<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 1-12793
--------
STARTEK, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1370538
- -------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
111 HAVANA STREET
DENVER, COLORADO 80010
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 361-6000
- -------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at August 14, 1998
Common Stock, par value $.01 per share 13,828,571
<PAGE> 2
STARTEK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - December 31, 1997
and June 30, 1998 3
Condensed Consolidated Statements of Operations - Three months ended
June 30, 1997 and 1998; Six months ended June 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flow - Six months ended
June 30, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 26,960 $ 13,546
Investments available for sale ............................... 7,356 17,158
Trade accounts receivable, less
allowance for doubtful accounts of
$383 and $415, respectively ............................... 12,518 9,790
Inventories .................................................. 2,539 847
Deferred tax asset ........................................... 440 450
Prepaid income taxes ......................................... -- 380
Prepaid expenses and other ................................... 205 577
------------ ------------
Total current assets .............................................. 50,018 42,748
Property, plant and equipment, net ................................ 8,151 14,408
Other assets ...................................................... 3 8
------------ ------------
Total assets ...................................................... $ 58,172 $ 57,164
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 9,387 $ 5,332
Accrued liabilities .......................................... 1,292 1,915
Income taxes payable ......................................... 106 --
Current portion of capital lease obligations ................. 82 60
Current portion of long-term debt ............................ 26 56
Other ........................................................ 421 298
------------ ------------
Total current liabilities ......................................... 11,314 7,661
Capital lease obligations, less current portion ................... 121 92
Long-term debt, less current portion .............................. 435 405
Deferred income tax ............................................... 231 275
Other ............................................................. 65 46
Stockholders' equity:
Common stock ................................................. 138 138
Additional paid-in capital ................................... 41,661 41,661
Cumulative translation adjustment ............................ 70 83
Unrealized loss on investments ............................... (92) (276)
Retained earnings ............................................ 4,229 7,079
------------ ------------
Total stockholders' equity ........................................ 46,006 48,685
------------ ------------
Total liabilities and stockholders' equity ........................ $ 58,172 $ 57,164
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................... $ 16,067 $ 24,692 $ 32,733 $ 49,013
Cost of services ........................... 12,541 20,008 25,273 39,765
----------- ----------- ----------- -----------
Gross profit ............................... 3,526 4,684 7,460 9,248
Selling, general and adminIstrative
expenses .............................. 1,952 3,285 4,115 6,017
Management fee expense ..................... 2,333 -- 3,126 --
----------- ----------- ----------- -----------
Operating profit (loss) .................... (759) 1,399 219 3,231
Net interest income (expense) and other .... (98) 702 (183) 1,244
----------- ----------- ----------- -----------
Income (loss) before income taxes .......... (857) 2,101 36 4,475
Income tax expense (credit) ................ (216) 763 (216) 1,625
----------- ----------- ----------- -----------
Net income (loss) .......................... $ (641) $ 1,338 $ 252 $ 2,850
=========== =========== =========== ===========
Basic and diluted net income per share ..... $ 0.10 $ 0.21
Weighted average shares outstanding ........ 13,828,571 13,828,571
</TABLE>
See accompanying notes
4
<PAGE> 5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 252 $ 2,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 907 1,180
Gain on sale of assets .................................. -- (135)
Changes in operating assets and liabilities:
Accounts receivable .................................. 3,625 2,728
Inventories .......................................... 889 1,692
Prepaid expenses and other assets .................... (103) (377)
Prepaid income taxes ................................. -- (380)
Deferred taxes ....................................... (299) 34
Accounts payable ..................................... (2,482) (4,055)
Accrued and other liabilities ........................ (358) 481
Income taxes payable ................................. 192 (106)
---------- ----------
Net cash provided by operating activities .................. 2,623 3,912
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net ............ (693) (7,478)
Proceeds from sale of property, plant and equipment ........ -- 176
Collections on notes receivable-stockholders ............... 213 --
Purchases of investments ................................... (25,125) (9,986)
---------- ----------
Net cash used in investing activities ...................... (25,605) (17,288)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit borrowings .................. (3,500) --
Net principal payments on borrowings ....................... (354) --
Principal payments on capital lease obligations ............ (2,130) (51)
Dividend to S corporation stockholders ..................... (8,000) --
Net proceeds from initial public offering of common stock .. 41,042 --
Contributed capital ........................................ 1,641 --
---------- ----------
Net cash provided by financing activities .................. 28,699 (51)
Effect of exchange rate changes on cash .................... (36) 13
---------- ----------
Net increase (decrease) in cash and cash equivalents ....... 5,681 (13,414)
Cash and cash equivalents at beginning of period ........... 2,742 26,960
---------- ----------
Cash and cash equivalents at end of period ................. $ 8,423 $ 13,546
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 339 $ 41
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Unrealized losses, net of deferred taxes ................... $ -- $ 184
Common stock split effected by stock dividend .............. $ 107 $ --
</TABLE>
See accompanying notes.
5
<PAGE> 6
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The condensed consolidated financial statements
reflect all adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation. Operating
results for the three and six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The balance sheet at December 31, 1997, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For additional information, refer to
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
2. NEW ACCOUNTING STANDARDS
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share (FAS 128), which
supersedes Accounting Principles Board Opinion No. 15. Under FAS 128, basic
earnings per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. For the three and
six months ended June 30, 1998, the additional shares assuming dilution has no
impact on earnings per share because the average price per share of common stock
during the period was less than the exercise price of outstanding options.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which is effective in 1998 for the
Company. The Statement establishes new rules for the reporting and display of
comprehensive income. Comprehensive income is defined essentially as all changes
in stockholders' equity, exclusive of transactions with owners. Comprehensive
income was a loss of $639 and income of $1,128 for the three months ended June
30, 1997 and 1998, respectively. Comprehensive income was income of $203 and
$2,679 for the six months ended June 30, 1997 and 1998, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which is effective for 1998 for the Company. The Statement changes the way
companies report segment information in annual financial statements by requiring
the "management approach" for reporting financial and descriptive information
about operating segments. The Statement does not provide for application in 1998
interim financial statements, but comparative information for interim periods of
the initial year of application is to be reported for interim periods in the
second year of application.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 24, 1997 the Company closed an initial public offering of its
common stock. The Company sold 3,000,000 shares of common stock at an offering
price of $15.00 per share. Total proceeds after deducting $3,958 in costs
associated with the offering were $41,042. Immediately prior to the closing of
the offering the Company completed a 322.1064-for-one common stock split
effected by a stock dividend. All common stock amounts, equivalent share amounts
and per share amounts included in the accompanying financial statements and
related notes have been adjusted to give effect to the stock dividend.
Effective immediately prior to the closing of the initial public
offering, the Company declared an $8,000 dividend in an amount approximately
equal to the estimated additional paid-in capital and retained earnings of the
Company as of the closing date of the initial public offering, pursuant to
certain promissory notes. Such notes were paid on June 30, 1997 from the net
proceeds of the initial public offering.
6
<PAGE> 7
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(unaudited)
4. INVESTMENTS AVAILABLE FOR SALE
The following is a summary of available-for-sale investments at
December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Corporate bonds ........................ $ 2,205 $ 5 $ (45) $ 2,165
Other debt securities .................. 5,299 -- (108) 5,191
----------- ----------- ----------- -----------
Total .................................. $ 7,504 $ 5 $ (153) $ 7,356
=========== =========== =========== ===========
</TABLE>
The following is a summary of available-for-sale investments at June 30, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Corporate bonds ...................... $ 7,097 $ 35 $ (91) $ 7,041
Other debt securities ................. 8,