits in this Section and
attached to this Lease are incorporated in this Lease by this reference and are
to be construed as a part of this Lease.
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Exhibit "A" - Site Plan
Exhibit "B" - Legal Description of Land
Exhibit "C" - Form of Estoppel Certificate
Exhibit "D" - Specifications
ARTICLE II
Premises
Section 2.1. Lease. Landlord, for and in consideration of the rents herein
reserved and of the covenants and agreements herein contained on the part of
Tenant to be kept, observed and performed, does by these presents, lease to
Tenant, and Tenant hereby leases from Landlord, the building (hereinafter
referred to as the "Building") and Initial Improvements being depicted on the
site plan attached hereto as Exhibit "A" to be constructed on the real estate
located at Diehl Road in Naperville, DuPage County, Illinois legally described
on Exhibit "B" attached hereto and by this reference incorporated herein (all of
said real estate is hereinafter referred to as the "Land"). The Land, Initial
Improvements and other improvements now or hereafter constructed on the Land are
hereinafter collectively referred to as the "Premises". The demise of the
Premises is subject to the Legal Requirements.
ARTICLE III
Term
Section 3.1. Term. The Initial Term of this Lease shall commence on the
date hereinafter referred to as the "Commencement Date") which is the later of
(i) the Estimated Commencement Date or (ii) the Substantial Completion Date,
which date is estimated to be the Estimated Commencement Date, and shall end on
the last day of the tenth (10th) Lease Year thereafter unless sooner terminated
as herein set forth. The term "Lease Year" when used in this Lease shall mean a
twelve (12) month period commencing (i) as to the first Lease Year, on the date
(hereinafter referred to as the "First Lease Year Commencement Date") which is
ninety (90) days alter the Commencement Date if same is the first (1st) day of a
calendar month or the first (1st) day of the fourth (4th) full calendar month
after the Commencement Date if same does not occur on the first (1st) day of a
calendar month, and (ii) as to subsequent Lease Years, on the annual anniversary
date of the First Lease Year Commencement Date. Concurrent with the actual
Commencement Date of this Lease, Tenant shall deliver to Landlord an estoppel
certificate in accordance with Article XVII hereof.
Section 3.2. Memorandum of Lease Term. Landlord and Tenant shall execute
an instrument fixing the actual Commencement Date and termination of the Initial
Term of this Lease at the request of either Landlord or Tenant.
ARTICLE IV
Construction of Improvements
Section 4.1. Landlord's Construction Obligation. Subject to the terms and
conditions of this Article IV, Landlord shall, at its sole cost and expense,
construct or cause to be constructed the Initial Improvements on the Land in
accordance with the Plans and the Specifications. Landlord agrees that all
services
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and work performed in connection with the Initial Improvements shall be done in
a good and workmanlike manner using only new material, and shall be performed
substantially in accordance with applicable Legal Requirements
Section 4.2. Plans Approval. Landlord shall cause the Project Architect to
prepare Plans acceptable to Landlord. The Plans are subject to Tenant's approval
(which shall not be unreasonably withheld or delayed), and if Tenant does not
approve same, Tenant shall advise Landlord in reasonable detail of the reasons
for such disapproval. Tenant shall comment on the Plans (or any component
thereof submitted to Tenant) and each revision thereof within five (5) business
days after receipt from Landlord; provided, however, that Tenant shall have ten
(10) business days within which to comment on the final Plans. In the event that
Tenant does not disapprove of the Plans (or any component thereof submitted to
Tenant) within said time periods, as applicable, the Plans (or applicable
component thereof) shall be deemed approved. Tenant may not object to any
changes as may be incorporated in the Plans necessary to obtain the approval of
the Village, provided Tenant is promptly notified of same, and so long as such
changes do not materially affect Tenant's intended use of the Premises.
Section 4.3. Completion. Landlord shall diligently proceed with the
necessary approvals for and the construction of the Initial Improvements upon
approval of Landlord, Tenant and the Village. Landlord shall use its best
efforts to substantially complete the Initial Improvements and deliver
possession thereof to Tenant on or before the Estimated Commencement Date;
provided, however, if construction is delayed because of any Force Majeure
Delays, then the time of completion of such construction shall be extended for
the additional time caused by such Force Majeure Delays without liability on the
part of Landlord.
Section 4.4. Tenant's inspection Right. Landlord shall exercise reasonable
efforts to keep Tenant advised with respect to the progress of the construction
of the Initial Improvements and the estimated date of Substantial Completion,
and Landlord shall notify Tenant in writing as soon as Substantial Completion
occurs as provided herein. During the construction of the Initial Improvements
and subject to Landlord's reasonable scheduling requirements, Tenant shall have
the right to inspect to Premises to monitor the progress of construction of the
Initial Improvements; provided, however, that such right may not be exercised
unless Tenant has: (i) given Landlord prior notice of the date and time Tenant
intends to exercise such inspection right; and (ii) Tenant and/or Tenant's
architect are accompanied at all times during the course of said inspection by
Landlord and Landlord's representative or the Project Architect.
Section 4.5. Changes. Tenant may propose one or more changes to the Plans,
consistent with the scope of the work described in the Plans, to Landlord any
time before the Substantial Completion Date, subject to the reasonable approval
of Landlord and the Village. As promptly as reasonably practicable after the
receipt and approval thereof, Landlord shall provide Tenant with a written
estimate of the Force Majeure Delay in the Substantial Completion Date and the
amount of the additional cost to complete the Initial Improvements which will
result from such change (whether hard costs or soft costs), which costs shall
be: (i) the cost of all materials, supplies, equipment and labor used or
supplied in making the proposed change, including general conditions and any
contractor's fees (which general conditions and contractor's fees shall together
total fifteen percent (15%) of such costs); (ii) any architect and engineer
fees; (iii) soft costs; and (iv) fees and expenses of architects, engineers and
other third party consultants in connection with review or approval of changes
in Plans. If Tenant fails to approve of the revised Plans and associated
estimate within five (5) days after delivery of the same, Tenant shall be deemed
to have abandoned its request for such change, and the Initial Improvements
shall be constructed in accordance with the then existing Plans. If Tenant
approves the revised Plans and associated estimate within said five (5)-day
period by signing and returning a copy of Landlord's estimate, Landlord shall
cause the Initial Improvements to be constructed in accordance with the Plans as
so revised. Tenant shall, at Tenant's option (hereinafter referred to as the
"Change Option"), to be exercised by written notice to Landlord within ten (10)
days after Tenant's receipt of the cost estimate from Landlord, either (i) pay
Landlord the amount of such additional costs within five (5) days alter Landlord
submits to Tenant a bill for such additional costs as are then due and payable
from time to time or (ii) agree that the Annual Base Rent shall be increased
(hereinafter referred to as the "Increased Rent") by an amount equal to the
actual cost of completing the change as referenced above multiplied by .1050.
The Increased Rent shall be further increased by fifteen percent (15%) on the
first day of the sixth (6th) Lease Year. In the event that Tenant fails to send
a notice to Landlord exercising the Change Option, Tenant shall be deemed to
have elected to pay Landlord the cost of completing the change in cash. In no
event shall Landlord have any obligation to commence any work relating to such
changes until Landlord has been paid the cost of the estimate in full and in the
event that
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the additional costs are not paid within said five (5)-day period, Tenant shall
be deemed to have abandoned its request for such changes and the Initial
Improvements shall be constructed in accordance with the then existing Plans.
Unless requested in writing by Tenant to the contrary, Landlord shall continue
with construction of the Initial Improvements according to the then existing
Plans during the pendency of any proposed change in the Plans until such change
and cost estimate are approved by Landlord and Tenant as provided above. Any
halt in construction requested in writing by Tenant shall constitute a Tenant
Delay hereunder. If Tenant requests a change to the Plans pursuant to this
Section 4.5, and Tenant does not ultimately approve of the resulting revised
Plans or cost estimates, Tenant shall promptly reimburse Landlord, as Additional
Rent, for any reasonable costs and expenses resulting from such requested
changes incurred by Landlord. In the event a change in the Plans proposed by
Tenant results in a reduction in actual cost to complete the Initial
Improvements, the Annual Base Rent shall be reduced by an amount equal to the
net cost savings multiplied by .1050. For example, if the actual net cost
savings is $200,000.00, the Annual Base Rent shall be reduced by $21,000.00.
Landlord may make changes to the Plans without Tenant's consent, provided that:
(i) such changes (a) will not create any additional monetary obligation for
Tenant under this Lease, (b) are in material conformity with the Plans (as may
have been previously revised by permissible Tenant and/or Landlord changes
thereto), and (c) will not decrease the quality of any component of the Initial
Improvements; or (ii) such changes are required by any applicable Legal
Requirements so long as such changes do not materially affect Tenant's use of
the Premises.
Section 4.6. Punchlist. Before Tenant takes occupancy of the Premises but
no later than five (5) business days after the Substantial Completion Date,
Landlord, the Project Architect and Tenant shall conduct an inspection of the
Premises, and work in good faith to jointly prepare a punchlist (hereinafter
referred to as the "Pre-Occupancy Punchlist"). Within ten (10) days following
the date Tenant first occupies all or any portion of the Premises, Landlord, the
Project Architect and Tenant shall conduct an additional inspection of the
Premises, and work in good faith to jointly prepare a supplement to the
Pre-Occupancy Punchlist containing such items as may be difficult to discover or
ascertain prior to Tenant's occupancy, but excluding: (i) any items theretofore
corrected by Landlord; and (ii) any damage caused by any act or omission of
Tenant or any member of the Tenant Group or any party claiming by, through or
under any of them (the Pre-Occupancy Punchlist, as so supplemented is
collectively referred to as the "Final Punchlist"). Except as otherwise
expressly provided in this Lease and except for latent defects, any items not on
the Final Punchlist shall be deemed accepted by Tenant. Tenant shall provide
reasonable access to Landlord, its employees, agents and contractors for
purposes of the repair and correction of any punchlist items. Landlord shall
complete all Final punchlist items and proceed to obtain a permanent certificate
of occupancy as soon as is reasonably practicable after such Final Punchlist
items are finally determined subject to extension due to any Force Majeure
Delays. If a temporary occupancy certificate is revoked and Tenant is required
to and vacates the Premises, Rent shall abate until the temporary occupancy
certificate (or similar authorization) is reinstated or a permanent occupancy
certificate (or similar authorization) is issued.
Section 4.7. Representatives. Landlord designates Michael M. Mullen or
Fred Reynolds as its representative for all purposes of this Article IV. Tenant
designates Joseph Cabon or Glen J. Franchi as its representative for all
purposes of this Article IV. Wherever the terms of this Article IV require any
notice to be given to or by a party, or any determination or action to be made
or taken by a party, the representative of each party shall act for and on
behalf of such party, and the other party shall be entitled to rely thereon.
Either party may designate one or more substitute representatives for all or a
specified portion of the provisions of this Article IV, subject to notice to the
other party of the identity of such substitute representative.
Section 4.8. Warranty. Landlord represents that it shall obtain (i) a
warranty against defective materials and workmanship with respect to the Initial
Improvements from FCL Builders, Inc., for a period of one (1) year from
Substantial Completion of the Initial Improvements; and (ii) a warranty against
defects in the roof for a period of fifteen (15) years from Substantial
Completion thereof from the roof manufacturer. Tenant shall notify Landlord in
writing of any defective condition occurring with respect to the Initial
Improvements promptly following Tenant's discovery thereof and Landlord shall
request that the party issuing the warranty referenced above and any warranty
from any other subcontractor or material supplier, if any, perform any remedial
work required to be performed under such warranty.
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Section 4.9. Late Completion. In the event that the Initial Improvements
are not Substantially Complete on or before November 1, 1997 (hereinafter
referred to as the "Penalty Date") once Substantial Completion occurs, Base Rent
shall abate one day for each day after the Penalty Date until Substantial
Completion occurs. In the event that the Initial Improvements are not complete
on or before April 1, 1998 (hereinafter referred to as the "Termination Date")
Tenant may terminate this Lease upon written notice to Landlord within ten (10)
days after the Termination Date unless Substantial Completion occurs prior to
the receipt of such notice by Landlord. Notwithstanding the foregoing, if
construction is delayed because of any Force Majeure Delays, then the Penalty
Date and Termination Date shall be extended for additional time caused by such
Force Majeure Delays.
ARTICLE V
Rent
Section 5.1. Base Rent. In consideration of the leasing aforesaid, Tenant
agrees to pay Landlord, without offset or deduction, base rent for the Initial
Term (hereinafter referred to as "Base Rent") in the amount of the Annual Base
Rent set forth in the Base Rent Schedule. The Annual Base Rent shall be paid in
advance, in twelve (12) equal monthly installments, commencing on the
Commencement Date (prorated for any partial month) and continuing on the first
(1st) day of each month thereafter for the balance of the Term of this Lease,
and in addition thereto, shall pay such charges as are herein described as
"Additional Rent". The term "Rent" when used in this Lease shall include all
Base Rent payable under this Section 5.1, as well as the charges herein
described as Additional Rent, and all other sums due from Tenant to Landlord
hereunder. All Rent payable hereunder shall be payable to Landlord and
Landlord's Mailing Address, or as Landlord may otherwise from time to time
designate in writing.
Section 5.2. Interest and Late Charges on Late Payments. Tenant
acknowledges that its late payment of any Rent will cause Landlord to incur
certain costs and expenses not contemplated under this Lease, the exact amount
of which is extremely difficult or impracticable to fix. Such costs and expenses
will include, without limitation, loss of use of money, administrative and
collection costs and processing and accounting expenses. Therefore, if any
installment of monthly Base Rent is not received by Landlord within five (5)
days after the date when due or any other sum due hereunder is not paid within
five (5) days after the date when due, Tenant shall immediately pay to Landlord
a late charge equal to two percent (2%) of the unpaid amount. Such late charge
is in addition to any interest due pursuant to the first sentence of this
Section 5.3. Landlord and Tenant agree that this late charge represents a
reasonable estimate of costs and expenses incurred by Landlord from, and is fair
compensation to Landlord for, its loss suffered, by such non-payment by Tenant.
Acceptance of the late charge shall not constitute a waiver of Tenant's default
with respect to such non-payment by Tenant or prevent Landlord from exercising
any other rights and remedies available to Landlord under this Lease. Rent not
paid within thirty (30) days of the date when due shall bear interest from the
date when the same is payable under the terms of this Lease until the same shall
be paid at an annual rate of interest equal to the rate of interest announced
from time to time by The First National Bank of Chicago as its Corporate Base
Rate, plus three percent (3%), unless a lesser rate shall then be the maximum
rate permissible by law, in which event said lesser rate shall be charged
("Lease Interest Rate"). The term "Corporate Base Rate" means that rate of
interest announced by The First National Bank of Chicago ("First") from time to
time as its "Corporate Base Rate" of interest, changing automatically and
simultaneously with each change in the Corporate Base Rate made by First from
time to time. Any publication issued or published by First from time to time or
a certificate signed by an officer of First stating its Corporate Base Rate as
of a date shall be conclusive evidence of the Corporate Base Rate on that date.
Failure to pay the late charge and interest shall constitute a default under
this Lease.
Section 5.3. Rent Abatement. Notwithstanding the anything to the contrary
contained in this Article 5, so long as Tenant is not in default under the terms
and conditions of this Lease as of the date any monthly installment of Base Rent
would otherwise be due and owing during the Abatement Period (as hereinafter
defined),
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Tenant shall be entitled to an abatement of Base Rent for the first three (3)
months of the Initial Term (hereinafter referred to as the "Abatement Period").
In the event Tenant is in default (after any applicable grace or cure periods)
under the terms and conditions of this Lease on the day any installment of Base
Rent would have been due hereunder but for the abatement of Base Rent during the
Abatement Period, then, in such event, the rent abatements attributable to Base
Rent, as set forth above, shall no longer be in effect and Tenant shall be
obligated, during the period of such uncured default, to pay the monthly
installment of Base Rent that would have been due and owing hereunder but for
the abatement of said components of Rent (hereinafter referred to as the "Rent
Default Payments"). Tenant shall not be entitled to a proration of any Rent
Default Payments so paid whether or not Tenant cures the default at any time
prior to the last day of the calendar month for which such installments were
paid. Tenant shall further be obligated to make all required Rent Default
Payments until the subject default is cured.
ARTICLE VI
Taxes and Impositions
Section 6.1. Taxes. Tenant further agrees to pay before any fine, penalty,
interest or cost may be added thereto for the nonpayment thereof, as Additional
Rent for the Premises, all Taxes (as hereinafter defined) levied, assessed or
imposed upon the Premises or any part thereof accruing during the Term of this
Lease, notwithstanding that such Taxes may not be due and payable until after
the expiration of the Term of this Lease; provided, however, that the Taxes
levied against the Premises shall be prorated between Landlord and Tenant for
the first year of the Initial Term hereof as of the Commencement Date, and as of
the date of expiration of the Term of this Lease for the last year of said Term.
After the expiration of the Term hereof, including any extensions thereof,
Tenant hereby agrees to reprorate Taxes upon issuance of the actual tax bill for
the last year of the Term. In the event of any increase in Taxes from the Taxes
reflected on the proration made upon the expiration of the Term of this Lease,
Tenant agrees to immediately pay to Landlord such sums as reflected by such
reproration. Benefit may be taken by Tenant of the provisions of any statute or
ordinance permitting any special assessment to be paid over a period of years;
provided, however, that Tenant shall pay all installments of special assessments
due during the Term hereof. Tenant shall, in addition to the foregoing, pay any
new Tax of a nature not presently in effect but which may hereafter be levied,
assessed or imposed upon Landlord or upon the Premises, if such Tax shall be
based upon or arise out of the ownership, use or operation of the Premises;
provided, however, that for the purpose of computing Tenant's liability for such
new type of Tax, the Premises shall be deemed the only property of Landlord. As
used herein, the term "Taxes" shall mean real estate taxes, assessments, sewer
rents, rates and charges, permit and license fees, transit taxes, taxes based
upon the receipt of rent, and any other federal, state or local governmental
charge, general, special, ordinary or extraordinary, which may now or hereafter
be assessed against the Premises or any portion thereof in any year during the
Term hereof, and shall also include any personal property taxes (attributable to
the year in which paid) imposed upon the furniture, fixtures, machinery,
equipment, apparatus, systems and appurtenances used in connection with the
operation of the Premises.
Nothing contained herein shall be construed to require Tenant to pay any
franchise, inheritance, estate, succession or transfer tax of Landlord or any
income or excess profits tax assessed upon or in respect of all income of
Landlord or chargeable to or required to be paid by Landlord unless such tax
shall be specifically levied against the rental income of Landlord derived
hereunder (as opposed to a general income tax), which tax shall be paid by
Tenant as part of Taxes hereunder provided said rental income shall be
considered as the sole income of Landlord.
Section 6.2. Utilities. Tenant shall pay, directly to the appropriate
supplier, all costs of natural gas, electricity, heat, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Premises. Landlord shall, at Landlord's sole cost and expense,
separately meter the Premises. If, however, at any time, any services or
utilities are jointly metered, Landlord shall make a reasonable determination of
Tenant's share thereof and Tenant shall pay its share, as Additional Rent
hereunder, within fifteen (15) days after
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receipt of Landlord's written statement. Landlord shall not in any way be liable
or responsible to Tenant for any cost or damage or expense which Tenant may
sustain or incur if either the quality or character of such service is changed
or is no longer available or suitable for Tenant's requirements, unless caused
by Landlord's negligence or intentional acts.
Section 6.3. Additional Tenant Obligations. Tenant further agrees to (i)
perform sprinkler inspections required by any insurance carrier or by any Legal
Requirement from time to time during the Term; (ii) pay any and all ADT charges
for ADT services reasonably required by the Landlord for the Premises; and (iii)
perform roof inspections required by the roof warranty or any Legal
Requirements, from time to time. Tenant shall provide Landlord with evidence
reasonably acceptable to Landlord reflecting Tenant's compliance with its
obligations as set forth in this Section 6.3.
Section 6.4. Deposits. As security for the obligations contained in
Sections 6.1. and 9.7. hereof, Tenant shall deposit monthly with Landlord, or
such other entity as Landlord may designate, on the first (1st) day of each and
every month of the Term, a sum equal to one twelfth (1/12) of Landlord's
estimate of the current amount of Taxes levied with respect to the Premises,
Insurance Premiums (as hereinafter defined) and Expenses. All monthly deposits
need not be kept separate and apart by Landlord and shall be held by Landlord in
such account or accounts as may be authorized by the then current state or
federal banking laws, rules or regulations. The monthly deposits shall be used
as a fund to be applied, to the extent thereof, to the payment of Taxes,
Expenses and Insurance Premiums, as the same become due and payable. The
existence of said fund shall not limit or alter Tenant's obligation to pay the
Taxes, Expenses and Insurance Premiums for which the fund was created. Tenant
shall not be entitled to interest on said fund. Tenant shall pay Landlord as its
monthly deposit for the period commencing on the Commencement Date and
terminating on the December 31st immediately thereafter the Initial Monthly Rent
Adjustment Deposit. On or prior to each December 31st occurring within the Term,
Landlord shall advise Tenant as to Landlord's reasonable estimate of the Monthly
Rent Adjustment Deposits that will be required for the next Calendar Year (as
hereinafter defined).
Section 6.5. Adjustment Statement. As soon as reasonably feasible after
the expiration of each calendar year contained within the Term (hereinafter
referred to as the "Calendar Year"), Landlord will furnish Tenant a statement
(hereinafter referred to as the "Adjustment Statement") showing the following:
(i) Actual Taxes and Insurance Premiums for the Calendar Year last
ended and the amount of Taxes and Insurance Premiums payable by Tenant for
such Calendar Year;
(ii) The amount of Additional Rent due Landlord for the Calendar
Year last ended, less credits for monthly deposits paid, if any; and
(iii) The monthly deposits due in the current Calendar Year.
Section 6.6. Payments. Within thirty (30) days after Tenant's receipt of
each Adjustment Statement, Tenant shall pay to Landlord:
(i) The amount of Additional Rent shown on said Adjustment Statement
to be due Landlord for the Calendar Year last ended; plus
(ii) The amount, which when added to the monthly deposits
theretofore paid in the current Calendar Year would provide that Landlord
has then received such portion of the monthly deposits as would have
theretofore been paid to Landlord had Tenant paid one twelfth (1/12) of
the monthly deposits, for the current Calendar Year, to Landlord monthly
on the first day of each month of such Calendar Year.
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During the last Calendar Year, Landlord may include in the monthly deposits its
estimate of the Additional Rent which may not be finally determined until after
the expiration of the Term. Tenant's obligation to pay such Additional Rent
shall survive the Term.
Section 6.7. Payment Adjustments. Tenant's payment of the monthly deposits
for each Calendar Year shall be credited against the Additional Rent for such
Calendar Year. If the monthly deposits paid by Tenant for any Calendar Year
exceed the Additional Rent due for such Calendar Year, then Landlord shall give
a credit to Tenant in an amount equal to such excess against the Additional Rent
due for the next succeeding Calendar Year, except that if any such excess
relates to the last Calendar Year of the Term, then, provided that no default of
Tenant exists hereunder, Landlord shall refund such excess to Tenant.
Section 6.8. Right to Pay. Landlord shall, at its option, have the fight,
without notice to Tenant, at all times during the Term to pay any such Taxes not
timely paid by Tenant, and the amounts so paid, including reasonable expenses,
shall be so much Additional Rent due at the next rent day after any such
payments, with interest at the Lease Interest Rate from the date of payment
thereof.
Section 6.9, Landlord's Contest of Taxes. Landlord shall, on an annual
basis, contest the imposition of any Taxes against the Land and Improvements, in
accordance with applicable law. Tenant agrees Taxes shall include all of
Landlord's reasonable costs and expenses, including legal fees and court costs,
in pursuing any such contest provided Landlord is successful in obtaining a
reduction in the Taxes. There shall be deducted from Taxes the amount of any
Taxes refunded in any Calendar Year, provided said refund relates to an
assessment year included within the Term of the Lease. If a refund is received
by Landlord after the termination of the Term relating to an assessment year
included within the Term, provided all of Tenant's obligations under the Lease
have been satisfied, Landlord shall refund to Tenant Tenant's share of such
refund. In the event Landlord elects not to contest the imposition of Taxes,
Tenant may do so at Tenant's sole cost and expense.
ARTICLE VII
Use
Section 7.1. Use. The Premises shall be used for the Use only, and for no
other purpose.
Section 7.2. Prohibited Uses. Tenant shall not permit the Premises, to be
used in such manner which impairs Landlord's right, title or interest in the
Premises or any portion thereof, or in such manner which gives rise to a claim
or claims of adverse possession or of a dedication of the Premises or any
portion thereof for public use. Tenant shall not use or occupy the Premises, in
whole or in part, to be used or occupied, or do or permit anything to be done in
or on the Premises, in whole or in part, in a manner which would in any way
violate any certificate of occupancy affecting the Premises, or make void or
voidable any insurance then in force with respect thereto, or which may make it
impossible to obtain fire or other insurance thereon or which would render the
insurance risk more hazardous, or which will cause or be apt to cause the
structural injury to the Premises or any part thereof, or which would cause the
value or usefulness of the Premises or any part thereof to diminish, and shall
not use or occupy or permit the Premises to be used or occupied, in whole or in
part, in a manner which may violate and shall comply with any present or future,
ordinary or extraordinary, foreseen or unforeseen, Legal Requirements, whether
or not Landlord also is liable for compliance. Tenant will not do or permit or
suffer any public or private waste, damage, impairment or injury to or upon the
Premises or any part thereof.
Section 7.3. No Implied Permission. Except as otherwise expressly provided
herein, nothing in this Lease contained shall authorize Tenant to do or permit
or suffer any act which shall in any way encumber the fee title of Landlord in
and to the Premises or any interest therein. The title, interest or estate of
Landlord in the Premises shall not be in any way subject to any claim by way of
lien or encumbrance, whether arising by
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operation of law or by virtue of an express or implied contract by Tenant. Any
claim to a lien or encumbrance upon the Premises arising from any act of
omission of Tenant shall accrue only against the Tenant's leasehold estate and
shall in all respects be subject and subordinate to the paramount title and
right of Landlord in and to the Premises. Every person furnishing, manufacturing
or preparing any material, fixtures, apparatus or machinery for, or on account
of, the Premises or any other improvements now or hereafter erected, or the
appurtenances or furnishings therein, or performing any labor or services in,
upon or about the Premises, or the improvements or appurtenances, or dealing in
any way with Tenant or anyone claiming by, through or under Tenant shall take
and be held charged with notice of this condition, and shall have and acquire no
lien upon Landlord's estate or interest through the furnishing of such material,
fixtures, apparatus, machinery, labor or services.
Section 7.4. Adverse Claims. In amplification and not in limitation of the
foregoing provisions of Article VII, Tenant shall not permit any portion of the
Premises to be used by any person or persons or by the public, as such, at any
time or times during the Term in such manner as might reasonably tend to impair
title to the Premises or any portion thereof, or in such manner as might
reasonably make possible a claim or claims of adverse use, adverse possession,
prescription, dedication or other similar claims of, in, to or with respect to
the Premises or any part thereof or estate therein.
ARTICLE VIII
Maintenance of Premises
Section 8.1. Maintenance. Tenant agrees, at Tenant's sole cost and
expense, to take good care of the Premises and keep and maintain same and all
parts thereof, including, but not limited to, the Initial Improvements, the
entire interior and exterior thereto, all floors, floor coverings, roof,
structure, windows, glass, plate glass, ceilings, skylights, interior and
exterior and demising walls, doors, electrical systems, lighting fixtures and
equipment, plumbing systems and fixtures, sprinkler systems, heating,
ventilating and air conditioning systems, loading docks, areas and doors, rail
space areas, fences and signs, and all other pipes, mains, water, sewer and gas
connections and all other fixtures, machinery, apparatus, equipment and
appurtenances now or hereafter belonging to, connected with or used in
conjunction with the Premises together with any and all alterations and
additions thereto, in good order, condition and repair, suffering no waste or
injury. Tenant shall, at its sole cost and expense, promptly make all necessary
repairs and replacements, ordinary as well as extraordinary, foreseen as well as
unforeseen, in and to the Premises, including, but not limited to the entire
interior and exterior of the Initial Improvements, any equipment now or
hereafter located in or on the Premises, all floors, floor coverings, roof,
structure, windows, glass, plate glass, ceilings, skylights, interior and
demising walls, doors, electrical systems, lighting fixtures and equipment,
plumbing systems and fixture, sprinkler systems, heating, ventilating and air
conditioning systems, loading docks, areas and doors, rail space areas, fences
and signs, connections, pipes, mains, water, sewer and connections, and all
other fixtures, machinery, apparatus, equipment and appurtenances now or
hereafter belonging to, connected with or used in conjunction with the Premises.
All such maintenance, repairs and replacements shall be of first class quality
and sufficient for the proper maintenance and operation of the Premises. Tenant
shall keep and maintain the Premises safe, secure and clean, specifically
including, but not by way of limitation, removal of waste and refuse matter.
Tenant shall not permit anything to be done upon the Premises (and shall perform
all maintenance and repairs thereto so as not) to invalidate, in whole or in
part, or prevent the procurement of any insurance policies which may, at any
time, be required under the provisions of this Lease. Tenant shall not obstruct
or permit the obstruction of any parking area, adjoining street or sidewalk. The
foregoing obligations of Tenant shall not be deemed to be a waiver of Tenant's
rights under Section 4.8 hereof.
Section 8.2. Governmental Requirements. Tenant at its own cost and expense
also shall promptly comply with any and all requirements of any Governmental
Authority to or affecting the Premises or any part thereof, irrespective of the
nature of the work required to be done, extraordinary as well as ordinary,
whether or not the same involve or require any structural changes or additions
in or to the Building and irrespective of
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whether or not such changes or additions be required on account of any
particular use to which the Premises or any part thereof are being put;
provided, however that Tenant's compliance with any and all requirements of any
Governmental Authority requiring structural changes or additions to the Building
shall only be required of Tenant to the extent required due to Tenant's
particular use, occupancy or alteration of the Premises. Included in the
obligations set forth above, but not in limitation thereof, Tenant, at its own
cost and expense, shall promptly comply with OSHA regulations relating to
overhead cranes (CFR 1910-179(j)(2) and 184(d), CFR 1910-179(j)(3), CFR
1910-179(e)(1) through (4) and CFR 1910-179(b)(5)).
Section 8.3. Tenant's Responsibilities. Landlord shall not be required to
furnish any services or facilities whatsoever to the Premises. Tenant hereby
assumes full and sole responsibility for condition, operation, repair.
alteration, improvement, replacement and maintenance of the Premises. Landlord
shall not be responsible for any loss or damage to the person or property of
Tenant, any guests or invitees, any persons using or working on the Premises, or
any persons claiming by, through or under, or any agents, employees, heirs,
legal representatives, successors or assigns of, any of the foregoing.
Section 8.4. Maintenance Contract. At Landlord's option, Tenant shall
enter into a maintenance contract, in form and substance and with a firm
reasonably satisfactory to Landlord, for the maintenance of the HVAC system in
the Building.
ARTICLE IX
Insurance
Section 9.1. Coverage Required. Tenant shall procure and maintain, or
cause to be maintained, at all times during the term of this Lease, at Tenant's
sole cost and expense, and until each and every obligation of Tenant contained
in the Lease has been fully performed, the types of insurance specified below,
with insurance companies authorized to do business in the State of Illinois
covering all operations of Tenant or any member of the Tenant Group under this
Lease, whether performed by Tenant or by Tenant's contractors. For purposes of
this Article IX, "Contractors" shall mean Tenant and contractors and
subcontractors and materialmen or any tier providing services, material, labor,
operation or maintenance on or about the Premises.
A. In General. Upon execution of the Lease, Tenant shall procure and
maintain the following kinds and amounts of insurance:
(i) Worker's Compensation and Occupational Disease Insurance.
Worker's Compensation and Occupational Disease Insurance, in
statutory amounts, covering all Tenant's employees who provide a
service under this Lease. Employer's liability coverage with limits
of not less than $100,000 each accident or illness shall be
included.
(ii) Commercial Liability Insurance (Primary and Umbrella).
Commercial Liability Insurance or equivalent with limits of not less
than $5,000,000 per occurrence, combined single limit, for bodily
injury, personal injury. and property damage liability.
Products/completed operation, independent contractors, broad form
property damage and contractual liability coverages are to be
included. Landlord is to be named as additional insureds, on a
primary basis for any liability, arising directly or indirectly from
this Lease.
(iii) Automobile Liability Insurance. When any motor vehicles
are used in connection with this Lease, Tenant shall provide
Automobile Liability Insurance with limits of not less than
$2,000,000 per occurrence combined single limit, for bodily and
property damage.
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(iv) Contents Insurance. Insurance against fire, sprinkler
leakage, vandalism, and the extended coverage perils for the full
insurable value of all contents of Tenant within the Premises, and
of all office furniture, trade fixtures, office equipment,
merchandise and all other items of Tenant's property on the Premises
and business interruption insurance.
B. Construction. During any construction costing in excess of
$25,000.00 (other than with respect to the construction of the Initial
Improvements by Landlord, but including improvements, betterments or
repairs), Tenant shall procure and maintain, or cause to be maintained,
the following kinds and amounts of insurance:
(i) Worker's Compensation and Occupational Disease Insurance.
Worker's Compensation and Occupational Disease Insurance, in
statutory amounts, covering all employees who are to provide a
service under this construction. Employer's liability coverage with
limits of not less than $500.ooo for each accident or illness shall
be included.
(ii) Commercial Liability Insurance (Primary and Umbrella).
Commercial Liability Insurance or equivalent with limits of not less
than $10,000,000 per occurrence, combined single limit, for bodily
injury, personal injury, and property liability. Products/completed
operations, explosion, collapse, underground, independent
contractors, broad form property damage and contractual liability
coverages are to be included. Landlord and Tenant are to be named as
additional insureds on a primary non-contributory basis for any
liability arising directly or indirectly from the Lease.
(iii) Automobile Liability Insurance (Primary and Umbrella).
When any motor vehicles are used in connection with work to be
performed, Tenant's contractor shall provide Automobile Liability
Insurance with limits of not less than $5.000.000 per occurrence
combined single limit, for bodily injury and property damage.
Landlord is to be named as an additional insured on a primary
non-contributory basis.
(iv) All Risk Builders Risk Insurance. Tenant or Contractor
shall provide All Risk Blanket Builder's Risk Insurance to cover the
materials, supplies, equipment, machinery and fixtures that are or
will be part of the Premises. Coverage extensions shall include the
following: right to partial occupancy, material stored off-site and
in-transit, boiler and machinery, earthquake, flood (including
surface water backup), collapse, water damage, debris removal,
mechanical-electrical breakdown and failure, business interruption,
extra expense, loss of revenue, loss of rents and loss of use of
property, as applicable, Landlord shall be named as loss payee.
(v) Professional Liability. When any architects, engineers, or
consulting firms perform work in connection with this Lease,
Professional Liability Insurance shall be maintained by the
applicable architect, engineer or consultant with limits of
$1,000,000. The policy shall have an extended reporting period of
two (2) years. When policies are renewed or replaced, the policy
retroactive date must coincide with, or precede, start of work.
Tenant shall deliver to Landlord, at least fifteen (15) days prior to the
earlier of (1) the Commencement Date of this Lease or (2) the date Tenant
takes possession of the Premises, duplicate copies of policies (or
certificates evidencing such policies) of the insurance required by this
Section 9.1. Such policies of insurance shall be renewed and duplicate
copies of the new policies (or new certificates) shall be deposited with
Landlord at least forty-five (45) days prior to the expiration of the old
policies.
Section 9.2. Policies. All insurance policies shall be written with
insurance companies and shall be in form reasonably satisfactory to Landlord.
All general liability insurance policies shall name Landlord as an additional
insured and shall provide that they may not be terminated or modified without
thirty (30) days'
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advance written notice to Landlord. All policies shall also contain an
endorsement that Landlord, although named as additional insured, shall
nevertheless be entitled to recover for damages caused by the negligence of
Tenant. The minimum limits of insurance specified in this Section shall in no
way limit or diminish Tenant's liability under this Lease. Tenant shall furnish
to Landlord, not less than fifteen (15) days prior to the date such insurance is
first required to be carried by Tenant, and thereafter at least fifteen (15)
days prior to the expiration of each such policy, true and correct certificates
of insurance, and such other evidence of coverages as Landlord may reasonably
request, and evidence of payment of all premiums and other expenses owed in
connection therewith. Upon Tenant's default in obtaining or delivering the
certificates for any such insurance or Tenant's failure to pay the charges
therefor. Landlord may, at its option, on or after the tenth (10th) day after
written notice thereof is given to Tenant, procure or pay the charges for any
such policy or policies and the total cost and expense (including attorneys'
fees) thereof shall be immediately paid by Tenant to Landlord as Additional Rent
upon receipt of a bill therefor.
Section 9.3. Subrogation. Landlord and Tenant agree to have all property
and material damage insurance which may be carried by either of them endorsed
with a clause providing that any release from liability of or waiver of claim
for recovery from the other party or any of the parties named in Section 9.2
above entered into in writing by the insured thereunder prior to any loss or
damage shall not affect the validity of said policy or the right of the insured
to recover thereunder, and providing further that the insurer waives all rights
of subrogation which such insurer might have against the other party or any of
the parties named in Section 9.2 above. Without limiting any release or waiver
of liability or recovery contained in any other Section of this Lease but rather
in confirmation and furtherance thereof, Landlord and any beneficiaries of
Landlord waive all claims for recovery from Tenant, and Tenant waives all claims
for recovery from Landlord, any beneficiaries of Landlord and the managing agent
for the Premises and their respective agents, partners and employees, for any
loss or damage to any of its property insurable under valid and collectible
insurance policies to the extent of any recovery collectible under such
insurance policies. Notwithstanding the foregoing or anything contained in this
Lease to the contrary, any release or any waiver of claims shall not be
operative, nor shall the foregoing endorsements be required, in any case where
the effect of such release or waiver is to increase the cost thereof (provided
that in the case of increased cost the other party shall have the right, within
ten (10) days following written notice, to pay such increased cost, thereby
keeping such release or waiver in full force and effect).
Section 9.4. Miscellaneous Insurance Provisions. Landlord and Tenant
further agree as follows:
A. Tenant and Contractors expressly understand and agree that any
insurance coverages and limits furnished by the Tenant and Contractors
shall in no way limit the Tenant's and Contractor's liabilities and
responsibilities specified under the Lease, or contracts executed relating
to the Premises, or by law.
B. The failure of Landlord to obtain such evidence from Tenant or
Contractors before permitting Tenant or Contractors to commence work shall
not be deemed to be a waiver by Landlord, and Tenant or contractors shall
remain under continuing obligation to maintain the insurance coverage.
C. Any and all deductibles on referenced insurance coverages shall
be borne by Tenant and Contractors.
D. Tenant expressly understands and agrees that any insurance
maintained by Landlord shall apply in excess of and not contribute with
insurance provided by the Tenant or Contractor under the Lease.
E. If Tenant or any Contractors desire additional coverage, higher
limits of liability, or other modifications for their own protection,
Tenant and such Contractors shall be responsible for the acquisition and
cost of such additional protection.
F. Tenant and Contractors shall not violate or permit to be violated
any of the conditions or provisions of any of the insurance policies, and
Tenant and Contractors shall so perform and satisfy or cause
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to be performed and satisfied the requirements of the companies writing
such policies so that at all times companies of good standing,
satisfactory to Landlord shall be willing to write and continue such
insurance.
G. Landlord shall not be limited in the proof of any damages which
Landlord may claim against Tenant and Contractors arising out of or by
reason of Tenant's and Contractor's failure to provide and keep in force
insurance, as aforesaid, to the amount of the insurance premium or
premiums not paid or incurred by Tenant and Contractors and which would
have been payable under such insurance, but Landlord shall also be
entitled to recover as damages for such breach the uninsured amount of any
loss, to the extent of any deficiency in the insurance required by the
provisions of this Lease, and damages, costs and expenses of Suit suffered
or incurred by reason of damage to, or destruction of, the Premises
occurring during any period when Tenant or Contractors shall have failed
or neglected to provide insurance as aforesaid.
H. The insurance required by this Lease, at the option of Tenant or
Contractors, may be effected by blanket or umbrella policies issued to
Tenant or Contractors covering the Premises and other properties owned or
leased by Tenant or Contractors, provided that the policies otherwise
comply with the provisions of this Lease and allocate to the Premises the
specified coverage, without possibility of reduction or coinsurance by
reason of, or damage to, any other premises covered therein.
I. All insurance companies shall have a Best rating of not less than
A/VII, or an equivalent rating in the event Best ceases to exist or
provide a rating.
J. Tenant and Contractors shall provide and keep in force such other
insurance in such amounts as may from time to time be reasonably required
by Landlord or a holder of a Mortgage (defined in Section 23.1 hereof)
against such other insurable hazards as at the time are commonly insured
against in the case of prudent owners of properties similar to the
Premises, and in that connection Landlord may require changes in the
forms, types and amounts of insurance required pursuant to this Section or
add to, modify or delete other requirements.
K. The required insurance to be carried shall not be limited by any
limitations expressed in the indemnification language herein or any
limitation placed on the indemnity therein given as a matter of law.
Section 9.5. Kinds and Amounts. Landlord shall at all times during the
Term of this Lease keep in effect insurance on all improvements now or hereafter
a part of the Premises against loss by fire and lightning, the risks covered by
what is commonly known as extended coverage, malicious mischief and vandalism,
and all other risks of direct physical loss (other than the insurance provided
by Tenant hereunder) in an amount equal to the full replacement value on the
replacement form basis, of such improvements. The policy or policies evidencing
such insurance shall be written by a company or companies reasonably
satisfactory to Landlord and to Landlord's mortgagee, if any, and authorized to
do business in the state where the Premises are located, shall name Landlord as
insured thereunder, and shall provide that losses shall be paid to Landlord or
its mortgagee, if applicable. At the request of Landlord, a mortgage clause may
be included in said policies covering Landlord's mortgagee, if any. Tenant
further agrees that if and when obtainable, Landlord will procure and maintain
so-called war risk and war damage insurance, earthquake and flood insurance on
said improvements for not less than one hundred percent (100%) of the full
insurance value above foundation. Such insurance shall provide for payment of
loss thereunder to Landlord and shall, at Landlord's request, contain a mortgage
clause in favor of Landlord's mortgagee, if any. Landlord shall also obtain
boiler and machinery insurance in an amount equal to the full replacement value
of the improvements and insurance against loss of Rents in the amount of all
Base Rent payments, taxes, assessments and insurance premiums required hereunder
for a twelve (12)-month period, and shall obtain insurance against breakage of
all plate glass used in the improvements. Landlord shall also maintain such
other insurance required by Landlord
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under the terms customarily carried by Landlord for other buildings owned by
Landlord in the Chicago metropolitan area.
Section 9.6. Insurance Appraisals. From time to time during the Term
hereof upon the request of Landlord, or Landlord's mortgagee, if any, Landlord
shall obtain insurance appraisals reasonably satisfactory to Landlord and
Tenant, as such are regularly and ordinarily made by or for the benefit of
insurance companies, in order to determine the then replacement value of the
improvements. Such insurance appraisals shall not be required more frequently
than once in each Lease Year during the Term hereof. The cost of such insurance
shall be deemed to be a part of the Insurance Premium (defined below).
Section 9.7. Tenant Payments. All such insurance described in Section 9.5
shall be kept in full force throughout the Term of this Lease, and any amounts
paid therefor by Landlord (hereinafter collectively referred to as "Insurance
Premiums") shall be payable by Tenant, as Additional Rent, in accordance with
Sections 6.4. and 6.6. hereof.
ARTICLE X
Damage or Destruction
Section 10.1. Property Demise. In the event the Premises are damaged by
fire or other casualty, then Landlord shall, except during the last year of the
Term hereof, proceed with all due diligence to repair and restore the Premises,
subject, however, to extension for Force Majeure Delays. In such event, Rent
shall abate in proportion to the non-useability of the Premises during the
period while repairs are in progress. If the Premises are made untenantable
during the last year of the Term hereof, provided Tenant has not exercised the
Renewal Option (defined below), Landlord shall have the right to terminate this
Lease as of the date of fire or other casualty upon sixty (60) days' prior
notice to Tenant, in which event, Rent shall be apportioned on a per diem basis
and paid to the date of such fire or other casualty.
Section 10.2. Insurance Deductible. In the event of either a total or
partial demise of the Premises, provided Landlord intends to repair or restore
the Premises, Tenant shall pay to Landlord the amount of the deductible under
Landlord's property insurance for the Premises.
ARTICLE XI
Liens
Section 11.1. Lien Claims. Tenant shall not do any act which shall in any
way encumber the interest or estate of Landlord in and to the Premises or any
portion thereof, nor shall any interest or estate of Landlord in the Premises or
any portion thereof be in any way subject to any claim by way of lien or
encumbrance, whether by operation of law or by virtue of any express or implied
contract by Tenant, and any claim to or lien upon the Premises or any portion
thereof arising from any act or omission of Tenant shall accrue only against the
leasehold estate of Tenant and shall in all respects be subject and subordinate
to the paramount title and rights of Landlord in and to the Premises or any
portion thereof. Tenant will not permit the Premises or any portion thereof to
become subject to any mechanics', laborers' or materialmen's lien on account of
labor or material furnished to Tenant or claimed to have been furnished to
Tenant in connection with work of any character performed or claimed to have
been performed on the Premises by or at the direction of sufferance of Tenant;
provided, however that Tenant shall have the right to contest in good faith and
with reasonable diligence, the validity of any such lien or claimed lien if
Tenant shall first give to Landlord an amount equal to one hundred twenty
percent (120%) of the amount of the
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lien or claimed lien which, together with interest earned thereon, shall be held
by Landlord as security to insure payment thereof and to prevent any sale,
foreclosure or forfeiture of the Premises by reason of non-payment thereof. The
amount so deposited with Landlord shall be held by Landlord in an account
established at a federally insured banking institution until satisfactory
removal of said lien or claim of lien. On any final determination of the lien or
claim for lien, Tenant will immediately pay any judgment rendered, with all
proper costs and charges, and will, at its own expense, have the lien released
and any judgment satisfied. Should Tenant fail to diligently contest and pursue
such lien contest, Landlord may, at its option, use the sums so deposited to
discharge any such lien upon the renewal of such lien or encumbrance Landlord
shall pay all such sums remaining on deposit to Tenant.
Section 11.2. Landlord's Right to Cure. If Tenant shall fail to contest
the validity of any lien or claimed lien or fail to give security to Landlord to
insure payment thereof, or shall fail to prosecute such contest with diligence,
or shall fail to have the same released and satisfy any judgment rendered
thereon, then Landlord may, at its election (but shall not be so required)
remove or discharge such lien or claim for lien (with the right, in its
discretion, to settle or compromise the same), and any amounts advanced by
Landlord, including reasonable attorneys' fees, for such purposes shall be so
much additional rent due from Tenant to Landlord at the next rent date after any
such payment, with interest thereon at the Lease Interest Rate from the date so
advanced.
ARTICLE XII
Tenant Alterations
Section 12.1. Alterations. Tenant shall not at any time during the Term of
this Lease make any openings in or other alteration or improvement to the roof
or exterior walls of the Building or make any alteration, addition or
improvement to the Premises or any portion thereof (hereinafter collectively
referred to as "Alterations") without in each instance, the prior written
consent of Landlord; provided, however, upon notice to, but without the
requirement of the written consent of Landlord, Tenant shall have the right to
make Alterations to the interior of the Premises where same are non-structural,
do not require openings in or other alteration or improvement to the roof,
exterior walls or other structural components of the Building, do not adversely
affect any Building system, and do not exceed FIFTY THOUSAND AND NO/100 DOLLARS
($50,000.00) in the aggregate in any twelve (12)-month period. In the event
Tenant requests Landlord's consent to make any Alteration which does not involve
openings in or other alterations or improvements to the roof, Landlord shall not
unreasonably withhold its consent to the Alteration. No Alterations to the
Premises for which Landlord's consent is required shall be commenced by Tenant
until Tenant has furnished Landlord with a satisfactory certificate or
certificates from an insurance company acceptable to Landlord, evidencing
insurance coverage required under Section 9.2 hereof. Any Alterations by Tenant
hereunder shall be done in a good and workmanlike manner in compliance with any
Legal Requirements. Upon completion of any Alteration by Tenant hereunder,
Tenant shall furnish Landlord with a copy of the "as built" plans covering such
construction. Tenant, at its sole cost and expense, will make all Alterations on
the Premises which may be necessary by the act or neglect of any other person or
corporation (public or private), except Landlord, its agents, employees or
contractors. Before commencing any Alterations, involving an estimated cost of
more than FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00): (a) plans and
specifications therefor, prepared by a licensed architect, shall be submitted to
and approved by Landlord (such approval shall not be unreasonably withheld or
delayed); (b) Tenant shall furnish to Landlord an estimate of the cost of the
proposed work, certified by the architect who prepared such plans and
specifications; (c) all contracts for any proposed work shall be submitted to
and subject to the reasonable approval of Landlord; (d) evidence of insurance as
required by Article IX hereof; and (f) such other requirements as Landlord may
reasonably require to be satisfied. Prior to the commencement of any
construction activity for which Landlord's consent shall be required,
certificates of such insurance coverages shall be provided to Landlord and
renewal certificates shall be delivered to Landlord prior to the expiration date
of the respective policies.
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Notwithstanding the foregoing, no Alterations of any kind shall be made
which would (i) change the general design, use, character or structure of the
Premises or any part thereof; (ii) decrease the size of the Premises or any part
thereof; (iii) reduce or impair, to any material extent, the value, rentability
or usefulness of the Premises or constitute waste; or (iv) give to any owner,
lessee or occupant of any other property or to any other person or corporation
any easement, right-of-way or any other right over the Premises.
Any Alteration shall be made with reasonable dispatch and in a good and
workmanlike manner and in compliance with all applicable permits and
authorizations and buildings and zoning laws and with all other Legal
Requirements. If any work does not comply with the provisions of this Lease,
Landlord may, by notice to Tenant, require that Tenant stop the work and take
steps necessary to cause corrections to be made, or Landlord may, itself,
perform the work, at Tenant's cost.
Section 12.2. Ownership of Alterations. All Alterations (except Tenant's
Equipment, as defined in Section 19.2 hereof), put in at the expense of Tenant
shall become the property of Landlord and shall remain upon and be surrendered
with the Premises as a part thereof at the termination of this Lease, or at
Landlord's option, provided Landlord shall have advised Tenant in writing at the
time of its consent to said Alteration is sought that same must be removed and
restored to its original condition.
Section 12.3. Signs. Tenant shall not place any signs on any part of the
Building or Land without the prior written consent of Landlord which consent
shall not be unreasonably withheld. Upon notice to and with the consent of
Landlord, which consent shall not be unreasonably withheld, Tenant may place
exterior signs on the Premises, provided that (i) the installation and
dimensions of said signs are in strict accordance with Legal Requirements and
any Reciprocal Easement Agreements; (ii) Tenant continually maintains said signs
in a first-class manner and (iii) Tenant, at Tenant's sole cost and expense,
pays the costs associated with the installation and maintenance of the signs and
removes said signs at the expiration of the Term and restores the area in which
said signs are placed to its condition prior to the installation of said signs.
ARTICLE XIII
Condemnation
Section 13.1. Taking: Lease to Terminate. If a portion of the Premises
shall be lawfully taken or condemned for any public or quasi-public use or
purpose, or conveyed under threat of such condemnation and as a result thereof
the Premises cannot be used for the same purpose and with the same utility as
before such taking or conveyance, the Term of this Lease shall end upon, and not
before, the date of the taking of possession by the condemning authority, and
without apportionment of the award. Tenant hereby assigns to Landlord, Tenant's
interest in such award, if any. Current Rent shall be apportioned as of the date
of such termination. If any part of the Premises shall be so taken or condemned,
or if the grade of any street or alley adjacent to the Premises is changed by
any competent authority and such taking or change of grade makes it necessary to
demolish, substantially remodel, or restore the Building, the Landlord shall
have the right to cancel this Lease upon not less than ninety (90) days' prior
notice to the date of cancellation designed in the notice.
Section 13.2. Taking: Lease to Continue. Except as provided in Section
13.1, in the event only a part of the Premises shall be taken as a result of the
exercise of the power of eminent domain or condemned for a public or
quasi-public use or purpose by any competent authority or sold to the condemning
authority under threat of condemnation, and as a result thereof the balance of
the Premises can be used for the same purpose as before such taking, sale or
condemnation, this Lease shall not terminate and Landlord shall promptly repair
and restore the Premises, subject to Force Majeure Delays; provided that in no
event shall Landlord be obligated to spend in excess of the amount of the Award
in restoring the Premises. In the event of a minor taking for road widening (or
similar) no restoration shall be required. Any award paid as a consequence of
such taking, sale or condemnation,
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shall be paid to Landlord. Any sums not so disbursed shall be retained by
Landlord. In the event of a partial taking of the Building there shall be an
equitable adjustment of the Base Rent.
Section 13.3. Tenant's Claim. To the extent permitted by law and subject
to the rights of any lender with respect to the Premises, Tenant shall be
allowed to pursue a claim against the condemning authority (hereinafter referred
to as the "Tenant's Claim") that shall be independent of and wholly separate
from any action, suit or proceeding relating to any award to Landlord for
reimbursement of relocation expenses, or for Tenant's Equipment and personal
property, provided: (i) Tenant's Claim shall in no way limit, affect, alter or
diminish in any kind or way whatsoever Landlord's award as a result of such
taking, sale or condemnation; (ii) Tenant's Claim shall in no event include any
claim for any interest in real property, it being expressly understood and
agreed that all sums paid with respect to the real property interests taken,
sold or condemned shall be the sole property of Landlord; and (iii) Tenant's
Claim shall in no event be joined with Landlord's proceeding or argued or heard
concurrently therewith and if the tribunal hearing Tenant's Claim orders such
joinder, Tenant agrees to voluntarily dismiss or stay Tenant's Claim without
prejudice until such time as Landlord has received its award for such taking,
sale or condemnation. Tenant may also pursue a claim against the condemning
authority for the unamortized value of non-removable leasehold improvements
installed by Tenant at Tenant's sole cost and expense so long as the balance of
the award is sufficient to satisfy the sums secured by any Mortgage.
ARTICLE XIV
Assignment -- Subletting by Tenant
Section 14.1. No Assignment, Subletting or Other Transfer. Tenant shall
not assign this Lease or any interest hereunder, nor shall Tenant sublet or
permit the use or occupancy of the Premises or any part thereof by anyone other
than Tenant, without the express prior written consent of Landlord which consent
shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, so
long as Tenant is not in default hereunder, Tenant may, upon written notice to
Landlord, (i) assign this Lease to an affiliate or (ii) sublease any unimproved
portion of the Land for agricultural purposes subject to compliance with all
Legal Requirements and Reciprocal Easement Agreements. An "affiliate", as such
term is used herein shall mean an entity which owns or is owned by Tenant. No
assignment or subletting shall relieve Tenant of its obligations hereunder, and
Tenant shall continue to be liable as a principal and not as a guarantor or
surety, to the same extent as though no assignment or sublease had been made,
unless specifically provided to the contrary in Landlord's consent. Consent by
Landlord pursuant to this Article shall not be deemed, construed or held to be
consent to any additional assignment or subletting, but each successive act
shall require similar consent of Landlord. Landlord shall be reimbursed by
Tenant for any reasonable out-of-pocket costs or expenses incurred pursuant to
any request by Tenant for consent to any such assignment or subletting. In the
consideration of the granting or denying of consent, Landlord may, at its
option, take into consideration: (i) the business reputation and credit
worthiness of the proposed subtenant or assignee; (ii) any required alteration
of the Premises; (iii) the intended use of the Premises by the proposed
subtenant or assignee; and (iv) any other factors which Landlord shall
reasonably deem relevant.
Section 14.2. Operation of Law. Tenant shall not allow or permit any
transfer of this Lease, or any interest hereunder, by operation of law, or
convey, mortgage, pledge or encumber (other than in connection with a Tenant
corporate asset based financing) this Lease or any interest hereunder.
Section 14.3. Excess Rental. If Tenant shall, with Landlord's prior
consent as herein required, sublet the Premises, an amount equal to fifty
percent (50%) of the rental (after deducting reasonable cost of subletting) in
excess of the Base Rent and any Additional Rent herein provided to be paid shall
be for benefit of Landlord and shall be paid to Landlord promptly when due under
any such subletting as Additional Rent due hereunder.
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Section 14.4. Merger or Consolidation. If Tenant is a corporation whose
stock is not publicly traded, any transaction or series of transactions
(including, without limitation, any dissolution, merger, consolidation or other
reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of
any capital stock of Tenant, whether voluntary, involuntary or by operation of
law, or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, shall be deemed to be a voluntary assignment of
this Lease by Tenant subject to the provisions of this Article XIV. If Tenant is
a partnership or limited liability company, any transaction or series of
transactions (including without limitation any withdrawal or admittance of a
partner or member or a change in any partner's or member's interest in Tenant,
whether voluntary, involuntary or by operation of law, or any combination of any
of the foregoing transactions) resulting in the transfer of control of Tenant,
shall be deemed to be a voluntary assignment of this Lease by Tenant subject to
the provisions of this assignment of this Lease by Tenant subject to the
provisions of this Article XIV. If Tenant is a corporation, a change or series
of changes in ownership of stock which would result in direct or indirect change
in ownership by the stockholders or an affiliated group of stockholders of less
than twenty-five percent (25%) of the outstanding stock as of the date of the
execution and delivery of this Lease shall not be considered a change of
control. Notwithstanding the immediately foregoing, Tenant may, upon notice to,
but without Landlord's consent, assign this Lease to any corporation resulting
from a merger or consolidation of Tenant or the sale of substantially all of the
assets or capital stock of Tenant, provided that the total assets and the total
net worth of such assignee after such consolidation or merger shall be in excess
of the greater of (i) the net worth of Tenant immediately prior to such
consolidation or merger, or (ii) the net worth of Tenant as of the date hereof,
determined by generally accepted accounting principles and provided that Tenant
is not at such time in default hereunder, and provided further that such
successor shall execute an instrument in writing, acceptable to Landlord in its
reasonable discretion, fully assuming all of the obligations and liabilities
imposed upon Tenant hereunder and deliver the same to Landlord. Tenant shall
provide in its notice to Landlord such information as may be reasonably required
by Landlord to determine that the requirements of this Section 14.4 have been
satisfied. As used in this Section 14.4, the term "control" means possession of
the power to vote not less than a majority interest of any class of voting
securities and partnership or limited liability company interests or to direct
or cause the direction of the management or policies of a corporation, or
partnership or limited liability company through the ownership of voting
securities, partnership interests or limited liability company interests,
respectively.
Section 14.5. Unpermitted Transaction. Any assignment, subletting, use,
occupancy, transfer or encumbrance of this Lease or the Premises without
Landlord's prior written consent shall be of no effect and shall, at the option
of Landlord, constitute a default under this Lease.
ARTICLE XV
Financial Statements
Section 15.1. Financial Statements. Tenant agrees to furnish Landlord
annually, within ninety (90) days of the end of such fiscal year with a copy of
its annual audited statements, together with applicable footnotes and any other
financial information reasonably requested by Landlord (hereinafter collectively
referred to as the "Financial Information") and agrees that Landlord may deliver
such Financial Information to any institutional mortgagee, prospective
institutional mortgagee, prospective purchaser, auditor or security analyst on a
confidential basis.
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ARTICLE XVI
Indemnity for Litigation
Section 16.1. Indemnity for Litigation. Tenant agrees to pay, and to
indemnify and defend Landlord against, all costs and expenses (including
reasonable attorneys' fees) incurred by or imposed upon Landlord by or in
connection with any litigation to which Landlord becomes or is made a party
without fault on Landlord's part, whether commenced by or against Tenant, or any
other person or entity or that may be incurred by Landlord in enforcing any of
the covenants and agreements of this Lease with or without the institution of
any action or proceeding relating to the Premises or this Lease, or in obtaining
possession of the Premises after an Event of Default hereunder or upon
expiration or earlier termination of this Lease. The foregoing notwithstanding,
Tenant's responsibility under this Section 16.1 to pay Landlord's costs and
expenses (including reasonable attorneys' fees) shall not extend to such costs
and expenses incurred in defending an action brought by Tenant to enforce the
terms of this Lease in which there is a court determination that Landlord failed
to perform its obligations under this Lease. The provisions of this Section 16.1
shall survive the expiration or earlier termination of this Lease.
Section 16.2. Landlord's Indemnity. Landlord agrees to pay, and to
indemnify and defend Tenant against all costs and expenses (including reasonable
attorney's fees) incurred by or imposed upon Tenant by or in connection with any
litigation by Tenant to enforce Landlord's obligations under this Lease in which
Tenant is the prevailing party.
ARTICLE XVII
Estoppel Certificates
Section 17.1. Estoppel Certificate. Tenant agrees that on the Commencement
Date and at any time and from time to time thereafter, upon not less than ten
(10) days' prior written request by Landlord, it will execute, acknowledge and
deliver to Landlord, or Landlord's mortgagee to the extent factually accurate, a
statement in writing in the form of Exhibit "D" attached hereto and by this
reference incorporated herein; provided, however, Tenant agrees to certify to
any prospective purchaser or mortgagee any other reasonable information
specifically requested by such prospective purchaser or mortgagee. Landlord
agrees that, upon not less than ten (10) days' prior written request of Tenant,
it will execute and deliver to Tenant, to the extent factually accurate, a
statement indicating (i) whether or not this Lease is in full force and effect,
(ii) the amount of Base Rent and Rent Adjustment Deposits, (iii) to Landlord's
knowledge whether or not Tenant is in default under this Lease, and (iv) the
date through which Rent has been paid.
ARTICLE XVIII
Inspection of Premises
Section 18.1. Inspections. Tenant agrees to permit Landlord and any
authorized representatives of Landlord, to enter the Premises at all reasonable
times on reasonable advance notice, for the purpose of inspecting the same. Any
such inspections shall be solely for Landlord's purposes and may not be relied
upon by Tenant or any other person.
Section 18.2. Signs. Tenant agrees to permit Landlord and any authorized
representative of Landlord to enter the Premises at all reasonable times during
business hours on reasonable advance notice to exhibit the same for the purpose
of sale, mortgage or lease. Landlord may display on the Premises customary "For
Sale"
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signs and during the final year of the Term hereof or any extension thereof,
Landlord may display on the Premises customary "For Rent" signs.
ARTICLE XIX
Fixtures
Section 19.1. Building Fixtures. All improvements and all plumbing,
heating, lighting, electrical and air-conditioning fixtures and equipment, and
other articles of personal property installed by Landlord and used in the
operation of the Premises (as distinguished from operations incident to the
business of Tenant), whether or not attached or affixed to the Premises
(hereinafter referred to as "Building Fixtures"), shall be and remain a part of
the Premises and shall constitute the property of Landlord.
Section 19.2. Tenant's Equipment. All of Tenant's trade fixtures and all
personal property, fixtures, apparatus, machinery and equipment now or hereafter
located upon the Premises, other than Building Fixtures, as shall be and remain
the personal property of Tenant, and the same are herein referred to as
"Tenant's Equipment."
Section 19.3. Removal of Tenant's Equipment. Tenant's Equipment may be
removed from time to time by Tenant; provided, however, that if such removal
shall injure or damage the Premises, Tenant shall repair the damage and place
the Premises in the same condition as it would have been if such Tenant's
Equipment had not been installed.
ARTICLE XX
Default
Section 20.1. Events of Default, Tenant agrees that any one or more of the
following events shall be considered "Events of Default" as said term is used
herein:
A. If an order, judgment or decree shall be entered by any court
adjudicating Tenant a bankrupt or insolvent, or approving a petition
seeking reorganization of Tenant or appointing a receiver, trustee or
liquidator of Tenant, or of all or a substantial part of its assets, and
such order, judgment or decree shall continue unstayed and in effect for
any period of sixty (60) days; or
B. Tenant shall file an answer admitting the material allegations of
a petition filed against Tenant in any bankruptcy, reorganization or
insolvency proceeding or under any laws relating to the relief of debtors,
readjustment or indebtedness, reorganization, arrangements, composition or
extension; or
C. Tenant shall make any assignment for the benefit of creditors or
shall apply for or consent to the appointment of a receiver, trustee or
liquidator of Tenant, or of the assets of Tenant; or
D. Tenant shall file a voluntary petition in bankruptcy, or shall
admit in writing its inability to pay its debts as they come due, or shall
file a petition or an answer seeking reorganization or arrangement with
creditors or take advantage of any insolvency law; or
E. A decree or order appointing a receiver of the property of Tenant
shall be made and such decree or order shall not have been vacated within
sixty (60) days from the date of entry or granting thereof; or
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F. Tenant shall abandon the Premises during the Term hereof; or
G. Tenant shall default in making any payment of Rent or other
payment required to be made by Tenant hereunder and such default shall
continue for a period of five (5) days after written notice from Landlord
to Tenant; or
H. If Tenant shall suffer or permit any lien or encumbrance (subject
to Tenant's right to contest liens as provided in Section 11.1 hereof) to
attach to the Landlord's interest in the Premises, and Tenant shall not
discharge said lien or encumbrance within thirty (30) days or within ten
(10) days prior to any sale or disposition or forfeiture pursuant to such
execution, whichever date shall first occur; or
I. If Tenant shall fail to carry all required insurance under this
Lease; or
J. Any material misrepresentation (including by omission) made by
Tenant in this Lease; or
K. If Tenant shall fail to comply with an order of a court of
competent jurisdiction or proper order of a Governmental Authority within
the required time period;
L. Tenant shall repeatedly default in the timely payment of Rent or
any portion thereof, whether or not Tenant shall timely cure any such
payment. For purpose of the foregoing, the occurrence of similar defaults
two (2) times during any twelve month period shall constitute a repeated
default; or
M. If Tenant shall default in the performance of any covenant,
promise or agreement on the part of Tenant contained in this Lease not
otherwise specified in this Section 20.1 and such default shall continue
for thirty (30) days after notice thereof in writing by Landlord to
Tenant, or if such default or condition which gives rise thereto cannot
with due diligence and good faith be cured within such twenty (30)-day
period, if Tenant shall not in good faith and within the period of thirty
(30) days commence the curing of such default and pursue the curing of
such default continuously and diligently and in good faith to the end that
such default shall be cured within such minimum period in excess of thirty
(30) days as may be reasonably necessary to cure such default through
pursuing such cure promptly, diligently, continuously and in good faith;
provided, however, that such additional period beyond thirty (30) days
shall not apply to a default that creates a clear and present danger to
persons or property or materially adversely affects the Premises, or if
the failure or default by Tenant is one for which Landlord (or any officer
or other agent or beneficial or other owner thereof) may be subject to
fine or imprisonment.
Upon the occurrence of any one or more of such Events of Default, Landlord
may at its election terminate this Lease or terminate Tenant's right to
possession only, without terminating this Lease. Upon termination of this Lease
or of Tenant's right to possession, Tenant shall immediately surrender
possession and vacate the Premises, and deliver possession thereof to Landlord,
and Landlord or Landlord's agents may immediately or any time thereafter without
notice, re-enter the Premises and remove all persons and all or any property
therefrom, either by any suitable action or proceeding at law or equity, without
being liable in indictment, prosecution or damages, therefor, and repossess and
enjoy the Premises, together with the right to receive all income of, and from,
the Premises.
Upon termination of this Lease, Landlord shall be entitled to recover as
liquidated damages, because the parties hereto recognize that as of the date
hereof actual damages are not ascertainable and are of imprecise calculation and
not as a penalty, (i) all Rent and other sums due and payable by Tenant through
the date of termination plus (ii) an amount (the "Liquidated Damage Amount")
equal to the difference between (a) the then present value of the aggregate Rent
and other sums provided herein to be paid by Tenant for the residue of the Term
(assuming Landlord had not terminated this Lease) minus (b) the then present
value of the aggregate then rental value of the Premises for the remainder of
the term of the Lease (taking into consideration the time and expense to relet
the Premises) plus (iii) the costs of performing any other covenants to be
performed by Tenant and Landlord's costs
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to decorate or make any repairs, changes, alterations or additions in or to the
Premises as may he necessary or desirable. The present value referenced to
herein shall be computed based upon a discount rate equal to the Corporate Base
Rate.
If Landlord elects to terminate Tenant's right to possession only, without
terminating this Lease, Landlord may, at Landlord's option, enter into the
Premises, remove Tenant's signs and other evidences of tenancy, and take and
hold possession thereof as hereinabove provided, without such entry and
possession terminating this Lease or releasing Tenant, in whole or in part, from
Tenant's obligations to pay the Rent hereunder for the full Term or from any
other obligations of Tenant under this Lease. Landlord shall use commercially
reasonable efforts to relet all or any part of the Premises for such rent and
upon terms as are commercially reasonable (including the right to relet the
Premises for a term greater or lesser than that remaining of the Term and the
right to relet the Premises as a part of a larger area, the right to change the
character or use made of the Premises and the right to grant concessions of free
rent). For the purpose of such reletting, Landlord may decorate or make any
repairs, changes, alterations, or additions in or to the Premises that may be
necessary or desirable. If Landlord is unable to relet the Premises after using
such commercially reasonable efforts to do so, Landlord shall have the right to
terminate this Lease, in which event, Tenant shall pay to Landlord liquidated
damages (because the parties hereto recognize that as of the date hereof actual
damages are not ascertainable and are of imprecise calculation and not as a
penalty) equal to the Liquidated Damage Amount. If the Premises are relet and
sufficient sums shall not be realized from such reletting after payment of all
expenses of such decorations, repairs, changes, alterations, additions and the
expenses of repossession and such reletting, and the collection of the Rent
herein provided and other payments required to be made by Tenant under the
provisions of this Lease for the remainder of the Term of this Lease then, in
such event, Tenant shall pay to Landlord on demand any such deficiency and
Tenant agrees that Landlord may file suit to recover any sums falling due under
the terms of this Section from time to time, and all costs and expenses of
Landlord, including attorneys' fees, incurred in connection with any such suit
shall be paid by Tenant.
If the Premises are relet and sufficient sums shall not be realized from
such reletting after payment of all expenses of such decorations, repairs,
changes, alterations, additions and the expenses of repossession and such
reletting, and the collection of the Rent herein provided and other payments
required to be made by Tenant under the provisions of this Lease for the
remainder of the Term of this Lease then, in such event, Tenant shall pay to
Landlord on demand any such deficiency and Tenant agrees that Landlord may file
suit to recover any sums falling due under the terms of this Section from time
to time, and all costs and expenses of Landlord, including attorneys' fees,
incurred in connection with any such suit shall be paid by Tenant.
Section 20.2. Waivers. Tenant hereby expressly waives, so far as permitted
by law, the service of any notice of intention to re-enter provided for in any
statute, and except as is herein otherwise provided. Tenant for and on behalf of
itself and all persons claiming through or under Tenant, also waives any and all
fights of redemption or re-entry or repossession in case Tenant shall be
dispossessed by a judgment or by warrant of any court or judge or in case of
re-entry or repossession by Landlord or in case of any expiration or termination
of this Lease. The terms "enter", "re-enter", "entry" or "re-entry", as used in
this Lease, are not restricted to their technical legal meanings.
Section 20.3. Bankruptcy. If Landlord shall not be permitted to terminate
this Lease, as provided in this Article XX because of the provisions of the
United States Code relating to Bankruptcy, as amended (hereinafter referred to
as the "Bankruptcy Code"), then Tenant as a debtor-in-possession or any trustee
for Tenant agrees promptly, within no more than sixty (60) days after the filing
of the bankruptcy petition, to assume or reject this Lease. In such event,
Tenant or any trustee for Tenant may only assume this Lease if: (a) it cures or
provides adequate assurances that the trustee will promptly cure any default
hereunder; (b) compensates or provides adequate assurance that Tenant will
promptly compensate Landlord of any actual pecuniary loss to Landlord resulting
from Tenant's default; and (c) provides adequate assurance of performance during
the fully stated term hereof of all of the terms, covenants, and provisions of
this Lease to be performed by Tenant. In no event after the assumption of this
Lease shall any then-existing default remain uncured for a period in excess of
the earlier of ten (10) days or the time period set forth herein. Adequate
assurance of performance of this Lease, as set forth hereinabove, shall
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include, without limitation, adequate assurance: (i) of the source of rent
reserved hereunder; and (ii) that the assumption of this Lease will not breach
any provision hereunder.
If Tenant assumes this Lease and proposes to assign the same pursuant to
the provisions of the Bankruptcy Code to any person or entity who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to Tenant, then notice of such proposed assignment, setting forth: (i) the name
and address of such person; (ii) all of the terms and conditions of such offer,
and (iii) the adequate assurance to be provided Landlord to assure such person's
future performance under the Lease, including, without limitation, the assurance
referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to
Landlord by the Tenant no later than twenty (20) days after receipt by the
Tenant but in any event no later than ten (10) days prior to the date that the
Tenant shall make application to a court of competent jurisdiction for authority
and approval to enter into such assignment and assumption, and Landlord shall
thereupon have the prior right and option, to be exercised by notice to the
Tenant given at any time prior to the effective date of such proposed
assignment, to accept an assignment of this Lease upon the same terms and
conditions and for the same consideration, if any, as the bona fide offer made
by such person, less any brokerage commissions which may be payable out of the
consideration to be paid by such person for the assignment of this Lease.
If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code any and all monies or other considerations
payable or otherwise to be delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or of
the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting the Landlord's property under the
preceding sentence not paid or delivered to the Landlord shall he held in trust
for the benefit of Landlord and shall be promptly paid to the Landlord.
Any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be conclusively 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 demand
execute and deliver to Landlord an instrument confirming such assumption. Any
such assignee shall be permitted to use the Leased Premises only for the Use.
Nothing contained in this Section shall, in any way, constitute a waiver
of the provisions of Article XIV of this Lease relating to alienation. Tenant
shall not, by virtue of this Section, have any further rights relating to
assignment other than those granted in the Bankruptcy Code. Notwithstanding
anything in this Lease to the contrary, all amounts payable by Tenant to or on
behalf of Landlord under this Lease, whether or not expressly denominated as
rent, shall constitute rent for the purpose of Section 501(b)(6) or any
successive section of the Bankruptcy Code.
Section 20.4. Re-entry. Tenant agrees, upon receipt of notice of
termination, to at once surrender possession of the Premises, and related
improvements to Landlord. Tenant expressly waives (to the full extent permitted
by law) the service of any other notice of intention to terminate this Lease or
of intention to re-enter which may be presently provided for by any statute or
other law or any future amendment or similar statute or law (so long as, in the
case of a future amendment or statute or law, the remedies to be exercised by
Landlord are not substantially different than remedies presently available to
Landlord). No receipt of money by Landlord from Tenant after any termination,
howsoever occurring, of this Lease shall reinstate, continue or extend the Term
of this Lease.
Section 20.5. No Waiver. The specified remedies to which Landlord may
resort under the terms of this Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which Landlord may be
lawfully entitled in case of any breach or threatened breach by Tenant of any
provision of this Lease. The failure of Landlord to insist in any one or more
cases upon the strict performance of any of the covenants of this Lease or to
exercise any option herein contained or right to approval or consent shall not
be construed as a waiver or a relinquishment for the future application and
enforcement of such covenant or option or right to approve or consent. A receipt
by Landlord of Rent or any other charges payable by Tenant hereunder with
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knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed by Landlord. In
addition to the other remedies in this Lease provided, Landlord shall be
entitled to the restraint by injunction of the violation, or attempted or
threatened violation, of any of the covenants, conditions or provisions of this
Lease or to a decree compelling performance of any of the covenants, conditions
or provisions of this Lease.
ARTICLE XXI
Landlord's Performance of Tenant's Covenants
Section 21.1. Landlord's Right to Perform Tenant's Obligations. In
the event Tenant shall fail to maintain any insurance required to be paid by it
under the terms hereof, or in an Emergency Situation or upon occurrence of an
Event of Default, Landlord may (but shall not be obligated so to do), and
without waiving or releasing Tenant from any obligation of Tenant hereunder,
make any payment or perform any other act which Tenant is obligated to make or
perform under this Lease in such manner and to such extent as Landlord may deem
desirable; and in so doing Landlord shall also have the right to enter upon the
Premises for any purpose reasonably necessary in connection therewith and to pay
or incur any other necessary and incidental costs and expenses, including
reasonable attorneys' fees. All sums so paid and all liabilities so incurred by
Landlord, together with interest thereon at the rate per annum which is the
lesser of (i) the Lease Interest Rate or (ii) the highest rate permitted by law
shall be deemed Additional Rent hereunder and shall be payable to Landlord upon
demand as Additional Rent. Landlord shall use reasonable efforts to give prior
notice (which may be oral) of its performance, if reasonably feasible under the
circumstances. The performance of any such obligation by Landlord shall not
constitute a waiver of Tenant's default in failing to perform the same. Inaction
of Landlord shall never be considered as a waiver of any right accruing to it
pursuant to this Lease. Landlord, in making any payment hereby authorized: (a)
relating to Taxes, may do so according to any bill, statement or estimate,
without inquiry into the validity of any tax, assessment, sale, forfeiture, tax
lien or title or claim thereof; (b) for the discharge, compromise or settlement
of any lien, may do so without inquiry as to the validity or amount of any claim
for lien which may be asserted; or (c) in connection with the completion of
construction of improvements to the Premises or the repair, maintenance or the
payment of operating costs thereof, may do so in such amounts and to such
persons as Landlord reasonably may deem appropriate. Nothing contained herein
shall be construed to require Landlord to advance monies for any purpose.
Landlord shall not in any event be liable for inconvenience, annoyance,
disturbance, loss of business or other damage of Tenant or any other occupant of
the Premises or any part thereof, by reason of making repairs or the performance
of any work on the Premises or on account of bringing materials, supplies and
equipment into or through the Premises during the course thereof and the
obligations of Tenant under this Lease shall not thereby be affected in any
manner. In doing so, however, Landlord shall use reasonable efforts not to
interfere with the normal operation of the Premises. The term "Emergency
Situation" shall mean a situation which has caused or is likely to cause bodily
injury to persons, contamination of or physical damage to the Premises or
adjoining property or criminal jeopardy to Landlord.
ARTICLE XXII
Exercise of Remedies
Section 22.1. Cumulative Remedies. No remedy contained herein or
otherwise conferred upon or reserved to Landlord, shall be considered exclusive
of any other remedy, but the same shall be cumulative and shall be in addition
to every other remedy given herein, now or hereafter existing at law or in
equity or by statute, and every power and remedy given by this Lease to Landlord
may be exercised from time to time and as often as occasion may arise or as may
be deemed expedient. No delay or omission of Landlord to exercise any right or
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power arising from any default shall impair any such right or power or shall be
construed to be a waiver of any such default or an acquiescence therein.
Section 22.2. No Waiver. No waiver of any breach of any of the
covenants of this Lease shall be construed, taken or held to be a waiver of any
other breach, or a waiver, acquiescence in or consent to any further or
succeeding breach of the same covenant. The acceptance by Landlord of any
payment of Rent or other sums payable hereunder after the termination by
Landlord of this Lease or of Tenant's right to possession hereunder shall not,
in the absence of agreement in writing to the contrary by Landlord, be deemed to
restore this Lease or Tenant's right to possession hereunder, as the case may
be, but shall be construed as a payment on account and not in satisfaction of
damages due from Tenant to Landlord. Receipt of Rent by Landlord, with knowledge
of any breach of this Lease by Tenant or of any default by Tenant in the
observance or performance of any of the conditions or covenants of this Lease,
shall not be deemed to be a waiver of any provision of this Lease.
Section 22.3. Equitable Relief. In the event of any breach or
threatened breach by Tenant of any of the agreements, terms, covenants or
conditions contained in this Lease, Landlord shall be entitled to enjoin such
breach or threatened breach and shall have the right to invoke any right and
remedy allowed at law or in equity or by statute or otherwise as though
re-entry, summary proceedings, and other remedies were not provided for in this
Lease.
ARTICLE XXIII
Subordination to Mortgages
Section 23.1. Subordination. Landlord may execute and deliver a
mortgage or trust deed in the nature of a mortgage ("Mortgage") against its
interest in the Premises or any portion thereof. This Lease and all of the
rights of Tenant hereunder, shall automatically, and without the requirement of
the execution of any further documents, be and are hereby made expressly subject
and subordinate at all times to the lien of any Mortgage and to all advances
made or hereafter to be made upon the security thereof; provided the holder of
said Mortgage agrees in writing not to disturb the rights of Tenant under this
Lease so long as Tenant is not in default hereunder. Notwithstanding the
foregoing, Tenant agrees to execute and deliver such instruments subordinating
this Lease to the lien of any such Mortgage as may be requested in writing by
Landlord from time to time. Notwithstanding anything to the contrary contained
herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant,
subordinate its Mortgage to this Lease.
Section 23.2. Mortgage Protection. Tenant agrees to give the holder
of any Mortgage, by registered or certified mail, a copy of any notice of
default served upon the Landlord by Tenant, provided that prior to such notice
Tenant has received notice (by way of service on Tenant of a copy of an
assignment of rents and leases, or otherwise) of the address of such mortgagee
and containing a request therefor. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for in this Lease,
then said mortgagee shall have an additional thirty (30) days after receipt of
notice thereof within which to cure such default or, if such default cannot be
cured within that time, then such additional time as may be necessary, if,
within such thirty (30) days, any mortgagee has commenced and is diligently
pursuing the remedies necessary to cure such default (including but not limited
to commencement of foreclosure proceedings, if necessary to effect such cure).
Such period of time shall be extended by any period within which such mortgagee
is prevented from commencing or pursuing such foreclosure proceedings by reason
of Landlord's bankruptcy. Until the time allowed as aforesaid for said mortgagee
to cure such defaults has expired without cure, Tenant shall have no right to,
and shall not, terminate this Lease on account of default. This Lease may not be
modified or amended so as to reduce the Rent or shorten the Term, or so as to
adversely affect in any other respect to any material extent the rights of the
Landlord, nor shall this Lease be cancelled (except as a result of the exercise
of remedies after an event of default as provided in this Lease) or surrendered,
without the prior written consent, in each instance, of the mortgagee.
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ARTICLE XXIV
Indemnity and Waiver
Section 24.1. Indemnity. Tenant shall not do or permit any act or
thing to be done or omit to do any act or thing upon the Premises which may
subject Landlord to any liability or responsibility for injury, damage to
persons or property, or to any liability by reason of any violation of Legal
Requirements and shall exercise such control over the Premises so as to fully
protect Landlord against any such liability. Tenant shall defend, indemnify and
save Landlord, and any official, agent. beneficiary, contractor, director,
employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee
of Landlord (each an "Indemnified Party") representatives, successors and
assigns harmless from and against any and all liabilities, suits, judgments,
settlements, obligations, fines, damages, penalties, claims, costs, charges and
expenses, including, without limitation, engineers', architects' and attorneys'
fees, court costs and disbursements, which may be imposed upon or incurred by or
asserted against any Indemnified Party by reason of any of the following
occurring during or after (but attributable to a period of time falling within)
the Term:
A. any demolition or razing or construction of any improvements or
any other work or thing done in, on or about the Premises or any part
thereof by Tenant or any member of the Tenant Group;
B. any use, nonuse, possession, occupation, alteration, repair.
condition, operation, maintenance or management of the Premises or any
part thereof or of any tunnel, creek, ditch, detention area, sidewalk,
curb or vault adjacent thereto by Tenant or any member of the Tenant
Group;
C. any act or failure to act on the part of Tenant or any member of
the Tenant Group;
D. any accident, injury (including death) or damage to any person or
property occurring in, on or about the Premises or any part thereof or in,
on or about any tunnel, creek, ditch, detention area sidewalk, curb or
vault adjacent thereto as a result of the act or neglect of Tenant or any
member of the Tenant Group;
E. any failure to perform or comply with any of the covenants,
agreements, terms or conditions in this Lease on Tenant's part to be
performed or complied with (other than the payment of money);
F. any lien or claim which may be alleged to have arisen against or
on the Premises, or any lien or claim which may be alleged to have arisen
out of this Lease and created or permitted to be created by Tenant or any
member of the Tenant Group against any assets of Landlord, or any
liability which may be asserted against Landlord with respect thereto;
G. any failure on the part of Tenant to keep, observe and perform
any of the terms, covenants, agreements, provisions, conditions or
limitations contained in the contracts and agreements affecting the
Premises on Tenant's part to be kept, observed or performed; and
H. any contest permitted pursuant to the provisions of this Lease.
No agreement or covenant of Tenant in this Section 24.1 shall be
deemed to exempt Landlord from, and Tenant's obligations under this Section 24.1
shall not include liability or damages for injury to persons or damage to
property caused by or resulting from the negligence of Landlord, its agents or
employees, in the operation or maintenance of the Premises.
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The obligations of Tenant under this Section 24.1 shall not be
affected in any way by the absence in any case of covering insurance or by the
failure or refusal of any insurance carrier to perform any obligation on its
part under insurance policies affecting the Premises or any part thereof.
Section 24.2. Waiver of Claims. Tenant waives all claims it may have
against Landlord and Landlord's agents for damage or injury to person or
property sustained by Tenant or any member of the Tenant Group or by any
occupant of the Premises resulting from any part of the Premises becoming out of
repair, or resulting from any accident on or about the Premises or resulting
directly or indirectly from any act or neglect of any person (excluding
Landlord). This Section 24.2 shall include, but not by way of limitation, damage
caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors,
or noise, or caused by bursting or leaking pipes or plumbing fixtures, and shall
apply equally whether any such damage results from the act or neglect of Tenant
(excluding Landlord), and whether such damage be caused or result from anything
or circumstance above mentioned or referred to, or to any other thing or
circumstance whether of a like nature or of a wholly different nature. All
Tenant's Equipment and other personal property belonging to Tenant or any
occupant of the Premises that is in or on any part of the Premises shall be
there at the risk of Tenant or of such other person only, and Landlord shall not
be liable for any damage thereto or for the theft or misappropriation thereof.
ARTICLE XXV
Surrender
Section 25.1. Condition. Upon the termination of this Lease whether
by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's
right to possession of the Premises, Tenant will at once surrender and deliver
up the Premises to Landlord, broom clean, in good order, condition and repair,
reasonable wear and tear and damage by casualty excepted. "Broom clean" means
free from all debris, dirt, rubbish, personal property of Tenant, inside and
outside of the Building and on the grounds comprising the Premises. Any damage
caused by removal of Tenant from the Premises, including any damages caused by
removal of Tenant's Equipment, as herein defined, shall be repaired and paid for
by Tenant prior to the expiration of the Term.
All Alterations temporary or permanent, excluding Tenant's
Equipment, in or upon the Premises placed there by Tenant, shall become
Landlord's property and shall remain upon the Premises upon such termination of
this Lease by lapse of time or otherwise, without compensation or allowance or
credit to Tenant, unless Landlord has requested their removal pursuant to
Section 12.2. If Landlord so requests removal of said additions, hardware,
alterations or improvements and Tenant does not make such removal by the
termination of this Lease, or within ten (10) days after such request, whichever
is later, Landlord may remove the same and deliver the same to any other place
of business of Tenant or warehouse same, and Tenant shall pay the cost of such
removal, delivery and warehousing to Landlord on demand.
Section 25.2. Removal of Tenant's Equipment. Upon the termination of
this Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment
provided, however, that Tenant shall repair any injury or damage to the Premises
which may result from such removal. If Tenant does not remove Tenant's Equipment
from the Premises prior to the end of the Term, however ended, Landlord may, at
its option. remove the same and deliver the same to any other place of business
of Tenant or warehouse the same, and Tenant shall pay the cost of such removal
(including the repair of any injury or damage to the Premises resulting from
such removal), delivery and warehousing to Landlord on demand, or Landlord may
treat Tenant's equipment as having been conveyed to Landlord with this Lease as
a Bill of Sale, without further payment or credit by Landlord to Tenant.
Section 25.3. Holdover. If Tenant retains possession of the Premises
or any part thereof after the termination of the Term, by lapse of time and
otherwise, then Tenant shall pay to Landlord monthly rent, for the first thirty
(30) days at one hundred twenty percent (120%) of the rate payable for the month
immediately preceding
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said holding over (including increases for Additional Rent which Landlord may
reasonably estimate) and thereafter at one hundred fifty percent (150%) of the
rate payable for the month immediately preceding said holding over (including
increases for Additional Rent which Landlord may reasonably estimate). All such
rent shall be computed on a per-month basis, for each month or part thereof
(without reduction for any such partial month) that Tenant thus remains in
possession, and in addition thereto, Tenant shall pay Landlord all damages,
consequential as well as direct, sustained by reason of Tenant's retention of
possession. Alternatively, at the election of Landlord expressed in a written
notice to Tenant and not otherwise, in the event that Tenant retains possession
of the Premises for more than sixty (60) days after the expiration of the Term,
such retention of possession shall constitute a renewal of this Lease for six
(6) months, at a rental equal to one hundred twenty percent (120%) of the Rent
during the previous year. The provisions of this paragraph do not exclude the
Landlord's rights of re-entry or any other right hereunder. Any such extension
or renewal shall be subject to all other terms and conditions herein contained.
ARTICLE XXVI
Covenant of Quiet Enjoyment
Section 26.1. Covenant of Quiet Enjoyment. Landlord covenants that
Tenant, on paying the Rent and all other charges payable by Tenant hereunder,
and on keeping, observing and performing all the other terms, covenants,
conditions, provisions and agreements herein contained on the part of Tenant to
be kept, observed and performed, all of which obligations of Tenant are
independent of Landlord's obligations hereunder, shall, during the Term,
peaceably and quietly have, hold and enjoy the Premises subject to the terms,
covenants, conditions, provisions and agreement hereof free from hindrance by
Landlord or any person claiming by, through or under Landlord.
ARTICLE XXVII
Recording
Section 27.1. Recording. Tenant may, at its sole cost and expense,
record a memorandum hereof in a form reasonably acceptable to Landlord and
Landlord agrees to sign any such memorandum.
ARTICLE XXVIII
Notices
Section 28.1. Notices. All notices, consents, approvals to or
demands upon or by Landlord or Tenant desired or required to be given under the
provisions hereof, shall be in writing. Any notices or demands from Landlord to
Tenant shall be deemed to have been duly and sufficiently given if a copy
thereof has been personally served, forwarded by expedited messenger or
recognized overnight courier service with evidence of delivery or mailed by
United States registered or certified mail in an envelope properly stamped and
addressed to Tenant at Tenant's Mailing Address, or at such other address as
Tenant may theretofore have furnished by written notice to Landlord. Any notices
or demands from Tenant to Landlord shall be deemed to have been duly and
sufficiently given if forwarded by expedited messenger or recognized overnight
courier service with evidence of delivery or mailed by United States registered
or certified mail in an envelope properly stamped and addressed to Landlord at
Landlord's Mailing Address, with a copy to Mark S. Richmond, Katz Randall &
Weinberg, 333 West Wacker Drive, Suite 1800, Chicago, Illinois 60606, or at such
other address as Landlord may theretofore have furnished by written notice to
Tenant. The effective date of any such notice shall be the date of actual
delivery, except that if delivery is refused, the effective date of notice shall
be the date delivery is refused.
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ARTICLE XXIX
Covenants Run with Land
Section 29.1. Covenants. All of the covenants, agreements,
conditions and undertakings in this Lease contained shall extend and inure to
and be binding upon the heirs, executors, administrators, successors and assigns
of the respective parties hereto, the same as if they were in every case
specifically named, and shall be construed as covenants running with the Land,
and wherever in this Lease reference is made to either of the parties hereto, it
shall be held to include and apply to, wherever applicable, the heirs,
executors, administrators, successors and assigns of such party. Nothing herein
contained shall be construed to grant or confer upon any person or persons,
firm, corporation or governmental authority, other than the parties hereto,
their heirs, executors, administrators, successors and assigns, any right, claim
or privilege by virtue of any covenant, agreement, condition or undertaking in
this Lease contained.
Section 29.2. Release of Landlord. The term "Landlord" as used in
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at the
time in question of fee title to the Premises, and in the event of any transfer
or transfers of the title, Landlord herein named (and in the case of any
subsequent transfers or conveyances, the then grantor) shall be automatically
freed and relieved, from and after the date of such transfer or conveyance, of
all personal liability as respects the performance of any covenants or
obligations on the part of Landlord contained in this Lease thereafter to be
performed; provided that any funds in the hands of such Landlord or the then
grantor at the time of such transfer, in which Tenant has an interest, shall be
turned over to the grantee.
ARTICLE XXX
Environmental Matters
Section 30.1. Defined Terms.
A. The term "Hazardous Materials", when used herein, shall include,
but shall not be limited to, any substances, materials or wastes that are
regulated by any local governmental authority, the state where the Premises or
the Premises is located, or the United States of America because of toxic,
flammable, explosive. corrosive, reactive, radioactive or other properties that
may be hazardous to human health or the environment, including without
limitation, above or underground storage tanks, flammables, explosives,
radioactive materials, radon, petroleum and petroleum products, petroleum
products (other than petroleum products that are normally contained in motor
vehicles to the extent such products are not released), urea formaldehyde foam
insulation, methane, lead-based paint, polychlorinated biphenyl compounds,
hydrocarbons or like substances and their additives or constituents, pesticides
and any other special, toxic or hazardous materials, wastes, substances or
materials of any kind, including without limitation, those now or hereafter
defined, determined or identified as "hazardous substances," "hazardous
materials," "toxic substances" or "hazardous wastes" in any Environmental Law.
B. "Environmental Law" shall mean any Federal, state or local law,
statute. ordinance, code, rule, regulation, policy, common law, license,
authorization, decision, order, injunction, which pertains to health, safety,
any Hazardous Material, or the environment (including but not limited to ground
or air or water or noise pollution or contamination, and underground or
above-ground tanks) and shall include, without limitation, the Resource
Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss.6901 et seq., as amended by
the Hazardous and Solid Waste Amendments of 1984; the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
ss.9601 et seq. ("CERCLA"), as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"); the Hazardous Materials Transportation
Act, 49 U.S.C. ss.1801 et seq.; the Federal Water Pollution
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Control Act, 33 U.S.C. ss.1251 et seq.; the Clean Air Act, 42 U.S.C. ss.7401 et
seq.; the Toxic Substances Control Act, 15 U.S.C. ss.2601 et seq.; the Safe
Drinking Water Act, 42 U.S.C. ss.300f et seq.; the Illinois Environmental
Protective Act, 415 ILSC 4/1 et seq.; the Clean Air Act (42 U.S.C. ss.7401 et
seq., "CAA"); the Rivers and Harbors Act, (33 U.S.C. ss.401 et seq., "RHA"); the
Emergency Planning and Community Right-to-Know Act of 1986(41 U.S.C. 11001 et
seq., "EPCRA"), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.
136 to 136y); the Oil Pollution Act of 1990 (33 U.S.C. 2701 et seq., "OPA"); and
the Occupational Safety and Health Act (29 U.S.C. 651 et seq., "OSHA"); and any
other local, state or federal environmental statutes, and all rules,
regulations, orders and decrees now or hereafter promulgated under any of the
foregoing, as any of the foregoing now exist or may be changed or amended or
come into effect in the future.
C. "Environmental Claim" shall mean and include any demand, notice
of violation, inquiry, cause of action, proceeding or suit for damages
(including reasonable attorneys' and experts' fees), losses, injuries to person
or property, damages to natural resources, fines, penalties, interest, cost
recovery, compensation, or contribution resulting from or in any way arising in
connection with any Hazardous Material or any Environmental Law.
D. "Pre-Existing Condition" shall mean the presence of any Hazardous
Material on the Premises, to the extent such Hazardous Material was not
introduced onto the Premises after the Commencement Date.
E. "Environmental Condition" shall mean the existence of any
Hazardous Material on the Premises other than a Pre-Existing Condition, (i) in
violation of, or requiring cleanup under, any Environmental Law or the
provisions of this Article XXX; or (ii) which subjects Landlord to liability for
any Environmental Claim or which must be remediated to prevent Landlord from
incurring liability as a result of such Environmental Claim.
F. "Environmental Remediation" shall mean any investigative,
cleanup, removal, containment, remedial or other action relating to an
Environmental Condition (i) required pursuant to any Environmental Law, or (ii)
necessary to prevent Landlord from incurring, or relieve Landlord from,
liability as a result of an Environmental Claim.
G. "Remediating Party" shall mean that party which has elected (or
is deemed to have elected) to perform any Environmental Remediation.
Section 30.2. Tenant's Covenants with Respect to Environmental
Matters. During the Term, Tenant, at its sole cost and expense, shall:
A. comply with all Environmental Laws relating to the use and
operation of the Premises;
B. keep the Premises free of Hazardous Materials; provided, however,
that Tenant may use Hazardous Materials incidental to the operation of
Tenant's business used in accordance with all Environmental Laws and this
Lease;
C. not exacerbate a Pre-Existing Condition of which Landlord has
notified Tenant;
D. in the case of an Environmental Condition:
(1) promptly, but not later than ten (10) business days after
the discovery of an Environmental Condition, notify Landlord of the
Environmental Condition;
(2) furnish a letter of credit, personal guaranty, escrow of
funds or other security reasonably acceptable to Landlord to secure
performance of Environmental Remediation and to assure Landlord that
all necessary funds are readily available to Landlord to pay the
costs and expenses of Environmental Remediation;
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(3) submit to Landlord for review and approval prior to
commencement of any Environmental Remediation, a proposed scope of
work and timetable therefor, and provide Landlord with a cost
estimate for same;
(4) diligently perform Environmental Remediation, as approved
by Landlord which approval shall not be unreasonably withheld;
(5) submit to Landlord in a timely manner for review and
comment the documentation and information required by Sections 30.5
and 30.6 relating to each phase of the Environmental Remediation,
including proof satisfactory to Landlord at the conclusion of the
work of proper implementation, and pay all costs of Landlord
described in Section 30.12(C); and
(6) comply with applicable release reporting requirements and
provide Landlord with any information necessary to comply;
E. not install or operate any above or below ground tank, sump, pit,
pond, lagoon or other storage or treatment vessel or device on the
Premises without first obtaining Landlord's prior written consent;
F. not handle, use, generate, treat, dispose of or permit the use,
handling, generation, treatment, storage or disposal of any Hazardous
Materials in, on, under, around or above the Premises at any time during
the Term, except for Hazardous Materials incidental to the operation of
Tenant's business used in accordance with all Environmental Laws and this
Lease.
Section 30.3 Conduct of Tenant. If Tenant, with the prior written
authorization of Landlord, which authorization may be granted or denied by
Landlord in its sole and absolute discretion, and as otherwise permitted by
Section 30.2 F, generates, uses, transports, stores, treats or disposes of any
Hazardous Materials
A. Tenant shall, at its own cost and expense, comply with all
Environmental Laws relating to Hazardous Materials;
B. Tenant shall (i) not dispose of any Hazardous Materials in
dumpsters or trash containers or at any other location at the Premises;
(ii) not discharge any Hazardous Materials into drains or sewers; (iii)
not cause or allow the release, discharge, emission or run-off of any
Hazardous Materials to air, to surface waters, to the land, to ground
water, whether directly or indirectly; (iv) at Tenant's own cost and
expense, arrange for the lawful transportation and off-site disposal of
all Hazardous Materials generated by Tenant; (v) provide secondary
containment around all Hazardous Materials storage containers, storage
facilities and above ground storage tanks; (vi) conduct all necessary
environmental inspections, such as, but not limited to, asbestos
inspections prior to any renovation or demolition, as required by 40 CFR
Part 61 and provide copies of all such reports to the Landlord; (vii)
comply with all reporting requirements under any local, state or federal
ordinance, statute or regulation, such as, but not limited to, toxics
inventory reporting under the Emergency Planning and Community
Right-to-Know Act, the provisions under 40 CFR Part 61, or various
regulations controlling the emissions into the atmosphere of volatile
organic compounds and provide copies of all such reports and notifications
to Landlord; and (viii) use only highly skilled people to address all
environmental issues associated with the leasehold, that such people and
all employees of the Tenant shall receive all required training or
certification under any local, state or federal law specifically mentioned
or alluded to in Section 30.1 of this Lease;
C. Tenant shall promptly provide Landlord with copies of all
communications, permits or agreements with any governmental authority or
agency (federal, state or local) or any private entity relating in any way
to the violation or alleged violation of any Environmental Laws or to any
violation of Tenant's obligations under subparagraph (13) above;
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D. Landlord and Landlord's agents and employees shall have the right
to enter the Premises on reasonable prior notice to Tenant and/or conduct
appropriate tests for the purpose of ascertaining that Tenant complies
with all applicable laws, rules or permits relating in any way to the
presence of Hazardous Materials on the Premises; and
E. Upon the written request of Landlord no more frequently than once
every year, or on any other occasion in the event that Landlord has reason
to believe an environmental problem exists at the Premises, Tenant shall
provide Landlord the results of appropriate tests of air, water and soil
to demonstrate (i) that Tenant is in compliance with all applicable laws,
rules or permits relating in any way to the presence of any Hazardous
Materials on the Premises and (ii) the lack of any releases, discharges or
emissions.
If the presence, release, threat of release, placement on or in the
Premises occurs or is caused in whole or in part during the Term of this Lease,
or the generation, transportation, storage, treatment, or disposal at the
Premises occurs or is caused in whole or in part during the Term of this Lease
of any Hazardous Materials gives rise to liability (including, but not limited
to, a response action, remedial action, or removal action) under any
Environmental Laws or common law theory, including, but not limited to nuisance,
strict liability, negligence and trespass, Tenant shall promptly take any and
all remedial and removal action necessary to clean up the Premises containing
such Hazardous Materials and mitigate exposure to liability arising from the
Hazardous Materials, whether or not required by law.
Section 30.4. Exacerbation. If Tenant exacerbates a Pre-Existing
Condition of which Landlord notifies Tenant (including as a result of Tenant's
investigative or remediation activities) during the Lease term, that the
provisions of this Article XXX shall apply to such exacerbation of the
Pre-Existing Condition, and Tenant shall perform Environmental Remediation as to
such exacerbation. Tenant shall be responsible for all fines and penalties
caused by Tenant or to the extent exacerbated by Tenant (including Tenant's
environmental investigation or remediation activities) at any time during the
Lease Term.
Section 30.5. Rights of Inspection. Landlord and their respective
agents and representatives shall have a right of entry and access to the
Premises upon reasonable prior notice to Tenant for the purposes of (i)
inspection of the documentation relating to Hazardous Materials or environmental
matters maintained by Tenant or occupant of the Premises; (ii) ascertaining the
nature of the activities being conducted on the Premises and investigating
whether Tenant is in compliance with its obligations under Article XXX of this
Lease; and (iii) determining the type, kind and quantity of all products,
materials and substances brought onto the Premises, or made or produced thereon.
Landlord's entry shall not unreasonably interfere with the operation of Tenant's
business. Landlord and its agents and representatives shall have the right to
take samples in quantities sufficient for analysis of all products, materials
and substances present on the Premises including, but not limited to, samples,
products, materials or substances brought onto or made or produced on the
Premises by Tenant or occupant of the Premises or their respective agents,
employees, contractors or invitees and shall also have the right to conduct
other tests and studies as may be reasonably determined by Landlord to be
appropriate in order to investigate whether Tenant is in compliance with its
obligations under Article XXX.
Section 30.6. Copies of Notices. During the term of this Lease,
Tenant and Landlord shall each provide the other promptly with copies of all
summons, citations, directives, information inquiries or requests, notices of
potential responsibility, notices of violation or deficiency, orders or decrees,
Environmental Claims, complaints, investigations, judgments, letters, notices of
environmental liens or response actions in progress, and other communications,
written or oral, actual or threatened, received in the case of Tenant, by Tenant
or occupant of the Premises, or in the case of Landlord, by Landlord, from the
United States Environmental Protection Agency, Occupational Safety and Health
Administration, Illinois Environmental Protection Agency, or other federal,
state or local agency or authority, or any other entity or individual (including
both governmental and non-governmental entities and individuals), concerning (a)
any actual or alleged release of a Hazardous Material on, to or from the
Premises; (b) the imposition of any lien on the Premises relating to any
Hazardous Material; (c) any actual or alleged violation of or responsibility
under Environmental Laws; or (d) any actual or alleged liability under any
theory of
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common law tort or toxic tort, including without limitation, negligence,
trespass, nuisance, strict liability or ultrahazardous activity.
Section 30.7. Tests and Reports.
A. Upon written request of either party to this Lease, the other
party shall provide: (i) copies of all environmental reports and tests prepared
or obtained by or for such first party; (ii) copies of transportation and
disposal contracts (and related manifests, schedules, reports and other
information) entered into or obtained by such first party with respect to any
Hazardous Materials; (iii) copies of any permits issued to such first party
under Environmental Laws with respect to the Premises; (iv) prior to filing,
copies of any and all reports, notifications and other filings to be made by
such first party to any federal, state or local environmental authorities or
agencies and after filing, copies of such filings; and (v) any other applicable
documents and information with respect to environmental matters relating to the
Premises. The parties to this Lease shall be obligated to provide such
documentation only to the extent within their possession or control.
B. In addition, Landlord shall ever reasonably believe that there
exists any breach by Tenant of the terms of this Article XXX, or if any
Environmental Claim is made or threatened, or if a default shall have occurred
under the Lease, or at Landlord's discretion, one (1) time per Lease Year,
Landlord shall have the right, but not the duty, to enter upon the Premises and
conduct an environmental assessment of the Premises, including but not limited
to a visual site inspection, review of records pertaining to the site and
interviews of Tenant's representatives or others concerning the site use and
history and other matters. The investigation may also include reasonable
subsurface or other invasive investigation of the Premises including but not
limited to soil borings and sampling of site soil and ground or surface water
for laboratory analysis, as may be recommended by the consultant as part of its
inspection of the Premises or based upon such other reasonable evidence of
Environmental Conditions warranting such subsurface or other invasive
investigation. Landlord shall have the right, but not the duty, to retain any
independent professional consultant to conduct any such environmental
assessment; provided, however, that Landlord agrees to limit, in the absence of
an Environmental Claim or default under this Article XXX, the number of such
environmental assessments to one (1) per Lease Year for the Lease Term. Tenant
will cooperate with the Landlord's consultant and will supply to the
consultant, promptly upon request, any information reasonably requested by
Landlord to facilitate the completion of the environmental assessment. Landlord
and its designees are hereby granted access to the Premises at any time or
times, upon reasonable notice (which may be written or oral) to perform such
environmental assessment, In exercising its right, Landlord shall use its
reasonable efforts to minimize disruption of operations at the Premises. Any
costs associated with performance of the environmental assessment, including but
not limited to the consultant fees and restoration of any property damaged by
such environmental assessment, shall be paid by Landlord, unless such
investigation discloses an Environmental Condition, in which case Tenant shall
pay such costs.
C. Tenant shall pay Tenant's Proportion of all costs incurred by
Landlord for consultant fees to review and comment on all reports, and other
documentation and information required by Sections 30.5 and 30.6 concerning the
work, and to monitor the performance of any Environmental Remediation performed
by Tenant.
Section 30.8. Indemnification. Tenant shall reimburse, defend,
indemnify and hold Landlord and any other Indemnified Party free and harmless
from and against any and all Environmental Claims, response costs, losses,
liabilities, damages, costs and expenses, including, without limitation, loss of
rental income, loss due to business interruption, and reasonable attorneys' fees
and costs, arising out of or in any way connected with any or all of the
following:
A. any Hazardous Materials (other than a Pre-Existing Condition)
which, at any time during the Term, are or were actually or allegedly
generated, stored, treated, released, disposed of or otherwise located on
or at the Premises as a result of the act or omission of Tenant or any
member of the Tenant Group (regardless of the location at which such
Hazardous Materials are now or may in the future be located or disposed
of), including, but not limited to any and all (i) liabilities under any
common law theory
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of tort, nuisance, strict liability, ultrahazardous activity, negligence
or otherwise based upon, resulting from or in connection with any
Hazardous Material; (ii) obligations to take response, cleanup or
corrective action pursuant to any Environmental Laws; and (iii) the costs
and expenses of investigation or remediation in connection with the
decontamination, removal, transportation, incineration or disposal of any
of the foregoing; and
B. any actual or alleged illness, disability, injury or death of any
person, in any manner arising out of or allegedly arising out of exposure
to Hazardous Materials or other substances or conditions present at the
Premises as a result of the act or omission of Tenant or any member of the
Tenant Group (including, but not limited to, ownership, operation and
disposal of any equipment which generates, creates or uses electromagnetic
files, x-rays, other forms of radiation and radioactive materials),
regardless of when any such illness, disability, injury or death shall
have occurred or been incurred or manifested itself; and
C. any actual or alleged failure of Tenant or any member of the
Tenant Group at any time and from time to time to comply with all
applicable Environmental Laws;
D. any failure by Tenant to comply with its obligations under this
Article XXX relating to an Environmental Condition for which Tenant is
Remediating Party;
E. Tenant's failure to provide all information, make all
submissions, and take all steps required by all applicable governmental
authorities;
F. the imposition of any lien for damages caused by, or the recovery
of any costs for, the remediation cleanup of Hazardous Material as a
result of events that took place during the Term of this Lease as a result
of the act or omission of Tenant or any member of the Tenant Group;
G. costs of removal of any and all Hazardous Material from all or
any portion of the Premises, which Hazardous Material were placed on the
Premises during the Term of this Lease to the extent caused as a result of
the act or omission of Tenant or any member of the Tenant Group;
H. costs incurred to comply, in connection with all or any portion
of the Premises, with all governmental regulations with respect to
Hazardous Materials on, in, under or affecting the Premises, which
Hazardous Materials were placed on the Premises during the Term of this
Lease to the extent caused as a result of the act or omission of Tenant or
any member of the Tenant Group;
I. any spills, discharges, leaks, escapes, releases, dumping,
transportation, storage, treatment or disposal of any Hazardous Materials
which occur during the Term of this Lease, but only to the extent that
such Hazardous Materials originated from or were or are located on the
Premises due to the act or omission of Tenant or any member of the Tenant
Group.
In the event Environmental Claims or other assertion of liability
shall be made against any Indemnified Party for which the Indemnified Party is
entitled to indemnity hereunder, the procedure set forth in Section 24.1 shall
apply. The obligations of Tenant under this Section 30.8 shall survive any
termination or expiration of this Lease.
Section 30.9. Tenant Representations with respect to Environmental
Matters. Subject to Section 4.8, Tenant acknowledges that the Premises are being
leased in their present "as is" condition. Tenant further acknowledges that
Landlord has made no representation whatsoever regarding Hazardous Materials on
or about the Premises.
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ARTICLE XXXI
Security Deposit
INTENTIONALLY OMITTED.
ARTICLE XXXII
Renewal Options
Section 32.1. First Renewal Option. Tenant shall have the option
(hereinafter referred to as the "First Renewal Option") to renew the Initial
Term for all of the Premises as of the expiration date of the Initial Term, for
one (1) additional period of five (5) years (hereinafter referred to as the
"First Renewal Term") upon the following terms and conditions:
A. Tenant gives Landlord written notice of its exercise of the
Renewal Option at least twelve (12) months prior to the expiration of the
First Renewal Term.
B. An Event of Default has not occurred and is continuing
either on the date Tenant delivers the notice required under subparagraph
32.1A. above or at any time thereafter prior to the commencement of the
First Renewal Term.
C. All of the terms and provisions of this Lease (except this
Section 32.1) shall be applicable to the First Renewal Term, except that
Base Rent for the First Renewal Term shall be determined as follows: Base
Rent for the First Renewal Term shall be equal to the greater of: (i) one
hundred percent (100%) of the Base Rent and Addition Rent, if any, for the
last year of the Initial Term, or (ii) Landlord's determination of the
Fair Value (as hereinafter defined). For purposes of this Lease, "Fair
Value" shall mean Landlord's determination, utilizing its reasonable
judgment, of an annual amount per rentable square foot for each year of
the First Renewal Term for which Fair Value is being determined beginning
with the first (1st) day of the subject period that a willing,
creditworthy, new non-equity tenant leasing comparable space to Tenant's
would pay and a willing, comparable landlord of an industrial building
comparable to the Building in the Chicago metropolitan area (hereinafter
referred to as the "Market") would accept at arm's length, giving
appropriate consideration to annual rental rate per rentable square foot,
rental escalations, length of lease term, size and location of the
premises being leased, and other generally applicable terms and conditions
prevailing for comparable space in comparable buildings located in the
Market. In determining Fair Value, the parties shall not consider
improvements installed by Tenant at Tenant's sole cost and expense. Tenant
shall notify Landlord within ten (10) days after receipt of notice of
Landlord's determination of Fair Value whether or not Tenant disagrees
with Landlord's determination. If Tenant agrees with Landlord's
determination, Base Rent for the First Renewal Term shall be the amount
determined by Landlord. If Tenant disagrees with Landlord's determination,
Tenant shall indicate whether or not it is revoking its exercise of the
First Renewal Option or that the dispute shall be resolved by arbitration
as hereinafter provided. If Tenant does not respond within the required
time period or fails to elect, Tenant shall be deemed to have elected
arbitration. Landlord and Tenant will each select an arbitrator who shall
be disinterested and shall be a person that has been actively engaged in
the development or leasing of industrial buildings in the Chicago
Metropolitan area for a period not less than seven (7) years immediately
preceding his or her appointment. Landlord and Tenant shall each
simultaneously submit to the arbitrators a determination of Fair Value.
(If no submittal is made, the parties shall be deemed to have approved the
other parry's submission.) The arbitrators shall be directed as promptly
as possible to select from the two determinations submitted by Landlord
and Tenant the one that is closer to the Fair Value as determined by the
arbitrators, and said selection shall thereafter be deemed the Fair Value.
If the two arbitrators so
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appointed fail to agree as to which of the determinations submitted by
Landlord and Tenant is closest to the actual Fair Value, the two
arbitrators shall appoint a third arbitrator, using the criteria described
above, to decide upon which of the two determinations submitted is closest
to the actual Fair Value. The cost of the foregoing arbitration process
shall be borne by the losing party. If no determination is made prior to
the date for commencement of payment of rent for which Fair Value must be
determined, then Landlord's determination shall be used until the
arbitration is completed. If Tenant's determination is later selected,
Landlord shall refund any overpayments to Tenant.
Section 32.2. Second Renewal Option. Tenant shall have the option
(hereinafter referred to as the "Second Renewal Option") to renew the Initial
Term for all of the Premises as of the expiration date of the Initial Term, for
one (1) additional period of five (5) years (hereinafter referred to as the
"Second Renewal Term") upon the following terms and conditions:
A. Tenant gives Landlord written notice of its exercise of the
Renewal Option at least twelve (12) months prior to the expiration of the
Second Renewal Term.
B. An Event of Default has not occurred and is continuing
either on the date Tenant delivers the notice required under subparagraph
32.1A. above or at any time thereafter prior to the commencement of the
Second Renewal Term.
C. All of the terms and provisions of this Lease (except this
Section 32.1) shall be applicable to the Second Renewal Term, except that
Base Rent for the Second Renewal Term shall be determined as follows: Base
Rent for the Second Renewal Term shall be equal to the greater of: (i) one
hundred percent (100%) of the Base Rent and Addition Rent, if any, for the
last year of the Initial Term, or (ii) Landlord's determination of the
Fair Value (as hereinafter defined). For purposes of this Lease, "Fair
Value" shall mean Landlord's determination, utilizing its reasonable
judgment, of an annual amount per rentable square foot for each year of
the Second Renewal Term for which Fair Value is being determined beginning
with the first (1st) day of the subject period that a willing,
creditworthy, new non-equity tenant leasing comparable space to Tenant's
would pay and a willing, comparable landlord of an industrial building
comparable to the Building in the Market would accept at arm's length,
giving appropriate consideration to annual rental rate per rentable square
foot, rental escalations, length of lease term, size and location of the
premises being leased, and other generally applicable terms and conditions
prevailing for comparable space in comparable buildings located in the
Market. In determining Fair Value, the parties shall not consider
improvements installed by Tenant at Tenant's sole cost and expense. Tenant
shall notify Landlord within ten (10) days after receipt of notice of
Landlord's determination of Fair Value whether or not Tenant disagrees
with Landlord's determination. If Tenant agrees with Landlord's
determination, Base Rent for the Second Renewal Term shall be the amount
determined by Landlord. If Tenant disagrees with Landlord's determination,
Tenant shall indicate whether or not it is revoking its exercise of the
Second Renewal Option or that the dispute shall be resolved by arbitration
as hereinafter provided. If Tenant does not respond within the required
time period or fails to elect, Tenant shall be deemed to have elected
arbitration. Landlord and Tenant 'will each select an arbitrator who shall
be disinterested and shall be a person that has been actively engaged in
the development or leasing of industrial buildings in the Chicago
Metropolitan area for a period not less than seven (7) years immediately
preceding his or her appointment. Landlord and Tenant shall each
simultaneously submit to the arbitrators a determination of Fair Value.
(If no submittal is made, the parties shall be deemed to have approved the
other party's submission.) The arbitrators shall be directed as promptly
as possible to select from the two determinations submitted by Landlord
and Tenant the one that is closer to the Fair Value as determined by the
arbitrators, and said selection shall thereafter be deemed the Fair Value.
If the two arbitrators so appointed fail to agree as to which of the
determinations submitted by Landlord and Tenant is closest to the actual
Fair Value, the two arbitrators shall appoint a third arbitrator, using
the criteria described above, to decide upon which of the two
determinations submitted is closest to the actual Fair Value. The cost of
the foregoing arbitration process shall be borne by the losing party. If
no determination is made prior to the date for commencement
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of payment of rent for which Fair Value must be determined, then
Landlord's determination shall be used until the arbitration is completed.
If Tenant's determination is later selected, Landlord shall refund any
overpayments to Tenant.
Section 32.3. "As Is" Condition. Tenant agrees to accept the
Premises to be covered by this Lease during the First Renewal Term and the
Second Renewal Term in an "as is" physical condition and Tenant shall not be
entitled to receive any allowance, credit, concession or payment from Landlord
for the improvement thereof.
Section 32.4. Amendment. In the event that Tenant exercises the
Renewal Option, then Landlord and Tenant shall mutually execute and deliver an
amendment to this Lease reflecting the renewal of the Term on the terms herein
provided, which amendment shall be executed and delivered promptly after the
determination of Base Rent to be applicable to the First Renewal Term and again
with respect to the Second Renewal Term as hereinabove provided.
Section 32.5. Termination. The Renewal Options herein granted shall
automatically terminate upon the earliest to occur of (i) the expiration or
termination of this Lease, (ii) the termination of Tenant's right to possession
of the Premises, or (iii) the failure of Tenant to timely or properly exercise
either the First Renewal Option or the Second Renewal Option.
ARTICLE XXXIII
Expansion of Improvements
Section 33.1. Construction of Addition. Upon written request from
Tenant from time to time, and upon satisfaction of the conditions hereinafter
set forth, Landlord agrees, subject to and to the extent permitted under all
Legal Requirements and Reciprocal Easement Agreements, to construct an addition
or additions, from time to time, to the Initial Improvements of up to the floor
area permitted by all Legal Requirements (hereinafter referred to as the
"Addition"). Each Addition shall, in Landlord's reasonable determination, be
architecturally compatible with the Initial Improvements and constructed to be
used as an office warehouse facility. Landlord's obligation to construct each
Addition shall be subject to satisfaction of the following conditions:
(a) Tenant shall not be in default hereunder at the time of
Tenant's request for an Addition and thereafter and no event shall have
occurred during such time which would, with the passage of time or the
giving of notice, or both, constitute such a default.
(b) This Lease shall not have been terminated.
(c) The Tenant has not sublet in excess of fifty percent (50%)
of the Premises and has not assigned its rights hereunder.
(d) All trade fixtures of Tenant and other equipment necessary
for the operation of Tenant's business shall not be included in the Plans
and shall be paid for by Tenant; and
(e) This Lease shall be amended to incorporate the increase in
Rent hereinafter provided and other terms herein contained.
Section 33.2. Addition Plans. Landlord, at Tenant's sole cost and
expense, shall furnish plans and specifications for each Addition (hereinafter
referred to as the "Addition Plans") prepared by an architect licensed in
Illinois. The Addition Plans shall be approved in accordance with the process
described in Section 4.2
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hereof. Within forty-five (45) days after Tenant's approval of the Addition
Plans, Landlord shall obtain and deliver to Tenant a bid from a general
contractor for the construction of the Addition, based on the approved Addition
Plans. If such bid is not acceptable to Tenant, Tenant may, subject to the
approval of Landlord, make revisions to the Plans, and thereupon, Landlord will
obtain a further bid based on the revised Plans. Provided the bid for
construction of the Addition is accepted by Tenant, Landlord shall cause the
Addition to be constructed substantially in accordance with the Addition Plans.
Section 33.3. Addition Rent. On the date of Substantial Completion
of each Addition (hereinafter with respect to each Addition referred to as the
"Addition Date"), Tenant shall pay to Landlord annually during the Term, as
Addition Rent, an amount (hereinafter referred to as the "Addition Rent") equal
to the product of the "Addition Cost" (as hereinafter defined) with respect to
each Addition, multiplied by the "the Percentage Factor" (as hereinafter
defined). The Addition Rent shall be payable in equal monthly installments in
the manner provided in Sections 5.1 hereof. The Addition Rent with respect to
each Addition shall be increased by two and five tenths percent (2.5%) on each
anniversary of the Addition Date with respect to each Addition during the Term.
Section 33.4. Extension Term. Notwithstanding anything to the
contrary contained herein, if there is less than seven (7) years remaining in
the Initial Term of this Lease on the applicable Addition Date (or the Renewal
Term of this Lease if an Addition Date occurs in a Renewal Term), then the Term
of this Lease shall be automatically extended so that the expiration of the Term
is the last day of the eighty-fourth (84th) full calendar month following the
most recent Addition Date, without the requirement of any written amendment to
this Lease. All of the terms and provisions hereof shall be applicable during
any such additional extension period except that the Annual Base Rent shall be
increased on each anniversary of the first day of the 10th Lease Year to an
amount equal to 1.0250% of the Annual Base Rent during the month (on an
annualized basis) immediately preceding the date of said increase.
Section 33.5. Further Definitions. The phrase "Addition Cost" as
used herein shall mean one hundred ten percent (110%) of the aggregate of all
soft and hard costs and expenses of any nature whatsoever including, but not
limited to the cost of debt (whether or not financed and if not financed the
Percentage Factor shall be used as the deemed rate of interest incurred by
Landlord) and permit fees required directly or indirectly to design and
construct the Addition in accordance with the Plans. The phrase "Percentage
Factor" as used herein shall mean 375 basis points in excess of the yield on a
United States 30 year Treasury Bond as of the Addition Date, as such yield is
reported in The Wall Street Journal, or if such publication is discontinued,
then any other nationally recognized financial publication.
ARTICLE XXXIV
Miscellaneous
Section 34.1. Captions. The captions of this Lease are for
convenience only and are not to be construed as part of this Lease and shall not
be construed as defining or limiting in any way the scope or intent of the
provisions hereof.
Section 34.2. Severability. If any covenant, agreement or condition
of this Lease or the application thereof to any person, firm or corporation or
to any circumstances, shall to any extent be invalid or unenforceable, the
remainder of this Lease, or the application of such covenant, agreement or
condition to persons, firms or corporations or to circumstances other than those
as to which it is invalid or unenforceable, shall not be affected thereby. Each
covenant, agreement or condition of this Lease shall be valid and enforceable to
the fullest extent permitted by law.
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Section 34.3. Applicable Law. This Lease shall be construed and
enforced in accordance with the laws of the state where the Premises are
located.
Section 34.4. Amendments in Writing. None of the covenants, terms or
conditions of this Lease, to be kept and performed by either party, shall in any
manner be altered, waived, modified, changed or abandoned, except by a written
instrument, duly signed, acknowledged and delivered by the other party.
Section 34.5. Relationship of Parties. Nothing contained herein
shall be deemed or construed by the parties hereto, nor by any third party, as
creating the relationship of principal and agent or of partnership, or of joint
venture by the parties hereto, it being understood and agreed that no provision
contained in this Lease nor any acts of the parties hereto shall be deemed to
create any relationship other than the relationship of Landlord and Tenant.
Section 34.6. Brokerage. Landlord and Tenant warrant to each other
that they had no dealings with any real estate broker or agent in connection
with this lease other than Landlord's Broker and Tenant's Broker, and Landlord
and Tenant covenants to the other to pay, hold harmless and indemnify the other
from and against any and all cost, expense or liability for any compensation,
commissions and charges claimed by any other broker or other agent with respect
to this Lease or the negotiation thereof arising out of any acts of their
respective acts. Landlord shall pay any commission due Tenant's Broker pursuant
to the written agreement between Landlord and Tenant's Broker, if any and
Landlord hereby indemnifies and holds Tenant harmless from and against all cost,
expense and liability for any commission due Tenant's Broker. Landlord shall
further give Tenant's Broker the listing on the building Tenant is vacating at
745 Birginal, Bensenville, Illinois on terms reasonably acceptable to Landlord.
Section 34.7. No Accord and Satisfaction. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly rent herein stipulated
and additional rent shall be deemed to be other than on account of the earliest
stipulated rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.
Section 34.8. Joint Effort. The preparation of this Lease has been a
joint effort of the parties hereto and the resulting documents shall not, solely
as a matter of judicial construction, be construed more severely against one of
the parties than the other.
Section 34.9. Waiver of Jury Trial. Landlord and Tenant hereby waive
a jury trial in any action brought by the other hereunder.
Section 34.10. Time. Time is of the essence of this Lease, and all
provisions herein relating thereto shall be strictly construed.
Section 34.11. Consent. The granting of any consent under this
Lease, or the failure to object to any action taken by a party to this Lease
without the other party's consent to the extent required under this Lease, shall
not be deemed a waiver of any right to require such consent for any further
similar act. No waiver of any other breach of the covenants of this Lease shall
be construed, taken or held to be a waiver of any other breach or to be a
waiver, acquiescence in or consent to any further or succeeding breach of the
same covenant. None of the covenants under this Lease, and no breach thereof,
shall be waived, altered or modified except by a written instrument executed by
the non-breaching party.
Section 34.12. No Partnership. Landlord is not, and shall not be
deemed to be, in any way or for any purpose, the partner, employer, principal,
master or agent of or with Tenant.
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Section 34.13. Landlord's Liability. Notwithstanding anything to the
contrary herein contained, after the Commencement Date there shall be absolutely
no personal liability asserted or enforceable against Landlord or on any
persons, firms or entities who constitute Landlord with respect to any of the
terms, covenants, conditions and provisions of this Lease, other than with
respect to the Security Deposit and Rent Adjustment Deposits actually paid to
Landlord, and Tenant shall, subject to the rights of any mortgagee, look solely
to the interest of Landlord, its successors and assigns in the Premises for the
satisfaction of each and every remedy of Tenant in the event of default by
Landlord hereunder; such exculpation of personal liability is absolute and
without any exception whatsoever. If the entity constituting Landlord is a
partnership, Tenant agrees that the deficit capital account of any such partner
shall not be deemed an asset or property of said partnership.
Section 34.14. Landlord Rights. Landlord specifically excepts and
reserves to itself the non-exclusive right to install, use, maintain and access
cellular (or similar) antennas, towers and related equipment and utility service
for same on the Premises or any portion thereof designated by Landlord, provided
the designation of such location shall be subject to Tenant's approval, which
approval shall not be unreasonably withheld or delayed.
Section 34.15. Rent Absolute. Except as otherwise expressly provided
herein, this Lease shall be deemed and construed to be a "net lease" and Tenant
agrees to pay all costs and expenses of every kind and nature whatsoever,
ordinary and extraordinary, arising out of or in connection with the ownership,
maintenance, repair, replacement, use and occupancy of the Premises during the
Term of this Lease, which, except for the execution and delivery hereof, would
otherwise have been payable by Landlord.
Section 34.16. Authority. Simultaneously with the execution and
delivery of this Lease, Tenant shall deliver to Landlord and Landlord shall
deliver to Tenant:
A. Certified resolutions of its board of directors authorizing the
execution and delivery of this Lease.
B. A certificate of incumbency executed by its secretary identifying
by name, office and facsimile signature the officers executing this Lease.
C. A current certificate of good standing issued by the Secretary of
State of the state of incorporation of Tenant and the State of Illinois.
Section 34.17. Entire Agreement. It is understood and agreed that
all understandings and agreements heretofore had between the parties hereto are
merged in this Lease, the exhibits annexed hereto and the instruments and
documents referred to herein, which alone fully and completely express their
agreements, and that no patty hereto is relying upon any statement or
representation, not embodied in this Lease, made by the other. Each party
expressly acknowledges that, except as expressly provided in this Lease, the
other party and the agents and representatives of the other party have not made,
and the other party is not liable for or bound in any manner by, any express or
implied warranties, guaranties, promises, statements, inducements,
representations or information pertaining to the transactions contemplated
hereby.
Section 34.18. Purchase Contingency. Landlord and Tenant acknowledge
and agree that Landlord's obligations under this Lease are expressly contingent
upon Landlord's purchase of the Premises and the closing of such purchase by
which Landlord obtains fee simple title to the Land. In the event that said
events have not occurred on or before November 30, 1996, either party may
terminate this Lease upon notice to the other at any time prior to the closing
of such purchase.
42
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the
date set forth above.
LANDLORD: CENTERPOINT REALTY SERVICES CORPORATION, an Illinois
corporation
By: [Illegible]
------------------------------------------------
Its: CHIEF INVESTMENT OFFICER
By: [Illegible]
------------------------------------------------
Its: Chief Financial Officer
TENANT: FACTORY CARD OUTLET OF AMERICA LTD., an Illinois
corporation
By: [Illegible]
------------------------------------------------
Its:
Attest:
By: [Illegible]
------------------------------------------------
Its: EXECUTIVE VICE PRESIDENT
43
<PAGE>
EXHIBIT "A"
SITE PLAN
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION OF LAND
Lot 2 in CenterPoint Subdivision in Sections 4 and 5, Township 38 North, Range 9
East of the Third Principal Meridian, in DuPage County, Illinois. (To be
finalized)
<PAGE>
EXHIBIT "C"
TENANT ESTOPPEL CERTIFICATE
Property Name: ____________________________________________________________
("Property")
Tenant:
To: ____________________________________________________________
DEFINITIONS:
Lease Date:
Landlord:
Tenant:
Security Deposit: ____________________________________________________________
Date of Possession:
Rent Commencement Date:
Monthly Base Rent:
Annual Base
Rental Amount:
Monthly Deposits:
Term:
Termination Date:
Renewal Option(s):
Square Footage:
Use:
Tenants Address
For Notices:
["Purchaser"] ["Lender"] proposes to [purchase the Property] [finance the
Property] and this Tenant Estoppel Certificate is to be made and delivered in
connection with that [purchase] [financing].
The undersigned Tenant under the above-referenced lease dated as of the
Lease Date between Landlord and Tenant ("Lease"), certifies, represents,
confirms and agrees in favor of [Purchaser] [Lender] the following:
<PAGE>
1. The above-described Lease has not been cancelled, modified, assigned,
extended or amended and contains the entire agreement between Landlord and
Tenant except as follows:
2. Rent has been paid to _____________________________________. There is
no Prepaid Rent. The amount of the Security Deposit is as set forth above, which
is currently being held by Landlord.
3. Tenant took possession of the leased premises on the Date of
Possession, and commenced to pay rent on the Rent Commencement Date, in the
amount of the Monthly Base Rent, each payable in advance. Our current Annual
Base Rental Amount is as set forth above, payable in equal monthly installments,
subject to percentage rental, common area maintenance charges, escalation
charges and other charges in accordance with the terms and provisions of the
Lease, which as of the date hereof total the Monthly Deposit Amount, each
payable in equal monthly installments in advance. We are currently in occupancy
of the leased premises. No "discounts", "free rent", "discounted rent" or
"abatements of rent" have been agreed to or are in effect.
4. The Lease is for the Term set forth above and ending on the Termination
Date, and we have the Renewal Option(s) set forth above.
5. All space and improvements covered by the Lease have been completed and
furnished to the satisfaction of Tenant, all conditions required under the Lease
have been met, and Tenant has accepted and taken possession of the leased
premises on the Date of Possession as set forth above and presently occupies the
leased premises, presently consisting of the Square Footage as set forth above.
6. The Lease is (a) in full force and effect, and (b) free from default
by both Landlord and Tenant; and we have no claims, liens, charges or credits
against Landlord or offsets against rent.
7. The undersigned has not assigned or sublet the Lease, nor does the
undersigned hold the Property under assignment or sublease.
8. There are no other agreements written or oral, between the undersigned
and Landlord with respect to the Lease and/or the leased premises and building.
Landlord has satisfied all commitments, arrangements or understandings made to
induce Tenant to enter into the Lease, and Landlord is not in any respect in
default in the performance of the terms and provisions of the Lease, nor is
there now any fact or condition which, with notice or lapse of time or both,
would become such a default.
9. The leased premises are currently being used for the use set forth
above.
10. Tenant is maintaining (free of default) all insurance policies that
the Lease requires Tenant to maintain.
11. Except as otherwise provided in the Lease, neither Landlord nor
[Purchaser] [Lender] nor any of their respective successor or assigns, has or
will have any personal liability of any kind or nature under or in connection
with the Lease; and, in the event of a default by Landlord or [Purchaser]
[Lender] under the Lease, Tenant shall look solely to Landlord's or
[Purchaser's] [Lender's] interest in the building in which the leased premises
are located.
12. Tenant is not in any respect in default under the terms and provisions
of the Lease (nor is there now any fact or condition which, with notice or lapse
of time or both, would become such a default), and Tenant has not assigned,
transferred or hypothecated its interest under the Lease.
13. Tenant (i) does not have any option or preferential right to purchase
all or any part of the leased premises or all or any part of the building of
which the leased premises are a part; and (ii) does not have any right, title or
interest with respect to the leased premises other than as lessee under the
Lease.
2
<PAGE>
14. We understand that [Purchaser] [Lender] is planning to [purchase]
[finance] the Property on which the leased premises is located to Purchaser, and
we agree to make all payments required under the Lease to [Purchaser) [Lender]
upon our receipt of notice from Landlord and/or [Purchaser] [Lender]. Further,
upon receipt of such notice, we will thereafter look to [Purchaser] [Lender] and
not Landlord as the landlord under the Lease. We agree to give all notices
required to be given by us to Landlord under the Lease to [Purchaser] [Lender]
upon our receipt of said notice.
15. The statements contained herein may be relied upon by [Purchaser]
[Lender] and by any prospective purchaser or lender of the Property.
16. If Tenant is a Corporation, the undersigned is a duly appointed
officer of the corporation signing this Agreement, and is the incumbent in the
office indicated under his or her name. If Tenant is a partnership or joint
venture, the undersigned is a duly appointed partner or officer of the
partnership or joint venture signing this certificate. In any event, the
undersigned individual is duly authorized to execute this Agreement on behalf of
Tenant.
17. Tenant (a) executes this certificate with the understanding that
[Purchaser] [Lender] is contemplating [purchasing] [financing] the Property, and
that if [Purchaser] [Lender] [purchases] [finances] the Property, [Purchaser]
[Lender] will do so in material reliance on this certificate; and (b) agrees
that the certifications and representations made herein shall survive such
acquisition.
18. The current address to which all notices to Tenant as required under
the Lease should be sent is the Tenant's Address for Notices.
19. [Purchaser's] [Lender's] rights hereunder shall inure to its
successors and assigns.
IN WITNESS WHEREOF, Tenant has executed this estoppel certificate as of
this ______ day of ________, 199__.
_____________________________________a
________________________
By: ___________________________________
Its:
3
<PAGE>
EXHIBIT "D"
[LETTERHEAD OF FCL BUILDERS, INC.]
REVISED PRELIMINARY SPECIFICATIONS
OF A 440,343 SQUARE FOOT BUILDING FOR
CENTERPOINT PROPERTIES
AND
FACTORY CARD OUTLET
October 25, 1996
This outline specification, along with the attached preliminary plans, A - Site
A1, A3, A1 (elevation) as prepared by Heitman Architects, Scheme C, dated
October 16, 1996, shall define the scope of a new facility for CENTERPOINT
PROPERTIES/FACTORY CARD OUTLET.
<PAGE>
TABLE OF CONTENTS
General Description ............................................ Section 1.00
Design ......................................................... Section 2.00
Site Work ...................................................... Section 3.00
Building Shell ................................................. Section 4.00
Interior Improvements .......................................... Section 5.00
H.V.A.C. System ................................................ Section 6.00
Plumbing ....................................................... Section 7.00
Fire Protection ................................................ Section 8.00
Electrical ..................................................... Section 9.00
Miscellaneous .................................................. Section 10.00
-2-
<PAGE>
1.00 GENERAL DESCRIPTION
1.10 Size of Building and Tract:
The facility will be approximately 440,343 square feet, located on
38.698 acres/1,685,700 square feet on Diehl Road in Naperville,
Illinois.
1.20 Scheme C - Size of Building (by use):
Office 71,025 Square Feet (3 floors of 23,675 s.f each)
Warehouse 301,289 Square Feet (Incl. Ship/Rec office of
1200 sf and Operations Support of
2,480 sf)
Operating Mezz. 68,029 Square Feet
-------
Total 440,343 Square Feet
=======
1.30 Expansion:
There will be warehouse expansion to the west of initial phase of
construction as follows: Scheme C - 346,825 square feet, of which 59,633
square feet is for future mezzanine. In addition to the initial parking
for two hundred forty (240) cars there will be four hundred ten (410)
future stalls landbanked for expansion totaling six hundred fifty (650)
ultimate car parking.
2.00 DESIGN
The design of the facility will be completed by registered architects and
engineers. The design will include architectural, structural, civil,
mechanical, plumbing, fire protection, electrical and landscaping plans.
The plans will be in sufficient detail to allow issuance of a building
permit by local authorities. All building permit and tap-on fees are
included.
3.00 SITE WORK
3.10 Grading:
All work necessary to clear, strip, excavate, backfill and grade the
site for the initial building construction in accordance with
recommendations of an independent soils engineer.
-3-
<PAGE>
3.20 Paved Areas:
i) Automobile Parking - Two hundred forty (240) initial stalls to
be provided, handicap as required. Paving to be 3" asphalt
over 10" stone. Striping and perimeter concrete curbing
provided. Handicap signage included.
ii) Truck Drive - Paving to be 2 1/2" asphalt over 6" BAM over 4"
stone.
iii) Truck Dock Staging Area - Paving shall be 7" thick reinforced
concrete, extending 60' from building at depressed docks.
iv) Fire Lane - Paving to be 3" asphalt over 10' stone, 18' wide
extending along the west and north side of the building as per
plan.
v) Trailer Storage - Total of thirty-one (31) initial trailer
stalls. The west twenty-one (21) trailers' paving to be 2 1/2"
asphalt over 6" BAM over 4" stone with 7" concrete, 10' wide,
dolly strips as required. The east ten (10) trailers' paving
to be 7" concrete as specified in truck dock staging area.
There will be a total of seventy-eight (78) future trailer
count.
3.30 Sidewalks, Plazas, Stoops and Pads - To be 5" concrete, broom
finished over compacted stone.
3.40 Exterior Lighting - Install twelve (12) bollard lights to illuminate
the entry walk, fifteen (15) 400 watt wall-mounted high pressure
sodium light fixtures to illuminate truck dock and car parking
areas, six (6) light poles with two (2) 400 watt high pressure
sodium light fixtures each to illuminate remote car parking areas,
and three (3) light poles with two (2) 400 watt high pressure sodium
light fixtures each to illuminate truck maneuvering area.
3.50 Landscaping:
An allowance of $125,000.00 is included for such items as sodding,
seeding, fine grading, plantings, lawn irrigation and landscape
retaining walls.
3.60 All necessary storm, sanitary and water connections to existing
municipal lines. All plumbing materials to conform with local code.
3.70 Provide a full fire loop around the building including fire hydrants
as required by code.
-4-
<PAGE>
4.00 BUILDING SHELL
4.10 Exterior Walls:
All elevations of building to receive load bearing insulated precast
concrete wall panels. Panels to have an R value of 10. Wall panels
and accent bands to be stained to tenant's choice of color.
Prefinished aluminum coping to be installed on all elevations of the
building. Coping to be painted to tenant's choice of standard color.
4.20 Windows:
Provide a full height curtain wall glazing system with window system
consisting of 1" tinted insulated glass in aluminum thermal break
frames as per office elevations. Exterior aluminum mullions to be
painted to tenant's choice of standard color. Frames to be
manufactured by Kawneer or equal. Provide "knock-out" panels for
future "punched" windows at future office area.
4.30 Entry Plaza:
Entry plaza to receive 5" poured in place concrete sidewalk leading
from parking lot to weather protected main office entry and
operation support entry. Aluminum and safety-glass doors and
sidelights to be Kawneer or equal.
4.40 Steel Structure:
Steel structure to be a combination of long span steel bar joists,
beams and wide flange columns. Columns to be spaced approximately
40' x 42' 4" on center, as per floor plan. Bottom of joists to be
35' 6" clear from top of slab. Operating mezzanine to be designed
for 150 pounds per square foot live load with bay spacing
approximately 20' x 20'. Office mezzanine shall be designed for 125
pounds per square foot live load.
4.50 Roof:
4.51 Roof Deck:
To be 22 gauge standard ribbed deck with isocyanurate
insulation (R value equal to 12). Roof to be a single ply,
ballasted EPDM membrane roofing system, Firestone, Carlisle or
equal. This system is to be applied in accordance with
manufacturer's specifications, and shall carry a
manufacturer's fifteen (15) year warranty.
4.52 Storm Piping and Drains:
All roof drainage via interior PVC downspouts with insulated
horizontal offsets.
-5-
<PAGE>
4.60 Floor Slabs:
Concrete floor slabs to be 6" (3,500 psi concrete), reinforced with
fibermesh, steel trowel finish on 3" compacted stone in the
warehouse area and 4" concrete with 6 x 6 x 10/10 gauge steel mesh,
steel trowel finish on 3" compacted stone in the office area.
Warehouse floor slab shall have a floor flatness rating of
F(pound)35 a floor levelness of F120 and shall receive two (2) coats
of Lapidolith floor sealer. Concrete floor to be sawcut in both
directions, no greater that 15' on center. A vapor barrier will be
installed throughout the 1st floor office area.
4.70 Truck Docks and Overhead Doors:
4.71 Truck Loading Doors:
Exterior truck docks to receive eighteen (18) 9' x 10'
manually operated insulated metal overhead doors.
One (1) dock opening for trash compactor to be 9' x 10'.
Compactor excluded.
Grade level truck/van entrance on the west elevation to
receive one (1) 14' x 17' electrically operated, insulated
metal overhead door.
4.72 Truck Dock Accessories:
Provide eighteen (18) 25,000# capacity 7' x 8' standard
automatic hydraulic levelers. Provide eighteen (18) dock seals
with drop curtains.
Provide eighteen (18) "Phoenix" type dock lights with fans,
one (1) per door.
-6-
<PAGE>
5.00 INTERIOR IMPROVEMENTS:
5.10 Office Interior Finish: 47,350 s.f. 1st & 3rd story office
2,487 s.f. Operation support
-----------
49,837 s.f.
An allowance of $1,393,280 total for office finishes has been
included. This allowance is to include the following:
1. Drywall partitions and wall treatments.
2. Decorating.
3. Floor treatments (i.e., carpet, VCT, etc.).
4. Ceiling grid and acoustical tile.
5. Doors, hardware, and frames.
6. All office and restroom heating and air conditioning systems
including rooftop units.
7. Office lighting, telephone and electrical outlets. Office
lighting shall be controlled by motion sensor switches.
8. Fire sprinkler heads and drops.
9. Cabinets and millwork.
10. Office washroom and warehouse washroom plumbing fixtures,
lockers and accessories.
11. Depressed concrete floor slab at Computer Room (location to be
determined) with floor drain, sump pit and sump pump.
Please Note: The 2nd floor office will receive minimal heat, minimal
light, vertical plumbing rough-in and stub-out, emergency lighting
and fire protection as per code.
5.20 Provide two (2) three stop passenger elevators serving mezzanine
areas. Shaft, pit, equipment and cab are included at an allowance of
$100,000 ($50,000 each).
6.00 H.V.A.C. SYSTEMS
6.10 Office Area:
Please see Section 5.00, Interior Improvements.
6.20 Warehouse:
Provide three (3) roof mounted (62,000 cfm, 4,400 Mbh each unit)
direct-fired "80/20" air pressurization units for warehouse heat.
Provide four (4)12,000 CFM roof exhaust fans for summer ventilation.
Warehouse heating system to provide 600F. at -100F. outside
temperature.
Shipping/Receiving Office to be heated/air conditioned via two (2)
thru wall units.
-7-
<PAGE>
7.00 PLUMBING
Please see Section 5.00, Interior Improvements.
7.20 Warehouse:
Warehouse Shipping & Receiving Office washrooms:
Install one (1) sink and one (1) toilet in each men & women
washroom.
8.00 FIRE PROTECTION
Install an ESFR sprinkler system throughout warehouse area. Heads to be
located above bar joists. This design is preliminary, awaiting local
code interpretation for commodity and rack layout approval.
An allowance of $20,000.00 is included for fire alarm system.
9.00 ELECTRICAL SERVICE, OUTLETS AND LIGHTING
9.10 Electrical Service:
Install a 6,000 total ampere (4,000 + 2,000), 277/480 volt, 3 phase,
4 wire main electrical service, with subpanels for building loads
only.
9.20 Electrical and Telephone Outlets:
Please see Section 5.00, Interior Improvements.
9.30 Lighting:
9.31 Office Areas:
Please see Section 5.00, Interior Improvements.
9.32 Warehouse Areas:
Warehouse areas to receive 400 watt metal halide light
fixtures located to provide an initial 25 footcandles. Bulbs
are included. Under mezzanine areas to receive two tube 96"
fluorescent light fixtures to provide an initial 35
footcandles.
9.33 Operating Mezzanine Areas:
Areas to receive 400 watt metal halide light fixtures located
to provide an initial 50 footcandles. Bulbs are included.
9.34 Emergency Lighting:
Emergency lighting to be installed throughout building to
conform to local code.
-8-
<PAGE>
10.00 MISCELLANEOUS
Inclusions & Allowances:
-- Tap fees and building permits are included.
-- Scheduled construction time is ten (10) months from the issuance of
a building permit.
-- Builders' Risk insurance.
-- Architectural plans and specifications.
-- Surveys and soil borings.
-- Fire alarm system included at an allowance of $20,000.00.
-- Construction guarantee for one (1) year.
-- Landscaping allowance of $125,000.00 has been included.
-- Signage allowance of $20,000.00 has been included.
-- An allowance of $26,000.00 has been included for an electrical
distribution monitoring system.
Exclusions:
-- Field painting of steel or piping.
-- In-rack sprinklers, hose stations, additional wall or yard hydrants.
-- Winter conditions.
-- Utility companies' excess facility charges.
-9-
<PAGE>
FACTORY CARD OUTLET CORP.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of Factory Card Outlet Corp.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Code. The provisions of the Plan, accordingly,
shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Factory Card Outlet Corp., a Delaware
corporation, and any Designated Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings,
overtime and shift premiums, sales commissions, incentive compensation and
bonuses, but shall exclude other compensation.
(f) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "EMPLOYEE" shall mean, with respect to the first Offering Period,
any individual who, as of the Enrollment Date, is an employee of the Company for
tax purposes whose customary employment with the Company is at least twenty (20)
hours per week and more than five (5) months in any calendar year. With respect
to all other Offering Periods, an Employee is any individual who, as of the
Enrollment Date, is an employee of the Company for tax purposes whose customary
employment with the Company is at least twenty (20) hours per week and more than
five (5) months in any calendar year, and who has at least one thousand (1,000)
hours of service with the Company. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other
<PAGE>
leave of absence approved by the Company. Where the period of leave exceeds
ninety (90) days and the individual's right to reemployment is not guaranteed
either by statute or by contract, the employment relationship shall be deemed to
have terminated on the ninety-first (91st) day of such leave.
(h) "ENROLLMENT DATE" shall mean the first day of each Offering
Period.
(i) "EXERCISE DATE" shall mean the last day of each Offering Period.
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sale price for the Common Stock (or the mean of the closing bid and
asked prices, if no sales were reported), as quoted on such exchange (or the
exchange with the greatest volume of trading in Common Stock) or system on the
date of such determination (or the last Trading Day prior to the date of
determination, if the date of determination is not a Trading Day), as reported
in The Wall Street Journal or such other source as the Board deems reliable, or
(2) If the Common Stock is quoted on the Nasdaq System (but not
on the Nasdaq National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination (or the last Trading Day prior to the date of
determination, if the date of determination is not a Trading Day), as reported
in The Wall Street Journal or such other source as the Board deems reliable, or
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(4) For purposes of the Enrollment Date under the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final Prospectus included within the Registration
Statement on Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock.
(k) "OFFERING PERIOD" shall mean the period beginning on the first
Trading Day of a calendar quarter and ending on the last Trading Day of that
calendar quarter. Notwithstanding the above sentence, the first Offering Period
shall begin on the effective date of the Company's initial public offering of
its Common Stock that is registered with the Securities and Exchange Commission
and shall end on the last Trading Day of the first calendar quarter of 1997. The
duration of Offering Periods may be changed pursuant to Section 4 of this Plan.
2
<PAGE>
(l) "PLAN" shall mean this 1996 Employee Stock Purchase Plan.
(m) "PURCHASE PRICE" shall mean an amount equal to ninety percent
(90%) of the Fair Market Value of a share of Common Stock on the Exercise Date.
Notwithstanding the above sentence, with respect to the first Offering Period,
the Purchase Price shall mean ninety percent (90%) of the Fair Market Value on
the Enrollment Date for that Offering Period, as set forth in Section 2(j)(4).
(n) "RESERVE" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(o) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than fifty percent (50%) of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now exists or is
hereafter organized or acquired by the Company or a Subsidiary.
(p) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who is employed by the Company on a given Enrollment
Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan to the extent, immediately
after the grant, such Employee (or any other person whose stock would be
attributed to such Employee pursuant to Section 424(d) of the Code) would own
capital stock of the Company and/or hold outstanding options to purchase such
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of the capital stock of the Company or of any Subsidiary.
4. OFFERING PERIODS. The Plan shall be implemented through consecutive
Offering Periods.. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) without shareholder
approval if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first Offering Period to be affected thereafter.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions and filing it
with the office designated by the Company to receive such agreements prior to
the applicable Enrollment Date.
3
<PAGE>
(b) Payroll deductions for a participant in the Plan shall commence
on the first payroll following the Enrollment Date and shall end on the last
payroll in the Offering Period to which such authorization is applicable, unless
sooner terminated by the participant as provided in Section 10 hereof. Unless
changed or terminated by a participant under Section 6(c) or Section 10, a
participant's subscription agreement for a given Offering Period will be given
continued effect for the next following Offering Period.
6. PAYROLL DEDUCTIONS.
(a) At the time an eligible Employee participating in the Plan files
his or her subscription agreement, he or she shall elect to have payroll
deductions made during an Offering Period in an amount not exceeding ten percent
(10%) of the Compensation which he or she received during the Offering Period.
The aggregate total of all payroll deductions accumulated during an Offering
Period under this Plan and all other stock purchase plans of the Company may not
exceed $5,500.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments in such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, and may increase or decrease the rate of
his or her payroll deductions during the Offering Period, except that during the
first Offering Period, a participant will not be permitted to increase the rate
of his or her payroll deductions.
(d) At the time the option (as hereinafter described) is exercised,
in whole or in part, or at the time some or all of the Company's Common Stock
issued under the Plan is disposed of, the participant must make adequate
provision for the Company's federal, state, or other tax withholding
obligations, if any, which arise upon the exercise of the option or the
disposition of the Common Stock. At any time, the Company may, but shall not be
obligated to, withhold from the participant's compensation the amount necessary
for the Company to meet applicable withholding obligations, including any
withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the participant's account as of the
Exercise Date by the applicable Purchase Price. In no event shall an Employee
be permitted to purchase during each Offering Period under this Plan and all
other employee stock purchase plans of the Company more than the number of
shares determined by dividing $5,500 by the applicable Purchase Price. All such
purchases shall be subject to the limitations set forth in
4
<PAGE>
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the number of shares
subject to such option shall be purchased for such participant at the applicable
Purchase Price with the accumulated payroll deductions in his or her account.
Fractional shares may be purchased and credited to a participant. During a
participant's lifetime, the participant's option to purchase shares hereunder is
exercisable only by him or her.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the shares shall be credited to an account in
the participant's name with a brokerage firm selected by the Company to hold the
shares in its street name.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all of the
payroll deductions credited to his or her account and not yet used to exercise
his or her options under the Plan at any time by giving written notice of same
to the Company. All of the participant's payroll deductions credited to his or
her account shall be paid to such participant within two (2) weeks after the
Company's receipt of written notice of withdrawal. Such participant's option
for the Offering Period shall be automatically terminated, and no further
payroll deductions for the purchase of shares shall be made during the Offering
Period. If a participant withdraws during a given Offering Period, payroll
deductions shall not resume at the beginning of the succeeding Offering Period
unless the participant delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an active Employee for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise such participant's options under
the Plan shall be returned to such participant, and such participant's options
shall be automatically terminated.
(c) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock which
shall be made available to Employees eligible to participate under the Plan
shall be one million (1,000,000) shares, subject to adjustment upon changes in
capitalization of the Company as
5
<PAGE>
provided in Section 17 hereof. If on a given Exercise Date the number of shares
with respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available for purchase in as uniform a manner as shall be
practicable and as the Board shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his or her option until such option has been exercised and paid in
full.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant unless otherwise indicated.
13. ADMINISTRATION.
(a) ADMINISTRATIVE BODY. The Plan shall be administered by the Board
or a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
(b) RULE 16B-3 LIMITATIONS. Notwithstanding the provisions of
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
the receipt of shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will or the laws of descent and
distribution) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds from an Offering Period in
accordance with Section 10 hereof.
15. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
16. REPORTS. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the current amount
of payroll deductions and the number of shares purchased.
6
<PAGE>
17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the Reserves as well as the price per share
of Common Stock covered by each option under the Plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number of price of shares of Common Stock subject
to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all or the assets of the Company, or the merger of the Company
with or into another corporation, each option under the Plan shall be assumed or
an equivalent option shall be substituted by such successor corporation or a
parent or subsidiary of such successor corporation, unless the Board determines,
in the exercise of its sole discretion and in lieu of such assumption or
substitution, to shorten the Offering Period then in progress by setting a new
Exercise Date (the "New Exercise Date") or to cancel each outstanding right to
purchase and refund all sums collected from participants during the Offering
Period then in progress. If the Board shortens the Offering Period then in
progress in lieu of assumption or substitution in the event of a merger or sale
of assets, the Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for his or
her option has been changed to the New Exercise Date and that his or her option
shall be exercised automatically on the New Exercise Date, unless prior to such
date he has withdrawn from the Offering Period as provided in Section 10 hereof.
For purposes of this paragraph, an option granted under the Plan shall be deemed
to be assumed if, following the sale of assets or merger, the option confers the
right to purchase or receive, for each share of option stock subject to the
option immediately prior to the sale of assets or merger, the consideration
(whether stock, cash or other securities or property) received in the sale of
assets or merger by holders of Common Stock for each share of Common Stock held
on the effective date of the transaction (and if such holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock); provided, however, that if
such consideration received in the sale of assets or merger was not solely
common stock of the successor corporation or its parent (as defined in Section
424(e) of the Code), the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
option to be solely
7
<PAGE>
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock and the
sale of assets or merger.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event the Company
effects one or more reorganizations, recapitalizations, rights offerings or
other increases or reductions of shares of its outstanding Common Stock, and in
the event that the Company is consolidated with or merged into any other
corporation.
18. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 17 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 17
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to which any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the length of Offering
Periods, limit the frequency and/or number of charges permitted in the amount
withheld during an Offering Period, establish the exchange ratio applicable to
amounts withheld in a currency other than U.S. dollars, permit payroll
withholding in excess of the amount designated by a participant in order to
adjust for delays or mistakes in the Company's processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods
and/or accounting and crediting procedures to ensure that amounts applied toward
the purchase of Common Stock for each participant properly correspond with
amounts withheld from the participant's Compensation, and establish such other
limitations or procedures as the Board (or its committee) determines in its sole
discretion advisable which are consistent with the Plan.
19. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
20. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934,
8
<PAGE>
as amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
21. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 18 hereof.
9
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Exhibit 10.6.3
FACTORY CARD OUTLET
OF AMERICA LTD.
INCENTIVE SAVINGS PLAN
<PAGE>
TABLE OF CONTENTS
Article Contents Page
- ------- -------- ----
I Definitions 1
II Participation 15
III Participant Salary Reduction 18
IV Employer Contributions 27
V Participant Contributions 41
VI Termination of Service 42
VII Time and Method of payment of Benefits 48
VIII Withdrawals 55
IX Investment of Contributions 58
X Loans 61
XI Employer Administrative Provisions 65
XII Participant Administrative Provisions 67
XIII Committee Duties With Respect to 72
Participant's Account
XIV Fiduciary Duties and Responsibilities 75
XV Top Heavy Rules 77
XVI Exclusive Benefit, Amendment and Termination 82
<PAGE>
FACTORY CARD OUTLET OF AMERICA LTD.
INCENTIVE SAVINGS PLAN
ARTICLE I
DEFINITIONS
Whenever the following words and phrases appear in the Plan, they shall
have the respective meaning set forth below, unless the context clearly
indicates otherwise:
1.01 "Accounting Date" shall be the last day of the Plan Year. The fair
market value of the Trust's assets will be determined on the Accounting Date.
The Committee shall allocate the earnings and losses for a particular Plan Year
to each Participant's account in the ratio that such Account Balance bears to
all Account Balances as of the Accounting Date of that Plan Year. Further, all
contributions under the Plan will be allocated as of the Accounting Date.
1.02 "Account Balance" shall mean the aggregate of the amount in the
Participant's Salary Reduction Contribution Account, Matching Contribution
Account and Base Contribution Account as of any date, plus any Rollover
Contributions accepted under Article V, less any excess amounts which must be
returned to the participant in order to avoid exceeding the limitations of
Article IV.
1.03 "Annual Addition" shall mean for any Plan Year the sum of (a)
Employer contributions, (b) Employee contributions, (c) forfeitures, and (d)
amounts allocated to an individual medical account, as defined in Section 415(1)
(2) which is part of a pension or annuity plan maintained by the Employer, and
amounts derived from contributions paid or accrued which are attributable to
post-
<PAGE>
retirement medical benefits allocated to the separate account of a key employee,
as defined in Section 419A(d) (3) of the Code, under a welfare benefit fund, as
defined in Section 419(e) of the Code, maintained by the Employer.
1.04 "Annuity Starting Date" shall mean the first day of the first period
for which the Plan pays an amount as an annuity or in any other form.
1.05 "Base Contribution Account" shall mean the account maintained for a
Participant to record base contributions made by the Employer pursuant to
Article IV.
1.06 "Beneficiary" is a person designated by a Participant who is or may
become entitled to a benefit under the Plan.
1.07 "Break in Service" shall mean a Plan Year during which an Employee
completes less than 501 Hours of Service.
1.08 "Code" means the Internal Revenue Code of 1986, as amended.
1.09 "Committee" shall mean the Retirement Committee appointed by the
Company to administer this Plan pursuant to Article XIII hereof. In addition to
its other duties, the Committee shall have full responsibility for compliance
with the reporting and disclosure rules under ERISA as respects this Plan. Each
Committee member is designated a Named Fiduciary under the Plan.
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<PAGE>
1.10 "Company" means Factory Card Outlet of America Ltd.
1.11 "Compensation" shall mean the total remuneration paid by the Employer
to an Employee for services rendered to the Employer as reflected on Form W-2
for Federal income tax withholding purposes, as well as amounts deferred
pursuant to Article III. In the case of any self-employed individual,
Compensation shall mean Earned Income. Notwithstanding the above, only the first
$200,000 (as adjusted by the Secretary of the Treasury pursuant to Section
415(d) of the Code) of an Employee's Compensation shall be taken into account
for purposes of the Plan in any one Plan Year. In determining the Compensation
of a Participant for purposes of this limitation, the rules of Section 414(q)(6)
of the Code shall apply, except in applying such rules, the term "family" shall
include only the spouse of the Participant and any lineal descendants of the
Participant who have not attained age 19 before the close of the Plan Year. If,
as a result of the application of such rules the adjusted $200,000 limitation is
exceeded, then the limitation shall be prorated among the affected individuals
in proportion to each such individual's Compensation prior to the application of
this limitation.
1.12 "Earned Income" shall mean the net earnings from self-employment in
the trade or business with respect to which the Plan is established, for which
personal services of the individual are a material income-producing factor. Net
earnings will be determined without regard to items not included in gross income
and
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<PAGE>
the deductions allocable to such items. Net earnings are reduced by (1)
contributions by the Employer to a qualified plan to the extent deductible under
Section 404 of the Code, and (2) the deduction allowed to the employer by
Section 164(f) of the Code.
1.13 "Effective Date" of this Plan is July 10, 1989.
1.14 "Employment Commencement Date" shall mean the date on which the
Employee first performs an Hour of Service for the Employer.
1.15 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.16 "Employer" shall mean the Company and any Participating Employer
which adopts this Plan, as well as any predecessors or successors to the
Employer.
1.17 "Employee" shall mean any employee of the Employer or of any other
employer required to be aggregated under Section 414(b), \c), (m), (n) or (o) of
the Code.
1.18 "Enrollment Period" shall mean the thirty-one (31) day period from
December 1 to December 31 each year preceding the January 1 Plan Entry Date, and
the thirty (30) day period from June 1 to June 30 each year preceding the July 1
Plan Entry Date.
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<PAGE>
1.19 "Highly Compensated Employee" shall mean an Employee who, during the
Plan Year or during the preceding 12-month period:
(a) is a more than 5% owner of the Employer (applying the constructive
ownership rules of Section 318 of the Code);
(b) has Compensation in excess of $75,000 (as adjusted by the Commissioner
of Internal Revenue for the relevant year);
(c) has Compensation in excess of $50,000 (as adjusted by the Commissioner
of Internal Revenue for the relevant year) and is part of the top-paid 20%
group of employees (based on Compensation for the relevant year); or
(d) has Compensation in excess of 50% of the dollar amount prescribed in
Section 415(b) (1) (A) of the Code and is an officer of the Employer.
If the Employee satisfies the definition in clause (b), (c) or (d) in the
Plan Year but does not satisfy clause (b), (c) or (d) during the preceding 12-
month period and does not satisfy clause (a) in either period, the Employee is a
Highly Compensated Employee only if he is one of the 100 most highly compensated
Employees for the Plan Year. The number of officers taken into account under
clause (d) will not exceed the greater of 3 or 10% of the total number (after
application of the exclusions under Section 414(q) of the Code) of Employees,
but no more than 50 officers. If no Employee satisfies the Compensation
requirement in clause (d) for the relevant year, the Committee will treat the
highest paid officer as satisfying clause (d) for that year.
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<PAGE>
The term "Highly Compensated Employee" also includes any former Employee
who separated from service (or has a deemed separation from service, as
determined under Treasury regulations) prior to the Plan Year, performs no
service for the Employer during the Plan Year, and was a Highly Compensated
Employee either for the separation year or any Plan Year ending on or after his
55th birthday. If the former Employee's separation from service occurred prior
to January 1, 1987, he is a Highly Compensated Employee only if he satisfied
clause (a) of this Section 1.19 or received Compensation in excess of $50,000
during: (1) the year of his separation from service (or the prior year); or (2)
any year ending after his 54th birthday.
The Committee shall also have discretion to use any other definition of
"Highly Compensated Employee" promulgated by the Secretary of Treasury.
1.20 "Hour of Service" shall mean:
(a) Each hour of service for which the Employer, either directly or
indirectly, pays an Employee, or for which the Employee is entitled to
payment, for the performance of duties during the Plan Year. The Committee
shall credit Hours of Service under this subsection (a) to the Employee
for the Plan Year in which the Employee performs the duties, irrespective
of when paid;
(b) Each hour of service for back pay, irrespective of mitigation of
damages, which the Employer has agreed to pay, or for which the Employee
has received an award. The Committee shall credit Hours of Service under
this subsection (b) to the Employee for the Plan Year(s) to which the
award of the agreement pertains,
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<PAGE>
rather than for the Plan Year in which the award, agreement or payment is
made; and
(c) Each hour of service for which the Employer, either directly or
indirectly, pays an Employee, or for which the Employee is entitled to
payment (irrespective of whether the employment relationship is
terminated), for reasons other than for the performance of duties during a
Plan Year, such as leave of absence, vacation holiday, sick leave,
illness, incapacity (including disability), layoff, jury duty, military
duty, or Maternity and Paternity Leave. The Committee shall not credit
more than five hundred one (501) Hours of Service under this subsection
(c) to an Employee on account of any single continuous period during which
the Employee does not perform any duties (whether or not such period
occurs during a single Plan Year). The Committee shall credit Hours of
Service under this subsection (c) in accordance with the rules of
subsections (b) and (c) of Department of Labor Reg. 2530.200(b)-2, which
the Plan, by this reference, specifically incorporates in full within this
subsection (c).
The Committee shall not credit an Hour of Service under more than one of
the above subsections. Furthermore, if the Committee is to credit Hours of
Service to an Employee for the twelve month period beginning with the Employee's
Employment Commencement Date or with an anniversary of such date, then such
twelve month period shall be substituted for the term "Plan Year" wherever the
latter term appears in this Section 1.20. The Committee shall resolve any
ambiguity with respect to the crediting of an Hour of Service in favor of the
Employee.
The Committee shall credit every Employee with Hours of Service on the
basis of the "actual" method. For purposes of the Plan, "actual" method means
the determination of Hours of Service
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<PAGE>
from records of hours worked and hours for which the Employer makes payment or
for which payment is due from the Employer.
1.21 "Leased Employee" shall mean an individual (who otherwise is not an
Employee of the Employer) who, pursuant to a leasing agreement between the
Employer and any other person, has performed services for the Employer (or for
the Employer and any persons related to the Employer within the meaning of
Section 414(n)(6) of the Code) on a substantially full time basis for at least
one year and who performs services historically performed by employees in the
Employer's business field. The Plan treats a Leased Employee as an Employee of
the Employer. "Compensation" for a Leased Employee includes Compensation from
the leasing organization which is attributable to services performed for the
Employer. The Committee will reduce a Leased Employee's allocation of Employer
contributions under this Plan by the Leased Employee's allocation under the
leasing organization's plan, but only to the extent that such allocation is
attributable to the Leased Employee's service provided to the Employer.
The Plan does not treat a Leased Employee as an Employee if the leasing
organization covers the employee in a safe harbor plan and, prior to application
of this safe harbor plan exception, 20% or less of the Employer's Employees
(other than Highly Compensated Employees) are Leased Employees. A safe harbor
plan is a money purchase pension plan providing immediate participation, full
and immediate vesting, and a nonintegrated contribu-
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<PAGE>
tion formula equal to at least 10% of the employee's compensation without regard
to employment by the leasing organization on a specified date. The safe harbor
plan must determine the 10% contribution on the basis of compensation as defined
in Section 415(c) (3) of the Code plus contributions to a cash or deferred
arrangement under Section 401(k) of the Code.
1.22 "Matching Contribution Account" shall mean the account maintained for
a Participant to record matching contributions made by the Employer pursuant to
Article IV.
1.23 "Maternity and Paternity Leave" shall mean an absence from work for
any period by reason of the Employee's pregnancy, birth of the Employee's child,
placement of the child with the Employee in connection with the adoption of such
child, or any absence for the purpose of caring for such child for a period
immediately following the birth or placement. For this purpose, Hours of Service
shall be credited for the computation period in which the absence from work
begins, only if credit therefore is necessary to prevent the Employee from
incurring a one year Break in Service, or in the immediately following
computation period. The Hours of Service credited for a Maternity and Paternity
Leave shall be those which would have normally been credited but for such
absence, or, in any case in which the Committee is unable to determine such
hours normally credited, eight (8) Hours of Service per day. The total Hours of
Service
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<PAGE>
required to be credited for a Maternity and Paternity Leave shall not exceed
501.
1.24 "Named Fiduciary" shall mean a person designated a fiduciary under
this Plan.
1.25 "Nonforfeitable" shall mean a Participant's or Beneficiary's
unconditional claim, legally enforceable against the Plan, to the Participant's
Account Balance.
1.26 "Normal Retirement Date" shall mean the later of the date the
Participant attains the Normal Retirement Age of 65, or the fifth anniversary of
the Participant's Plan Entry Date.
1.27 "Owner-Employee" shall mean an individual who is a sole proprietor,
or who is a partner owning more than 10 percent of either the capital or profits
interest of the partnership. If this Plan provides contributions or benefits for
one or more Owner-Employees who control both the business for which this Plan is
established and one or more other trades or businesses, this Plan and the plan
established for other trades or businesses must, when looked at as a. single
plan, satisfy Sections 401(a) and (d) of the Code for the employees of this and
all other trades or businesses.
If the Plan provides contributions or benefits for one or more Owner-
Employees who control one or more other trades or businesses, the employees of
the other trades or businesses must
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<PAGE>
be included in a plan which satisfies Sections 401(a) and (d) of the Code and
which provides contributions and benefits not less favorable than provided for
Owner-Employees under this plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which are not controlled and the individual controls a
trade or business, then the contributions or benefits of the employees under the
plan of the trades or businesses which are controlled must be as favorable as
those provided for him under the most favorable plan of the trade or business
which is not controlled.
For purposes of the preceding paragraphs, an Owner-Employee, or two or
more Owner-Employee, will be considered to control a trade or businesses if the
Owner- Employee, or two or more Owner-Employees together:
(1) Own the entire interest in an unincorporated trade or business, or
(2) in the case of a partnership, own more than 50 percent of either the
capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees shall be treated as owning any interest in a partnership which
is owned, directly or indirectly, by a partnership which such Owner-Employee, or
such two or more Owner-Employees, are considered to control within the meaning
of the preceding sentence.
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<PAGE>
1.28 "Participant" is an Employee who is eligible to be and becomes a
participant in accordance with the provisions of Article II.
1.29 "Participating Employer" shall mean any member of a controlled group
of corporations, as defined in section 1563 (a) of the Code, of which the
Company is a member, which, with the written consent of the Company, adopts this
Plan.
1.30 "Plan Year" shall mean the twelve (12) consecutive month period
commencing on January 1 and ending on December 31.
1.31 "Plan" shall mean the Factory Card Outlet of America Ltd. Incentive
Savings Plan.
1.32 "Plan Entry Dates" shall mean the Effective Date and every January
1st and July 1st after the Effective Date.
1.33 "Salary Reduction Contribution" shall mean the amount by which the
Participant elects to reduce his Compensation which is then contributed to the
Trust by the Employer.
1.34 "Salary Reduction Contribution Account" shall mean the account
maintained for a Participant to record Salary Reduction Contributions made on
his behalf by the Employer.
1.35 "Salary Reduction Agreement" shall mean the agreement between the
Participant and the Employer whereby the
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<PAGE>
participant directs the Employer to contribute a designated percentage of his
Compensation to the Trust.
1.36 "Self-Employed Individual" shall mean an individual who has Earned
Income for the taxable year from the trade or business for which the Plan is
established or an individual who would have had Earned Income but for the fact
that the trade or business has no net profits for the taxable year.
1.37 "Trust" shall mean the trust created under the Plan, known as the
Factory Card Outlet of America Ltd. Profit Sharing and 401(k) Plan Trust.
1.38 "Trust Fund" shall mean all property of every kind held or acquired
by the Trustee pursuant to this Plan. Trust assets will be valued at fair market
value.
1.39 "Trustee" shall mean the trustee appointed under the Trust, or any
successor Trustee appointed pursuant to the terms of the Trust.
1.40 "Year of Service" shall mean a Plan Year during which the Employee
completes at least 1,000 Hours of Service. If the Employer maintains the plan of
a predecessor employer, Year of Service shall also include all Years of Service
with such predecessor employer.
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<PAGE>
1.41 Wherever used herein, the singular shall include the plural and the
masculine shall include the feminine and the neuter, unless the context clearly
indicates otherwise.
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<PAGE>
ARTICLE II
PARTICIPATION
2.01 ELIGIBILITY. Each Employee who is in the employ of the Employer on
the Effective Date and has attained age 21 shall become a Participant on the
Effective Date. Each other Employee shall become a Participant in the Plan on
the Plan Entry Date coincident with, or next following, the later of the date on
which he completes six consecutive Months of Service or attains age twenty-one
(21).
Notwithstanding the foregoing, any person who is a member of a collective
bargaining unit is excluded from participation. If a Participant does not
terminate employment but becomes a member of a collective bargaining unit, then
unless the applicable collective bargaining agreement provides otherwise, during
the period that such Participant is a member of a collective bargaining unit,
the Committee shall limit that Participant's sharing in the allocation of
Employer contributions and Participant forfeitures, if any, under the Plan to
the extent of his Compensation paid by the Employer for services rendered while
he is not a member of a collective bargaining unit. However, during such period,
the Participant's Account Balance shall continue to share fully in Trust Fund
earnings and losses.
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If an Employee who is not a Participant ceases to be a member of a collective
bargaining unit, he shall participate in the Plan immediately if he has
satisfied the service and age conditions of this Section 2.01 and would have
been a Participant had he not been a member of a collective bargaining unit
during his period of service with the Employer. Furthermore, an Employee shall
receive vesting credit under Article VI for each included Year of Service during
his period of service with the Employer without regard to whether the Employee
is a member of a collective bargaining unit.
For purposes of this Section 2.01, an Employee is a member of a collective
bargaining unit if he is included in a unit of Employees covered by an agreement
which the Secretary of Labor finds to be a collective bargaining agreement
between employee representatives and one (1) or more employers if there is
evidence that retirement benefits were the subject of good faith bargaining
between such employee representatives and such employer or employers. The term
"employee representatives" does not include an organization of which more than
one half the members are owners, officers or executives of the Employer.
2.02 MONTH OF SERVICE - PARTICIPATION. For purposes of participation under
Section 2.01, the Plan shall take into account all of an Employee's Months of
Service with the Employer. Months of Service shall include all Months of Service
an Employee completes with an Employer or any entity which is required to be
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aggregated with the Employer pursuant to Section 414(b), (c), (m), (n), or (o)
of the Code. Month of Service shall mean a one (1) month period during which the
Employee completes not less than eighty-three (83) Hours of Service. If the
Employee does not complete five hundred (500) Hours of Service during the six
(6) month period commencing with the Employment Commencement Date, the Plan
shall measure the six (6) month period from the Plan Entry Date next following
the Employment Commencement Date. The Plan shall measure any subsequent six (6)
month period necessary for a determination of Month of Service for participation
by reference to succeeding Plan Entry Dates.
2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in
the Plan, the Plan shall not apply any Break in Service rule.
2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment
terminates shall re-enter the Plan as a Participant on the date of his re-
employment. An Employee who has satisfied the eligibility condition(s) of
Section 2.01, but who terminates employment prior to becoming a participant,
shall become a participant in the Plan on the date of his re-employment. Any
other Employee whose employment terminates and who is subsequently re-employed
shall become a participant in accordance with the provisions of Section 2.01 and
Section 2.02.
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ARTICLE III
PARTICIPANT SALARY REDUCTION
3.01 SALARY REDUCTION AGREEMENT. A Participant may elect to enter into a
Salary Reduction Agreement with the Employer which will be applicable to all
payroll periods within such Plan Year after the Plan Entry Date following
execution of the Salary Reduction Agreement. The terms of any such Salary
Reduction Agreement shall provide that the Participant agrees to a reduction in
Compensation from the Employer equal to any whole percentage from one percent
(1%) to thirteen percent (13%) of his Compensation for each payroll period
within such Plan Year. For purposes of the preceding sentence only, Compensation
will be limited to the amount earned by an Employee while he is a participant. A
Participant who does not elect to enter into a Salary Reduction Agreement with
the Employer shall continue to receive his entire amount of Compensation in
cash.
3.02 CHANGE IN SALARY REDUCTION RATE. A Participant may suspend his
contributions under his Salary Reduction Agreement at any time. A Participant
may amend his Salary Reduction Agreement twice during any Plan Year by filing
two weeks advance written notice of any change. Salary Reduction Agreement
amendments shall be effective as of the first day of the calendar quarter next
following the advance notice. Notwithstanding the above limitations, the
Employer may decrease at any time the Salary Reduction Contribution of any
Participant by any
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percentage, whether whole or fractional, if the Committee notifies the Employer
that such decrease is necessary to ensure that the limitations of Sections 3.04,
3.05 or 4.06 are met for the Plan Year.
3.03 VESTING - SALARY REDUCTION CONTRIBUTION ACCOUNTS. Amounts credited to
a Participant's Salary Reduction Contribution Account shall be 100% vested and
Nonforfeitable at all times. The Committee shall pay all Salary Reduction
Contributions over to the Trust no later than ninety (90) days after the date
the funds were withheld from the Participant's Compensation.
3.04 SALARY REDUCTION CONTRIBUTION LIMITATIONS. Notwithstanding Section
3.01 hereof, the maximum amount of Compensation a Participant is permitted to
defer during any calendar year is limited to $7,000 as adjusted by the Secretary
of Treasury pursuant to Section 402(g) (5) of the Code. Any amount that cannot
be credited to the Participant's Salary Reduction Account due to the foregoing
limit shall be paid to the Participant in cash. For purposes of the limitation
of this Section 3.04, the amount contributed to a Participant's Salary Reduction
Contribution Account shall not include any Salary Reduction Contributions
properly returned to the Participant as excess Annual Additions under Section
4.07.
If a Participant would exceed the limitation of this Section 3.04 when the
amount the Participant elects to contribute
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to his Salary Reduction Account is aggregated with the amounts deferred by the
Participant under other plans or arrangements described in Sections 401(k),
408(k), 403(b), 457 or 501(c)(18) of the Code, the Participant may request that
the Committee distribute the excess deferrals to him. Such excess deferrals and
income or loss allocable thereto may be distributed no later than April is of
the year following the year in which any such excess deferrals are contributed,
to Participants who claim such allocable deferral contributions for the
preceding calendar year. The Participant's claim shall be in writing; shall be
submitted to the Committee no later than March 1; shall specify the
Participant's deferral contribution amount for the preceding calendar year; and
shall be accompanied by the Participant's written statement that if such amounts
are not distributed, such deferral contributions, when added to amounts deferred
under other plans or arrangements described in Sections 401(k), 408(k), 403(b),
457 or 501(c)(18) of the Code, exceed the limit imposed on the Participant in
accordance with the applicable provisions of the Code for the year in which the
deferral occurred. To the extent the excess deferral arises under this Plan when
combined with other plans of the Employer, the individual will be deemed to have
notified the Committee of the excess deferral and requested distribution of the
excess deferral.
The income or loss allocable to the excess deferrals shall be the sum of
(1) the amount determined by multiplying the
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income or loss allocable to the Participant's accounts containing the excess
deferrals for the calendar year by a fraction, the numerator of which is the
excess deferrals on behalf of the Participant for the calendar year and the
denominator of which is the Participant's account balance in his accounts
containing the excess deferrals as of the last day of the calendar year in which
the excess deferrals are made without regard to any gain or loss allocable to
such total amount for the calendar year; and (2) ten (10) percent of the amount
determined under (1) multiplied by the number of whole calendar months between
the end of the calendar year in which the excess deferrals were made and the
date of distribution, counting the month of distribution if distribution occurs
after the 15th day of such month. Excess deferrals shall be treated as Annual
Additions, unless such amounts are distributed to the Participant no later than
April 15 of the year following the year in which any such excess deferrals are
contributed.
3.05 SALARY REDUCTION DISCRIMINATION LIMITATION. The Employer shall not
permit a Participant to defer an amount of Compensation that would cause the
Plan to not satisfy at least one of the following tests in any Plan Year:
(a) The Actual Deferral Percentage for the group of Highly Compensated
Employees shall not exceed the Actual Deferral Percentage of all other
eligible Employees multiplied by 1.25; or
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(b) The Actual Deferral Percentage for the group of Highly Compensated
Employees shall not exceed the Actual Deferral Percentage for all other
eligible Employees multiplied by 2.0, provided that the Actual Deferral
Percentage for the group of Highly Compensated Employees does not exceed
the Actual Deferral Percentage of all other eligible Employees by more
than two (2) percentage points or such lesser amount as the Secretary of
the Treasury shall prescribe to prevent the multiple use of this
alternative limitation with respect to any Highly Compensated Employee.
The Actual Deferral Percentage for a specified group of Employees for a Plan
Year shall be the average of ratios (calculated separately for each Employee in
such group) of (i) the amount of Salary Reduction Contributions actually paid
over to the Trust on behalf of each such Employee for such Plan Year, to (ii)
the Employee's Compensation for that portion of the Plan Year during which the
Employee was eligible to participate. In computing the Actual Deferral
Percentage, Salary Reduction Contributions shall not include any amounts
properly returned to (i) the Participant as excess Annual Additions under
Section 4.07; or (ii) a Nonhighly Compensated Employee as excess deferrals under
Section 3.05. The Actual Deferral Percentage for a Participant who makes no
Salary Reduction Contributions during a Plan Year shall be 0%. Contributions
taken into account for purposes of determining the
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Actual Deferral Percentage test must be made before the last day of the twelve-
month period immediately following the Plan Year to which the contributions
relate. In computing the Actual Deferral percentage, the Committee may include
in subparagraph (i) above, the amount of any Employer contributions which are
100% vested when made and are unavailable for withdrawal under any
circumstances. If matching contributions are taken into account for purposes of
this subparagraph (i), they must meet the requirements applicable to Employer
contributions in the preceding sentence and cannot be taken into account under
Section 4.02(i). In the event Salary Reduction Contributions are used to satisfy
the Average Contribution percentage test under Section 4.02, the Actual Deferral
Percentage test must be satisfied both with and without inclusion of the Salary
Reduction. Contributions used in the Average Contribution Percentage test.
The Actual Deferral Percentage for any Employee who is a Highly
Compensated Employee for the Plan Year and who has Salary Reduction
Contributions allocated to his account under two or more plans of the Employer,
shall be determined as if all such contributions were made under a single plan.
If the above plans have different plan years, all cash or deferred arrangements
ending with or within the same calendar year shall be treated as a single
arrangement.
In the event that this Plan satisfies the requirements of Section 401(k),
401(a)(4) or 410(b) of the Code only if
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aggregated with one or more other plans, or if one or more other plans satisfy
the requirements of Section 401(k), 401(a)(4) or 410(b) of the Code only if
aggregated with this Plan, then this Section 3.05 shall be applied by
determining the Actual Deferral Percentages of Participants as if all such plans
were a single plan. Plans may be aggregated to satisfy Section 401(k) of the
Code only if they have the same plan year.
For purposes of determining the Actual Deferral Percentage of a
Participant who is a five percent (5%) owner or one of the ten most highly-paid
Highly Compensated Employees, the Salary Reduction Contributions and
Compensation of such Participant shall include the Salary Reduction
Contributions and Compensation for the Plan Year of Family Members as defined in
Section 414(q)(6) of the Code. Family Members, with respect to such Highly
Compensated Employees, shall be disregarded as separate Employees in determining
the Actual Deferral Percentage both for Participants who are Non- Highly
Compensated Employees and for Participants who are Highly Compensated Employees.
The Employer shall maintain records sufficient to demonstrate satisfaction
of the Actual Deferral Percentage test. The determination and treatment of the
Actual Deferral Percentage amounts of any Participant shall satisfy such other
requirements as may be prescribed by the Secretary of the Treasury.
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3.06 EXCESS CONTRIBUTIONS. Notwithstanding the foregoing paragraph, with
respect to any Plan Year in which Salary Reduction Contributions on behalf of
Highly Compensated Employees exceed the applicable limit, the Committee shall
reduce the amount of the Excess Contributions made on behalf of the Highly
Compensated Employees (by reducing such contributions in order of actual
deferral percentages beginning with the highest), and shall distribute any
Excess Contributions which exist after such reduction, as adjusted by the income
or loss allocable to such Excess Contributions, to the affected Highly
Compensated Employees no later than March 15 of the year following the Plan Year
in which any such Excess Contributions are made, but in no event shall such
amounts be distributed later than the end of the Plan Year following the Plan
Year in which such Excess Contributions were contributed. Excess Contributions
shall be allocated to Participants who are subject to the Family Member
aggregation rules as defined in Section 414(q) (6) of the Code in proportion to
the Salary Reduction Contributions and amounts treated as Salary Reduction
Contributions of each family member that is combined to determine the combined
Actual Deferral Percentage, in the manner prescribed by the regulations.
For purposes of Section 3.06, "Excess Contributions" shall mean, with
respect to any Plan Year, the aggregate amount of Employer contributions
actually taken into account in computing the Actual Deferral Percentage of the
Highly
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Compensated Employees over the maximum amount of such contributions permitted by
the Actual Deferral Percentage test. The income or loss allocable to the Excess
Contributions shall be the sum of (1) the amount determined by multiplying the
income or loss allocable to the Participant's accounts containing the Excess
Contributions for the Plan Year by a fraction, the numerator of which is the
Excess Contributions on behalf of the Participant for the Plan Year and the
denominator of which is the Participant's account balance in his accounts
containing the Excess Contributions as of the Accounting Date of the Plan Year
in which the Excess Contribution is made without regard to any gain or loss
allocable to such total amount for the Plan Year; and (2) ten (10) percent of
the amount determined under (1) multiplied by the number of whole calendar
months between the end of the Plan Year in which the Excess Contributions were
made and the date of distribution, counting the month of distribution if
distribution occurs after the 15th day of such month.
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ARTICLE IV
EMPLOYER CONTRIBUTIONS
4.01 DISCRETIONARY MATCHING CONTRIBUTION. The Employer may elect to make a
discretionary matching contribution. The Employer's matching contribution will
be allocated only to Participants who earn a Year of Service in the Plan Year
for which the matching contribution is made, except that Participants who
terminate their service with the Employer because of death, disability, or
retirement on or after Normal Retirement Date will be eligible to receive an
allocation of the matching contribution for that Plan Year. Notwithstanding the
foregoing, if a Participant completes 501 or more Hours of Service, regardless
of whether he is employed on the last day of the Plan Year, he will receive a
matching contribution if such contribution is necessary to enable the Plan to
satisfy the minimum coverage test of Section 410(b) of the Code or the minimum
participation test of Section 401(a)(26) of the Code. Although the amount to be
contributed for each Plan Year by the Employer under this Section 4.01 is purely
discretionary, any such contributed amounts will be allocated to the Matching
Contribution Accounts of each Participant on the basis of .33 multiplied by a
fraction, the numerator of which is equal to the amount of the participant's
Salary Reduction Contribution (not in excess of six percent (6%) of such
Participant's Compensation), and the denominator of which is the sum total of
all Participants' Salary Reduction
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Contributions (not in excess of six percent (6%) of each such Participant's
Compensation).
4.02 LIMITATIONS ON MATCHING CONTRIBUTIONS. The Employer shall not make
matching contributions to the Plan which would cause the Plan not to satisfy at
least one of the following tests in any Plan Year:
(a) The Average Contribution Percentage for the group of Highly
Compensated Employees shall not exceed the Average Contribution Percentage
for all other eligible Employees multiplied by 1.25; or
(b) The Average Contribution Percentage for the group of Highly
Compensated Employees shall not exceed the Average Contribution Percentage
for all other eligible Employees multiplied by 2.0, provided that the
Average Contribution Percentage for the group of Highly Compensated
Employees does not exceed the Average Contribution Percentage for all
other eligible Employees by more than two (2) percentage points or such
lesser amount as the Secretary of the Treasury shall prescribe to prevent
the multiple use of this alternative limitation with respect to any Highly
Compensated Employee.
For purposes of this Section, the Average Contribution Percentage for a
specified group of Employees shall be the average of the ratios (calculated
separately for each Employee in the group) of
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(i) the matching contributions under the Plan on behalf of the Employee for the
Plan Year, to (ii) the Employee's Compensation for that portion of the Plan Year
during which the Employee was eligible to participate. The Average Contribution
Percentage for a Participant who is not allocated a matching contribution shall
be 0%. For purposes of determining Contribution Percentages, Salary Reduction
Contributions are considered to have been made in the Plan Year in which
contributed to the Trust. Employer contributions will be considered made for a
Plan Year if made no later than the end of the twelve-month period beginning on
the day after the close of the Plan Year. In computing Contribution percentages,
the Committee may include in subparagraph (i) above, Salary Reduction
Contributions, except for Salary Reduction Contributions which are properly
distributed as excess Annual Additions under Section 4.07, and base
contributions which are 100% vested when made and are not available for
withdrawal under any circumstances.
In computing Contribution Percentages, the Committee shall not include
matching contributions that are forfeited either to correct Excess Aggregate
Contributions under Section 4.03 or because the contributions to which the
matching contributions relate are excess deferrals under Section 3.04, Excess
Contributions under Section 3.06 or Excess Aggregate Contributions under Section
4.03.
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The Contribution Percentage for any Employee who is a Highly Compensated
Employee for the Plan Year and who has matching contributions allocated to his
account under two or more plans of the Employer shall be determined as if all
such contributions were made under a single plan. If the above plans have
different plan years, the plans ending with or within the same calendar year
shall be treated as a single plan.
In the event that this Plan satisfies the requirements of Section 401(m),
401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans,
or if one or more other plans satisfy the requirements of Section 401(m), 401(a)
(4) or 410(b) of the Code only if aggregated with this Plan, then this Section
4.02 shall be applied by determining the Contribution Percentages of Employees
as if all such plans were a single plan. Plans may be aggregated in order to
satisfy Section 401(m) of the Code only if they have the same Plan Year.
For purposes of determining the Contribution Percentage of a Participant
who is a five percent (5%) owner or one of the ten most highly-paid Highly
Compensated Employees, the Contribution Percentage amounts and Compensation of
such Participant shall include the Contribution Percentage amounts and
Compensation for the Plan Year of Family Members as defined in Section 414(q)(6)
of the Code. Family Members, with respect to Highly Compensated Employees, shall
be disregarded as separate employees in determining the Contribution Percentages
both for
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Participants who are Non-Highly Compensated Employees and for Participants who
are Highly Compensated Employees. Excess Aggregate Contributions shall be
allocated to Participants who are subject to the Family Members aggregation
rules of Section 414(q)(6) of the Code in proportion to the Employee and
matching contributions or amounts treated as matching contributions of each
family member that is combined to determine the combined Actual Contribution
Percentage, in the manner prescribed by the regulations.
The determination and treatment of the Contribution Percentage of any
Employee shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury. The Employer shall maintain records sufficient to
demonstrate satisfaction of the Average Contribution Percentage test.
4.03 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Excess Aggregate
Contributions and income allocable thereto shall be distributed no later than
March 15 of the Plan Year following the Plan Year in which any such Excess
Aggregate Contribution were made, but in no event shall the Excess Aggregate
Contributions be distributed later than the last day of the Plan Year following
the Plan Year in which the contributions giving rise to the Excess Aggregate
Contributions were allocated. If Excess Aggregate Contributions are distributed
more than 2 1/2 months after the last day of the Plan Year in which such excess
amounts arose, a ten (10) percent excise tax will be imposed on
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the Employer maintaining the Plan with respect to those amounts. Excess
Aggregate Contributions shall be treated as Annual Additions under the Plan.
For purposes of Section 4.03, "Excess Aggregate Contributions" shall mean,
with respect to any Plan Year, the excess of the aggregate Contribution
Percentage amounts taken into account in computing the numerator of the
Contribution Percentage actually made on behalf of Highly Compensated Employees
for such Plan Year, over the maximum Contribution Percentage amounts permitted
by the Average Contribution Percentage test (determined by reducing
contributions made on behalf of Highly Compensated Employees in order of their
Compensation Percentages beginning with the highest of such percentages). Such
determination shall be made after first determining Excess Contributions
pursuant to Section 3.06 and then determining Excess Aggregate Contributions
pursuant to this Section 4.03. The Excess Aggregate Contributions to be
distributed to a Participant shall be adjusted by the income or loss allocable
to such Excess Aggregate Contribution. The income or loss allocable to the
Excess Aggregate Contributions shall be the sum of (1) the amount determined by
multiplying the income or loss allocable to the Participant's accounts
containing the excess amounts for the Plan Year by a fraction, the numerator of
which is the Excess Aggregate Contributions on behalf of the Participant for the
Plan Year and the denominator of which is the participant's account balance in
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the accounts containing the excess amounts as of the Accounting Date of the Plan
Year in which the Excess Aggregate Contribution is made without regard to any
gain or loss allocable to such total amount for the Plan Year; and (2) ten (10)
percent of the amount determined under (1) multiplied by the number of whole
calendar months between the end of the Plan Year in which the Excess Aggregate
Contributions were made and the date of distribution, counting the date of
distribution if distribution occurs after the 15th day of such month.
4.04 FORFEITURE OF MATCHING CONTRIBUTIONS. In order to satisfy Section
4.02, the Committee, in its discretion, may forfeit non-vested matching
contributions and the income allocable thereto in lieu of distributing Excess
Aggregate Contributions. In the event a matching contribution relates to an
excess deferral under Section 3.04, or an Excess Contribution under Section
3.06, the matching contribution and income allocable thereto shall be forfeited.
The income allocable to a matching contribution shall be determined in
accordance with the procedure for determining income allocable to Excess
Aggregate Contributions set forth in Section 4.03. Forfeited matching
contributions and the income allocable thereto shall be reallocated to the
accounts of the NonHighly Compensated Participants for the Plan Year in which
the forfeiture occurs in the ratio which each such Participant's Compensation
for the Plan Year bears to the total Compensation of all such Participants for
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such Plan Year. The forfeited amounts are treated as Annual Additions under the
Plan for both those Participants to whose Accounts such amounts are reallocated
as well as for those Participants from whose Accounts the amounts are forfeited.
4.05 DISCRETIONARY BASE CONTRIBUTIONS. For each Plan Year, the Employer
may contribute to the Trust a discretionary base contribution amount if the
Employer deems it advisable. The Employer's base contribution amount will be
allocated only to Participants who are employed by the Employer on the last day
of the Plan Year, except that a Participant whose service with the Employer
terminates in a Plan Year because of death, disability, or retirement on or
after Normal Retirement Date, will share in the allocation of the Employer's
base contribution for the Plan Year. Notwithstanding the foregoing, if a
Participant completes 501 or more Hours of Service, regardless of whether he is
employed on the last day of the Plan Year, he will receive a base contribution
if such contribution is necessary to enable the Plan to satisfy the minimum
coverage test of Section 410(b) of the Code or the minimum participation test of
Section 401(a) (26) of the Code. The allocation of the Employer's base
contribution shall be based on a ratio, the numerator of which is the
Participant's Compensation for the Plan Year, and the denominator of which is
the total Compensation for all Participants for that Plan Year.
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4.06 EMPLOYER CONTRIBUTIONS. This Plan is intended to be a profit sharing
plan to which Employer contributions shall be made without regard to current or
accumulated profits. All contributions by the Employer shall be paid to the
Trustee not later than the time prescribed by law for filing the federal income
tax return of the Employer, including any extensions which have been granted for
the filing of such return.
4.07 LIMITATION ON ALLOCATION TO PARTICIPANT'S ACCOUNT. If an Employee
does not and has not ever received an allocation of Annual Additions as defined
in 1.03(d), the amount of Annual Additions which the Committee may allocate
under this Plan on a Participant's behalf for a Limitation Year shall not exceed
the Maximum permissible Amount. Prior to the determination of the Participant's
actual Compensation for a Limitation Year, the Committee may determine the
Maximum Permissible Amount on the basis of the Participant's estimated annual
Compensation for such Limitation Year. The Committee shall make this
determination on a uniform and reasonable basis for all Participants similarly
situated. As soon as is administratively feasible after the end of the
Limitation Year, the Committee shall determine the Maximum permissible Amount
for the Limitation Year on the basis of the Participant's Compensation for the
Limitation Year.
If, as a result of the Committee's estimation of the Participant's
Compensation, as a result of a forfeiture
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allocation, or as a result of a reasonable error in determining the amount of
Salary Reduction Contributions that may be made with respect to any Participant
under the limits of Section 415 of the Code, an Excess Amount exists, any Salary
Reduction Contributions or nondeductible voluntary contributions will be
returned to the Participant. To the extent an Excess Amount still exists, the
Committee shall reduce any Employer contributions and forfeitures to the
Participant's Accounts at the end of the Limitation Year by the Excess Amount,
and any remaining Excess Amount shall be carried over to the next Limitation
Year. If the participant is not covered by the Plan as of the end of the
Limitation Year, then the Excess Amount will be allocated to the Accounts of all
other Participants in the Plan for the Limitation Year before any other amounts
are allocated for such Limitation Year.
If an Employee is a Participant at any time in both a defined benefit plan
and a defined contribution plan maintained by the Employer, the sum of the
defined benefit plan fraction and the defined contribution plan fraction for any
Plan Year may not exceed 1.0.
The defined benefit plan fraction for any Plan Year is a fraction, the
numerator of which is the Participant's projected annual benefit under the plan
(determined at the close of the Plan Year) and the denominator of which is the
lesser of (1) 1.25 multiplied by the dollar limitation in effect for such Plan
Year
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under Section 415(b)(1)(A) of the Code as adjusted by Section 415(d) of the
Code; or (2) 1.4 multiplied by one-hundred percent (100%) of the Participant's
average monthly Compensation during the three consecutive years when the total
Compensation paid to him was highest, including any adjustment under Section
415(b) of the Code. Notwithstanding the above, if the Participant was a
participant as of the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined benefit plans maintained by the
Employer which were in existence on May 6, 1986, the denominator of this
fraction will not be less than 125 percent of the sum of the annual benefits
under such plans which the Participant had accrued as of the close of the last
Limitation Year beginning before January 1, 1987, disregarding any changes in
the terms and conditions of the plan after May 5, 1986. The preceding sentence
applies only if the defined benefit plans individually and in the aggregate
satisfied the requirements of Section 415 for all Limitation Years beginning
before January 1, 1987.
The defined contribution plan fraction for any Plan Year is a fraction,
the numerator of which is the sum of the Annual Additions to the Participant's
Account Balance as of the close of the Plan Year, (including the Annual
Additions attributable to the Participant's nondeductible employee contributions
to all defined benefit plans, whether or not terminated, maintained by the
Employer, and the Annual Additions attributable to all
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welfare benefit funds, as defined in Section 419(e) of the Code, and individual
medical accounts, as defined in Section 415(1)(2) of the Code, maintained by
the Employer) and the denominator of which is the sum of the applicable maximum
amounts of Annual Additions which could have been made under Section 415(c) of
the Code for such Plan Year and for all prior years of such Participant's
employment. If the employee was a Participant as of the end of the first day of
the first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which were in existence on
May 6, 1986, the numerator of this fraction will be adjusted if the sum of this
fraction and the defined benefit fraction would otherwise exceed 1.0 under the
terms of this Plan. Under the adjustment, an amount equal to the product of (1)
of the excess of the sum of the fractions over 1.0 times (2) the denominator of
this fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they would be
computed as of the end of the last Limitation Year beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the Plan made
after May 5, 1986, but using the Section 415 limitation applicable to the first
Limitation Year beginning on or after January 1, 1987.
The applicable maximum amount for any Plan Year shall be equal to the
lesser of (1) 1.25 multiplied by the dollar
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limitation in effect for such Plan Year under Section 415(c)(1)(A) of the
Code; or (2) 1.4 multiplied by twenty-five percent (25%) of the Participant's
Compensation for such Plan Year. For purposes of this limitation, all defined
benefit plans of the Employer, whether or not terminated, are to be treated as
one defined benefit plan and all defined contribution plans of the Employer,
whether or not terminated, are to be treated as one defined contribution plan.
The following definitions apply to this Section only:
(a) "Maximum Permissible Amount" - For a Limitation Year, the Maximum
Permissible Amount with respect to any Participant shall be the lesser of
(i) $30,000 (or, if greater, 25% of the dollar limitation in effect under
Section 415(b)(1)(A) of the Code), or (ii) twenty-five percent (25%) of
the Participant's Compensation for the Limitation Year.
(b) "Compensation" - Compensation as defined but excluding amounts
deferred pursuant to Article III or pursuant to a cafeteria plan as
defined by Section 125 of the Code.
(c) "Employer" - The Employer which adopts this Plan as well as any entity
which must be aggregated with the Employer pursuant to Section 414(b),
(c), (m), (n) or (o) of the Code.
(d) "Excess Amount" - The excess of the Participant's Annual Additions
credited to the Participant's Account for the Limitation Year over the
Maximum permissible Amount. Any Excess Amount shall be held in a suspense
account which does not participate in the allocation of the Trust's
investment gains and losses. Excess Amounts may not be distributed to
Participants or former Participants. Any Excess Amount which is allocated
shall be deemed to be an Annual Addition for the Limitation Year in which
it is allocated.
(e) "Limitation Year" - The Plan Year.
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(f) "Projected Annual Benefit" - The annual retirement benefit (adjusted
if such benefit is expressed in a form other than a straight life annuity
or qualified joint and survivor annuity) to which the Participant would be
entitled under the terms of the plan assuming:
(1) the Participant will continue employment until normal retirement
age under the plan (or current age, if later), and
(2) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the
Plan will remain constant for all future Limitation Years.
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ARTICLE V
PARTICIPANT CONTRIBUTIONS
5.01 ROLLOVER CONTRIBUTIONS. Any Employee, with the Committee's consent,
may contribute cash to the Trust Fund, if the contribution is a Rollover
Contribution. For this purpose a Rollover Contribution means (a) a contribution
by an Employee of a distribution received from the qualified plan of another
employer provided the Employee makes the contribution within 60 days of his
receipt of a distribution which satisfied the requirements of Section 402(a)(5)
of the Code; (b) a contribution by an Employee under Section 408(d)(3) of
the Code of the balance in an individual retirement account or annuity which
amount is attributable to a prior rollover distribution which satisfied the
requirements of Section 402(a)(5) of the Code; or (3) a direct transfer of the
Employee's interest from the trustee of a qualified plan maintained by another
employer. Before accepting a Rollover Contribution, the Committee may require
the Employee to furnish satisfactory evidence that the proposed transfer is in
fact a Rollover Contribution which the Code permits an Employee to make to a
qualified plan. The Committee shall not accept any amount from or attributable
to any defined benefit plan or other plan which is required to provide automatic
survivor benefits under Section 401(a)(11) of the Code. All Rollover
Contributions shall be fully vested at all times.
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ARTICLE VI
TERMINATION OF SERVICE
6.01 NORMAL RETIREMENT DATE. Upon reaching his Normal Retirement Date, a
participant shall be fully vested in his Account Balance. A Participant who
remains employed after reaching his Normal Retirement Date shall continue to
fully participate in this Plan. Upon termination of a Participant's employment
for any reason after Normal Retirement Date, the Committee shall direct the
Trustee to commence payment of the Participant's Account Balance to him (or to
his Beneficiary if the participant is deceased), in accordance with the
provisions of Article VII no later than sixty (60) days after the close of the
Plan Year in which the participant's employment terminates.
6.02 PARTICIPANT DISABILITY. A participant shall be fully vested in his
Account Balance if he is deemed disabled by the Committee. The Committee shall
direct the Trustee to commence payment of the Participant's Account Balance to
him in accordance with the provisions of Article VII no later than sixty (60)
days after the close of the Plan Year in which the Participant is deemed
disabled. The Plan shall consider a participant disabled on the date the
Committee determines the participant, because of a physical or mental
disability, will be unable to perform the duties of his customary position of
employment (or is unable to engage in any substantial gainful activity) for an
indefinite period which the Committee considers will be of
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long and continued duration. The Committee also shall consider a Participant
disabled if he incurs the permanent loss of use of a member or function of the
body, or is permanently disfigured. The immediately preceding sentence shall not
apply unless the Participant terminates employment. The Committee may require a
Participant to submit to a physical examination in order to confirm disability.
If the disabled Participant is a member of the Committee, a disinterested third
party shall be appointed by the Committee to evaluate the Committee member's
condition. The Committee shall apply the provisions of this Section 6.02 in a
nondiscriminatory, consistent and uniform manner.
6.03 TERMINATION OF SERVICE PRIOR TO NORMAL RETIREMENT DATE. Upon
termination of a Participant's employment prior to Normal Retirement Date (for
any reason other than death or disability), the Committee shall direct the
Trustee to commence payment of the Participant's vested Account Balance to him
(or to his Beneficiary if the Participant is deceased), in accordance with the
provisions of Article VII, no later than sixty (60) days after the close of the
Plan Year in which the Participant's employment terminates.
6.04 VESTING - EMPLOYER CONTRIBUTIONS. Amounts credited to a Participant's
Matching Contribution Account shall be one hundred percent (100%) vested at all
times. A Participant's Base Contribution Account shall be one hundred percent
(100%) vested upon reaching his Normal Retirement Date (if
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employed by the Employer on or after that date), or if his employment with the
Employer terminates as a result of death or disability. If a Participant's
employment with the Employer terminates prior to his Normal Retirement Date for
any reason other than death or disability, then for each Year of Service he
shall earn a Nonforfeitable percentage of his Base Contribution Account as
determined by the following vesting schedule:
Percent of
Nonforfeitable
Years of Service Base Contribution Account
---------------- -------------------------
Less than 1 0
1 20%
2 40%
3 60%
4 80%
5 or more 100%
For purposes of determining Years of Service under Section 6.04, the Plan shall
take into account all Years of Service an Employee completes with the Employer
or any entity which is required to be aggregated with the Employer pursuant to
Section 414(b), (c), (m), (n) or (0) of the Code. In addition, a Participant
will be credited with Years of Service for purposes of this Section for years of
service earned with Viking Enterprises Corp. or its subsidiaries, provided that
such participant became employed by the Employer on the Effective Date.
Solely for purposes of determining a Participant's Nonforfeitable
percentage of his Base Contribution Account which accrued prior to a Forfeiture
Break in Service, the Plan shall
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disregard any Years of Service after the Participant first incurs a Forfeiture
Break in Service. A participant incurs a Forfeiture Break in Service when he
incurs five (5) consecutive one-year Breaks in Service.
If a Participant who has no vested interest incurs a Break in Service, the
Committee shall disregard the Participant's pre-break Years of Service for
purposes of determining his vested interest in his post-break Account Balance if
the number of the Participant's aggregate one-year Breaks in Service equals or
exceeds the greater of five (5) or the number of the participant's aggregate
Years of Service.
6.05 FORFEITURE AND REPAYMENT. If a Participant terminates employment
before his interest in his Base Contribution Account is fully vested, that
portion which has not vested shall be forfeited as of the last day of the Plan
Year in which (i) he receives a distribution of the Nonforfeitable portion of
his Account Balance or (ii) he incurs a Forfeiture Break in Service. If the
value of the Participant's vested Base Contribution Account is zero, the
Participant shall be deemed to have received a distribution of such vested
Account Balance. If a Participant who has received a distribution of the
Nonforfeitable portion of his Account Balance is rehired before he incurs a
Forfeiture Break in Service, he may repay to the Trustees an amount equal to the
distribution amount. The participant must make repayment prior to the earlier of
the date
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he would incur a Forfeiture Break in Service after such distribution, or five
(5) years after the date on which he is re-employed. Such repayment shall be
credited to his Account Balance and an additional amount equal to the forfeited
portion of his Base Contribution Account will either be allocated to the
Participant's Account Balance out of current forfeitures or contributed by the
Employer as of the last day of that Plan Year. It shall be the duty of the
Employer to give timely notification to any rehired Employee if such Employee is
eligible to make a repayment, of his right to make such a repayment, and of the
consequences of not making such repayment. In the case of a terminated
Participant who is deemed to have received a distribution and is rehired before
he incurs a Forfeiture Break in Service, his forfeited Base Contribution Account
shall be restored upon reemployment. In the case of a terminated Participant who
does not receive a distribution of the Nonforfeitable portion of his Account
Balance and whose service resumes after five (5) consecutive one-year Breaks in
Service, the Nonforfeitable Account Balance shall be maintained as a fully
vested subaccount within his Base Contribution Account.
Subject to any restoration allocation of a forfeited amount on behalf of a
Participant who repays a distribution as described above, the Employer shall
allocate forfeitures which arise under this section in proportion to each
Participant's Compensation for the Plan Year in relation to the total Compensa-
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tion of all participants for the Plan Year. Such allocated forfeiture amounts
shall be credited to each Participant's Base Contribution Account.
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ARTICLE VII
TIME AND METHOD OF PAYMENT OF BENEFITS
7.01 TIME OF PAYMENT OF ACCOUNT BALANCE. Unless the Participant elects in
writing, if distribution has not yet commenced pursuant to Sections 6.02 or
6.03, the Committee shall direct the Trustee to commence distribution of a
Participant's Account Balance determined as of the Accounting Date coincident
with or preceding the event causing distribution no later than sixty (60) days
after the close of the Plan Year in which the later of the following events
occurs:
(a) The date the Participant reaches his Normal Retirement Date, or
(b) The date the Participant terminates service with the Employer.
The Committee shall, however, direct the Trustee to commence distribution no
later than the Participant's Required Beginning Date. The Required Beginning
Date is April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2, notwithstanding the Participant's continued
employment; except that any Participant who attained age 70 1/2 before January
1, 1988, and who is not a five percent owner in the Plan Year in which he
attained age 66 1/2 or any later Plan Year, need not commence receiving payments
hereunder until April 1 of the year following the year in which he actually
retires.
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7.02 DEFERRED DISTRIBUTION. A Participant who separates from service prior
to attaining age 70 1/2 may request that the Committee direct the Trustee to
defer commencement of his distribution until his Required Beginning Date.
7.03 FORMS OF PAYMENT. The Participant may elect one of the optional forms
of payment described herein. The election of such option must be in writing, in
such form as the Committee shall prescribe, signed by the Participant and filed
with the Committee during the 90 day period preceding the Annuity Starting Date.
Any election may be revoked by written notice filed with the Committee at least
30 days prior to the Participant's Annuity Starting Date.
The following optional forms of distribution will be available:
(a) a lump sum payment; or
(b) installment payments over a period not to exceed ten years.
7.04 PAYMENT UPON DEATH. If distribution of the Participant's Account
Balance has commenced in accordance with a method selected pursuant to Section
7.03 and the Participant dies before his entire interest is distributed to him,
the remaining portion of such interest shall be distributed at least as rapidly
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as under the method of distribution selected by the Participant as of his date
of death.
If a Participant dies prior to the commencement of distribution of his
Account Balance, distribution of his Account Balance to his designated
Beneficiary shall be completed by December 31 of the calendar year containing
the fifth anniversary of his death, unless one of the following exceptions
apply:
(a) If the Participant's Account Balance is payable to or for the benefit
of a designated Beneficiary, it may be distributed over the life of such
Beneficiary (or over a period not extending beyond the life expectancy of
such Beneficiary), provided such distribution commences no later than the
December 31 following the close of the calendar year in which the
Participant's death occurred.
(b) In the event that the Participant's spouse is his designated
Beneficiary, distribution to the spouse must commence no later than the
later of the December 31 of the calendar year in which the deceased
Participant would have attained age 70 1/2 had he survived or the December
31 following the close of the calendar year in which the Participant's
death occurred. If the surviving spouse dies before distribution to such
spouse has commenced, then the five year distribution requirement of this
Section shall apply as if the spouse were the Participant.
If the Participant has not designated a method of distribution in
accordance with (a) or (b) above, the Participant's designated Beneficiary must
elect the method of distribution no later than the earlier of (1) December 31 of
the calendar year in which distributions would be required to begin under this
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Section, or (2) December 31 of the calendar year which contains the fifth
anniversary of the date of death of the Participant. If the Participant has no
designated Beneficiary, or if the designated Beneficiary does not elect a method
of distribution, distribution of the Participant's entire interest must be
completed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
For purposes of this Section, any amount paid to a child of the
Participant will be treated as if it had been paid to the surviving spouse if
the amount becomes payable to the surviving spouse when the child reaches the
age of majority. For purposes of this Section only, distribution of a
Participant's interest is considered to begin on the Participant's Required
Beginning Date (or, if (b) above is applicable, the date distribution is
required to begin to the surviving spouse). If distribution in the form of an
annuity irrevocably commences to the Participant before the Required Beginning
Date, the date distribution is considered to begin is the date distribution
actually commences.
If the Trustee makes distribution in accordance with the exceptions in
either clause (a) or (b), the minimum distribution for a calendar year equals
the Participant's Nonforfeitable Account Balance as of the latest Accounting
Date preceding the beginning of the calendar year (adjusted by distributions
made after the Accounting Date but prior to the end of the calendar year),
divided by the designated Beneficiary's life expectancy without recalculation. A
distribution to the Beneficiary in the
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form of an annuity will satisfy the minimum distribution requirements of this
Section 7.04 if the method of distribution provides substantially nonincreasing
payments and otherwise satisfies applicable Treasury regulations. The Committee
shall use the unisex life expectancy multiples under Treasury regulation Section
1.72-9 for purposes of applying this paragraph. In construing this Section 7.04,
the method of distribution to the Participant's Beneficiary must satisfy Section
401(a)(9) of the Code and the applicable Treasury regulations.
7.05 MINIMUM DISTRIBUTION REQUIREMENTS. Notwithstanding anything else to
the contrary herein, the Committee may not direct the Trustee to distribute the
Participant's Non-forfeitable Account Balance, nor may the Participant elect to
have the Trustee distribute his Account Balance over a period extending beyond
the Participant's life expectancy or over a period extending beyond the joint
life and last survivor life expectancy of the Participant and his designated
Beneficiary. The minimum distribution for a calendar year equals the
Participant's Nonforfeitable Account Balance as of the most recent Accounting
Date preceding the calendar year (adjusted for allocations of contributions,
forfeitures and distributions made after the Accounting Date but prior to the
end of the calendar year, if applicable), divided by the applicable life
expectancy or, if the Participant's spouse is not his designated Beneficiary,
the applicable divisor determined from the table set forth in Q&A-4 of Section
1.401(a)(9)-2 of the proposed
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regulations. The applicable life expectancy shall be the life expectancy (or
joint and last survivor expectancy) calculated using the attained age of the
Participant (or designated Beneficiary) as of the Participant's (or designated
Beneficiary's) birthday in the first distribution calendar year reduced by one
for each calendar year which elapsed since the date life expectancy was first
calculated. Applicable life expectancies will be determined under the unisex
life expectancy multiples under Treasury regulation Section 1.72-9, and will not
be recomputed. The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the Participant's Required
Beginning Date. The minimum distribution for other calendar years, including the
minimum distribution for the distribution calendar year in which the
Participant's Required Beginning Date occurs, must be made on or before December
31 of that distribution calendar year. The first distribution calendar year is
the calendar year immediately preceding the calendar year which contains the
Participant's Required Beginning Date. All distributions under the Plan must be
made in accordance with Section 401(a)(9) of the Code and the Treasury
regulations thereunder. To the extent provisions of this Plan are inconsistent
with Section 401(a)(9) of the Code, Section 401(a)(9) of the Code will
override such provisions.
7.06 IMMEDIATE DISTRIBUTION. If the Participant's Non-forfeitable Account
Balance is $3,500 or less, including voluntary contributions, if applicable, the
Committee will immediately distribute such amount to the Participant without his
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consent upon his termination of employment. No distribution may be made pursuant
to this Section after the Annuity Starting Date without the consent of the
Participant, and if applicable, the Participant's spouse.
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ARTICLE VIII
WITHDRAWALS
8.01 HARDSHIP WITHDRAWAL. If a Participant elects to withdraw all or any
part of his Salary Reduction Contribution Account, such withdrawal will require
the consent of the Committee and such consent shall be given only if, under
uniform rules of application, the Committee determines that the purpose of the
withdrawal is to meet heavy and immediate financial needs of the Participant and
the amount of the hardship distribution requested is necessary to satisfy the
specified need. Withdrawals are permitted only for (1) payment of college or
graduate school tuition and related educational fees for college or graduate
school for the next 12 months for the Participant, the Participant's spouse,
children or dependents; (2) costs directly related to the purchase of a
principal residence for the Participant, excluding mortgage payments; (3)
payments necessary to prevent the Participant's eviction from, or foreclosure on
the mortgage of, the Participant's principal residence; and (4) expenses for
medical care, to the extent not covered by insurance, which have either been
previously incurred by the Participant, the Participant's spouse or dependents
or are necessary for the Participant, the Participant's spouse or dependents to
obtain medical care. The foregoing definition of hardship may be altered by the
Committee, as may the time, amount and manner of distributions under this
Section, to the extent required by the Code or applicable regulations. No
distributions may be made under this Section to the extent that such
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distributions would be allocable to income allocable to Salary Reduction
Contributions.
The amount of the hardship distribution shall not exceed the amount of the
Participant's immediate and heavy financial need. The amount of an immediate and
heavy financial need may include any amounts necessary to pay any Federal, state
or local income taxes or penalties reasonably anticipated to result from the
distribution. Prior to obtaining a hardship distribution from this Plan, the
Participant must obtain all distributions, other than hardship distributions,
and all nontaxable loans from this Plan and from all other plans maintained by
the Employer.
A hardship distribution from this Plan will be permitted only if all other
plans maintained by the Employer prohibit the participant from making (a)
elective contributions and Employee contributions for at least twelve (12)
months subsequent to the hardship distribution; and (b) elective contributions
for the taxable year subsequent to the taxable year of the hardship
distribution, which exceed the limit on such deferrals under Section 402(g) of
the Code for such subsequent taxable year less the amount of such Participant's
elective contributions for the taxable year of the hardship distribution.
A Participant who has obtained a hardship distribution shall not make
Salary Reduction Contributions to this Plan for at least twelve (12) months
subsequent to the hardship distribution nor shall the participant make Salary
Reduction Contributions to this Plan for the taxable year subsequent to the
taxable year of
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the hardship distribution, which exceed the limit on such deferrals under
Section 402(g) of the Code for such subsequent taxable year less the amount of
such Participant's Salary Reduction Contributions for the taxable year of the
hardship distribution.
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ARTICLE IX
INVESTMENT OF CONTRIBUTIONS
9.01 FUNDING VEHICLE. The Employer has entered into a Trust Agreement with
the Trustee providing for the establishment of a Trust to which all Salary
Reduction Contributions, matching contributions, base contributions and
voluntary contributions, if any, shall be contributed and from which all
benefits under the Plan shall be paid.
9.02 INVESTMENT FUNDS. The Trustee may, pursuant to the direction of the
Committee, establish and maintain separate subfunds into which the Participants
may direct the investment of their Accounts.
9.03 INVESTMENT ELECTIONS. If the Trustee maintains separate subfunds
pursuant to Section 9.02, each Participant's Account Balance shall be allocated
to any or all of the subfunds, in multiples of ten percent (10%), as the
Participant shall elect. Such election shall be made by the Participant in
writing and shall be filed with the Committee. A Participant's initial election
shall be made during the Enrollment Period preceding his entry into the Plan.
Separate accounts will be maintained reflecting the interest of each Participant
attributable to each subfund.
9.04 CHANGE IN INVESTMENT ELECTION. Any investment election made by the
Participant shall be deemed to be a continuing election until changed. A
Participant may change his investment election with respect to future
contributions by
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filing an appropriate notice with the Committee prior to the first pay period of
the next succeeding calendar quarter for which the election is to be effective,
but not more frequently than four times in any Plan Year. Such change shall be
effective only with respect to future amounts deferred from the Participant's
Compensation and for future matching contributions and base contributions, if
any.
9.05 TRANSFERS BETWEEN FUNDS. A Participant periodically may direct the
Trustee to transfer designated amounts from one subfund to another.
9.06 INVESTMENT OF EARNINGS. All earnings (whether denominated income,
capital gain or otherwise) from investments in each subfund shall be reinvested
in the same subfund.
9.07 LOAN FUNDS. Notwithstanding anything in this Article IX to the
contrary, any Participant who borrows from the Trust Fund pursuant to Article X
will be treated as having directed the Trustee to allocate such portion of his
Account Balance as is equal to the borrowed amount to the Participant's Loan
Fund. The Loan Fund, and the promissory note executed by the Participant held
therein, remains a part of the Trust Fund, but to the extent of the loan
outstanding at any time, the borrowing participant's Loan Fund alone shares in
any interest paid on the loan, and it alone bears any expense or loss it incurs
in connection with the loan. The Trustee may retain in an interest-bearing
account any interest and principal paid on the borrowing Participant's loan in
the Loan Fund on behalf of the
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borrowing Participant until the Trustee deems it appropriate to add the amount
paid to the Participant's Loan Fund under the Plan (plus interest, if any) back
to the Participant's Account Balance, at the same time reducing the amount
treated as having been allocated to the Participant's Loan Fund by the amount of
principal payments made with respect to the loan.
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ARTICLE X
LOANS
10.01 LOAN APPLICATIONS. A Participant, or a Qualified Beneficiary may
make application to the Trustees to borrow from the Trust Fund, and the Trustees
may, in their sole discretion, permit such loan, provided, however, that such
loans shall be made available to all such Participants and Qualified
Beneficiaries on a reasonably equivalent basis. A Qualified Beneficiary for this
purpose, is a designated Beneficiary who is a party-in-interest as defined in
Section 3(14) of the Employee Retirement Income Security Act of 1974, as
amended. The authority herein granted to the Trustees to approve loans from the
Trust Fund shall not be used as a means of distributing benefits before they
otherwise become due.
10.02 LOAN TERMS AND CONDITIONS.
(a) The aggregate amount of all such loans to a Participant from this Plan
shall not, at the time any such loan is made, exceed the lesser of (i) $50,000
reduced by the excess (if any) of the highest outstanding balance of loans from
the Plan during the one year period ending on the day before the date on which
such loan was made, over the outstanding balance of loans from the Plan on the
date on which such loan was made, or (ii) fifty percent (50%) of the vested
portion of the Participant's Account Balance at the time of the making of such
loan. For purposes of this limitation, all loans from all qualified plans
maintained by the Employer or by any entity which
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is required to be aggregated with the Employer pursuant to Sections 414 (b),
(c), (m) or (o) must be aggregated. The minimum loan amount is $1,000, and no
Participant may have more than two (2) loans from the Plan outstanding at any
one time.
(b) Loans shall be made pursuant to notes approved by the Trustees which
shall bear a reasonable interest rate equal to the prevailing rate charged by
lenders for similar loans and shall specify the time and manner of repayment, as
determined by the Trustees.
(c) Loans shall not be made available to Participants who are Highly
Compensated Employees in an amount greater than the amount made available to
other participants.
(d) For all loans, the participant must consent in writing within the 90
day period before the making of the loan to the possible reduction in the
participant's Account Balance if the terms of the loan are not properly
fulfilled and fully executed. The consent must be in writing, must acknowledge
the effect of the loan, and must be witnessed by a Plan representative or notary
public. A new consent shall be required if the Account Balance is used for
renegotiation, extension, renewal, or other revision of the loan.
(e) All loans shall be adequately secured. A loan shall be deemed to be
adequately secured if the aggregate amount of all such loans to a participant
does not exceed fifty percent (50%) of the vested amount of the participant's
Account Balance
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at the time of the making of such loan. If, at any time, the aggregate amount of
outstanding loans to a Participant does exceed that limitation, then the
Trustees shall require the participant to repay the amount of principal balance
due on such loans to an amount not in excess of such limitation, or to
adequately secure with collateral other than the vested amount of the
Participant's Account Balance the amount by which such loans exceed the
limitation. The Trustees shall have sole discretion to determine the nature and
amount of security required.
(f) The period for repayment of a loan issued pursuant to this Section
must, by the terms of the note, not exceed five (5) years. Notwithstanding the
above, if the purpose or use of the loan, as determined at the time of issuance,
is to acquire any dwelling unit which within a reasonable time is to be used as
the principal residence of the Participant, the period for repayment of the loan
may be extended to ten (10) years. Repayment of a loan shall be made through
payroll deduction. Any loan shall, by its terms, require that repayment of
principal and interest be amortized quarterly over the period of the loan.
(g) In the event the Participant ceases to make Salary Reduction
Contributions, repayment of the loan shall be accelerated and any amount due
shall be paid from the Loan Fund unless otherwise satisfied by the Participant.
(h) In the event of default, foreclosure on the note and attachment of
security will not occur until a distributable event occurs in the Plan.
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(i) No loans will be made to any shareholder-employee or owner-employee.
For purposes of this requirement, a shareholder-employee means an employee or
officer of an electing small business (Subchapter S) corporation who owns (or is
considered as owning within the meaning of Section 318(a)(l) of the Code), on
any day during the taxable year of such corporation, more than 5% of the
outstanding stock of the corporation.
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ARTICLE XI
EMPLOYER ADMINISTRATIVE PROVISIONS
11.01 INFORMATION TO COMMITTEE. The Employer shall supply current
information to the Committee as to the name, date of birth, date of employment,
annual Compensation, leaves of absence and date of termination of employment of
each Employee who is, or who will be eligible to become, a Participant under the
Plan, together with any other information which the Committee considers
necessary. The Employer's records as to the current information the Employer
furnishes to the Committee shall be conclusive as to all persons.
11.02 NO LIABILITY. The Employer assumes no obligation or responsibility
to any of its Employees, Participants or Beneficiaries for any act of, or
failure to act, on the part of its Committee or the Trustees.
11.03 INDEMNITY OF COMMITTEE. The Employer indemnifies and holds harmless
the members of the Committee, and each of them, from and against any and all
loss resulting from liability to which the Committee or members of the Committee
may be subjected by reason of any act or conduct (except willful misconduct or
gross negligence) in their official capacities in the administration of this
Plan or Trust or both, including all expenses reasonably incurred in their
defense in case the Employer fails to provide such defense. The indemnification
provisions of this Section 11.03 shall not relieve any Committee member from
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any liability he may have under the Code or ERISA for breach of a fiduciary
duty.
11.04 FACILITY OF PAYMENT. If satisfactory evidence is received that a
person entitled to receive any benefits is physically incapable or mentally
incompetent to receive such payment and give a valid release therefor, and
another person or institution has been maintaining or has custody of such
person, payment of such benefit may be made to such person or institution and
the release of such person or institution shall be a valid and complete
discharge of any liability under this Plan.
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ARTICLE XII
PARTICIPANT ADMINISTRATIVE PROVISIONS
12.01 BENEFICIARY DESIGNATION. The Beneficiary of a married Participant
shall be the surviving spouse. A married participant may designate a Beneficiary
other than the spouse only if the Participant obtains the written consent of the
spouse to the alternate beneficiary, the spouse acknowledges the effect of the
consent and the spouse's signature is witnessed by a notary public or Plan
representative. Subject to the foregoing limitation, any Participant may from
time to time designate, in writing, any person or persons, contingently or
successively, to whom the Trustees shall pay his Account Balance in the event of
his death. The Committee shall prescribe the form for the written designation of
Beneficiary and, upon the Participant's filing the form with the Committee, it
effectively shall revoke all designations filed prior to that date by the same
Participant.
12.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a
Beneficiary, or if the Beneficiary named by a participant predeceases him, then
the Trustees shall pay the Participant's Account Balance (subject to the
provisions of Articles V and VII) in the following order of priority to:
(a) The Participant's surviving spouse:
(b) The Participant's surviving children, including adopted children, in
equal shares;
(c) The Participant's surviving parents, in equal shares; or
(d) The legal representative of the estate of the last to die of the
Participant and his Beneficiary.
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The Committee shall direct the Trustees as to whom the Trustees shall make
payment under this Section 12.02.
12.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of
a deceased Participant must furnish to the Committee such evidence, data or
information as the Committee considers necessary or desirable for the purpose of
administering the plan. The provisions of this Plan are effective for the
benefit of each Participant upon the condition precedent that each Participant
will furnish promptly full, true and complete evidence, data and information
when requested by the Committee, provided that the Committee shall advise each
Participant of the effect of his failure to comply with its request.
12.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a
deceased Participant shall file with the Committee from time to time, in
writing, his post office address and any change of post office address. Any
communication, statement or notice addressed to a Participant or Beneficiary at
his last post office address filed with the Committee, or as shown on the
records of the Employer, shall bind the Participant, or Beneficiary, for all
purposes of this Plan.
12.05 ASSIGNMENT OR ALIENATION. Neither a Participant nor a Beneficiary
shall anticipate, assign or alienate (either at law or in equity) any benefit
provided under the Plan, and the Trustees shall not recognize any such
anticipation, assignment or alienation. Furthermore, a benefit under the Plan is
not subject to attachment, garnishment, levy, execution or other legal or
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equitable process. The Committee shall, however, abide by any Qualified Domestic
Relations Order as defined in Section 414(p) of the Code and Section 206(d) (3)
of ERISA which is served upon the Plan.
12.06 NOTICE OF CHANGE IN TERMS. The Committee, within the time prescribed
by ERISA and the applicable regulations thereunder, shall furnish all
Participants and Beneficiaries with a summary description of any material
amendment to the Plan or notice of discontinuance of the Plan and all other
information required by ERISA to be furnished without charge.
12.07 INFORMATION AVAILABLE. Any Participant in the Plan or any
Beneficiary may examine copies of the Plan description, latest annual report,
any bargaining agreement, this Plan and Trust, as well as any contract or other
instrument under which the Plan was established or is operated. The Committee
will maintain all of the items listed in this Section 12.07 in its office, or in
such other place or places as it may designate from time to time in order to
comply with the regulations issued under ERISA, for examination during
reasonable business hours. Upon the written request of a Participant or
Beneficiary the Committee shall furnish him with a copy of any item listed in
this Section 12.07. The Committee may make a reasonable charge to the requesting
person for the copy so furnished.
12.08 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Committee shall provide
adequate notice in writing to any Participant or to any Beneficiary ("Claimant")
whose claim for benefits
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under the Plan the Committee has denied. The Committee's notice to the Claimant
shall set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on which the
Committee based its denial;
(c) A description of any additional material and information that is
needed; and
(d) That any appeal the Claimant wishes to make of the adverse
determination must be in writing to the Committee within seventy-five (75)
days after receipt of the Committee's notice of denial of benefits. The
Committee's notice must further advise the Claimant that his failure to
appeal the action to the Committee in writing within the seventy-five (75)
day period will render the Committee's determination final, binding and
conclusive.
If the Claimant should appeal to the Committee, he, or his duly authorized
representative, may submit, in writing, whatever issues and comments he or his
duly authorized representative feels are pertinent. The Claimant, or his duly
authorized representative, may review pertinent Plan documents. The Committee
shall re-examine all facts to the appeal and make a final determination as to
whether the denial of benefits is justified under the circumstances. The
Committee shall advise the Claimant of its decision within sixty (60) days of
the Claimant's written request for review, unless special circumstances (such as
a hearing) would make the rendering of a decision within the sixty (60) day
limit unfeasible, but in no event shall the Committee render a decision
respecting a denial for a claim for benefits later than one hundred twenty (120)
days after its receipt of a request for review.
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The Committee's notice of denial of benefits shall identify the name and
address of each member of the Committee to whom the Claimant may forward his
appeal.
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ARTICLE XIII
COMMITTEE DUTIES WITH RESPECT TO PARTICIPANT'S ACCOUNT
13.01 MEMBERS' COMPENSATION AND EXPENSES. The Company shall appoint a
Committee to administer the plan, the members of which may or may not be
Participants in the Plan. The members of the Committee shall serve without
compensation for services as such, but the Employer shall pay all expenses of
the Committee, including the expense for any bond required under ERISA.
13.02 TERM. Each member of the Committee shall serve until his successor
is appointed.
13.03 POWERS. In case of a vacancy in the membership of the Committee, the
remaining members of the Committee may exercise any and all of the powers,
authority, duties and discretion conferred upon the Committee pending the
filling of the vacancy.
13.04 GENERAL. The Committee shall have the following powers and duties:
(a) To select a Secretary, who need not be a member of the Committee;
(b) To determine the rights of eligibility of an Employee to participate
in the plan;
(c) To adopt rules of procedure and regulations necessary for the proper
and efficient administration of the Plan;
(d) To enforce the terms of the Plan and the rules and regulations it
adopts;
(e) To direct the Trustee as respects the crediting and distribution of
the Trust;
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(f) To review and render decisions respecting a claim for (or denial of a
claim for) a benefit under the Plan;
(g) To furnish the Employer with information which the Employer may
require for tax or other purposes; and
(h) To engage the services of agents whom it may deem advisable to assist
it with the performance of its duties.
(i) To exercise broad discretionary authority to determine Employees' and
Participants' eligibility for benefits as well as to construe the terms of
the Plan.
The Committee shall exercise all of its powers, duties and discretion
under the Plan in a uniform and nondiscriminatory manner.
13.05 MANNER OF ACTION. The decision of a majority of the members
appointed and qualified shall control.
13.06 AUTHORIZED REPRESENTATIVE. The Committee may authorize any one (1)
of its members, or its Secretary, to sign on its behalf any notices, directions,
applications, certificates, consents, approvals, waivers, letters or other
documents. The Committee must evidence this authority by an instrument signed by
all members and filed with the Trustee.
13.07 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting
Date of each Plan Year but within the time prescribed by ERISA and the
regulations under ERISA, the Committee will deliver to each Participant a
statement reflecting the condition of his Account Balance in the Trust as of
that date and such other information ERISA requires be furnished to the
participant or Beneficiary. A second such statement will be
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provided as soon as practicable. after the end of the second calendar quarter of
each year. No Participant, except a member of the Committee, shall have the
right to inspect the records reflecting the Account Balance of any other
Participant.
13.08 LOAN POLICY. This Section 13.08 specifically authorizes the
Trustee of the Plan to establish a Participant loan program and make loans on a
nondiscriminatory basis in accordance with this Plan and the loan policy
established by the Committee. The loan policy must be a written document and
must include the identity of the person authorized to administer the Participant
loan program, a procedure for applying for a loan, the criteria for approving or
denying a loan, the limitations, if any, on the types and amounts of loans
available, the procedure for determining a reasonable rate of interest, the
types of collateral which may secure a loan, and the events constituting default
and the steps the Plan will take to preserve Plan assets in the event of
default.
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ARTICLE XIV
FIDUCIARY DUTIES AND RESPONSIBILITIES
14.01 GENERAL FIDUCIARY STANDARD OF CONDUCT. Each Fiduciary of the Plan
shall discharge his duties hereunder solely in the interest of the Participants
and their Beneficiaries and for the exclusive purpose of providing benefits to
Participants and their Beneficiaries and defraying reasonable expenses of
administering the Plan. Each Fiduciary shall act with the care, skill, prudence
and diligence under the circumstances that a prudent man acting in a like
capacity and familiar with such matters would use in conducting an enterprise of
like character and with like aims, in accordance with the documents and
instruments governing this Plan, insofar as such documents and instruments are
consistent with this standard.
14.02 SERVICE IN MULTIPLE CAPACITIES. Any person or group of persons may
serve in more than one Fiduciary capacity with respect to this Plan.
14.03 LIMITATIONS ON FIDUCIARY LIABILITY. Nothing in this Plan shall be
construed to prevent any Fiduciary from receiving any benefit to which he may be
entitled as a Participant or Beneficiary under this Plan, so long as the benefit
is computed and paid on a basis which is consistent with the terms of this Plan
as applied to all other Participants and Beneficiaries. This Plan shall not be
interpreted to prevent any Fiduciary from receiving any reasonable compensation
for services rendered, or for the reimbursement of expenses properly and
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actually incurred in the performance of his duties with the Plan; except that no
person so serving who already receives full-time pay from the Employer shall
receive compensation from this Plan, except for reimbursement of expenses
properly and actually incurred.
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ARTICLE XV
TOP HEAVY RULES
15.01 MINIMUM EMPLOYER CONTRIBUTION. If this Plan becomes top heavy, the
Plan guarantees a minimum contribution of three percent (3%) of Compensation for
each Non-Key Employee who is a participant employed by the Employer on the
Accounting Date of the Plan Year. For purposes of determining whether the
minimum contribution is satisfied, Salary Reduction Contributions and matching
contributions shall be disregarded. The minimum contribution shall not be
forfeited under Sections 411(a) (3) (B) or (D) of the Code. The Plan satisfies
the guaranteed minimum contribution for the Non-Key Employee if the Non-Key
Employee's contribution rate is at least equal to the minimum contribution.
Notwithstanding the above, if the contribution rate for the Key Employee
with the highest contribution rate is less than three percent (3%), the
guaranteed minimum contribution for Non-Key Employees shall equal the highest
contribution rate received by a Key Employee (provided that the Employer does
not also sponsor a defined benefit plan which has designated this Plan to
provide the top heavy minimum). The contribution rate is the sum of Employer
contributions (not including Employer contributions to Social Security) and
forfeitures allocated to the participant's account for the Plan Year divided by
his Compensation for the Plan Year. To determine the contribution rate, the
Committee shall consider all qualified defined contribution plans maintained by
the Employer as a single plan.
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15.02 ADDITIONAL CONTRIBUTION. If the contribution rate for the Plan Year
with respect to a Non-Key Employee described in Section 15.01 is less than the
minimum contribution, the Employer will increase its contribution for such
Employee to the extent necessary so that his contribution rate for the Plan Year
will equal the guaranteed minimum contribution. The Committee shall allocate the
additional contribution to the Matching Contribution Account of the Non-Key
Employee for whom the Employer makes the contribution.
15.03 DETERMINATION OF TOP HEAVY STATUS. The Plan is top heavy for a Plan
Year if the top heavy ratio as of the Determination Date exceeds sixty percent
(60%). The top heavy ratio is a fraction, the numerator of which is the sum of
the present value of the Account Balances of all Key Employees as of the
Determination Date and distributions made within the five (5) Plan Year period
ending on the Determination Date, and the denominator of which is a similar sum
determined for all Employees. The Committee shall calculate the top heavy ratio
without regard to the Account Balance attributable to any Non-Key Employee who
was formerly a Key Employee. The Committee shall calculate the top heavy ratio,
including the extent to which it must take into account contributions not made
as of the Determination Date, distributions, rollovers and transfers, in
accordance with Section 416 of the Code and the regulations thereunder.
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If the Employer maintains other qualified plans (including a simplified
employee pension plan) this Plan is top heavy only if it is part of the Required
Aggregation Group, and the top heavy ratio for both the Required Aggregation
Group and the Permissive Aggregation Group exceeds sixty percent (60%). The
Committee will calculate the top heavy ratio in the same manner as required by
the first paragraph of this Section 15.03, taking into account all plans within
the aggregation group. The Committee shall calculate the present value of
accrued benefits and the other amounts the Committee must take into account
under defined benefit plans or simplified employee pension plans included within
the group in accordance with the terms of those plans, Section 416 of the Code
and the regulations thereunder. The Committee shall calculate the top heavy
ratio with reference td the Determination Dates that fall within the same
calendar year.
15.04 LIMITATION ON ALLOCATIONS. If, during any Limitation Year, the
Participant is a participant in both a defined contribution plan and a defined
benefit plan which are a part of a top heavy group, the Committee shall apply
the limitations of Article IV to such participant by substituting "1.0%" for
"1.25%" each place it appears in Section 4.06. This Section 15.04 shall not
apply if:
(a) The Plan would satisfy Section 15.01 if the guaranteed minimum
contribution was one percent (1%) greater than the guaranteed minimum
contribution the Committee otherwise would calculate; and
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(b) The top heavy ratio does not exceed ninety percent (90%).
15.05 DEFINITIONS. For purposes of applying the provisions of this
Article XV:
(a) "Key Employee" shall mean, as of any Determination Date, any Employee
or former Employee, or any Beneficiary thereof, who, at any time during
the Plan Year (which includes the Determination Date) or during the
preceding four Plan Years,
(i) is an officer of the Employer who has annual Compensation in
excess of 50% of the amount in effect under Section 415(b)(1)(A) of
the Code;
(ii) one of the ten Employees owning the largest interests in the
Employer with annual Compensation in excess of the dollar limit on
Annual Additions to a defined contribution plan under Section 415 of
the Code;
(iii) a more than five percent (5%) owner of the Employer; or
(iv) a more than one percent (1%) owner of the Employer who has
annual Compensation of more than $150,000.
The constructive ownership rules of Section 318 of the Code will apply to
determine ownership in the Employer. The Committee will make the
determination of who is a Key Employee in accordance with Section
416(i)(1) of the Code and the regulations thereunder.
(b) "Non-Key Employee" is an Employee who does not meet the definition of
Key Employee.
(c) "Required Aggregation Group" means: (1) Each qualified plan of the
Employer in which at least one Key Employee participates; and (2) Any
other qualified plan of the Employer which enables a plan described in (1)
to meet the requirements of Sections 401(a) (4) or 410 of the Code. Any
terminated plan that covered a Key
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Employee and was maintained within the five year period ending on the
Determination Date shall also be included in the Required Aggregation Group.
(d) "Permissive Aggregation Group" is the Required Aggregation Group plus any
other qualified plans maintained by the Employer, but only if such group would
satisfy in the aggregate the requirements of Sections 401(a)(4) and 410 of the
Code. The Committee shall determine which plan to take into account in
determining the Permissive Aggregation Group.
(e) "Determination Date" for any Plan Year is the Accounting Date of the
preceding Plan Year or, in the case of the first Plan Year of the Plan, the
Accounting Date of that Plan Year.
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ARTICLE XVI
EXCLUSIVE BENEFIT, AMENDMENT AND TERMINATION
16.01 EXCLUSIVE BENEFIT. The Employer shall have no beneficial interest in
any asset of the Trust and no part of any asset in the Trust shall ever revert
to or be repaid to an Employer, either directly or indirectly; nor prior to the
satisfaction of all liabilities with respect to the Participants and their
Beneficiaries under the Plan, shall any part of the corpus or income of the
Trust Fund, or any asset of the Trust, be used for, or diverted to, purposes
other than for the exclusive benefit of the participants or their Beneficiaries.
Notwithstanding the foregoing, if the Commissioner of Internal Revenue,
upon the Employer's timely request for initial approval of this Plan, determines
that the Trust created under the Plan is not a qualified trust exempt from
Federal income tax, then the Trustees, upon written notice from the Employer,
shall return the Employer's contributions and increments attributable to the
contributions to the Employer. The Trustees must make the return of the Employer
contribution under this Section 17.01 within one (1) year of a final disposition
of the Employer's request for initial approval of the Plan. The Plan and Trust
shall terminate upon the Trustees' return of the Employer's contributions.
The Employer contributes to this Plan on the condition that its
contribution is deductible under Section 404 of the Code. If the Employer's
contribution is disallowed as a
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deduction, or if the Employer's contribution is attributable to a mistake of
fact, the Trustee shall return to the Employer the amount contributed over, as
relevant, the amount that would have been contributed had no mistake of fact
occurred, or the amount of the deductible contribution. Earnings attributable to
the excess contribution may not be returned to the Employer, but losses
attributable thereto must reduce the amount returned. The excess contributions
must be returned within one year of the disallowance or mistake. Further, if the
amount returned to the Employer would cause any Participant's Account Balance to
be reduced to less than the balance which would have been in his Account had the
mistaken or nondeductible amount not been contributed, then the amount to be
returned to the Employer must be limited so as to avoid the reduction. The
Trustee may require the Employer to furnish it with whatever evidence the
Trustee deems necessary to enable the Trustee to confirm that the amount the
Employer has demanded be returned as properly returnable under the Code and
ERISA.
16.02 AMENDMENT BY COMPANY. The Company shall have the right at any time
and from time to time to amend this Agreement in any manner it deems necessary
or advisable including any amendment in order to qualify (or maintain
qualification of) this plan and the Trust created under it under the appropriate
provisions of the Code. An amendment to the plan's vesting shall not decrease
any participant's Nonforfeitable Account Balance as of the later of the date the
amendment is adopted or becomes effective. If the plan's vesting schedule is
amended, each
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Participant with three (3) or more Years of Service may elect to have the
vesting schedule applicable immediately prior to the amendment continue to
apply. The period during which such election may be made shall commence with the
date the amendment is adopted or deemed to be made and shall end on the latest
of:
(1) 60 days after the amendment is adopted;
(2) 60 days after the amendment becomes effective; or
(3) 60 days after the Participant is issued written notice of the
amendment by the Employer or Committee.
No amendment shall authorize or permit any of the Trust Fund (other than
the part required to pay taxes and administration expenses) to be used for or
diverted to purposes other than for the exclusive benefit of the participants or
their Beneficiaries or estates. No amendment shall cause or permit any portion
of the Trust Fund to revert to or become the property of the Employer; and the
Company shall not make any amendment which affects the rights, duties or
responsibilities of the Trustees or the Committee without the written consent of
the affected Trustee or the affected member of the Committee. No amendment shall
decrease a Participant's Account Balance or eliminate an optional form of
benefit to which the participant is entitled as a result of service prior to the
amendment. The Company shall make all amendments in writing. Each amendment
shall state the date to which it is either retroactively or prospectively
effective.
16.03 DISCONTINUANCE. The Company shall have the right, at any time, to
suspend or discontinue its contributions
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under the Plan, and to terminate, at any time, this Plan. Upon complete
discontinuance of contributions, the Account Balance of each affected
participant shall be one hundred (100%) percent Nonforfeitable.
16.04 FULL VESTING ON TERMINATION. Notwithstanding any other provision of
this Plan to the contrary, upon either full or partial. termination of the Plan,
an affected participant's right to his Account Balance shall be one hundred
percent (100%) Nonforfeitable. The Plan shall terminate upon the first to occur
of the following:
(a) The date terminated by action of the Employer provided the Employer
gives the Trustee thirty (30) days' prior notice of termination;
(b) The date the Employer shall be judicially declared bankrupt or
insolvent; or
(c) The dissolution, merger, consolidation or reorganization of the
Employer or the sale by the Employer of all or substantially all of its
assets, unless the successor or purchaser makes provision to continue the
Plan, in which event the successor or purchaser shall substitute itself as
the Employer under this Plan.
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16.05 MERGER. The Trustee shall not consent to, or be a party to, any
merger or consolidation with another plan, or to a transfer of assets or
liabilities to another plan, unless immediately after the merger, consolidation
or transfer, the surviving plan provides each Participant a benefit equal to or
greater than the benefit each Participant would have received had the Plan
terminated immediately before the merger or consolidation or transfer. The
Trustee possesses the specific authority to enter into merger agreements or
direct transfer of assets agreements with the trustees of other retirement plans
described in Section 401(a) of the Code and to accept the direct transfer of
plan assets, or to transfer plan assets, as a party to any such agreement.
16.06 TRUSTEE TRANSFERS. Effective as of January 1, 1993, a Participant or
Beneficiary may direct the Trustee to transfer any rollover eligible
distribution directly to an individual retirement account, a Section 403(b)
annuity plan or another qualified plan. Any such distribution must comply with
all applicable notice and spousal consent rules.
16.07 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan or any
modification or amendment to the Plan, or in the creation of any Salary
Reduction Contribution Account, or the payment of any benefit, shall give any
Participant the right to continued employment, or any legal or equitable right
against the Employer, an Employee of the Employer, the Trustee, or their
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agents or employees, except as expressly provided by the Plan, the Trust, ERISA
or the Code or by a separate agreement.
16.08 STATE LAW. New Jersey law shall determine all questions arising with
respect to the provisions of this Plan, except to the extent Federal statute
supersedes New Jersey law.
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Exhibit 10.7.1
Business Purpose Revolving
BANK [LOGO] ONE Promissory Note
================================================================================
Date November 1, 1996 Executed at Arlington Heights, Illinois
Amount: $25,000,000
For value received, receipt of which is hereby acknowledged, the undersigned
jointly and severally promises to pay to the order of BANK ONE, Chicago, NA
("BANK ONE") at its office located at Arlington Heights, Illinois or at such
other place as BANK ONE may designate from time to time, in lawful money of the
United States of America, the principal sum of Twenty Five Million and 00/100
DOLLARS or such lesser portion thereof as may have from time to time been
disbursed to, or for the benefit of the undersigned, and remaining unpaid
pursuant to the books or records of BANK ONE, together with interest on the
unpaid balance of principal advanced from the date(s) of disbursement until paid
in full as set forth below. The principal amount of this Note may be advanced,
repaid and readvanced in full or part during the term of this Note provided no
event of default or demand for payment exists hereunder.
------------------------------------
RATE OF INTEREST AND ITS CALCULATION
------------------------------------
|_| Fixed: _________ percent (___%) per annum
|X| Variable: Prior to maturity, unless the rate option set forth on attached
Addendum is elected. Prime Rate plus zero percent (0%) per annum
which will be adjusted to reflect the change in the Prime Rate:
|_| on the first day of each month following the month in which
the Prime Rate changes
|X| on the same day as the Prime Rate changes
After maturity, this Note shall bear interest at the Prime Rate plus 3.00%
|X| PRINCIPAL DUE AND PAYABLE ON THE MATURITY DATE, INTEREST DUE AND PAYABLE
ON THE MATURITY DATE OR PERIODICALLY:
|X| MATURITY DATE: October 1, 1998
|X| PRINCIPAL: The principal balance is immediately due and payable on
the MATURITY DATE
|X| INTEREST: Interest is due and payable:
|_| on the MATURITY DATE
|X| beginning December 1, 1996 and continuing on the same date
|X| Monthly |_| Quarterly thereafter, until the MATURITY DATE on
which date all outstanding accrued and unpaid interest shall
be immediately due and payable
|_| PRINCIPAL AND INTEREST DUE AND PAYABLE ON DEMAND. Principal and interest
are immediately due and payable on demand but until such time as demand
for payment is made, accrued interest thereon is due and payable as
hereinafter provided:
|_| INTEREST: Interest payment frequency:
|_| Date of first interest payment:
_________________________________ , and continuing
|_| Monthly |_| Quarterly thereafter, until demand is made
This Note |X| is issued in conjunction with loan agreement dated November 1,
1996, to which reference is made, and |X| is supported by other security
documents which are generally described therein or hereafter.
Renewal: If checked |X| this Note is a partial renewal of Notes dated November
10, 1995
As security for payment of the Obligations, the Obligor hereby pledges or
grants, or agrees to cause to be pledged or granted, to BANK ONE a continuing
security interest in the Collateral described below, or described in the
security agreement(s) referred to:
Business Loan Agreement of even date ("Loan Agreement")
----------
SIGNATURES
----------
Factory Card Outlet of America Ltd. Factory Card Outlet Corporation
By /s/ Glen Franchi By /s/ Charles R. Cumello
----------------------------- -----------------------------
ADDRESS: 745 Birginal Dr. ADDRESS: 745 Birginal Dr.
Bensenville, IL 60106 Bensenville, IL 60106
TELEPHONE NO.: (630) 238-0010 TELEPHONE NO.: (630) 238-0010
Additional terms and conditions of this Promissory Note
are contained on the reverse side.
FOR BANK USE:
CUSTOMER NO.:________ SIC CODE:_______ LOAN TYPE:______ COLLATERAL CODE:________
NOTE NO:_________ OFFICER NO:___________ TAX I.D. NO: ___________ CALL CODE:____
DISPOSITION OF PROCEEDS:________________________________________________________
________________________________________________________________________________
CREDIT TO ACCT. NO.:______________ DATE OF DISBURSEMENT:________________________
<PAGE>
ADDITIONAL TERMS AND CONDITIONS OF PROMISSORY NOTE
1. Interest shall be calculated on a 360 day year basis and shall be calculated
by dividing the actual number of days which elapsed during the period interest
accrued by a year of 360 days times the interest rate in effect.
2. After this Note becomes due and payable, whether at maturity, after demand,
by acceleration or otherwise, the interest rate on the outstanding principal sum
will be the rate stated above plus three percent (3%) per annum. BANK ONE shall
have the right to assess a late payment processing fee in the amount of 5% of
the scheduled payment in the event of a default in payment that remains uncured
for a period of at least 10 days.
3. Definitions: The following definitions apply to words and phrases used herein
(where not otherwise defined in this Note):
A. "Collateral" means (i) the property in which the Obligor has granted BANK ONE
a continuing security interest, which as been, is being or will be delivered,
pledged, assigned or otherwise tendered to BANK ONE as security for payment of
the Obligations, (ii) any and all other property of every kind or description of
the Obligor now or hereafter in the possession or control of Bank One, whether
as collateral security or for any other purpose, including without limitation,
all cash, deposits, securities, dividends, distributions, negotiable instruments
and documents, and (iii) all books and records relating to the Collateral and
all insurance policies insuring any of the Collateral. "Collateral" also
includes any Guaranty which has been, is being or will be given to BANK ONE and
all property in which any guarantor has granted BANK ONE a security interest as
security for the payment of the Obligations.
B. "Guarantor" means any endorser, guarantor, accommodation party, pledgor or
surety of any of the Obligations.
C. "Obligations" means all liabilities, obligations and indebtedness of any of
the Obligor to BANK ONE for payment of any and all amounts due under this Note
and of any other liabilities, obligations, indebtedness, or contractual duty of
every kind and nature of the Obligor or any of them or any Guarantor of this
Note to BANK ONE, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, primary or secondary, joint or several,
heretofore, now or hereafter existing, due or to become due and howsoever owned,
held or acquired, whether existing or arising through discount, overdraft,
purchase, direct loan, as collateral, by operation of law or otherwise,
including attorneys' and paralegals' fees in connection with perfecting BANK
ONE's security interests and right hereunder, advising BANK ONE or drafting any
documents at any time. Liabilities includes all of the liabilities, obligations
and indebtedness or contractural duties of partnerships to BANK ONE created,
arising, existing or assumed while the Obligor or any of them or any guarantor
of this Note may have been or may be a member of those partnerships.
D. "Obligor" or "Undersigned" means each party signing this Note and the use of
either term in the singular form shall include the plural form, unless otherwise
designated. Each such Obligor shall be jointly and severally obligated
hereunder. This Note shall be binding upon each Obligor and upon their
respective heirs, estates, legal representatives, successors and assigns and
shall inure to the benefit of BANK ONE and the successors and assigns of BANK
ONE.
E. "Prime Rate" means such rate as BANK ONE determines to be its prime rate.
Prime Rate is not necessarily the lowest rate charged by BANK ONE. The Prime
Rate will fluctuate from time to time and the effective date of any change in
the Prime Rate shall be the day of such change established by BANK ONE; BANK ONE
is not obligated to give notice of such fluctuations.
4. At the option of BANK ONE, and without in any way limiting its right to
demand payment in full of this Note if it is due and payable on demand, all
Obligations shall become immediately due and payable without prior notice or
demand upon the occurrence of any of the following events of default: (a)
failure of Obligor to make payment when due of the principal or interest of this
Note and/or any of the Obligations; (b) failure of Obligor to furnish
satisfactorily collateral or additional collateral, as the case may be, as
herein agreed; (c) failure of Obligor to comply with any of the terms and
conditions of this Note and/or any of the Obligations or contained in any
security agreement or instrument securing this Note and/or any of the
Obligations; (d) death of Obligor or Guarantor; (e) dissolution of, termination
of existence of, insolvency of, business failure of, appointment of a receiver
for, or assignment for the benefit of creditors or a commencement of any
proceeding under any bankruptcy, reorganization, arrangement or liquidation law
by or against Obligor or any property of Obligor; (f) failure of Obligor to pay
when due any premium on any policy of life or other insurance pledged hereunder,
or held in connection with any Collateral; (g) BANK ONE deems itself insecure
and in good faith believes that the prospect of payment or performance is
impaired; (h) the institution of any garnishment proceedings by attachment, levy
or otherwise against any deposit balance of Collateral maintained or deposited
with BANK ONE by Obligor; (i) failure of Obligor to either furnish BANK ONE
within thirty (30) days after written request by BANK ONE, current financial
statements, including income tax returns, in form satisfactory to BANK ONE or to
permit inspection of any of Obligor's books or records; (j) any representation,
warranty, statement, report, or application made, or furnished, by Obligor
proving to have been false, erroneous or misleading, in any material respect at
the time of the making thereof; (k) the issuance of any tax levy or lien against
Obligor or Obligor's failure to pay, withhold, collect or remit any tax when
assessed or due; (l) sale or transfer of Collateral out of Obligor's ordinary
course of business; (m) a bulk sale of Obligor's assets; or (n) suspension or
liquidation of Obligor's business.
5. No delay or omission on the part of BANK ONE in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note. A waiver on any one occasion shall not be construed as a bar to or
waiver of any such right and/or remedy on any future occasion.
6. Obligor waives presentment, demand, notice, protest and all other demands and
notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note; and assets to any extension or postponement of the
time of payment, modification or waiver of any payment amount or any other
indulgence, and/or to the addition or release of any other party or person
liable hereon or of any Collateral herefore.
7. This Note shall be governed by and construed in accordance with the laws of
the State of Illinois in all respects.
8. Obligor will pay on demand all costs of collection and attorneys' fees
incurred or paid by BANK ONE in enforcing this Note when the same have become
due, whether by acceleration or otherwise, if allowable by law.
9. BANK ONE shall have the right to charge interest on the amount of any
interest payment not paid as provided in this Note at the same rate as
applicable to the principal sum.
10. Payments shall be allocated between principal, interest and fees, if any, in
the discretion of BANK ONE, and, when applicable, any prepayments will be
applied to principal in the inverse order of scheduled maturity.
11. All rights, powers, privileges and immunities herein granted to BANK ONE
shall extend to its successors and assigns and any other legal holder of this
Note. All rights, powers, privileges and immunities of Obligor hereunder may not
in any way be assigned, transferred or sold. BANK ONE at any time is authorized
to correct patent errors and fill in any blanks herein.
12. Obligor acknowledges that this Note evidences a loan made primarily for
business, commercial or agricultural purposes and not primarily for personal,
family or household purposes.
13. When any Obligation becomes due, whether by acceleration or otherwise, and
at any time thereafter, BANK ONE shall have all of the remedies provided in the
security documents including the remedies of a secured party under the Uniform
Commercial Code. Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market, BANK
ONE will give Obligor reasonable notice of the time and place of any public sale
thereof or of the time after which any private sale or other intended
disposition is to be made. The requirement of reasonable notice shall be met if
such notice is mailed, postage prepaid, to the last known address of Obligor at
least ten (10) days before the time of the sale or disposition.
14. When any Obligation becomes due, whether by acceleration or otherwise, and
at any time thereafter, BANK ONE is empowered to collect, sell, assign,
transfer, set over and deliver the whole or any part of any Collateral through
any stock exchange, broker or agent or at any public or private sale, either for
cash or credit or for future delivery, without assumption of credit risk, and at
any such sale BANK ONE may become the purchaser of any part of the Collateral
discharged from right of redemption. Upon any such sale, after deducting all
costs and expenses of every kind related to retaking, storing and selling the
Collateral, the residue of the proceeds thereof may be applied as BANK ONE may
determine toward the payment of any or all of the Obligations, whether due or
not, returning the overage, if any, to Obligor and Obligor shall be and remain
liable to BANK ONE for every and any deficiency after application of such
proceeds.
15. Right is expressly granted to BANK ONE at its option to transfer at any time
to itself or to its nominee any securities pledged hereunder, to receive and
retain the income thereon, all splits, substitutions and divisions, and hold the
same as security herefore, or apply it on the principal or interest which has
become due on any Obligation, whether by acceleration or otherwise, and in the
case of voting shares or interests pledged to vote the same when BANK ONE deems
the exercise of such power necessary to maintain or protect such Collateral.
16. When any Obligation becomes due, whether by acceleration or otherwise, and
at any time thereafter, BANK ONE may, at its option, demand, sue for, collect,
or make any compromise or settlement it deems desirable with reference to the
Collateral. BANK ONE shall not be bound to take any steps necessary to preserve
any rights in the Collateral against prior parties, inasmuch as Obligor agrees
to assume such responsibility. BANK ONE shall have no duty with respect to
collection or protection of the Collateral or of any income on the Collateral as
to the preservation of any rights pertaining to the Collateral beyond safe
custody.
17. Obligor will deliver to BANK ONE satisfactory collateral or additional
collateral, as the case may be, should BANK ONE so require.
18. Obligor agrees that BANK ONE may upon default acceleration or when the
Obligations otherwise become due take possession of any Collateral without prior
judicial hearing or process, hereby expressly waives any right to such judicial
hearing process, and hereby assents to any substitution, exchange or release of
Collateral.
19. When any Obligation becomes due, by acceleration or otherwise, BANK ONE
shall have the right, without notice to Obligor, any party claiming under
Obligor, or any other party, such notice being hereby expressly waived, and
without regard to the adequacy of value of the Collateral or the solvency or
insolvency of Obligor to the appointment of a receiver by a court of competent
jurisdiction chosen solely by BANK ONE, upon application at any time, whether
prior to or after a judgment has been obtained against Obligor, to take
possession of the assets and/or business of Obligor together with its books and
records, to maintain or to liquidate said assets and/or business, to collect the
proceeds of the Collateral and apply the net proceeds to any Obligation. Obligor
consents to jurisdiction and venue for the appointment of such receiver by such
court and agrees that any receiver so appointed may take possession of the
assets and/or business of the Obligor, together with the Collateral in any other
jurisdiction in which the Collateral may be located.
20. Obligor authorizes BANK ONE to exchange BANK ONE deposit, credit and
borrowing information about Obligor with third parties.
21. Obligor jointly and severally hereby authorized any attorney at law to
appear in any action on this Note at any time after the same becomes due,
whether by acceleration or otherwise, in any court of record in or of the State
of Illinois, or elsewhere, and to waive the issuing and service of process
against any or all of said parties, enter an appearance and to confess judgment
is in favor of BANK ONE against any or all of said parties for the amount that
may be due, together with costs of suit, and to release all errors and waive all
rights of appeal and stay of execution from the judgment rendered. After the
judgment is entered against one or more of said parties, the powers herein
conferred may be exercised as to one or more of the others. The death of Obligor
shall not impair the authority herein granted as to the survivor or survivors of
Obligor.
22. Obligor hereby expressly waives any right to trial by jury of any claim,
demand, action or cause of action arising under this Note or any other
instrument, document or agreement executed or delivered in connection herewith.
<PAGE>
ADDENDUM
Business Purpose Revolving Promissory Note
November 1, 1996
1. Continuation and Conversion Procedure. So long as no default has occurred
under this Note or any other agreement between Obligor and Bank One, Obligor may
elect from time to time, subject to the terms and conditions of this Note, to
convert all or a portion of the outstanding Prime Rate Loans to LIBOR Rate Loans
(in each case, in a minimum amount of $1,000,000 and in even increments of
$250,000) or to convert all or a portion of a LIBOR Rate Loan to a Reference
Rate Loan.
A Prime Rate Loan shall continue as a Prime Rate Loan unless and until
converted to a LIBOR Rate Loan. At the end of the applicable Interest Period for
a LIBOR Rate Loan, such LIBOR Rate Loan shall automatically be converted into a
Reference Rate Loan unless Obligor shall have given Bank One a
Conversion/Continuation Notice (defined below) requesting that, at the end of
such Interest Period, all or a portion of such LIBOR Rate Loan be continued as a
LIBOR Rate Loan.
Obligor shall give Bank One irrevocable notice (a "Conversion/Continuation
Notice") of each conversion of a Reference Rate Loan to a LIBOR Rate Loan or
continuation of a LIBOR Rate Loan not later than 11 a.m., Chicago time, two
Business Days prior to the date of the requested conversion or continuation,
specifying (i) the requested date (which shall be a Business Day) of such
conversion or continuation, (ii) the amount and type of loan to be converted or
continued and (iii) the amount and type of the loan into which such loan is to
be converted or continued, and the duration of the Interest Period applicable
thereto. Each such request by Obligor shall be irrevocable.
2. Prepayment. Obligor may prepay any Reference Rate Loan, at any time and
without payment of premium or penalty. Obligor shall not prepay any LIBOR Rate
Loan prior to expiration of the applicable Interest Period.
3. Definitions.
"Adjusted LIBOR Rate" means with respect to an Interest Period for a LIBOR
Rate Loan, a rate per annum (rounded upward, if necessary, to the nearest 1/16
of 1%) determined pursuant to the following formula: Adjusted LIBOR Rate =
[LIBOR Rate + (1 - LIBOR Reserve Requirement)] + LIBOR Spread.
"Business Day" means a day (other than a Saturday or Sunday) on which
banks are open for business in Chicago, Illinois and on which dealings in
Dollars are carried on in the London interbank market.
"Interest Period" shall mean with respect to any LIBOR Rate Loan the
period commencing on the creation dale with respect to such LIBOR Rate Loan and
ending 30 or 90 days thereafter, as selected by Obligor in the notice to Bank
One as provided herein; provided, however, that no Interest Period may be
selected after the Bank One has demanded payment of this Note or extend beyond
the maturity date hereof.
"LIBOR Rate" shall mean, for a LIBOR Rate Loan for the applicable Interest
Period, the rate of interest per annum as determined by Bank One to be the rate
at which deposits of United States Dollars in immediately available and freely
transferable funds are offered at 11:00 a.m. London time two Business Days prior
to the commencement of such Interest Period by major banks in the London
interbank market, for a period equal to such Interest Period and in an amount
equal to the principal amount requested by Obligor. Each determination of a
LIBOR Rate made by Bank One shall be final and conclusive, absent manifest
error.
"LIBOR Rate Loan" means any portion of the outstanding balance of this
Note bearing interest at the Adjusted LIBOR Rate.
"LIBOR Reserve Requirement" means, with respect to a LIBOR Rate Loan for
the applicable Interest Period, the percentage (expressed as a decimal) equal to
the maximum aggregate reserve requirements (including without limitation, any
marginal, special, emergency or supplemental reserves) established by the Board
of Governors of the Federal Reserve System for "eurocurrency liabilities" (as
defined in Regulation D of such Board) or for other liabilities which include
deposits of the type used in determining the LIBOR Rate, having a term
approximately equal to the applicable Interest Period.
"LIBOR Spread" means 2.75%, except that it shall be 2.25% effective on the
first day of the month following receipt by Bank One of Obligor's monthly
financial statements which demonstrate that the ratio of Debt to Tangible Net
Worth plus Subordinated Debt, as defined in Section 6.4 of the Loan Agreement,
is less than 1.00:1 and continuing until such ratio is no longer less than
1.00:1, at which time it shall be 2.75%.
"Prime Rate Loan" shall mean any portion of the outstanding balance of
this Note bearing interest at or by reference to the Prime Rate.
4. Additional LIBOR Rate Loan Provisions. If Bank One determines that the making
or maintaining of a LIBOR Rate Loan would violate any applicable law, rule,
regulation or directive, whether or not having the force of law, then the
obligation of Bank One to make, continue, maintain or convert any LIBOR Rate
Loan shall be suspended until Bank One notifies Obligor that the circumstances
causing such suspension no longer exist. During any such period, all LIBOR Rate
Loans shall automatically convert into Reference Rate Loans at the end of the
applicable Interest Period or sooner if required by law.
If Bank One is unable to determine the LIBOR Rate in respect of a
requested Interest Period or Bank One is unable to obtain deposits of Dollars in
the London interbank market in the applicable amounts and for the requested
Interest Period, then, upon notice from Bank One to Obligor, the obligation of
Bank One to make any LIBOR Rate Loan, or to convert any Reference Rate Loan into
a LIBOR Rate Loan, shall be suspended until Bank One notifies Obligor that the
circumstances causing such suspension no longer exist.
If Bank One shall incur any loss or expense (including any loss or expense
incurred by reason of a liquidation or redeployment of deposits or other funds
acquired by Bank One to make, continue or maintain any portion of a LIBOR Rate
Loan or to convert any portion of a Reference Rate Loan into a LIBOR Rate Loan)
as a result of: (i) any conversion or repayment or prepayment of the principal
amount of LIBOR Rate Loan on a date other than the last day of the Interest
Period applicable thereto (whether as a result of acceleration, prepayment or
otherwise); (ii) any loan not being made as a LIBOR Rate Loan in accordance with
the request therefor or (iii) any loan not being converted into a LIBOR Rate
Loan, or any LIBOR Rate Loan not being continued as a LIBOR Rate Loan, in
accordance with the Continuation/Conversion Notice (as hereinafter defined)
therefor, then, upon written notice from Bank One to Obligor. Obligor shall,
within five days of its receipt thereof, pay to Bank One such amount as will (in
a reasonable determination of Bank One) reimburse Bank One for such loss or
expense. Such written notice (which shall include calculations in reasonable
detail) shall, in the absence of manifest error, be conclusive and binding on
Obligor.
<PAGE>
Exhibit 10.7.2
[LOGO] BANK 1 ONE
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$1,500,000.00 05-01-1995 06-30-1998 208
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
Borrower: FACTORY CARD OUTLET OF AMERICA, LTD., Lender: Bank One, Chicago, NA
AN ILLINOIS CORPORATION (TIN: ) 800 Davis Street
745 BIRGINAL DRIVE Evanston, IL 60201
BENSENVILLE, IL 60106
================================================================================
Principal Amount: $1,500,000.00
Date of Note: May 1, 1995
PROMISE TO PAY. For value received, the undersigned and if more than one, each
of them, jointly and severally ("Borrower") promises to pay to Bank One,
Chicago, NA ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million Five Hundred Thousand & 00/100
Dollars ($1,500,000.00), together with interest on the unpaid principal balance
from the date advanced until paid in full.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
2 consecutive monthly interest payments, beginning June 1, 1995, with
interest calculated on the unpaid principal balances at an interest rate
of 0.00 percentage points over the Index described below; and 36
consecutive monthly principal and interest payments to be determined as
provided on page 2 hereof, beginning July 31, 1995, with interest
calculated on the unpaid principal balances at an interest rate to be
determined as provided on page 2 hereof. Borrower's final payment will be
due on June 30, 1998. The final payment will be for all principal and
accrued interest not yet paid, together with any other unpaid amounts
under this Note.
Borrower will pay Lender at Lender's address shown above or at such other place
as Lender may designate in writing. If any payment of principal of or interest
on this Note shall become due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and any such extension of time
shall be included in computing interest in connection with such payment. As used
herein, the term "Business Day" shall mean any day other than a Saturday, Sunday
or any other day on which national banking associations are authorized to be
closed. Unless otherwise agreed or required by applicable law, payments will be
applied first to accrued unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs and late charges. The books and records of
Lender shall be prima facie evidence of all outstanding principal of and accrued
but unpaid interest on this Note. If this Note is executed in connection with a
loan agreement, this Note is subject to the terms and provisions thereof.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Bank One, Chicago, NA
Prime Rate (the "Index"). Bank One, Chicago, NA Prime Rate means such rate as
Lender determines to be its Prime Rate. The Prime Rate is not necessarily the
lowest rate charged by Lender. The Prime Rate will fluctuate from time to time
and the effective date of any change in the Prime Rate shall be the day of such
change established by Lender; Lender is not obligated to give notice of such
fluctuation. Lender will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each day. The
Index currently is 9.000% per annum. The interest rate or rates to be applied to
the unpaid principal balance of this Note will be the rate or rates set forth
above in the "Payment" section. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.
Whenever increases occur in the interest rate, Lender, at its option, may do one
or more of the following: (a) increase Borrower's payments to ensure Borrower's
loan will pay off by its original final maturity date, (b) increase Borrower's
payments to cover accruing interest, (c) increase the number of Borrower's
payments, and (d) continue Borrower's payments at the same amount and increase
Borrower's final payment.
PREPAYMENT PENALTY. Upon prepayment of this Note, Lender is entitled to the
following prepayment penalty: A PREPAYMENT PENALTY OF 2% WILL BE DUE IF THIS
NOTE IS PAID IN FULL WITHIN THE FIRST YEAR FOLLOWING THE DATE HEREOF AND A 1%
PENALTY WILL BE DUE IF THIS NOTE IS PAID IN FULL DURING THE SECOND YEAR FROM THE
DATE HEREOF. Except for the foregoing, Borrower may pay all or a portion of the
principal amount owed hereunder earlier than it is due. All prepayments shall be
applied to the indebtedness owing hereunder in such order and manner as Lender
may from time to time determine in its sole discretion.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment of principal or interest when due under this
Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b)
failure of Borrower or any other party to comply with or perform any term,
obligation, covenant or condition contained in this Note or in any other
promissory note, credit agreement, loan agreement, guaranty, security agreement,
mortgage, deed of trust or any other instrument, agreement or document, whether
now or hereafter existing, executed in connection with this Note (collectively,
the "Related Documents"); (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sale agreement, or any other agreement,
in favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents; (d) Any
representation or statement made or furnished to Lender herein, in any of the
Related Documents or in connection with any of the foregoing is false or
misleading in any material respect; (e) Borrower or any other party liable for
the payment of this Note, whether as maker, endorser, guarantor, surety or
otherwise, becomes insolvent or bankrupt, has a receiver appointed for any part
of its property, makes an assignment for the benefit of its creditors, or any
proceeding is commenced either by any such party or against it under any
bankruptcy or insolvency laws; (f) the occurrence of any Event of Default
specified in any of the other Related Documents; (g) the liquidation,
termination, dissolution, death or legal incapacity of Borrower or any other
party liable for the payment of this Note, whether as maker, endorser,
guarantor, surety, or otherwise; or (h) Lender deems itself insecure by in good
faith believing the prospect of payment or performance hereunder or under any of
the Related Documents is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. After this Note becomes due and
payable, whether by maturity, after demand, by acceleration or otherwise,
Lender, at its option, may also, if permitted under applicable law, do one or
more of the following: (a)
<PAGE>
05-01-1995 PROMISSORY NOTE Page 2
Loan No (Continued)
================================================================================
increase the variable interest rate on this Note by 3.000 percentage points, (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate), (c) refuse to advance any additional amounts under this Note, (d)
foreclose all liens securing payments hereof, or (e) pursue any other rights,
remedies and recourses available to the Lender, including without limitation,
any such rights, remedies or recourses under the Related Documents, at law or in
equity. The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
This Note has been delivered to Lender and is performable in Cook County,
Illinois. Courts within the State of Illinois have jurisdiction over any dispute
arising under or pertaining to this Note and venue for such dispute shall be in
Cook County, Illinois. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS AND APPLICABLE FEDERAL LAWS.
JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT
OR OTHERWISE) BETWEEN BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED
TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL
INDUCEMENT TO LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law to appear in any court of record and to confess judgment against
Borrower for the unpaid amount of this Note as evidenced by an affidavit signed
by an officer of Lender setting forth the amount then due, plus attorneys fees
as provided in this Note, plus costs of suit, and to release all errors, and
waive all rights of appeal. If a copy of this Note, verified by an affidavit,
shall have been filed in the proceeding, it will not be necessary to file the
original as a warrant of attorney. Borrower waives the right to any stay of
execution and the benefit of all exemption laws now or hereafter in effect. No
single exercise of the foregoing warrant and power to confess judgment will be
deemed to exhaust the power, whether or not any such exercise shall be held by
any court to be invalid, voidable, or void; but the power will continue
undiminished and may be exercised from time to time as Lender may elect until
all amounts owing on this Note have been paid in full.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts. Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on this Note against any and all such
accounts.
COLLATERAL. This Note is secured by COMMERCIAL SECURITY AGREEMENT OF EVEN DATE;
COMMERCIAL GUARANTY OF EVEN DATE EXECUTED BY FCOA ACQUISITION CORPORATION, A
DELAWARE CORPORATION; SECURITY AGREEMENT - ACCOUNTS, INVENTORY AND EQUIPMENT
DATED SEPTEMBER 21, 1990; LETTER AGREEMENT DATED SEPTEMBER 20, 1994; BUSINESS
LOAN AGREEMENT DATED SEPTEMBER 30, 1994 AS MODIFIED BY AMENDMENT DATED MAY 1,
1995; CROSS-COLLATERAL/CROSS-DEFAULT AGREEMENT OF EVEN DATE.
POSSESSORY COLLATERAL. In addition to any other collateral that may secure this
Note, Borrower hereby assigns and grants a security interest in any and all
other property of Borrower of every kind or description now or hereafter in
possession or control of Lender, whether as collateral security or any other
purpose, including, without limitation, all cash, deposits, securities,
dividends, distributions, negotiable instruments and documents.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note, any of the Related Documents or otherwise. including
without limitation contract and tort disputes, shall be arbitrated pursuant to
the Rules of the American Arbitration Association, upon request of either party.
No act to take or dispose of any collateral securing this Note shall constitute
a waiver of this arbitration agreement or be prohibited by this arbitration
agreement. This includes, without limitation, obtaining injunctive relief or a
temporary restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to Article
9 of the Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness of any act, or exercise of any
right, concerning any collateral securing this Note, including any claim to
rescind, reform, or otherwise modify any agreement relating to the collateral
securing this Note, shall also be arbitrated, provided however that no
arbitrator shall have the right or the power to enjoin or restrain any act of
any party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Note shell preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shell be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
INTEREST RATE CONVERSION. ON JULY 1, 1995, THE INTEREST RATE APPLICABLE TO SUMS
DUE UNDER THIS PROMISSORY NOTE SHALL BE ADJUSTED TO 225 BASIS POINTS IN EXCESS
OF THE 18-MONTH TREASURY BILL RATE THEN IN EFFECT AS QUOTED IN THE "MONEY RATES
SECTION" OF THE WALL STREET JOURNAL.
ADDITIONAL PROVISIONS REGARDING PAYMENTS. CONCURRENTLY WITH BOTH OF THE INTEREST
RATE CONVERSIONS DESCRIBED HEREIN, SUMS DUE HEREUNDER SHALL BE PAYABLE IN
MONTHLY INSTALLMENTS OF PRINCIPAL AND INTEREST BASED UPON A FULL AMORTIZATION,
COMMENCING JULY 31, 1995.
GENERAL PROVISIONS. Lender may delay or forego enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
Borrower agrees to furnish Lender, within thirty (30) days after written request
by Lender, current financial statements of Borrower (including, without
limitation, income tax returns), in form and detail satisfactory to Lender, and
to permit inspection of Borrower's books and records by Lender. Borrower also
covenants and agrees not to sell or otherwise transfer any collateral for this
Note except in the ordinary course of Borrower's business.
<PAGE>
05-01-1995 PROMISSORY NOTE Page 3
Loan No (Continued)
================================================================================
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
FACTORY CARD OUTLET OF AMERICA, LTD., AN ILLINOIS CORPORATION
By: /s/ J. BAYARD KELLY
-----------------------------
J. BAYARD KELLY, CEO
<PAGE>
Exhibit 10.7.3
BANK [LOGO] ONE Business Loan Agreement
================================================================================
Agreement by and between Bank One, Chicago ("Bank One"), located at Arlington
Heights, Illinois and Factory Card Outlet of America. Ltd. and Factory Card
Outlet Corporation ("Borrower"), located at 745 Birginal Dr., Bensenville,
Illinois 60106.
Borrower has requested certain extension(s) of credit provided by Bank One,
evidenced by the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Business Purpose
(a) Revolving Promissory Note $25,000,000 November 1, 1996
------------------------- ----------- ----------------- ---------------------
Instrument Amount Date (Obligor) (Guarantor)
Borrower
--------------------- -------------------------- ---------------------
Obligor Obligor (Obligor) (Guarantor)
(b) Promissory Note $1,500,000 May 1, 1995
------------------------- ----------- ----------------- ---------------------
Instrument Amount Date (Obligor) (Guarantor)
--------------------- -------------------------- ---------------------
Obligor Obligor (Obligor) (Guarantor)
(c)
------------------------- ----------- ----------------- ---------------------
Instrument Amount Date (Obligor) (Guarantor)
--------------------- -------------------------- ---------------------
Obligor Obligor (Guarantor)
Instrument Amount
</TABLE>
and any and all renewals, extensions or substitutions therefor ("Obligations").
In consideration of the mutual promises set forth below and the extension(s) of
credit as described above and subject to Borrower's satisfactory fulfillment of
all conditions incident to the borrowing(s), Bank One and Borrower agree as
follows:
ARTICLE I - DEFINITIONS
The following terms shall have the following meanings in this Agreement or in
any document made or delivered pursuant to or in conjunction with this
Agreement:
1.1 All computations and determinations as to accounting or financial matters
shall be made in accordance with generally accepted accounting principles
consistently applied ("GAAP"), and all accounting or financial terms shall have
the meanings ascribed to such terms by GAAP.
1.2 "Indebtedness" shall mean:
(a) All indebtedness and liabilities of whatsoever kind, nature and
description owed to Bank One by Borrower (including Liabilities of Borrower as
defined in any note now or hereafter executed by Borrower in favor of Bank One),
whether direct or indirect, absolute or contingent, due or to become due or
whether now existing or hereafter arising, and howsoever evidenced or acquired,
and whether joint and several;
(b) All future advances which Bank One at any time may, but shall not be
required to, make for the protection or preservation of Bank One's rights and
interests arising hereunder, including, without limitation, advances for taxes,
levies, assessments, insurance, and reasonable attorneys' fees, if allowable by
law; and
(c) All costs and expenses incurred by Bank One in the protection and
preparation for sale of any of the collateral hereinafter described in Section
3.1 in any other security document including, without limitation, attorneys'
fees, if allowable by law, and court costs.
1.3 "Obligation" shall mean the above referenced extension(s) of credit
including any Promissory Note, Guaranty, Letter of Credit or other instrument of
Borrower evidencing any loan, advance, credit or extension or renewal thereof
made or committed by Bank One to Borrower under this Agreement.
1.4 "Person" shall mean and include an individual, partnership, corporation,
trust, unincorporated association or organization, government or any department
or agency thereof.
1.5 "Related Person" shall include, but shall not be confined to, any Person
related to Borrower by common control or ownership.
1.6 "Subordinated Debt" shall mean indebtedness of Borrower which is
subordinated to all indebtedness of Borrower to Bank One under the terms and
conditions approved in writing by Bank One.
1.7 The aforestated definitions, and all other definitions which may be set
forth herein, shall be applicable to the singular and plurals of said defined
term.
ARTICLE II - REPRESENTATIVES AND WARRANTIES
Borrower represents and warrants that:
2.1 If applicable, it is a duly organized, legally existing corporation in good
standing under the laws of the State of Illinois, is qualified to do business in
and is in good standing under the laws of any other state in which it conducts
its business.
2.2 It has the power and is duly authorized to enter into this Agreement and to
execute and deliver to Bank One, now and from time to time hereafter, additional
instruments, resolutions, agreements and other instruments or documents relating
to the Obligation owed to Bank One. It has, by proper action, authorized and
empowered those persons whose signatures appear in this Agreement, and any
instruments, documents and exhibits that have been delivered in connection
herewith to execute the same for and on its behalf.
2.3 The execution by it of this Agreement or any other agreements, instruments,
or documents which may, from time to time hereafter, be executed in respect
hereto and delivered to Bank One, shall not constitute a breach of any
provisions contained in its articles of incorporation or bylaws, or if
promulgated pursuant thereto, and that the performance by it of its obligations
hereunder or any agreements executed by it and delivered hereunder shall not
constitute an event of default under any other agreement to which it is now a
party.
2.4 All financial statements and information relating to it which have been or
may hereafter be delivered by it, its agents or accountants to Bank One are true
and correct and have been prepared in accordance with GAAP and that there have
been no material adverse changes in its financial or business condition or
operations since the submission of any financial information to Bank One, and no
material adverse changes in its financial or business condition or operations
are imminent or threatened.
2.5 All of its Federal, State and other tax returns and reports, including
reports to any governmental authority, for the proper maintenance and operation
of its properties, assets and business, as may be required by law to be filed or
paid, have been filed, and all Federal, State and other taxes, assessments, fees
and other governmental charges (other than those presently payable, without
penalty) imposed upon it or its properties or assets, which are due and payable,
have been fully paid unless being contested by it in the ordinary course of
business for which it has provided adequate reserves.
2.6 There is no litigation or, legal or administrative proceedings,
investigations or other action of any nature, pending or, to its knowledge,
threatened against or affecting it, which have not been disclosed to Bank One
and involve the possibility of any judgment or liability not covered by
insurance which may materially or adversely affect any of its properties or
assets or its right to carry on its business as now conducted.
2.7 It has good, valid and marketable title to all of its property and assets
free of any adverse lien, security interest or encumbrance, except liens,
security interests, pledges and encumbrances disclosed to Bank One by Borrower
in writing prior to the date hereof.
2.8 All of the funds loaned to it pursuant to this Agreement have been or will
be used exclusively in its normal business operation, will not be diverted to or
used in any other manner, and will not be used for the purchasing or carrying of
any "Margin Stock" as defined in regulations promulgated by the Federal Reserve
Board or the Securities and Exchange Commission.
2.9 It possesses and will continue to possess all permits, licenses, trademarks,
patents and rights thereto to conduct its business and that its business does
not conflict or violate any valid rights of others with respect to the
foregoing.
<PAGE>
2.10 If applicable, it is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof ("ERISA"). Neither a Reportable Event nor a Prohibited Transaction, as
defined per ERISA, has occurred and is continuing with respect to any Plan, nor
has there been a notice of intent to terminate a Plan or appoint a trustee to
administrate a Plan.
2.11 It is in material compliance with all Federal, State and local laws,
ordinances, regulations, rulings and interpretations relating to industrial
hygiene, public health or safety, environmental conditions, the protection of
the environment, the release, discharge, emission or disposal to air, water,
land or ground water, the withdrawal or use of ground water or the use,
handling, disposal, treatment, storage or management of or exposure to Hazardous
Materials ("Hazardous Materials Laws"), the violation of which would have a
material effect on its business, its financial condition or its assets. The term
"Hazardous Materials" means any flammable materials, radioactive materials,
pollutants, toxic substances, hazardous water, hazardous materials, hazardous
substances, polychlorinated biphenyls, asbestos, urea formaldehyde, petroleum
(including its derivatives, by-products or other hydrocarbons) or related
materials or other controlled, prohibited or regulated substances or materials,
including, without limitation, any substances defined or listed as or included
in the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "pollutants" or "toxic substances" under any Hazardous Materials
Laws. It has not received any written or oral communication or notice from any
judicial or governmental entity nor it is aware of any investigation by any
agency for any violation of any Hazardous Materials Law,
2.12 Details of all litigation, legal or administrative proceedings,
investigation or other action of similar nature, pending or threatened against
it, at any time during the term of this Agreement, which in part or in whole may
or will render any of these Representations and Warranties no longer true,
accurate and correct in each and every respect, will be brought to the attention
of Bank One, in writing, within fifteen (15) days from the date Borrower
acquires knowledge of same.
ARTICLE III - SECURITY
3.1 As security for repayment of the Indebtedness, regardless of whether the
principal sum evidenced by an Obligation is reduced to zero and thereafter
increased/decreased an unlimited number of times, Borrower hereby grants to Bank
One or has previously caused to be granted to Bank One a security interest
and/or lien in or on the following property under separate instrument(s):
|X| Accounts, general intangibles, chattel paper, instruments, and other
forms of obligations and receivables
|X| Inventory, merchandise, raw materials, work in process and supplies
|X| Goods, equipment, machinery, furnishings and other personal property
___ Real estate located at _____________________________________________
___ An assignment of life insurance on the life of ______________________
in an amount no less than $_____________
___ Specific collateral described as follows: ____________________________
___________________________________________
3.2 It is further agreed that the security described above shall secure
repayment of all Indebtedness and that a default in terms of any note, security
agreement, mortgage, or other agreement from Borrower to Bank One shall
constitute a default of all notes, security agreements, mortgages, and other
agreements, and that Bank One may proceed in exercising its rights thereunder in
any order or manner it may choose. The purpose of this section being to
cross-collateralize and cross-default all Indebtedness. Additionally, the
security interest described above, if any, may be modified, added to or deleted
from time to time without modification of this Agreement.
ARTICLE IV - AFFIRMATIVE COVENANTS
Borrower covenants and agrees that so long as any Indebtedness is outstanding or
so long as this Agreement is in effect, Borrower shall:
4.1 Maintain insurance against fire, business interruption, public liability,
theft and other casualty on its insurable real and personal property to their
full replacement costs with companies acceptable to Bank One and against
liability on account of damage to persons or property and as required under all
applicable Workers' Compensation Laws. Furthermore, Borrower shall maintain any
other insurance as may from time to time be reasonably requested by Bank One,
shall insert a joint loss payee clause naming Bank One in all fire and extended
coverage policies and shall deliver certified copies of all such insurance
policies to Bank One upon demand.
4.2 Maintain, keep, and preserve its buildings and properties and every part
thereof in good repair, working order, and condition and from time to time make
all needful and proper repairs, renewals, replacements, additions, betterments,
and improvements thereto, so that at all times the efficiency thereof shall be
fully preserved and maintained.
4.3 Duly pay and discharge or cause to be paid and discharged all taxes,
assessments, and other governmental charges imposed upon it and its properties
or any part thereof or upon the income or profits therefrom, as well as all
claims for labor, materials, or supplies, which if unpaid might by law become a
lien or charge upon its property, except such items as are being in good faith
appropriately contested and for which it has provided adequate reserves.
4.4 Carry on and conduct its business in substantially the same manner and in
substantially the same fields as such business is now and has heretofore been
carried on, maintain management with the same expertise and experience, and if
management is to be changed, immediately notify Bank One of said change, and
maintain its legal existence, and comply with all valid and applicable statutes,
rules and regulations.
4.5 Maintain, keep, and preserve a system of accounting in accordance with GAAP,
deliver to Bank One financial reports in a form satisfactory to Bank One as Bank
One may request from time to time, permit the duly authorized representative(s)
of Bank One at all reasonable times to examine and inspect the books and records
of it or any related business entity of it, to make abstracts and copies
thereof, and to visit and inspect any of its property wherever the same may be
located.
4.6 Comply with all laws and regulations which it is required to comply with
including Hazardous Materials Laws and regulations, and permit Bank One to make
environmental audits from time to time if requested by Bank One with costs of
same to be paid by Borrower.
ARTICLE V - NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any Indebtedness is outstanding or
so long as this Agreement is in effect, except for that previously disclosed in
writing to and consented to by Bank One, Borrower shall not without prior
written consent of Bank One:
5.1 Create, incur or assume any indebtedness for borrowed money, other than to
Bank One, or act as guarantor for any indebtedness other than Subordinated Debt
outstanding as of the date of this Agreement of others in an aggregate
amount greater than $ 00 at any time. For purpose hereof, sale of accounts
receivable and or entering into capital leases of personal property shall be
deemed the incurring of indebtedness for borrowed money.
5.2 Mortgage, pledge, assign, hypothecate, encumber, create or grant a security
interest in any of its assets except to Bank One, nor sell, lease, transfer,
assign or otherwise dispose of any of its assets, properties or business outside
of the ordinary course of business, except secured purchase money or lease
indebtedness up to the amount permitted by Section 5.1, if any.
5.3 Invest in, loan or advance money to, organize or participate in the
organization or in the creation of any other business entity.
5.4 Merge, transfer, acquire or consolidate with or into any other entity,
change ownership, dissolve, and/or transfer or sell any assets outside of the
ordinary course of business without the prior written consent of Bank One.
5.5 If Borrower is a corporation, release, redeem, retire, purchase, or
otherwise acquire directly or indirectly any of its capital stock, or make any
changes in its capital structure, or pay, set aside, allocate or declare any
dividends, in cash or other property, upon its capital stock, except that
Borrower may purchase its capital stock for the benefit of or issue additional
capital stock to its employees in accordance with the terms with any Employee
Stock Purchase Plan established as of _______________, 1996.
ARTICLE VI - ADDITIONAL COVENANTS
Borrower agrees that each additional covenant listed below is fully applicable
if marked by an "X" or a check in the applicable box or boxes, or if the
information necessary to complete same is typed or written in the appropriate
space provided.
|_| 6.1 GUARANTY. Prior to or contemporaneous with the execution of this
Agreement, Borrower shall deliver to Bank One the Guaranty(s) of
_________________________________________ (Guarantor(s) name(s)) in
form and content acceptable to Bank One which Guaranty(s) shall
provide for liability of the Guarantor(s) for payment of the
Indebtedness and performance of the terms, conditions and provisions
of this Agreement and any and all applicable Security documents and
agreements.
| | 6.2 FINANCIAL REPORTS. Borrower covenants in accordance with Section 4.5
that it will deliver to Bank One:
| | (a) Within ninety (90) days after the end of each fiscal year of
Borrower, audited, consolidated financial statements of Borrower
prepared in accordance with GAAP which shall include a Balance
Sheet, Statement of Income, Statement of Reconciliation of Net
Worth, Statement of Changes in Financial Position and Notes to
financial statements and within thirty (30) days from the
applicable filing deadline, Borrower's Federal income tax return.
<PAGE>
|X| (b) Within thirty (30) days after the end of each fiscal month of
Borrower, internally prepared financial statements of Borrower
prepared in accordance with GAAP which shall include a Balance
Sheet at the end of each such period and an Income Statement for
the period from the beginning of the current fiscal year to the
end of such period. These statements shall be prepared on
substantially the same accounting basis as the statements
required in Section 6.2(a) above, if applicable, and the accuracy
of the statements (subject to audit and year-end adjustments)
shall be certified by the chief financial officer or president of
Borrower.
|X| (c) Simultaneously with the financial statements required above,
a Compliance Certificate, in form attached to this Agreement,
certifying that the financial statements are complete and correct
and that the Borrower has no knowledge of any condition, event or
act which with notice or lapse of time or both, could constitute
an Event or Default or which materially and adversely could
affect the financial condition or operations of Borrower, or if
such condition, event or acts exist, specifying the nature and
status thereof.
|_| (d) Within ___________________ (__) days after the end of each
_______________ year, signed and dated personal financial
statements of all individual Guarantor(s) and Obligor(s), if any,
on Bank One's forms, and by May 1 of each calendar year, the
personal income tax returns filed for the past calendar year of
all individual Guarantor(s) and Obligor(s), if any.
|_| (e) Simultaneously with the financial statements required in
___________ above, __________ financial statement(s) of all
corporate or partnership Guarantor(s) and Obligor(s), if any,
prepared in accordance with GAAP.
|X| 6.3 TANGIBLE NET WORTH. Borrower agrees to maintain a Tangible Net Worth
plus Subordinated Debt of not less than either (check one):
|X| (a) Twenty Five Million DOLLARS ($ 25,000,000) or
|_| (b) the amount(s) set forth for the following period(s):
Period(s) Amount(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
"Tangible Net Worth" shall be determined in accordance with GAAP and
shall be deemed to include the amount of total assets of Borrower
excluding the amount of Intangible Assets of Borrower minus the amount
of total liabilities of Borrower, exclusive of Subordinated Debt, if
any.
"Intangible Assets" shall be determined in accordance with GAAP and be
deemed to include at book value, without limitation, leasehold
improvements, goodwill, patents, copyrights, secret processes,
deferred expenses relating to sales, general administrative, research
and development expense, and all amounts due from any officer,
employee, director, shareholder or Related Person.
|X| 6.4 DEBT TO TANGIBLE NET WORTH. Borrower agrees to maintain ratio of Debt
to Tangible Net Worth plus Subordinated Debt of not more than either
(check one):
|X| (a) 1.65 to 1. _________ or
|_| (b) the ratio(s) set forth for the following period(s):
Period(s) Ratio(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
"Debt" shall be determined in accordance with GAAP and shall be deemed
to include all liabilities of Borrower including but not limited to
accruals, deferrals net of deferred rent liability, and capitalized
leases, less Subordinated Debt, if any.
|_| 6.5 WORKING CAPITAL. Borrower agrees to maintain net working capital
(Current Assets less current liabilities) of not less than either
(check one):
|_| (a) DOLLARS ($________________) or
|_| (b) the amount(s) set forth for the following period(s):
Period(s) Amount(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
"Current Assets" shall be determined in accordance with GAAP and shall
be deemed to include inventory at lower of cost or current market
value less any amounts due from any officer, employee, director,
shareholder or Related Person.
|X| 6.6 CURRENT RATIO. Borrower agrees to maintain a Current Ratio (Current
Assets divided by current liabilities including outstanding balance
of business purpose revolving promissory note of even date and any
renewal thereof) of not less than either (check one):
|X| (a) 1.20 to 1. ________ or
|_| (b) the ratio(s) set forth for the following period(s):
Period(s) Ratio(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
|_| 6.7 CASH FLOW RATIO. Borrower agrees to maintain a Cash Flow Ratio (net
income after taxes plus depreciation plus amortization to current
maturities of long term debt) of not less than either (check one):
|_| (a) _________. _________ to _________ _________
|_| (b) the amount(s) set forth for the following period(s):
Period(s) Ratio(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
|X| 6.8 DEBT SERVICE COVERAGE RATIO. Borrower agrees to maintain a Debt
Service Coverage Ratio (net income before interest expense, and
depreciation and amortization charges, plus or minus inventory
capitalization adjustment, deferred rent adjustment and nonrecurring
items to interest expenses plus current maturities of long term
debt of not less than either (check one):
|X| (a) 1.50 to 1. ________ or
|_| (b) the ratio(s) set forth for the following period(s):
Period(s) Ratio(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
|_| 6.9 CAPITAL EXPENDITURES. Borrower agrees not to purchase, lease or
otherwise acquire or enter into any commitment to purchase, lease or
otherwise acquire additional capital assets where the aggregate
liability or expenditure therefore exceeds the following, except with
prior written consent by Bank One (check one):
|_| (a) $_______________ per fiscal year commencing with fiscal
year ___________or
|_| (b) the amount(s) set forth for the following period(s):
Period(s) Amount(s)
__________________________ _______________________________
__________________________ _______________________________
__________________________ _______________________________
<PAGE>
|X| 6.10 SUBORDINATION OF DEBT. Borrower shall cause to be subordinate all
Indebtedness including interest thereon ("Junior Indebtedness"), which may at
any time now or hereafter be owed to any officer, employee, director,
shareholder or Related Person by the Borrower in favor of all Indebtedness,
including interest thereon ("Senior Indebtedness") due Bank One. Borrower shall
obtain and deliver to Bank One subordination agreements from said officers,
employees, directors, shareholders or Related Persons for said Junior
Indebtedness in form and content acceptable to Bank One. Upon the occurrence of
an Event of Default under this Agreement, Borrower shall without notice from
Bank One immediately cease payment of any fees or advances to any officer,
employee, director, shareholder or Related Person and shall also cease payment
of the sums, if any, allowed to be paid by the terms of the Subordination
Agreement(s).
|X| 6.11 DEPOSIT ACCOUNTS. Borrower shall establish and maintain its principal
deposit accounts at Bank One as long as any Indebtedness remains outstanding or
so long as this Agreement remains in effect.
|_| 6.12 COMPENSATION. Borrower agrees, except with prior written consent of
Bank One, that salary, withdrawals, bonuses and all other compensation paid, in
cash or otherwise, by Borrower to the following person(s) shall not exceed the
following amount(s).
Person(s) Amount(s)
__________________________ $_______________________________
__________________________ $_______________________________
__________________________ $_______________________________
|X| 6.13 BORROWING BASE. Borrower is subject to certain "Borrowing Base"
conditions as set forth in the "Borrowing Base" Addendum attached hereto and
made a part hereof.
|_| 6.14 OPINION OF COUNSEL. If required by Bank One, Bank One shall receive a
favorable written opinion of Counsel for Borrower acceptable to Bank One in form
and substance satisfactory to Bank One in its sole discretion, relating to the
Representations and Warranties set forth herein and such other matters as Bank
One may reasonably request.
|X| 6.15 ADDITIONAL PROVISIONS. If any, as are set forth in the Rider attached
hereto and made part hereof.
ARTICLE VII - DEFAULT AND REMEDIES
7.1 Borrower shall be in default hereunder upon the happening of any of the
following ("Event of Default"):
(a) The occurrence of an event of default under the terms of any evidence
of Indebtedness or any Obligation, security agreement, mortgage and
other agreement executed in connection therewith or herewith,
including any renewal, extension or modification thereof or hereof or
in any other obligation or agreement with Bank One, whether now or
hereafter existing;
(b) Non-performance of any covenant, warranty or liability contained or
referred to herein; or
(c) If any warranty, representation or statement made or furnished to Bank
One by or on behalf of Borrower, Guarantor or any Obligor, in
connection with this Agreement, or to induce Bank One to make a loan
to Borrower, proves to have been false in any material respect when
made or furnished.
7.2 Upon the occurrence of an Event of Default, Bank One may, at its option,
declare principal and accrued interest of all Indebtedness to be immediately due
and payable, without presentation, demand, protest or notice of any kind, all of
which are hereby expressly waived. Bank One shall have all the rights and
remedies of a Secured Party under the Uniform Commercial Code, as enacted in the
state where Bank One's principal office is located, said rights and remedies
being cumulative in nature. Bank One may set off any of the Borrower's or
Guarantor's deposits or accounts, and any other indebtedness of Bank One to
Borrower against the Indebtedness before or after an Event of Default, without
first looking to any property securing payment thereof.
7.3 Acceptance of payment, in full or part, or waiver of any Event of Default
shall not operate as a waiver of any current or later Event of Default, nor of
any other right of Bank One.
7.4 The provisions of this Agreement concerning any Event of Default are not
intended in any way to affect any rights of Bank One with respect to any
Indebtedness of Borrower to Bank One which may or hereafter be payable on
demand.
7.5 No delay or failure of Bank One in exercising any right, power, remedy or
privilege hereunder shall affect such right, power or privilege or be construed
as a waiver against Bank One.
7.6 Any waiver, permit, consent or approval by Bank One of any breach or Event
of Default hereunder must be in writing and shall be effective only to the
extent set forth in such writing.
ARTICLE VIII - MISCELLANEOUS
8.1 All notices required to be given under any term of this Agreement shall be
sufficient if mailed, via registered or certified mail, return receipt
requested, or sent via overnight or hand courier, to the parties at their
respective addresses as previously set forth.
8.2 All documents referred to in this Agreement shall for all purposes be
considered part of this Agreement, and all terms used in this Agreement shall
have the meaning set forth in said documents, and this Agreement shall include
all of the provisions stated in said documents.
8.3 This Agreement is a continuing agreement and shall continue in effect
notwithstanding that from time to time, no Indebtedness may exist. This
Agreement shall continue as to any Indebtedness and as to any and all renewals,
extensions or modifications thereof.
8.4 This Agreement may be executed in several counter-parts, each of which shall
be an original and all of which shall constitute the same instrument.
8.5 This Agreement, together with all other documents executed concurrently
herewith or attached hereto, constitutes the full and complete Agreement of the
parties and may not be modified except by written instrument signed by all
parties hereto.
8.6 This Agreement shall be binding upon and inure to the benefit of Borrower
and Bank One and their respective successors and assigns.
8.7 Borrower agrees to pay on demand all costs and expenses in connection with
the negotiation, preparation, execution, delivery, filing, recording,
administration, enforcement, litigation, collection, or filing of any legal
action on or for any Obligation, including, without limitation, the reasonable
fees and out-of-pocket expenses of counsel for Bank One, with respect thereto.
Time is of the essence of all requirements of Borrower hereunder. The
obligations of Borrower under this paragraph shall survive payment of any
Obligation.
8.8 This Agreement shall be governed and construed in accordance with the laws
of the state where Bank One's principal office is located.
8.9 Any provision contained in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
8.10 Borrower shall fully and promptly pay, perform, discharge, defend,
indemnify and hold harmless Bank One from any and all claims, orders, demands,
causes of action, proceedings, judgments, or suits and all liabilities, losses,
costs or expenses (including, without limitation, technical consultant fees,
count costs, expenses paid to third parties and reasonable legal fees) and
damages arising out of, or as a result of (i) any release, discharge, deposit,
dump, spilt, leak or placement of any Hazardous Material into or on any
Collateral or property owned, leased, rented or used by Borrower (the
"Property") at any time; (ii) any contamination of the soil or ground water of
the Property or damage to the environment and natural resources of the Property
or the result of actions whether arising under any Hazardous Material Law, or
common law; or (iii) any toxic, explosive or otherwise dangerous Material which
have been buried beneath or concealed within the Property. This indemnity shall
survive termination of this Agreement.
8.11 This Agreement contains the entire agreement of the panties and supersedes
all prior agreements and understandings, oral or written, with respect to the
subject matter hereof.
Executed this 1st day of November, 1996.
BORROWER:
Bank One, Chicago, NA Factory Card Outlet of America Ltd.
By: ___________________________ By: /s/ Glen Franchi
---------------------------------
Its ___________________________ Factory Card Outlet Corporation
By: /s/ Charles R. Cumello
---------------------------------
<PAGE>
RIDER TO BUSINESS LOAN AGREEMENT
DATED NOVEMBER 1, 1996
1. Borrower shall pay to Bank One a commitment fee equal to .25% per year
of the daily average unused amount of the Obligations, except that the
commitment fee shall equal .40% for any quarterly period when the outstanding
principal balance of the Obligation is less than $5,000,000, such payment due on
the last day of each calendar quarter.
2. Borrower shall maintain a Fixed Cost Coverage Ration with 87.5% of that
provided in the financial projections provided Bank One prior to the date of
this Agreement. "Fixed Cost Coverage Ratio" means the ratio of (a) the twelve
month rolling average of the sum of (i) earnings before interest, taxes and
non-store depreciation and amortization charges, plus (ii) rental payments, to
(b) the twelve month rolling average of the sum of (i) interest payments due and
payable plus (ii) rental payments. The "Fixed Cost Coverage Ratio" will be
reinstated beginning November 30, 1996.
3. Borrower shall maintain a Leverage Ratio of not greater than 4.00:1.
"Leverage Ratio" means the ratio of (a) the sum of (i) all indebtedness and
other liabilities of Borrower, but excluding Subordinated Debt plus (ii) 3 times
the aggregate of all of Borrower's obligations under operating leases to (b)
Tangible Net Worth plus Subordinated Debt.
4. In the event there is a default hereunder occasioned by a breach of a
covenant in paragraph 2 or 3 immediately above, which default continues for two
consecutive months, in addition to all other remedies available to Bank One
hereunder, Borrower is prohibited from executing any leases for the opening of
any new store or other retail outlet without the prior written consent of Bank
One.
5. Borrower shall not acquire any other business or make investments in
any other person or entity without providing Bank One with prior written notice
thereof and all information relative thereto as requested by Bank One.
6. Without the prior written consent of Bank One, Factory Card Outlet of
America, Ltd. shall make no loans, advances or extensions of credit, nor pay any
dividends or other distributions on account of its common stock, to Factory Card
Outlet Corporation.
<PAGE>
INITIAL /s/ [Illegible] 11/19
BANK [LOGO] ONE "Borrowing Base" Addendum
================================================================================
This "Borrowing Base" Addendum to the Business Loan Agreement additionally
governs the $25,000,000 Promissory Note ("Note") of Borrower, set forth in the
Agreement as an Obligation.
Borrower agrees so long as the Note or the indebtedness represented thereby is
outstanding or so long as the Agreement is in effect, the following shall apply:
1. Note Advancement Formula. The proceeds of the Note may be advanced,
repaid and readvanced an unlimited number of times with Borrower's right to
borrowing under the Note limited in that the total principal balance at any time
outstanding on the Note shall not exceed, prior to request for a draw or advance
or after a draw or advance, the borrowing base formula as hereinafter set forth.
The "Borrowing Base" formula as of any date shall mean the lesser of:
(a) the Note amount, or
(b) the total amount of one or more (as marked) of the following (check as
applicable):
|_| (a) ____________ % of Borrower's Eligible Accounts Receivable up
to a maximum of $_________
|X| (b) 50% of Borrower's Eligible Inventory up to a maximum of $N/A
|_| (c) ____________ % of Borrower's Eligible Raw Materials up to a
maximum of $________
|_| (d) ____________ % of Borrower's Eligible Equipment up to a
maximum of $_________
|_| (e) ____________ % Other (describe):_________________________
2. "Eligible Account Receivable" means an account receivable of Borrower
from a party (the "Account Debtor"), now existing or hereafter arising, which
meets all the following requirements at the time it came into existence and
continues to meet the same until it is collected in full:
(a) The account is due and payable in full and is less than
____________(________) days old from the due date shown on the original invoice
date (which first due date is not greater than sixty (60) days from invoice
date); (b) The account arose in the ordinary course of Borrower's business from
the performance of services or any outright and lawful sale or lease of goods by
Borrower. If goods are involved, all such goods having been lawfully shipped to
Account Debtor, and Borrower has possession of (and will deliver as required
hereunder) or has delivered to Bank One copies of all invoices, shipping
documents and delivery receipts evidencing such shipments; (c) The right to
payment has been fully earned by completed performance; (d) There has not been a
progress billing nor has Borrower extended the time for payment without the
consent of Bank One; for the purposes hereof, "progress billing" means any
invoice for goods sold or leased or services rendered under a contract or
agreement pursuant to which the Account Debtor's obligation to pay such invoice
is conditioned upon the Borrower's completion of any further performance under
the contract or agreement; (e) The account is not subject to any prior
assignment, claim, lien or security interest; (f) The true record of the amount
owed is reflected on Borrower's books and on any invoice or statement delivered
to Bank One relating to the account is owing to Borrower; (g) The account is not
subject to any setoff, counterclaim, credit, allowance, adjustment or discount
(excepting only any applicable discount for prompt payment); (h) Borrower has
not received notice of any liquidation, reorganization, dissolution, termination
or existence, insolvency, business failure, appointment of a receiver for all or
any part of the property of, assignment for the benefit of creditors made by, or
filing of a petition under any bankruptcy or insolvency statute by or against,
Account Debtor; (i) The account did not arise from a transaction with a Person,
or entity affiliated with Borrower; (j) The Account is not owed by the
government of the United States of America, or any department, agency, public
corporation, or other instrumentality thereof, unless the Federal Assignment of
Claims Act of 1940, as amended, and any other steps necessary to perfect Bank
One's security interest therein, have been complied with to the Bank One's
satisfaction with respect to such Account; (k) The Account is not owed by any
state, municipality or other political subdivision of the United States of
America, or any department, agency, public corporation, or other instrumentality
thereof and as to which Bank One determines that its security interest therein
is not or cannot be perfected; (I) Bank One has not informed Borrower that in
Bank One's reasonable credit judgment that the prospect of collection of such
Account is impaired or that the Account may not be paid by reason of the Account
Debtor's financial inability to pay or which is owed by an Account Debtor which
Bank One, in its reasonable credit judgment, otherwise deems to be
uncreditworthy; (m) The account did not arise out a contract or purchase order
prohibiting any assignment thereof or the creation of any security interest
therein and Borrower has not received any account acceptance, chattel paper,
promissory note, trade, payment instrument, draft or written agreement (other
than invoices, shipping documents and delivery receipts) with respect to such
account or payment thereof; (n) The account did not arise from an Account Debtor
whose mailing address or executive offices are located outside the United States
or is not organized under the laws of the United States or any state, unless the
obligation is secured and payable by an irrevocable letter of credit or
acceptance in form and substance satisfactory to Bank One; and (o) Other (if
any)______________________________________________________
In the event that more than _______ percent (___%) of the accounts
receivable from any one Account Debtor shall at any time become more than
________________________(______) days past due, none of the accounts receivable
outstanding from that Account Debtor shall be included in calculating Borrower's
Eligible Accounts Receivable, until such time, if any, as Bank One may, in its
sole discretion, determine otherwise.
3, "Eligible Inventory" means all tangible personal property, goods,
merchandise and other personal property now owned or hereafter acquired by
Borrower, wheresoever located in the United States, which is leased or
furnished, or held to be furnished, under contracts of sale, lease or service
and all finished goods which meet all of the following specifications: (a) the
inventory is lawfully owned by Borrower, is not subject to any lien, claim,
consignment, security interest or prior assignment and has not been held by
Borrower for more than ________________________(______) months; (b) Borrower has
the right of assignment thereof and the power to grant security interests
therein; (c) the inventory arose or was acquired in the ordinary course of
Borrower's business and no substantial portion thereof represents returned,
rejected or damaged goods; (d) no account receivable or document of title has
been created or issued with respect to such inventory; (e) the inventory does
not represent work-in-process, spare parts, packaging and shipping materials,
supplies, or returned or defective inventory; and (f) the inventory is not
otherwise regarded by Bank One as unsuitable collateral. "Eligible Inventory"
shall be valued in accordance with GAAP, excluding, however, (i) the amount of
progress payments, predelivery payments, deposits and any other sums received by
Borrower in anticipation of the sale and delivery of Eligible Inventory, and
(ii) all Eligible Inventory on lease to others. "Eligible Raw Materials" shall
mean all raw materials and components to be used in Borrower's business, meeting
all Eligible Inventory requirements and shall be valued in accordance with GAAP.
4. "Eligible Equipment" means that inventory of new or used machinery and
equipment of Borrower and all accessions thereto and products thereof. For the
purposes of determining the Borrowing Base, Eligible Equipment shall be valued
at either (check one):
_______ (a) cost minus accumulated depreciation in accordance with GAAP as
shown on Borrower's equipment/inventory report,
_______ (b) the equipment's then current appraised fair market value, or
_______ (a) the equipment's then current appraised liquidation value.
5. "Eligible Collateral" shall mean all Eligible Accounts Receivable,
Eligible Inventory, Eligible Raw Materials, Eligible Equipment and the other
property, if any described above.
6. Reporting. Borrower will supply no later than five (5) calendar days
from the end of each week/month (strike one), or more frequently, if requested
by Bank One a compliance certificate in a form and format acceptable to Bank
One, certifying Borrower's compliance and the requirements hereof.
7. Borrowing Base Deficiency. In the event the amount outstanding under
the Note exceeds the Borrowing Base at any time, then Borrower shall be required
to immediately reduce the outstanding principal balance to comply with the
Borrowing Base. Borrower shall pay to Bank One with its compliance certificate
by certified check, cashier's check or cash, the deficiency. If the deficiency
is not paid down as herein called for, the Note may be declared in default.
8. Change of Note Advancement Formula. Bank One retains the sole
discretion, to reduce the allowable percentage of any Eligible Collateral to be
used in calculating the Borrowing Base formula based upon the Eligible
Collateral changing in length, type or term from the Eligible Collateral
originally presented to and agreed upon between Bank One and Borrower prior to
the signing of this Agreement and/or based upon the present or projected
operating or financial condition of borrower.
9. Audits. Borrower agrees that Bank One shall have the right to make
audits to verify the Eligible Collateral report(s) that have been submitted to
Bank One from time to time. Such audits will be made at the request of Bank One
and shall be determined as to frequency solely by Bank One. Borrower also agrees
to make copies available to Bank One of all audits performed by state or federal
regulatory agencies. Audit costs, expenses and monitoring costs will be either
paid directly by Borrower or reimbursed to Bank One if Bank One has paid such
costs and expenses.
10. Draws by Borrower. No draw or advance shall be permitted unless
Borrower shall have timely provided Bank One with additional information and
certifications required hereunder, the amount of the advance sought by Borrower,
all invoices, shipping documents and delivery receipts evidencing the
shipment(s) against which the draw or advance is requested, and unless Borrower
shall be in compliance with all terms of this Agreement.
<PAGE>
Exhibit 10.10.1
[Logo] symbolease NO. F-96-801
MASTER LEASE AGREEMENT
Dated: August 19, 1996
LESSOR: SYMBOLEASE, INC. LESSEE: FACTORY CARD OUTLET OF AMERICA,
Ltd.
Principal place of business: Principal place of business:
One Symbol Plaza 745 Birginal Drive
Holtsville, New York 11742 Bensenville, IL 60106
The subject matter of the Agreement (the "Agreement") shall be Equipment
marketed by Symbol Technologies, Inc. ("Vendor") described in Exhibit A. Any
lease transaction requested by Lessee and accepted by Lessor shall be specified
in an Equipment Schedule ("Schedule"). A Schedule shall refer to and incorporate
by reference this Agreement and when signed by the parties, shall constitute the
Lease for the Equipment specified therein. The Schedule may include additional
terms and conditions as agreed upon between the parties, as well as amounts to
be financed. Financing may include software charges on Licensed Programs and/or
support services marketed by Vendor. Each Schedule shall constitute a separate
lease. The parties agree that each Schedule is a "Finance Lease" as defined by
ss.2A-103(g) of the Uniform Commercial Code.
1. AGREEMENT TERM. This Agreement shall be effective when signed by both parties
and may be terminated by either party with one month's prior written notice.
However, each Lease then in effect shall survive any termination of this
Agreement.
2 CREDIT REVIEW. For each Lease, Lessee consents to any reasonable credit
investigation and review by Lessor.
3. ASSIGNMENT TO LESSOR. Lessee hereby assigns, exclusively to Lessor, Lessee's
right to acquire the Equipment, Licensed Programs and/or support services from
Vendor. This assignment is effective when Lessor accepts the applicable Schedule
and Lessor shall then be obligated to purchase and pay for the Equipment.
If the Equipment is subject to a Volume Purchase Agreement or to another
discount offering, Lessor will pay the same amount for the Equipment that would
have been payable by Lessee.
4. SELECTION AND USE OF EQUIPMENT AND LICENSED PROGRAMS. Lessee agrees that it
shall be responsible for the selection, use of, and results obtained from, the
Equipment, licensed programs, and any other associated equipment, programs, or
services. Lessor has acquired the Equipment solely for the purposes of leasing
such products under the Schedule.
5. LESSEE'S OBLIGATIONS ABSOLUTE AND UNCONDITIONAL. Lessee agrees that its
Monthly Rental and other obligations hereunder shall be irrevocable,
independent, absolute and unconditional and shall not be subject to any
abatement, reduction, recoupment, defense, offset or counterclaim otherwise
available to Lessee against Lessor, nor, except as otherwise expressly provided
herein or as agreed to by Lessor in writing, shall this Agreement terminate for
any reason whatsoever prior to the end of the Initial Period or the end of any
Automatic Renewal Period.
<PAGE>
6. ASSIGNMENT.
a. LESSEE MAY ASSIGN THIS AGREEMENT OR ANY OF ITS RIGHTS HEREUNDER OR
SUBLEASE THE EQUIPMENT WITH THE PRIOR WRITTEN CONSENT OF LESSOR, which will not
be unreasonably withheld. NO PERMITTED ASSIGNMENT OR SUBLEASE SHALL RELIEVE
LESSEE OF ANY OF ITS OBLIGATIONS THEREUNDER. In no event shall Lessee remove the
Equipment from the United States.
b. Lessor may sell and assign its rights and interests in any Equipment and
in any Schedule hereunder, to another party ("Lessor's Assignee") either
outright or as collateral security for loans. Upon notice of any such assignment
and instructions from Lessor, Lessee shall pay its Monthly Rental and perform
its other obligations hereunder to the Lessor's Assignee (or to another party
designated by Lessor's Assignee). Upon any such sale or assignment, LESSEE'S
OBLIGATIONS TO LESSOR'S ASSIGNEE UNDER THE ASSIGNED EQUIPMENT SCHEDULE SHALL BE
ABSOLUTE AND UNCONDITIONAL AND LESSEE WILL NOT ASSERT AGAINST LESSOR'S ASSIGNEE
ANY CLAIM, DEFENSE OR COUNTERCLAIMS WHICH LESSEE MIGHT HAVE AGAINST LESSOR.
Lessor's Assignee shall have all of the rights but none of the obligations of
Lessor under this Agreement. Notwithstanding Any assignment by Lessor, Lessor's
Assignee shall not be deemed to have assumed or to be obligated to perform any
of the obligations of Lessor.
In connection with any assignment by Lessor of its interest in the Equipment or
this Agreement, Lessee acknowledges that the assignment will not materially
change the duty of or materially increase the burden of risk imposed on Lessee.
Upon any such assignment, Lessee agrees to execute (i) any document reasonably
requested by Lessor acknowledging such assignment and affirming to Lessor's
Assignee basic provisions of this Agreement and the Schedule, and (ii) UCC-1
precautionary filings reasonably requested.
7. WARRANTIES. Lessor grants to Lessee the benefit of any and all warranties
made available by Vendor in the Agreement for Acquisition of Products and
Services. Lessor warrants that neither Lessor nor anyone acting or claiming
through Lessor, by assignment or otherwise, will interfere with Lessee's quiet
enjoyment of the use of the Equipment so long as no event of default shall have
occurred and be continuing. EXCEPT FOR LESSOR'S WARRANTY OF QUIET ENJOYMENT,
LESSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL LESSOR'S LIABILITY OF ANY
KIND INCLUDE ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, EVEN IF
LESSOR HAS KNOWLEDGE OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.
8. TAXES. Lessee shall pay to Lessor an amount equal to all taxes paid, payable
or required to be collected by Lessor, however designated, which are levied or
based on the Monthly Rental or on the possession, use, operation lease, rental,
sale, purchase, control or value of the Equipment, including, without
limitation, registration and license fees and assessments, state and local
privilege or excise taxes, sales and use taxes, personal and other property
taxes, and taxes or charges based on gross revenue, but excluding taxes based on
Lessor's net income. Lessor shall invoice Lessee for all such taxes and Lessee
shall promptly remit to Lessor all such taxes and charges upon receipt of such
invoice from lessor. Lessee shall pay all penalties and interest resulting from
its failure to timely remit such taxes to Lessor when invoiced by Lessor and to
pay all subsequent penalties and interest due from any adverse rulings from
taxing authorities due to a failure to classify the lease properly for tax
and/or accounting purposes. Lessor shall file all required sales and use tax and
personal property tax returns and reports concerning the Equipment with all
applicable governmental agencies. It is the Lessee's responsibility at the time
the order is placed to provide Lessor with documentation required by the taxing
authorities to sustain any tax exemptions.
9. LESSEE AUTHORIZATION. So long as Lessee is not in default under the Lease (a)
Lessee is authorized to act on Lessor's behalf concerning delivery and
installation of the Equipment, any Vendor warranty service of the Equipment, and
any Licensed Program support services, and (b) Lessee shall have, solely for
these purposes, all rights Lessor may have against Vendor under the Agreement
for Acquisition of Products and Services. The foregoing authorization shall not
constitute any surrender of Lessor's interest in the Equipment.
10. LEASE TERM. The Initial Term of the Lease shall expire at the end of the
number of Payment Periods, specified as "Term" in the Schedule, after the
Commencement Date. Commencement Date, for purposes of this Agreement, is defined
as the first day of the month following the date in which Vendor has the
Equipment installed, ready for use and has successfully completed Vendor's
installation procedures (the "Acceptance Date"). Thereafter, the term of this
Agreement for all such Equipment shall be automatically extended for successive
twelve-month periods ("Automatic Renewal Periods") on the terms and conditions
which are set forth in this Agreement and the Schedule unless and until
terminated by either party giving to the other not less than three 13) months
prior written notice. Any such termination shall be effective only on the last
day of the Initial Period or the last day of any Automatic Renewal Period.
2
<PAGE>
11. RENT AND PAYMENT. As to any Equipment leased thereunder. the "Monthly
Rental" payable by Lessee to Lessor shall be set forth in the applicable
Schedule. The Monthly Rental shall begin on the Acceptance Date and shall be
payable by Lessee in advance on the first day of each month throughout the
Initial Period and any Automatic Renewal Period. Lessee's obligation to pay
shall begin on the Acceptance Date. Rent will be invoiced in advance of the
first day of the Payment Period. When the Acceptance Date is not on the first
day of a calendar month, the applicable payment will be prorated on the basis of
30-day months. Lessee shall pay all Monthly Rental to Lessor, its successors or
assigns, at Lessor's address set forth above (or as otherwise directed in
writing by Lessor, its successors or assigns), whether or not Lessee has
received any notice that such payment is due. LESSEE SHALL NOT ABATE, SET OFF,
OR DEDUCT ANY AMOUNT OR DAMAGES FROM OR REDUCE ANY MONTHLY RENTAL FOR ANY REASON
WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, ITS SUCCESSORS OR ASSIGNS.
Late charges on any past due payments, taxes or other charges hereunder shall
accrue at the rate of 2% per month or if such rate shall exceed the maximum rate
allowed by law, then at the highest rate that is permitted to be charged on
liquidated amounts after judgement) beginning with the date that such amount was
due and continuing until the amount is paid. If late charges are assessed by a
lending institution due to any late payment, Lessee agrees to pay such late
charges or to reimburse Lessor for their payment.
12. OWNERSHIP AND INSPECTION.
a. The Equipment shall at all times remain the property of Lessor or its
assigns. By this Agreement, Lessee acquires no ownership rights in the
Equipment. Lessor may affix (or require Lessee to affix) tags, decals or plates
to the Equipment indicating Lessor's ownership and Lessee shall not permit their
removal or concealment.
b. Licensed Programs are licensed and provided by Vendor directly to Lessee
under the terms and conditions of the Agreement for Acquisition of Products and
Services.
c. LESSEE SHALL KEEP THE EQUIPMENT AND LESSEE'S INTEREST UNDER THIS
AGREEMENT FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES, EXCEPT THOSE PERMITTED
BY LESSOR OR ITS ASSIGNS.
d. Lessor, its assigns and their agents shall have free access to the
Equipment at all reasonable times during normal business hours for the purpose
of inspecting the Equipment and for any other purpose contemplated in this
Agreement.
13. USE, ALTERATIONS AND ATTACHMENTS.
a. After Lessee receives and inspects any Equipment and the Equipment has
been verified by Lessee to Lessor to be operational according to the Vendor
published specifications, Lessee shall execute and deliver to Lessor an
Acceptance Certificate in a form provided by Lessor; provided, however, that
Lessee's failure to execute and deliver an Acceptance Certificate for any
Equipment shall not affect the validity of this Agreement with respect to the
Equipment.
b. Lessee shall be entitled to unlimited usage of the Equipment which is
leased solely for commercial or business purposes, during the Initial Period,
the Automatic Renewal Periods and any extension or renewal periods approved by
Lessor in writing.
c. Lessee will at all times keep the Equipment in its sole possession and
control. Removal from the location stated in the Schedule requires prior written
consent of the Lessor.
d. Lessee shall cause the Equipment to be installed, used, operated and at
the termination of this Agreement as to each Equipment Schedule, allow Lessor to
deinstall the Equipment for removal.
e. Alterations in or additional attachments to the Equipment requires prior
written consent of Lessor. Any such alterations or attachments shall be made at
Lessee's expense and shall not interfere with the normal and satisfactory
operation or maintenance of the Equipment. Vendor may incorporate engineering
changes or make temporary alterations to the Equipment upon request of Lessee.
Unless Lessor shall otherwise agree in writing, all such alterations and
attachments shall be and become the property of Lessor or, at the option of
Lessor, shall be removed by Lessee at the termination of this Agreement as to
such Equipment and Equipment restored at Lessee's expense to its original
condition, reasonable wear and tear only excepted.
f Lessee acknowledges that the Equipment is and shall remain personal
property during the term of this Agreement. Lessee shall not permit the
Equipment to become an accession to other goods or a fixture to, or part of, any
real property.
3
<PAGE>
4. MAINTENANCE AND REPAIRS; RETURN OF EQUIPMENT.
a. During the continuance of this Agreement and at its expense, Lessee (i)
shall keep the Equipment in good repair, working order and condition; (ii) shall
make all necessary adjustments, repairs and replacements; (iii) shall furnish
all required parts, mechanisms, devices and servicing; and (iv) shall not use or
permit the Equipment to be used for any purpose for which in the opinion of
Vendor, the Equipment is not designed or reasonably suitable. Such parts,
mechanisms and devices shall immediately become a part of the Equipment for all
purposes hereunder.
b. During the continuance of this Agreement and at its own expense, Lessee
shall enter into and maintain in force a contract with Vendor for maintenance of
each item of Equipment. Such contract as to each item shall be in place prior to
shipment with a commencement date at the expiration of Vendor's warranty period,
if any, relating to such item.
c. At the termination of this Agreement and at its expense, Lessee shall
return the Equipment to Lessor at the location within the continental United
States designated by Lessor. Upon such return, the Equipment shall be in the
same operating order, repair, condition, and appearance as on the Acceptance
Date, excepting reasonable wear and tear from proper use thereof including all
engineering changes theretofore prescribed by Vendor. Lessee shall provide
maintenance qualification letters and/or arrange for and pay the cost of repairs
which are necessary for Vendor to accept the Equipment under contract
maintenance at its then standard rates.
15. UPGRADES. Lessee shall have the option to upgrade the Equipment specified in
any Schedule at any time after ninety (90) days following the Commencement Date
providing that Lessee provides Lessor with ninety (90) days prior written notice
of its intention to upgrade. For the purposes of this provision, an upgrade will
be considered to be equipment manufactured by the Lessor that replaces the
Equipment specified on the Equipment Schedule to be upgraded. The new lease rate
will be determined by the Lessor.
16. EQUIPMENT ADDITIONS. Lessee shall have the option to add equipment to the
Equipment specified in any Schedule providing that the Lessee provides Lessor
with ninety (90) days prior written notice of its intent to make such additions.
For purposes of this provision, equipment additions will be considered to be
parts, features or model changes manufactured by Vendor that can be added to the
existing Equipment on any Schedule to provide increased capacity and/or
performance. The lease rate for the equipment additions will be determined by
the Lessor.
17. PURCHASE OPTION. Assuming no Event of Default shall have occurred and be
continuing, at the end of the Initial Term or end of any renewal term, the
Lessee may, with ninety 190) days prior written notice to the Lessor, purchase
all, but not less than all, of the Equipment listed in any Schedule at then Fair
Market Value of the Equipment.
18. RISK OF LOSS ON LESSEE. From and after the date that the Equipment is
installed and until the Equipment is returned to Lessor as provided in this
Agreement, Lessee shall bear all risk of loss, to the Equipment, howsoever
caused. If any item of Equipment is rendered unusable as a result of any
physical damage to or destruction of the Equipment or if any item of Equipment
is lost or stolen, then:
a. Lessee shall give Lessor immediate notice thereof, and this Agreement as
to such item shall continue in full force and effect without any abatement of
any Monthly Rental. Lessee shall determine and notify Lessor, within fifteen
(15) days after the date of occurrence, whether such item of Equipment can be
repaired.
b. If Vendor determines that such item of Equipment can be repaired, Lessee
shall request Vendor at Lessee's expense to have such item of Equipment promptly
repaired.
c. If Vendor determines that the item of Equipment cannot be repaired or if
the item of Equipment is lost or stolen, then Lessee shall, at its expense,
promptly replace such item of Equipment with like Vendor equipment having a
comparable or greater value and convey title to such replacement to Lessor free
and clear of all liens and encumbrances, whereupon this Lease shall continue in
full force and effect as though such loss, damage, theft or destruction had not
occurred.
All proceeds of insurance received by Lessor or Lessee under any insurance
policy shall be applied toward the cost of any such repair or replacement.
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19. LIABILITY INSURANCE. Lessee shall obtain and maintain comprehensive general
liability insurance, in an amount of $1,000,000 or more for each occurrence,
with an insurer having a "Best's Policyholders" rating of B+ or better. The
policy shall name Lessor as an additional insured as Lessor's interests may
appear and shall contain clause requiring the insurer to give Lessor at least
one month's prior written notice of the cancellation, or any alteration in the
terms, of the policy. Lessee shall furnish to Lessor, upon request, evidence
that such insurance overage is in effect.
20. GENERAL INDEMNITY. This lease is a net lease. Therefore, Lessee shall
indemnify Lessor against, and old Lessor harmless from, any and all claims,
actions damages, obligations, liabilities and liens; and all costs and expenses
including legal fees, incurred by Lessor in connection therewith; arising out of
the Lease including, without limitation, the purchase, ownership, lease,
licensing, possession, maintenance, condition, use or return of the Equipment or
Licensed Programs; or arising by operation of law; excluding, however, any of
the foregoing which result from the sole negligence or willful misconduct of
Lessor. Lessee agrees that upon written notice by Lessor of the assertion of any
claim, action, damage, obligation, liability or lien, Lessee shall assume full
responsibility of the defense thereof. Any payment pursuant to this paragraph
shall be of such amount as shall be necessary so that, after payment of any
taxes required to be paid thereon by Lessor, including taxes on or measured by
the net income of Lessor, the balance will equal the amount due hereunder. The
provisions of this paragraph with regard to matters arising during the Lease
shall survive the expiration or termination of the Lease.
21. EVENTS OF DEFAULT. The occurrence of any one or more of the following events
(each an "Event of Default") shall constitute a default under this Agreement:
a. Lessee fails to pay any Monthly Rental when the same becomes due and
such failure shall continue uncured for thirty (30) days after written notice
thereof is given to Lessee;
b. Except as expressly provided herein, Lessee attempts to, or does,
remove, sell, assign, transfer, encumber, sublet or part with possession of any
one or more items of the Equipment, or any interest under this Agreement, except
as expressly permitted herein.
c. Through the act or omission of Lessee, any item of Equipment is subject
to any levy, seizure, attachment assignment or execution; or Lessee abandons any
item of Equipment.
d. Lessee fails to observe or perform any of the other obligations required
to be observed or performed by Lessee hereunder and such failure shall continue
uncured for ten (10) days after written notice thereof is given to Lessee.
e. Lessee's representations and warranties made in this Agreement or in
connection herewith shall be false or misleading in any material respect.
f. Lessee ceases doing business as a going concern, makes an assignment for
the benefit of creditors, in insolvent, admits in writing its inability to pay
its financial obligations as they become due, files a voluntary petition in
bankruptcy, is adjudicated a bankrupt or an insolvent, files a petition seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar arrangement under any present or future
statute, law or regulation or files an answer admitting the material allegations
of a petition filed against it in any such proceeding, consents to or acquiesces
in the appointment of a trustee, receiver or liquidator of it or of all or any
substantial part of its assets or properties, or if it or its shareholders shall
take any action looking to its dissolution or liquidation.
g. Within thirty (30) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Lessee's consent or acquiescence of any
trustee, receiver or liquidator of it or of all or any substantial part of its
assets and properties, such appointment shall not be vacated.
5
<PAGE>
22. REMEDIES. Upon the occurrence of an Event of Default, Lessor shall have the
option, with or without giving notice to Lessee, to do any one or more of the
following;
a. Lessor may enforce this Agreement according to its terms;
b. Lessor may cause Vendor to refuse to deliver the Equipment to Lessee;
c. By notice to Lessee, Lessor may terminate this Agreement as to any or
all Schedules;
d. Lessee shall remain fully liable for and shall pay Lessor for (i) all
sums due and payable under the Schedule for all periods up to and including the
date on which Lessor has declared this Agreement to be in default; (ii) all
costs and expenses incurred by Lessor on account of such default, including, but
not limited to, all court costs and reasonable attorneys' fees; and (iii) all
reasonable damages as provided by law (collectively "Lessor's Damages").
e. Whether or not this Lease is terminated as to any or all Equipment
Schedules, Lessor may (i) take possession of any or all of the Equipment listed
on any or all Schedules, wherever situated, and for such purpose, subject to
Lessee's security regulations, Lessor may enter upon any of Lessee's premises
without any court order and without liability for so doing (Lessee hereby waives
any action for trespass or damages by reason of such entry or taking
possession); (ii) without removal, render the Equipment unusable and dispose of
the same on Lessee's premises or (iii) cause Lessee (and Lessee hereby agrees)
to assemble the Equipment and either make it available to Lessor at a place
designated by Lessor or return it to Lessor as provided in this Agreement.
f. Lessor may sue for and recover all rents and other payments that accrue
after the occurrence of the Event of Default, as the same become due;
g. Lessor may recover from Lessee, as liquidated damages ("Liquidated
Damages") for loss of a bargain and not as a penalty, an amount equal to the
present value of all future Monthly Rentals to be paid by. Lessee during the
remainder of the Initial Period or any Automatic Renewal Period then in effect,
discounted at the rate of eight percent (8%) per annum, which payment shall
become immediately due and payable;
h. Lessor may sell, dispose of, hold, use or lease any Equipment as Lessor
in its sole discretion may determine without any duty, except as provided below,
to account to Lessee. Lessee may purchase at any such sale, and Lessor shall not
be obligated to give preference to the sale, lease or other disposition of the
Equipment over the sale, lease or other disposition of similar equipment owned
by or leased by or through Lessor.
The rights and remedies afforded Lessor hereunder shall not be deemed to be
exclusive, but shall be in addition to any rights or remedies provided by law,
Lessor's failure promptly to enforce any right hereunder shall not operate as a
waiver of such rights and Lessor's waiver or any default shall not constitute a
waiver of any subsequent or other default. Lessor may accept late payments or
partial payments of amounts due under this Agreement and may delay enforcing any
of Lessor's rights hereunder without losing or waiving any of Lessor's rights
under this Agreement.
23. TAX INDEMNIFICATION. The Lease is entered into on the basis that under the
Internal Revenue Code of 1986, as amended (Code), Lessor shall be entitled to
(1) maximum Modified Accelerated Cost Recovery System (MACRS) deduction for
5-year property, and (2) deductions for interest expense incurred to finance
purchase of the Equipment, and 13) Gross Profit Tax Deferral.
Lessee represents, warrants, and covenants that at all times during the Lease:
a. No item of Equipment will constitute "public utility property as defined
in the Code;
b. Lessee will not make any election under the Code or take any action, or
fail to take any action, if such election, action or failure to act would cause
any item of Equipment to cease to be eligible for any MACRS deductions or
interest deductions;
6
<PAGE>
c. Lessee will keep and make available to Lessor the records required to
establish the matters referred to in this Paragraph 23; and
Furthermore, if Lessee is a tax exempt entity, Lessee covenants that it will not
renew or extend the Lease if such action shall cause Lessor a Tax Loss as
described below.
If, as a result of any act. failure to act, misrepresentation, inaccuracy, or
breach of any warranty or covenant, or default under the Lease. by Lessee, an
affiliate of Lessee. or any person who shall obtain the use or possession of any
item of Equipment through Lessee, Lessor shall lose the right to claim or shall
lose the right to claim or shall offer any disallowance or recapture of all or
any portion of any MACRS deductions or interest deductions (Tax Loss) with
respect to any item of Equipment, then, promptly upon written notice to Lessee
that a Tax Loss has occurred, Lessee shall reimburse the Lessor for the amount
determined below.
The reimbursement shall be an amount that, in the reasonable opinion of Lessor,
shall make Lessor's after-tax rate of return and cash flows (Financial Returns),
over the term of the Lease for such item of Equipment. equal to the expected
Financial Returns that would have been otherwise available. The reimbursement
shall take into account the effects of any interest, penalties and additions to
tax required to be paid by Lessor as a result of any payments pursuant to this
paragraph. Financial Returns shall be based on economic and tax assumptions used
by Lessor in entering into the Lease.
All the rights and privileges of Lessor arising from this Paragraph 23 shall
survive the expiration or termination of he Lease.
For purposes of determining tax effects under Paragraphs 8, 17, and 23, the term
"Lessor" shall include, to the extent of interests, any partner in Lessor and
any affiliated group of corporations. and each member thereof, of which Lessor
or any such partner is or shall become a member and with which Lessor or any
such partner joining the filing or consolidated or combined returns or any
entity acquiring Equipment, Licensed Program and/or support services from
Lessor.
24. GENERAL.
a. Integration. All schedules or riders to this Agreement; Schedules
executed hereunder; schedules or riders attached to Schedules; other documents
referred to in Schedules and Acceptance Certificates, whether they are signed
before, on or after the date of this Agreement. are incorporated into this
Agreement by this reference. Such documents appertaining to any Schedule and
this Agreement constitute the entire agreement between the parties with respect
to the items of Equipment listed on such Schedule.
b. Modification. This Agreement may not be amended or modified except by a
writing signed by a duly authorized representative of each party.
c. Integration. The provisions of this Agreement shall be deemed to be
independent and severable. The invalidity or partial invalidity of any one
provision or portion of this Agreement under the laws of any jurisdiction shall
not affect the validity or enforceability of any other provisions of this
Agreement. The captions and headings set forth herein are for convenience of
reference only and shall not define or limit any of the terms hereof.
d. Notices. Notices hereunder shall be in writing and addressed to the
other party at the address herein or such other address provided by Notice
hereunder and shall be effective Ii) upon the next business day, if sent by
guaranteed overnight express service (such as Federal Express); (ii) on the same
day, if personally delivered; or (iii) three days after mailing, if sent by
certified or registered U.S. mail, postage prepaid and addressed to the other
party.
e. Governing Law. This Lease shall be governed by the laws of the State of
New York.
f. Binding Effect. The provisions of this Agreement shall inure to the
benefit of and shall bind Lessor and Lessee and their respective permitted
successors and assigns.
g. Financing Statements. Lessee shall sign and deliver to Lessor one or
more financing statements, supplements thereto and other instruments in order to
establish, perfect. extend and/or enforce the parties' interests in the
Equipment and under this Agreement. A photocopy of this Agreement shall be
sufficient as, and may be filed as, an original financing statement. If Lessee
defaults hereunder, then Lessor shall automatically be constituted as Lessee's
attorney-in-fact for the purpose of carrying out the provisions of this
paragraph.
7
<PAGE>
h. Audited Financial Statements. Upon request, Lessee shall provide to
Lessor a copy of its annual audited financial statements.
i. Provisional Security Interest. In the event a court of competent
jurisdiction or other governing authority shall determine that this Agreement is
not a "true lease" or that Lessor (or its assigns) does not hold legal title to
or is not the owner of the Equipment, then this Agreement shall be deemed to be
a security agreement with Lessee, as debtor, having granted to Lessor, as
secured party, a security interest in the Equipment effective the date of this
Agreement; and Lessor shall have all of the rights, privileges and remedies of a
secured party under the New York Uniform Commercial Code.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the day and
year first above written.
LESSOR: SYMBOLEASE, INC. LESSEE: FACTORY CARD OUTLET OF AMERICA,
LTD.
By: /s/ Brian T. Burke By: /s/ Glen J. Franchi
------------------------- --------------------------------
(signature) (signature)
Print: Brian T. Burke Print: Glen J. Franchi
-----------------------------
Executive Vice President
Title: President Title: Chief Administrative Officer
-----------------------------
Date:_______________________ Date: August 26, 1996
8
<PAGE>
[LOGO] SYMBOLEASE
- --------------------------------------------------------------------------------
EQUIPMENT SCHEDULE NO.9591999-1 (Modified 10/7/96)
DATED: August 19,1996
This Equipment Schedule ("Schedule") is executed in connection with Master Lease
Agreement No. F-96-801, dated August 19. 1996, ("Master Lease") between
SymboLease, Inc. ("Lessor") and Factory Card Outlet of America, Ltd. ("Lessee").
and incorporates by reference the terms and conditions of the Master Lease. When
signed by Lessor and Lessee, this Schedule shall constitute a lease for the
Equipment described herein.
1. EQUIPMENT: See Attachment "A"
2. EQUIPMENT LOCATION: See Attachment "B"
3. ACCEPTANCE DATE: September 15, 1996
4. COMMENCEMENT DATE: October 1, 1996
5. INTERIM RENT: N/A
6. INITIAL PERIOD: 49 Months
7. ORIGINAL EQUIPMENT COST: $1,246,656.
8. MONTHLY RENTAL: Forty-eight monthly rentals of $30,688.43 each
plus all applicable taxes and one monthly rental
of $24,933.12 each plus applicable taxes -
maintenance beyond the factory warranty period
is not included in this lease.
Initial Period: $30,688.43 (plus all applicable
taxes and freight)
9. OPTIONS: At the expiration of the initial period, Lessee
has the four following options: 1)Renew the
lease for additional years at a lease rate
factor to be determined; 2)Upgrade to new Symbol
technology on a replacement basis under a new
lease schedule; 3)Purchase the equipment for the
then fair market value, not to exceed nine
percent (9%) of the Original Equipment Cost;
4)Return the equipment to a location specified
by the Lessor.
LESSOR: SYMBOLEASE, INC. LESSEE: FACTORY CARD OUTLET OF AMERICA,
LTD.
By: /s/ Brian T. Burke By: /s/ Glen J. Franchi
------------------------- --------------------------------
Brian T. Burke
Title: President Title: Executive Vice President
-----------------------------
Date:_______________________ Date: 10/14/96
-----------------------------
<PAGE>
ATTACHMENT A
Equipment List for Equipment Schedule No 9591999-1
Forming Part of Master Lease #F-96-801
Qty Description of Equipment Product Number
- --- ------------------------ --------------
536 Symbol Technologies L59100 Scanners SYM-002A09805
141 Symbol Technologies 3100 Batch Terminals SYM-PDT3100-S0824010
141 Symbol Technologies Single Slot Cradles SYM-CRD-3100-100U
141 Null Modem Cable 25M SYM-59846-03-00
141 NiMH Rechargeable Batteries SYM-KT- 12596-02
141 Printer Cable SYM-25-10413-0l
1 Application Development Kit SYM-SW-10441-04
141 Rascal Printers MON-9450-04
1 Rascal Programming Guide MON-M09459-1
<PAGE>
Exhibit 10.10.2
IBM Credit Corporation Stamford, CT 06904
Term Lease Master Agreement
Name and Address of Lessee: FACTORY CARD OUTLET OF Agreement No.: 5774339
AMERICA LTD
745 BIRGINAL DR
BENSENVILLE ,IL 60106-1212 Branch Office No.: 7MS
Branch Office Address: IBM CREDIT CORPORATION Customer No.: 2918261
600 ANTON BOULEVARD
COSTA MESA, CA 92626
ATTN: RCF DEPT. 577
The Lessor pursuant to this Term Lease Master Agreement (Agreement) will be (a)
IBM Credit Corporation, or a subsidiary or affiliate thereof, (b) a partnership
in which IBM Credit Corporation is a partner, or (c) a related business
enterprise for whom IBM Credit Corporation is the agent (Lessor). The subject
matter of the lease shall be machines, field installable upgrades, feature
additions or accessories marketed by International Business Machines Corporation
(IBM) and shall be referred to as Equipment. Any lease transaction requested by
Lessee and accepted by Lessor shall be specified in a Term Lease Supplement
(Supplement). A Supplement shall refer to and incorporate by reference this
Agreement and, when signed by the parties, shall constitute the lease (Lease)
for the Equipment specified therein. Additional details pertaining to a Lease
shall be specified in a Supplement. A Supplement may also specify additional
terms and conditions as well as other amounts to be financed (Financing).
Financing may include licensed program material charges (LPM Charges) for
licensed programs marketed by IBM under the referenced IBM license agreement
(License Agreement).
1. OPTIONS. The Supplement shall designate various lease and financing
options. Option A is a Lease available only for Modifications (Paragraph 23) to
Equipment under Option A prior to enactment of the Tax Reform Act of 1986.
Option B is a Lease with a fair market purchase option at the end of the Lease.
For Equipment under Option B Prime (B'), Lessor assumes for tax purposes that
Lessee is the owner. For financing LPM Charges, Option S will apply.
2. CREDIT REVIEW. For each Lease, Lessee consents to any reasonable credit
investigation and review by Lessor.
3. AGREEMENT TERM. This Agreement shall be effective when signed by both
parties and may be terminated by either party upon one month's written notice.
However, each Lease then in effect shall survive any termination of this
Agreement.
4. CHANGES. Lessor may, upon prior written notice, change the terms and
conditions of this Agreement. Any change will apply on the effective date
specified in the notice to Leases which have an Estimated Shipment Date, or
Effective Date for Additional License, one month or more after the date of
notice. By notice to Lessor in writing prior to delivery, or Effective Date for
Additional License, and within 15 days after receipt of such notice, Lessee may
terminate the Lease for an affected item. Otherwise, the change shall apply.
5. ADVANCE RENT. Lessee shall pay to Lessor, prior to Lessor's acceptance
of a Lease, Advance Rent, if specified. Advance Rent shall be refunded if Lessor
for any reason does not accept the Lease or Lessee terminates the Lease in
accordance with Paragraph 4,12 or 15.
6. SELECTION AND USE OF EQUIPMENT, PROGRAMMING AND LICENSED PROGRAM
MATERIALS. Lessee agrees that it shall be responsible for the selection, use of,
and results obtained from, the Equipment, any programming supplied by IBM
without additional charge for use on the Equipment (Programming) licensed
program materials, and any other associated equipment, programs or services.
7. ASSIGNMENT TO LESSOR. Lessee hereby assigns, exclusively to Lessor,
Lessee's right to purchase the Equipment from IBM. This assignment is effective
when Lessor accepts the applicable Supplement and Lessor shall then be obligated
to purchase and pay for the Equipment. Other than the obligation to pay the
purchase price, all responsibilities and limitations applicable to Customer as
defined in the referenced IBM purchase agreement in effect at the time the Lease
is accepted by Lessor (Purchase Agreement) shall apply to Lessee.
If the Equipment is subject to a volume procurement amendment to the
Purchase Agreement or to another discount offering, (a) Lessor will pay the same
amount for the Equipment that would have been payable by Lessee, and (b) Lessee
will remain responsible to IBM for any late order change charges, settlement
charges, adjustment charges or any other charges incurred under the volume
procurement amendment or other discount offering.
8. LEASE NOT CANCELLABLE; LESSEE'S OBLIGATIONS ABSOLUTE. Lessee's
obligation to pay shall be absolute and unconditional and shall not be subject
to any delay, reduction, set-off, defense, counterclaim or recoupment for any
reason whatsoever, including any failure of the Equipment, Programming or
licensed program materials or any representations by IBM. If the Equipment,
Programming or licensed program materials are unsatisfactory for any reason,
Lessee shall make any claim solely against IBM and shall, nevertheless, pay
Lessor all amounts payable under the Lease.
9. WARRANTIES. Lessor grants to Lessee the benefit of any and all
warranties made available by IBM in the Purchase Agreement. Lessor warrants that
neither Lessor nor anyone acting or claiming through Lessor, by assignment or
otherwise, will interfere with Lessee's quiet enjoyment of the use of the
Equipment so long as no event of default shall have occurred and be continuing.
EXCEPT FOR LESSOR'S WARRANTY OF QUIET ENJOYMENT, LESSOR MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
AS TO LESSOR, LESSEE LEASES THE EQUIPMENT AND TAKES
THE ADDITIONAL TERMS AND CONDITIONS ON PAGES 2 THROUGH 4 ARE PART OF THIS
AGREEMENT.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND ITS SUPPLEMENT,
UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER,
LESSEE AGREES THAT THIS AGREEMENT AND ITS SUPPLEMENT ARE THE COMPLETE AND
EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL
PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS
BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER THEREOF.
[_] INITIAL IF AGREEMENT COVERAGE PAGE
IS ATTACHED.
Accepted by:
FACTORY CARD OUTLET OF AMERICA LTD
IBM Credit Corporation ---------------------------------------
Customer
For or as Lessor:
By: /s/ signature illegible By: /s/ Glen J. Franchi
- -------------------------------- ---------------------------------------
Authorized Signature Authorized Signature
Glen J. Franchi 10-28-96
________________________________ ----------------------------------------
Name (Type or Print) Date Name (Type or Print) Date
Page 1 of 5
<PAGE>
ANY PROGRAMMING "AS IS". IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY
FOR, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR FOR, CONSEQUENTIAL DAMAGES,
ANY LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER COMMERCIAL LOSS.
10. LESSEE AUTHORIZATION. So long as Lessee is not in default under the
Lease (a) Lessee is authorized to act on Lessor's behalf concerning delivery and
installation of the Equipment, any IBM warranty service for the Equipment, and
any programming services for the Programming, and (b) Lessee shall have, solely
for these purposes, all rights Lessor may have against IBM under the Purchase
Agreement. The foregoing authorization shall not constitute any surrender of
Lessor's interest in the Equipment.
11. DELIVERY AND INSTALLATION. Lessee shall arrange with IBM for the
delivery of the Equipment and Programming and for installation or the Equipment
at the Equipment Location. Lessee shall pay any delivery and installation
charges. Lessor shall not be liable to Lessee for any delay in, or failure of,
delivery of the Equipment and Programming. Lessee shall examine the Equipment
and Programming immediately upon delivery. If the Equipment is not in good
condition or the Equipment or Programming does not correspond to IBM's
specifications, Lessee shall promptly give IBM written notice and shall provide
IBM reasonable assistance to cure the defect or discrepancy.
12. LATE DELIVERY. If the Equipment or licensed program materials are not
delivered to the Equipment Location on or before the 15th day after the
Estimated Shipment Date, Lessor may, upon written notice to Lessee, increase the
Lease Rate. Lessee may terminate the Lease for the affected item by giving
Lessor written notice prior to delivery. Otherwise, the Rent shall be adjusted
to reflect such increase.
13. RENT COMMENCEMENT DATE. The Rent Commencement Date, unless otherwise
specified in the Supplement, shall be the date payment is due IBM under the
applicable referenced agreement. Lessee shall be notified of the Rent
Commencement Date and the serial numbers of the Equipment.
14. LEASE TERM. The Lease shall be effective when signed by both parties.
The initial Term of the Lease shall expire at the end or the number of Payment
Periods, specified as Term in the Supplement, after the Rent Commencement Date.
However, obligations under the Lease shall continue until they have been
performed in full.
15. RATE PROTECTION. Unless modified pursuant to Paragraph 12, the Rent
shall be based on the Lease Rate specified in the Supplement or such greater
Lease Rate as may be specified by written notice to Lessee more than one month
before the Estimated Shipment Date or Effective Date for Additional License. By
notice to Lessor in writing prior to delivery, or Effective Date for Additional
License, and within 15 days after receipt of such notice, Lessee may terminate
the Lease for the affected item. Otherwise, the Rent shall be adjusted to
reflect the increase. The Unit Purchase Price and LPM Charges are subject to
change in accordance with the referenced agreements.
16. RENT. During the initial Term, Lessee shall pay Lessor, for each
Payment Period, Rent as determined in Paragraph 15. Lessee's obligation to pay
shall begin on the Rent Commencement Date. Rent will be invoiced in advance as
of the first day of each Payment Period and will be due on the day following the
last day of the Payment Period. When the Rent Commencement Date is not on the
first day of a calendar month and/or when the initial Term does not expire on
the last day of a calendar month, the applicable Rent will be prorated on the
basis of 30-day months. Advance Rent, if any, will be applied to the initial
invoice(s).
17. RENEWAL. If Lessee is not then in default under the Lease, Lessee may
renew the Lease one or more times but not beyond six years from the expiration
of the initial Term. Lessor shall offer renewal Terms of one year and may offer
longer Terms if then generally available. For a renewal Term, upon request by
Lessee, at least five months prior to Lease expiration, Lessor shall notify
Lessee, at least four months prior to expiration, of the Rent, any changes to
the Payment Period and due dates, and of any required Purchase Option or Renewal
Option, Percents not specified in the Supplement. The Rent shall be objectively
determined by Lessor by using the projected fair market rental value of the
Equipment as of the commencement of such renewal Term. However, for Option B',
the Rent shall be as specified in the Supplement. Lessee may renew for any
renewal Term only by so notifying Lessor in writing at least three months before
expiration.
18. PURCHASE OF EQUIPMENT. If Lessee is not then in default under the
Lease, Lessee may, upon three months prior written notice to Lessor, purchase
Equipment upon expiration of the Lease. Under Option A or B, the purchase price
shall be objectively determined by Lessor by using the projected fair market
sales value of the Equipment as of such expiration date plus, for Equipment
under Option A, any recapture of investment tax credit and any tax due thereon.
Under Option B Prime (B') the purchase price shall be an amount determined by
multiplying the Unit Purchase Price by the Purchase Option Percent for such
Equipment, If Lessee purchases any Equipment, Lessee shall, on or before the
date of purchase, pay to Lessor the purchase price, any applicable taxes, all
Rent due through the day preceding the date of purchase, any other amounts due,
and the prepayment of Financing (Paragraph 35). Lessor shall, on the date of
purchase, transfer to Lessee by bill Of sale, without recourse or warranty of
any kind, express or implied, all of Lessor's right, title and interest in and
to such Equipment on an As Is, Where Is basis except that Lessor shall warrant
title free and clear of all encumbrances.
19. OPTIONAL EXTENSION. If Lessee has not elected to renew or purchase, and
as long as Lessee is not in default under the Lease, the Lease will be extended
unless Lessee notifies Lessor in writing, not less than three months prior to
Lease expiration. that Lessee does not want the extension. The extension will be
under the same terms and conditions then in effect, including Rent (but, for
Options A or B, not less than fair market rental value) and will continue until
the earlier of termination by either party upon three months' prior written
notice or six years after expiration of the initial Term.
20. INSPECTION; MARKING; FINANCING STATEMENT. Upon request, Lessee shall
make the Equipment and its maintenance records available for inspection by
Lessor during Lessee's normal business hours. Lessee shall affix to the
Equipment any labels indicating ownership supplied by Lessor, Lessee shall
execute and deliver to Lessor for filing any Uniform Commercial Code financing
statements or similar documents Lessor may reasonably request.
21. EQUIPMENT USE. Lessee agrees that Equipment will be operated by
competent, qualified personnel, in accordance with applicable operating
instructions, laws and government regulations and that Equipment under Option A
will be used only for business purposes.
22. MAINTENANCE. Lessee, at its expense, shall keep the Equipment in a
suitable environment as specified by IBM and in good condition and working
order, ordinary wear and tear excepted.
23. ALTERATIONS; MODIFICATIONS; PARTS. Lessee may alter or modify the
Equipment only upon written notice to Lessor, Any non-IBM alteration is to be
removed and the Equipment restored to its normal, unaltered condition at
Lessee's expense prior to its return to Lessor. At Lessee's option, any IBM
field installable upgrade, feature addition or accessory added to any item of
Equipment (Modification) may be removed. If removed, the Equipment is to be
restored at Lessee's expense to its normal, unmodified condition. If not
removed, such Modification shall, upon return of the Equipment, become, without
charge, the property of Lessor free of all encumbrances. Restoration will
include replacement of any parts removed in connection with the installation of
an alteration or Modification, Any part installed in connection with warranty or
maintenance service shall be the property of Lessor.
24. LEASES FOR MODIFICATIONS AND ADDITIONS. Lessor will arrange for leasing
of Modifications and Additions under terms and conditions then generally in
effect, subject to satisfactory credit review, Additions shall be machines, or
LPM Charges for licensed program materials, which are associated with the
Equipment. These Modifications and Additions must be ordered by Lessee from IBM.
Any lease for Modifications shall, and any lease for Additions may, expire at
the same time as the Lease for the Equipment. The rent shall be determined by
Lessor and specified in a Supplement. If Lessee purchases Equipment prior to
Lease expiration, Lessee shall simultaneously purchase any Modifications under
the Lease.
25. RETURN OF EQUIPMENT. Upon expiration or termination of the Lease for
any item of Equipment, or upon demand by Lessor pursuant to Paragraph 38, Lessee
shall promptly return the Equipment freight prepaid, to a location in the
continental United States specified by Lessor. Except for Casualty Loss, Lessee
shall pay any costs and expenses incurred by Lessor to inspect and
Page 2 of 5
<PAGE>
[illegible] the Equipment for IBM's maintenance agreement service [illegible]
parts removed in connection therewith shall become Lessor's property.
26. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessor Will maintain, at its own
expense, insurance covering loss of or damage to the Equipment (but excluding
any Modifications not subject to a Lease and any non-IBM alterations) with a
$5,000 deductible per incident, If any item of Equipment shall be lost, stolen,
destroyed or irreparably damaged by any cause whatsoever (Casualty Loss) before
the Date of Installation as defined in the Purchase Agreement, the Lease for
that item shall terminate. If any item of Equipment suffers Casualty Loss, or
shall be otherwise damaged, on or after the Date of Installation, Lessee shall
promptly inform Lessor. If Lessor determines that the item can be economically
repaired, Lessee shall place the item in good condition and working order and
Lessor will reimburse Lessee the reasonable cost of such repair, less the
deductible. If not so repairable, Lessee shall pay Lessor the lesser of $5,000
or the fair market value of the Equipment immediately prior to the Casualty
Loss. Upon Lessor's receipt of payment the Lease for that item shall terminate.
27. TAXES. Lessee shall promptly reimburse Lessor for, or shall pay
directly if so requested by Lessor, as additional Rent, all taxes, charges, and
fees imposed or levied by any governmental body or agency upon or in connection
with the purchase, ownership leasing, possession, use or relocation of the
Equipment or Programming or in connection with the financing of LPM Charges or
otherwise in connection with the transactions contemplated by the Lease,
excluding, however, all taxes on or measured by the net income of Lessor. Upon
request, Lessee will provide proof of payment. Any other taxes, charges and fees
relating to the licensing, possession or use of licensed program materials will
be governed by the License Agreement.
28. LESSORS PAYMENT. If Lessee fails to perform its Obligations under
Paragraph 27 or 31 or to discharge any encumbrances created by Lessee, Lessor
shall have the right to substitute performance, in which case, Lessee shall pay
Lessor the cost thereof.
29. TAX INDEMNIFICATION (APPLIES ONLY FOR EQUIPMENT UNDER OPTIONS A OR B).
The Lease is entered into on the basis that under the Internal Revenue Code of
1986, as amended (Code), Lessor shall be entitled to (1) maximum Accelerated
Cost Recovery System (ACRS) deductions for 5-year property and (2) deductions
for interest expense incurred to finance purchase of the Equipment. The
Bulletin "Lessor's Tax Assumptions" will be given to Lessee on request, Lessee
represents, warrants and covenants that at all times during the Lease:
(a) no item of Equipment will constitute public utility property as
defined in the Code;
(b) Lessee will not make any election under the Code or take any
action, or fail to take any action, if such election, action or failure to act
would cause any item of Equipment to cease to be eligible for any ACRS
deductions or interest deductions;
(c) Lessee will keep and make available to Lessor the records required
to establish the matters referred to in this Paragraph 29; and
(d) for Equipment located in a United States possession, Lessee
represents that Lessee is a tax exempt entity as defined in he Code.
Furthermore, if Lessee is a tax exempt entity, Lessee covenants that it
will not renew or extend the Lease if such action shall cause Lessor a Tax Loss
as described below.
If, as a result of any act, failure to act, misrepresentation, inaccuracy,
or breach of any warranty or covenant, or default under the ease, by Lessee, an
affiliate of Lessee, or any person who shall obtain the use of possession of any
item of Equipment through Lessee, Lessor shall lose the right to claim or shall
suffer any disallowance or recapture of all or any portion of any ACRS
deductions [illegible] interest deductions (Tax Loss) with respect to any item
of Equipment, then, promptly upon written notice to Lessee that a Tax Loss has
occurred, Lessee shall reimburse Lessor the amount determined below.
The reimbursement shall be an amount that, in the reasonable opinion of
Lessor, shall make Lessor's after-tax rate of return and cash flows (Financial
Returns), over the term of the Lease for such [illegible] of Equipment, equal to
the expected Financial Returns that would have been otherwise available. The
reimbursement shall take into account the effects of any interest, penalties and
additions to tax required to be paid by Lessor as a result of such Tax Loss and
all taxes required to be paid by Lessor as a result of any payments pursuant to
this paragraph. Financial Returns shall be based on economic and tax assumptions
used by Lessor in entering into the Lease.
All the rights and privileges of Lessor arising from this Paragraph 29
shall survive the expiration or termination of the Lease.
For purposes of determining tax effects under Paragraphs 18, 27, 29 and 30,
the term Lessor shall include, to the extent of interests, any partner in Lessor
and any affiliated group of corporations, and each member thereof, of which
Lessor or any such partner is or shall become a member and with which Lessor or
any such partner loins in the filing of consolidated or combined returns.
30. GENERAL INDEMNITY. This Lease is a net lease. Therefore, Lessee shall
indemnify Lessor against, and hold Lessor harmless from, any and all claims,
actions, damages, obligations, liabilities and liens: and all costs and
expenses, including legal fees, incurred by Lessor in connection therewith:
arising Out of the Lease including, without limitation, the purchase, ownership,
lease, licensing, possession, maintenance, condition, use or return of the
Equipment, Programming or licensed program materials; or arising by operation of
law: excluding, however, any of the foregoing which result from the sole
negligence or willful misconduct of Lessor. Lessee agrees that upon written
notice by Lessor of the assertion of any claim, action, damage, obligation,
liability or lien, Lessee shall assume full responsibility for the defense
thereof. Any payment pursuant to this paragraph shall be of such amount as shall
be necessary so that, after payment of any taxes required to be paid thereon by
Lessor, including taxes on or measured by the net income of Lessor, the balance
will equal the amount due hereunder. Lessee's obligations under this paragraph
shall not constitute a guarantee of the residual value or useful life of any
item of Equipment or a guarantee of any debt of Lessor. The provisions of this
paragraph with regard to matters arising during the Lease shall survive the
expiration or termination of the Lease.
31. LIABILITY INSURANCE. Lessee shall obtain and maintain comprehensive
general liability insurance, in an amount of $1,000,000 or more for each
occurrence, with an insurer having a Best's Policyholders rating of B+ or
better. The policy shall name Lessor as an additional insured as Lessor's
interests may appear and shall contain a clause requiring the insurer to give
Lessor at least one month's prior written notice of the cancellation, or any
alteration in the terms, of the policy. Lessee shall furnish to Lessor, upon
request, evidence that such insurance coverage is in effect.
32. SUBLEASE AND RELOCATION OF EQUIPMENT; ASSIGNMENT BY LESSEE. Upon
Lessor's prior written consent, which will not be unreasonably withheld, Lessee
may sublet the Equipment or relocate it from the Equipment Location. No sublease
or relocation shall relieve Lessee of its obligations under the Lease. In no
event shall Lessee remove the Equipment from the United States. Lessee shall not
assign, transfer or otherwise dispose of the Lease or Equipment, or any interest
therein, or create or suffer any levy, lien or encumbrance thereof except those
created by Lessor.
33. ASSIGNMENT BY LESSOR. Lessee acknowledges and understands that the
terms and conditions of the Lease have been fixed to enable Lessor to sell and
assign its interest or grant a security interest or interests in the Lease and
the Equipment individually or together, in whole or in part, for the purpose of
securing loans to Lessor or otherwise. If Lessee is given written notice of any
assignment, it shall promptly acknowledge receipt thereof in writing. Each such
assignee shall have all of the rights of Lessor under the Lease. Lessee shall
not assert against any such assignee any setoff, defense or counterclaim that
Lessee may have against Lessor or any other person. Lessor shall not be relieved
of its obligations hereunder as a result of any such assignment unless Lessee
expressly consents thereto.
34. FINANCING. If the Lease provides for financing of LPM Charges, Lessor
will pay such Charges directly to IBM. Any other charges due IBM under the
License Agreement shall be paid directly to IBM by Lessee. Lessee's obligation
to pay Rent shall not be affected by any discontinuance, return or destruction
of any license or licensed program materials under the License Agreement on or
after the date LPM Charges are due. If Lessee discontinues any of the licensed
program materials in accordance with the terms of the License Agreement prior to
the date LPM Charges are due, the financing of affected LPM Charges shall be
cancelled.
Page 3 of 5
<PAGE>
35. FINANCING PREPAYMENT (Does Not Apply For [illegible] of Equipment).
Lessee may terminate an item of [illegible] (but not an item of Equipment) by
prepaying its remaining Rent. Lessee shall provide Lessor with notice of the
intended prepayment date which shall be at least one month after the date of the
notice. Lessor may, depending on market conditions at the time, make an
adjustment in the remaining Rent to reflect such prepayment and shall advise
Lessee of the balance to be paid. If, prior to Lease expiration, Lessee
purchases the Equipment or if the Lease is terminated, Lessee shall at the same
time prepay any related Financing including that for programs licensed to the
Equipment.
36. DELINQUENT PAYMENTS. If any amount to be paid to Lessor is not paid on
or before its due date, Lessee shall pay Lessor on demand 2% of such late
payment for each month or part thereof from the due date until the date paid or,
if less, the maximum allowed by law.
37. DEFAULT; NO WAIVER. Lessee shall be in default under the Lease upon the
occurrence of any of the following events: (a) Lessee fails to pay when due any
amount required to be paid by Lessee under the Lease and such failure shall
continue for a period of seven days after the due date; (b) Lessee fails to
perform any other provisions under the Lease or violates any of the covenants or
representations made by Lessee in the Lease, or Lessee fails to perform any of
its obligations under any other Lease entered into pursuant to this Agreement,
and such failure or breach shall continue unremedied for a period of 15 days
after written notice is received by Lessee from Lessor; (c) Lessee violates any
of the covenants or representations made by Lessee in any application for credit
or in any agreement with IBM with respect to the Equipment or licensed program
materials or fails to perform any provision in any such agreement (except the
obligation to pay the purchase price or LPM Charges); (d) Lessee makes an
assignment for the benefit of creditors, whether voluntary or involuntary, or
consents to the appointment of a trustee or receiver, or if either shall be
appointed for Lessee or for a substantial part of its property without its
consent; (e) any petition or proceeding if filed by or against Lessee under any
Federal or State bankruptcy or insolvency code or similar law; or (f) if
applicable, Lessee makes a bulk transfer subject to the provisions of the
Uniform Commercial Code.
Any failure of Lessor to require strict performance by Lessee or any waiver
by Lessor of any provision in the Lease shall not be construed as a consent or
waiver of any other breach of the same or of any other provision.
38. REMEDIES. If Lessee is in default under the Lease, Lessor shall have
the right, in its sole discretion, to exercise any one or more of the following
remedies in order to protect its interests, reasonably expected profits and
economic benefits. Lessor may (a) declare any Lease entered into pursuant to
this Agreement to be in default; (b) terminate in whole or in part any Lease:
(c) recover from Lessee any and all amounts then due and to become due; (d) take
possession of any or all items of Equipment, wherever located, without demand or
notice, without any court order or other process of law; and (e) demand that
Lessee return any or all such items of Equipment to Lessor in accordance with
Paragraph 25 and, for each day that Lessee shall fail to return any item of
Equipment, Lessor may demand an amount equal to the Rent, prorated on the basis
of a 30-day month, in effect immediately prior to such default. Upon
repossession or return of such item or items of Equipment, Lessor shall sell,
lease or otherwise dispose of such item or items in a commercially reasonable
manner, with or without notice and on public or private bid, and apply the net
proceeds thereof towards the amounts due under the Lease but only after
deducting (i) in the case of sale, the estimated fair market value of such item
or items as of the scheduled expiration of the Lease; or (ii) in the case of any
replacement lease, the rent due for any period beyond the scheduled expiration
of the Lease for such item or items (iii) in either case, all expenses,
including legal fees, incurred in connection therewith; and (iv) where
appropriate, any amount in accordance with Paragraph 29. Any excess net proceeds
are to be retained by Lessor. Lessor may pursue any other remedy available at
law or in equity, including, but not limited to, seeking damages, specific
performance and an injunction.
No right or remedy is exclusive of any other provided herein or permitted
by law or equity. All such rights and remedies shall be cumulative and may be
enforced concurrently or individually from time to time.
39. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs and
expense, including legal and collection fees, incurred by Lessor in enforcing
the terms, conditions or provisions of the Lease or in protecting Lessor's
rights and interests in the Lease and the Equipment.
40. OWNERSHIP; PERSONAL PROPERTY; LICENSED PROGRAM MATERIALS. The Equipment
under Lease is and shall be the property of Lessor. Lessee shall have no right,
title or interest therein except as set forth in the Lease. The Equipment is,
and shall at all times be and remain, personal property and shall not become a
fixture or realty. Licensed program materials are licensed and provided by IBM
directly to Lessee under the terms and conditions of the License Agreement.
41. NOTICES; ADMINISTRATION. Service of all notices under the Lease Shall
be sufficient if delivered personally or mailed to Lessee at its address
specified in the Supplement or to IBM Credit Corporation as Lessor in care of
the IBM Branch Office specified in the Supplement. Notice by mail shall be
effective when deposited in the United States mail, duly addressed and with
postage prepaid. Notices, consents and approvals from or by Lessor shall be
given by Lessor or on its behalf by IBM and all payments shall be made to IBM
until Lessor shall notify Lessee otherwise.
42. LESSEE REPRESENTATION. If the Lease includes Financing, Lessee
represents that it is (a) a corporation if any item of Equipment is located in
Ohio, Mississippi, Virginia or West Virginia, and/or (b) a business corporation
if any item of Equipment is located in Pennsylvania.
43. REVISIONS FOR PREVIOUSLY INSTALLED EQUIPMENT. Equipment installed with
Lessee under an IBM lease or rental agreement may be purchased by Lessor, on the
Effective Date of Purchase (as defined in the Purchase Agreement), for lease to
Lessee under Option B or B'. For such Equipment, the Lease shall be revised as
follows:
Paragraphs 4 and 26 -- replace "Estimated Shipment Date" by "Intended
Effective Date of Purchase"; replace "delivery" and "Date of Installation" by
"Effective Date of Purchase";
Paragraph 7 -- add at the end of the first paragraph, Assignment of the
option to purchase installed Equipment at the net purchase option price under an
IBM lease or rental agreement will be permitted only when Lessee submits the
Supplement in sufficient time to achieve the Intended Effective Date of
Purchase. The Effective Date of Purchase under this assignment shall be the
later of the first day of the Quotation Month or the day on which the applicable
Supplement is accepted by Lessor. If the Quotation Month expires and the
purchase of Equipment is not concluded, this assignment and Lease will be null
and void regarding any such Equipment and all rights, duties and obligations of
Lessee and IBM will remain in accordance with the provisions of the IBM
agreement under which the Equipment is currently installed.";
Paragraphs 11 and 12 -- delete both paragraphs; and
Paragraph 15 -- replace the entire paragraph with the following; The Rent
shall be based on the Lease Rate specified in the Supplement or such greater
Lease Rate as may be specified by written notice to Lessee more than one month
before the Effective Date of Purchase. The Unit Purchase Price is Subject to
change in accordance with the referenced Purchase Agreement. Lessee may
terminate the Lease for any item subject to an increase by giving Lessor written
notice on or before the Effective Date of Purchase.
44. APPLICABLE LAW; SEVERABILITY. The Lease Shall be governed by the laws
of the State of Connecticut. If any provision Shall be held to be invalid or
unenforceable, the validity and enforceability of the remaining provisions Shall
not in any way be affected or impaired.
Page 4 of 5
<PAGE>
IBM Credit Corporation Stamford, CT 06904
Term Lease Master Agreement
Agreement No.: 5774339
Enterprise No.: 2918132
Agreement Coverage Page
List below all entities affiliated With Lessee that may execute Supplements and
be deemed bound to this Agreement:
Entity Legal Name Address (if not all locations)
1. None
2
3.
4.
5.
6.
7.
8.
9.
10.
11.
page 5 of 5
<PAGE>
<TABLE>
<CAPTION>
TERM LEASE SUPPLEMENT
Date Prepared: 10/25/96 (Vendor Supplied Equipment) Page 1 of 5
Customer No.: 2918261 Installed at Location Supplement Number: D00293515 Purchase Agreement Ref.: 5774339
Customer Name and Address FACTORY CARD OUTLET OF IBM Branch Office No.: 7MS
FACTORY CARD OUTLET OF AMERICA, LTD. IBM Branch Office Address Lease Agreement No.: 5774339
AMERICA, LTD. 745 BERGINAL DR. IBM CREDIT CORPORATION Associated Supplement Nos.:
745 BERGINAL DR. BENSENVILLE, IL 60106-1212 600 ANTON BOULEVARD
BENSENVILLE, IL 60106-1212 COSTA MESA, CA 92626 Amendment Nos.:
ATTN: DEPT. RCF/577 Addendum Nos.: Q0130576104
800-426-3889
Customer Reference: Quote Letter No.: Q0130576106
Location/ Leased or Financed Item Plant Order (*) (*) Unit Purchase
Line Lessor Installed Type Model/Feature or Serial (*) Purch. Maint. (*) Price/
No Customer No. State Description MES No. No. Option Option Includ. Term Amount Financed
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
001 2918261/ IL 4694-044 (QTY of 85 at B$ $1 36 499,715.00
4508679 $5.879 EA) 4694 BASE UNIT
002 2918261/ IL 5716-SS1 S NA 36 26,595.00
4508679 OPERATING SYSTEM/400(R)
003 2918261/ IL 5716-XA1 S NA 36 14,700.00
4508679 CLIENT ACCESS FOR OS/400
004 2918261/ IL 5716-PW1 S NA 36 6,000.00
4508679 APP DEV TOOLSET OS/400 V
005 2918261/ IL 5716-QU1 S NA 4,800.00
4508679 QUERY FOR OS/400 V3
- ------------------------------------------------------------------------------------------------------------------------------------
Supplier Name Supplier Customer No Security Deposit Total Amount
Financed
GATEWAY DATA SCIENCES 3630444 (this page)
CUSTOMER ELECTS TO PAY LUMP SUM TAX AMOUNT: $48,191 551,810.00
- ------------------------------------------------------------------------------------------------------------------------------------
(*) See page 5 for explanations, definitions and additional terms. Total Amount
Financed
(this page)
866,347.00
-------------
Lease (*) Estimated
Rate Commencement
1/1000 Rent /Release Date
- ------------------------------------------------------------
001 STEP 10/96
002 STEP 10/96
003 STEP 10/96
004 STEP 10/96
005 STEP 10/96
- ------------------------------------------------------------
Interim See Step Pmt Payment Period
Rent Attachment for MONTHLY IN ARREARS
Applies Rent Details
-------------------
NO Rent Commencement Date
- ------------------------------------------------------------
See Step Pmt
Attachment for
Rent Details
---------------
FOR THESE LEASE RATES TO BE VALID, THIS SUPPLEMENT MUST BE SIGNED AND RECEIVED BY LESSOR BY: 10/20/96.
THE LEASE AGREEMENT REFERENCED ABOVE AND THIS SUPPLEMENT CONTAIN THE TERMS FOR THIS TRANSACTION. LESSEE AUTHORIZES LESSOR TO CHANGE
THE AMOUNT FINANCED AND THE RENT IF LESSEE'S SUPPLIER CHANGES LESSEE'S PURCHASE PRICE. LESSEE FURTHER AUTHORIZES LESSOR TO INSERT
SERIAL NUMBERS ON THIS SUPPLEMENT WITHOUT FURTHER AUTHORIZATION FROM LESSEE. BY SIGNING BELOW, BOTH PARTIES ACKNOWLEDGE THAT THEY
HAVE READ AND UNDERSTAND THE AGREEMENTS AND AGREE TO THE TERMS. FURTHER LESSEE AGREES THAT THESE TERMS SUPERSEDE ALL PROPOSALS OR
PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN BOTH PARTIES RELATING TO THE ITEMS LISTED HEREIN. DELIVERY
OF AN EXECUTED COUNTERPART OF THIS SUPPLEMENT BY FACSIMILE OR ANY OTHER RELIABLE MEANS SHALL BE DEEMED TO BE AS EFFECTIVE FOR ALL
PURPOSES AS DELIVERY OF THE MANUALLY EXECUTED COUNTERPART. THE LESSEE UNDERSTANDS THAT LESSOR MAY MAINTAIN A COPY OF THIS SUPPLEMENT
IN ELECTRONIC FORM AND AGREES THAT A COPY PRODUCED FROM THE ELECTRONIC FORM OR BY ANY RELIABLE MEANS (FOR EXAMPLE, PHOTOCOPY OR
FACSIMILE) SHALL IN ALL RESPECTS BE CONSIDERED EQUIVALENT TO AN ORIGINAL.
</TABLE>
Accepted by: FACTOR CARD OUTLET OF Initial below
IBM CREDIT CORPORATION AMERICA LTD. to request an
---------------------- IBM maintenance
Lessee agreement on
IBM leased
items.
For or as Lessor:
By: /s/ signature illegible By: /s/Glen J. Franchi
-------------------------- -------------------------
Authorized Signature Authorized Signature
Glen J. Franchi 10-28-96
- ------------------------------- ------------------------------
Name (Type or Print) Date Name (Type or Print) Date
<PAGE>
<TABLE>
<CAPTION>
TERM LEASE SUPPLEMENT
Date Prepared: 10/25/96 (Vendor Supplied Equipment) Page 2 of 5
Customer No.: 2918261 Installed at Location Supplement Number: D00293515 Purchase Agreement Ref.: 5774339
Customer Name and Address FACTORY CARD OUTLET OF IBM Branch Office No.: 7MS
FACTORY CARD OUTLET OF AMERICA, LTD. IBM Branch Office Address Lease Agreement No.: 5774339
AMERICA, LTD. 745 BERGINAL DR. IBM CREDIT CORPORATION Associated Supplement Nos.:
745 BERGINAL DR. BENSENVILLE, IL 60106-1212 600 ANTON BOULEVARD
BENSENVILLE, IL 60106-1212 COSTA MESA, CA 92626 Amendment Nos.:
ATTN: DEPT. RCF/577 Addendum Nos.: Q0130576104
800-426-3889
Customer Reference: Quote Letter No.: Q0130576106
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Location/ Leased or Financed Item Plant Order (*) (*) Unit Purchase
Line Lessor Installed Type Model/Feature or Serial (*) Purch. Maint. (*) Price/
No Customer No. State Description MES No. No. Option Option Includ. Term Amount Financed
- ------------------------------------------------------------------------------------------------------------------------------------
006 2918261/ IL 5716-RG1 S NA 36 6,000.00
4508679 1INT LANG ENV(R)RPG OS/4
007 2918261/ IL 5716-BR1 S NA 36 3,050.00
4508679 BKUP RECVRY MEDIA OS/400
008 2918261/ IL 5716-TBC S NA 36 2,600.00
4508679 PAGERPAC FOR OS/400V3
009 2918261/ IL 9406-510 B$ 1$ 36 257,648.00
4508679 AS/400 RISC Series Proce
010 2918261/ IL 9427-210 B$ 1$ 36 13,695.00
4508679 8MM TAPE LIBRARY
011 2918261/ IL 9995-007 S 36 31,544.00
4508679 SYSTEM SERVICES AMENDMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Total Amount
Financed
(this page)
314,537.00
- ------------------------------------------------------------------------------------------------------------------------------------
Lease (*) Estimated
Rate Commencement
1/1000 Rent /Release Date
- ------------------------------------------------------------
006 STEP 10/96
007 STEP 10/96
008 STEP 10/96
009 STEP 10/96
010 STEP 10/96
011 STEP 10/31/96
- ------------------------------------------------------------
See Step Pmt Payment Period
Attachment for
Rent Details
MONTHLY IN
ARREARS
- ------------------------------------------------------------
FOR THESE LEASE RATES TO BE VALID, THIS SUPPLEMENT MUST BE SIGNED AND RECEIVED BY LESSOR BY: 10/20/96.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TERM LEASE SUPPLEMENT
Date Prepared: 10/25/96 (Vendor Supplied Equipment) Page 3 of 5
Customer No.: 2918261 Installed at Location Supplement Number: D00293515 Purchase Agreement Ref.: 5774339
Customer Name and Address FACTORY CARD OUTLET OF IBM Branch Office No.: 7MS
FACTORY CARD OUTLET OF AMERICA, LTD. IBM Branch Office Address Lease Agreement No.: 5774339
AMERICA, LTD. 745 BERGINAL DR. IBM CREDIT CORPORATION Associated Supplement Nos.:
745 BERGINAL DR. BENSENVILLE, IL 60106-1212 600 ANTON BOULEVARD
BENSENVILLE, IL 60106-1212 COSTA MESA, CA 92626 Amendment Nos.:
ATTN: DEPT. RCF/577 Addendum Nos.: Q0130576104
800-426-3889
Customer Reference: Quote Letter No.: Q0130576106
Plant Order
or Serial
Customer No. Type Model/Feature MES No. No. Description
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2918261 9427-210
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $3729.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $305.00.
2918261 9406-510
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $70155.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $5743.00.
2918261 4694-044
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $136067.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $11139.00.
2918261 5798-TBC
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $708.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $58.00.
2918261 5716-BR1
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $831.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $68.00.
2918261 5716-QU1
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $1307.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $107.00.
2918261 5716-PW1
2918261 5716-RG1
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $1634.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $134.00.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TERM LEASE SUPPLEMENT
Date Prepared: 10/25/96 (Vendor Supplied Equipment) Page 4 of 5
Customer No.: 2918261 Installed at Location Supplement Number: D00293515 Purchase Agreement Ref.: 5774339
Customer Name and Address FACTORY CARD OUTLET OF IBM Branch Office No.: 7MS
FACTORY CARD OUTLET OF AMERICA, LTD. IBM Branch Office Address Lease Agreement No.: 5774339
AMERICA, LTD. 745 BERGINAL DR. IBM CREDIT CORPORATION Associated Supplement Nos.:
745 BERGINAL DR. BENSENVILLE, IL 60106-1212 600 ANTON BOULEVARD
BENSENVILLE, IL 60106-1212 COSTA MESA, CA 92626 Amendment Nos.:
ATTN: DEPT. RCF/577 Addendum Nos.: Q0130576104
800-426-3889
Customer Reference: Quote Letter No.: Q0130576106
Plant Order
or Serial
Customer No. Type Model/Feature MES No. No. Description
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<S> <C> <C> <C> <C>
2918261 5716-XA1
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $4004.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $329.00.
2918261 5716-SS1
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $7724.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $595.00.
2918261 9995-007
The following Step Payment information applies to the above unit
For payment 1 to 1 the rate is $272.29 and the monthly rent is $8592.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $706.00.
Supplement Totals
The following includes totals for all units on the supplement
For payment 1 to 1 the rate is $272.29 and the monthly rent is $235905.00.
For payment 2 to 36 the rate is $22.29 and the monthly rent is $19318.00.
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TERM LEASE SUPPLEMENT Supp. No.: D00293515
Additional Terms and Conditions
OPTION CODES
B,B+,C,C+ Lease with fair market value end of lease renewal and purchase options
B', C' Lease with prestated end of lease purchase and renewal options
B$, C$ Lease with, a one dollar ($l) end of lease purchase option
L Lease for Used Equipment
S Financing of IBM One-Time Charges
T Financing of non-IBM One-Time Charges
PURCH. Option (PURCHASE OPTION - END OF LEASE ONLY)
FM Fair market sales value as determined by Lessor, at end of Lease
CL Contact IBM Credit for purchase price
NA Not Applicable
$1 Purchase Price is One Dollar ($1.00)
number Prestated Purchase Percent - Purchase price will be the Unit
Purchase Price times this percent
MAINT. INCLUD. (Maintenance Included)
y Lease includes maintenance coverage
TERM
The initial Term starts on the Rent Commencement Date and continues for the
number of Payment Periods slated under Term. If the Term has a prefix of "CO"
then the Lease is coterminous with the Lease for the Equipment with the
referenced serial number.
ESTIMATED COMMENCEMENT
For Leases, the month stated is the month the Lease must commence for Lessee to
receive the stated Lease Rate, For Financing, the date stated Is the intended
start date of the Financing.
INTEREST RATE
The Interest Rate, if stated, is the Annual Percentage Rate (APR) for the Lease
or Financing. In the State of Texas the interest rate for the Lease or Financing
will not exceed the stated interest rate.
RENEWAL OF LEASES WITH PRESTATED PURCHASE OPTIONS
Lessee may renew a Lease with a prestated purchase option for a Term of one
year. The Rent will be one-half or the Prestated Purchase Percent times the Unit
Purchase Price stated in the Supplement. Renewal Rent payments will be annual
and due and payable in advance.
LEASES WITH MAINTENANCE INCLUDED
For Leases that include basic maintenance coverage, Lessor will arrange for
maintenance service on the Equipment. The coverage starts at the end of the
warranty period and ends with the initial Term. The cost will be included in the
Rent. Coverage beyond the basic maintenance will be Lessee's responsibility.
The maintenance service provider alone will be responsible for fulfilling all
contractual commitments. Lessee may finance additional maintenance coverage at
the end of the initial Term under then current terms.
LESSEE RESPONSIBILITIES FOR LEASES WITH MAINTENANCE INCLUDED
Lessee agrees, that before requesting maintenance service, to ensure that:
1. operational problems have been corrected;
2. error recovery procedures have been followed;
3. failures are clearly identified and logged; and
4. Customer Problem Analysis and Resolution (CPAR) procedures have been
completed for equipment requiring maintenance under this Lease.
Lessee also agrees to complete, and return to IBM, a self-initialization review
form ("Form"). Lessee agrees to ensure that the Equipment location qualifies as
a qualified customer location (as determined by IBM). Lessee acknowledges having
received a copy of that Form. If Lessee has a Corporate Service Option
Attachment to the IBM Customer Agreement then Lessee agrees to perform all
"Customer" obligations under that agreement for the Equipment on a Lease that
includes maintenance.
LESSEE REPRESENTATIONS
Lessee represents that for Financing in:
1. Ohio, Maryland, Mississippi, Virginia, or West Virginia, Lessee is a
corporation as defined by the applicable state law;
2. Pennsylvania, Lessee is a business corporation as defined by
Pennsylvania laws: and
3. Alabama or Wisconsin, the Financed Items are not being purchased for
agricultural purposes.
AUTHORITY TO SIGN FINANCING STATEMENTS
Lessee authorizes Lessor or its agent as attorney-in-fact to prepare, execute in
Lessee's name and file any Uniform Commercial Code financing statements or
similar documents covering this Equipment. Lessee authorizes Lessor to fill in
serial numbers on this Supplement after execution by Lessee for the Equipment
listed on the Supplement.
BASE EXTENSIONS
For machines designated as "Base Extension", this Supplement supersedes the
prior Lease for these machines and incorporates the terms of the Lease Agreement
effective for this Supplement, including these terms with respect to Purchase of
Equipment, which may be different than the terms governing the superseded Lease.
This Lease amends and supersedes the prior Lease for these machines with respect
to Term, Lease Rate, Rent, Payment Period, Purchase Option Code, and Lease
Option. These changes shall became effective on the Rent Commencement Date
specified in this Supplement.
AMENDMENT TO TERM LEASE MASTER AGREEMENT
This amends the Term Lease Master Agreement referenced on page 1.
1. In the preamble in line 4 after "(IBM)", insert "to Lessee's
Supplier"; in line 9 after "programs" delete balance of the sentence.
2. Replace all subsequent occurrences of "IBM" with "Lessee's Supplier"
except in Paragraph 23, 26, 37, and 41 or where it appears as IBM
Corporation or except as it appears in this Supplement.
3. Delete all occurrences of "or Effective Date for Additional License".
4. Replace all occurrences of "Estimated Shipment Date" with "Estimated
Commencement".
5. Replace all occurrences of "License Agreement" with "license
agreement".
6. Paragraph 1 - Options - delete the last sentence.
7. Paragraph 7 - Assignment to Lessor - replace lines 7 thru 16 with "the
buyer as defined in Lessee's Supplier's contract in effect at the time
the Lease is accepted by Lessor (Purchase Agreement) shall apply to
Lessee."
8. Paragraph 13 - Rent Commencement Date - in line 3 replace "the date
payment is due IBM under the applicable referenced agreement" with
"the date Lessee designates on the Certificate of Acceptance".
9. Paragraph 15 - Rate Protection - replace in its entirety with the
following: "The Rent shall be based on the Lease Rate specified in the
Supplement. Such Lease Rates are not subject to change provided the
signed Certificate of Acceptance is received within the month of the
Estimated Commencement."
10. Paragraph 18 - Purchase of Equipment in tine 4 replace "Under" Option
A or B" with "Equipment with a Purch. Option of "FM", in line 19 after
"encumbrances" insert "arising solely from claims against Lessor".
11. Paragraph 19 - Optional Extension - in line 7 replace "Option A or B"
with "Equipment with a Purch. Option of 'FM'".
12. Paragraph 24 - Leases for Modifications and Additions - in line 7
replace "by Lessee from IBM" with "by Lessee's Supplier from IBM for
Lessee".
13. Paragraph 34 - Financing - delete the first two sentences.
14. Delete Paragraph 43.
Page 5 of 5
<PAGE>
1133 Westchester Ave
IBM CREDIT CORPORATION White Plains, NY 10604
914/642-3000
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ADDENDUM TO TERM LEASE SUPPLEMENT
Enterprise No. 2918132 Term Lease Master Agreement No. 5774339
Customer No. 2918261 Supplement No. D00275403
Lessor and FACTORY CARD OUTLET OF AMERICA LTD (Lessee) agree that for the
purposes of the referenced Supplement only, the Term Lease Master Agreement
between the parties is hereby modified as follows:
- - Paragraph 10 - Lessee Authorization - in the first sentence insert after
the words "under the Lease" the following:
", subject to any notice and cure period, if applicable,"
- - Paragraph 17 - Renewal - in the first sentence insert after the words
"under the Lease" the following:
", subject to any notice and cure period, if applicable,"
- - Paragraph 18 - Purchase of Equipment - in the first sentence insert after
the words "under the Lease" the following:
", subject to any notice and cure period, if applicable,"
- - Paragraph 19 - Optional Extension - in the first sentence insert after the
words "under the Lease" the following:
", subject to any notice and cure period, if applicable,"
- - Paragraph 30 - General Indemnity - delete the entire Paragraph and replace
with the following:
"This Lease is a net lease. Therefore, Lessee shall indemnify Lessor
against, and hold Lessor harmless from, any and all claims, actions,
damages, obligations, liabilities and liens; and all costs and expenses,
including legal fees, incurred by Lessor in connection with the lease,
licensing, possession, maintenance, condition, use or return of the
Equipment, Programming or licensed program materials; or arising by
operation of law; excluding, however, the extent to which any of the
foregoing results from the negligence or willful misconduct of Lessor or
any of Lessor's officers, directors, partners, employees, representatives
or
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NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
OCT 02, 1996 Addendum No. Q01305761-04
1
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IBM Credit Corporation
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agents. Lessee agrees that upon written notice by Lessor of the assertion
of any such claim, action, damage, obligation, liability or lien, Lessee
shall assume full responsibility for the defense thereof. Lessee's
obligations under this paragraph shall not constitute a guarantee of the
residual value or useful life of any item of Equipment or a guarantee of
any debt of Lessor. The provisions of this paragraph with regard to matters
arising during the Lease shall survive the expiration or termination of the
Lease.
- - Paragraph 35 - Financing Prepayment - replace the entire paragraph with the
following:
"Lessee may terminate an item of Financing at any time by paying an amount
equal to the present value of the remaining payments using the average
interest rate for 2 and 3 year United States Treasury Notes, as quoted by
Telerate Service, for the last calendar week ending 30 days prior to the
prepayment. Lessee shall provide Lessor with notice of the intended
prepayment date which shall be at least one month after the date of notice.
If prior to Lease expiration Lessee purchases the Equipment or if the Lease
is terminated, Lessee shall at the same time prepay any related Financing
(pursuant to the formula set forth above) including that for programs
licensed to the Equipment."
- - Paragraph 37 - Default; No Waiver - delete the entire Paragraph and replace
with the following:
"Lessee shall be in default under the Lease upon the occurrence of any of
the following events: (a) Lessee fails to pay when due any amount required
to be paid by Lessee under the Lease and such failure shall continue for a
period of ten days after receipt of written notice that a payment due has
not been made; (b) Lessee fails to perform any other provisions under the
Lease or violates any of the covenants or representations made by Lessee in
the Lease, or Lessee fails to perform any of its obligations under any
other Lease entered into pursuant to this Agreement, and such failure or
breach shall continue unremedied for a period of 30 days after written
notice is received by Lessee from Lessor; (c) Lessee violates any of the
covenants or representations made by Lessee in any application for credit
or in any agreement with IBM with respect to the Equipment or licensed
program materials or fails to perform any material provision in any such
agreement (except the obligation to pay the purchase price or LPM Charges),
and with respect to such agreement, such violation or failure materially
jeopardizes Lessor's interest in the Equipment or expectation of due
performance under the Lease; (d) Lessee makes an assignment for the benefit
of creditors, whether voluntary or
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NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
OCT 02, 1996 Addendum No. Q01305761-04
2
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IBM Credit Corporation
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involuntary, or consents to the appointment of a trustee or receiver, or if
either shall be appointed for Lessee or for a substantial part of its
property without its consent; (e) any petition or proceeding if filed by or
against Lessee under any Federal or State bankruptcy or insolvency code or
similar law; or (f) if applicable, Lessee makes a bulk transfer subject to
the provisions of the Uniform Commercial Code.
Any failure of Lessor to require strict performance by Lessee or any waiver
by Lessor of any provision in the Lease shall not be construed as a consent
or waiver of any other breach of the same or of any other provision."
Prepared by: J HOOKS
Accepted by:
IBM Credit Corporation FACTORY CARD OUTLET OF AMERICA LTD
For or as Lessor:
by /s/ signature illegible by /s/ Glen J. Franchi
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Authorized Signature Authorized Signature
Glen J. Franchi 10-28-96
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Name (Type or Print) Date Name (Type or Print) Date
A30576 lD/BP4
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NO CHANGES TO THIS ADDENDUM ARE AUTHORIZED
OCT 02, 1996 Addendum No. Q01305761-04
3
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EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
We consent to the use of our reports included herein and to reference to our
firm under the heading "Experts" and "Selected Consolidated Financial and
Operating Data".
/S/ KPMG PEAT MARWICK LLP
Chicago, Illinois
November 20, 1996
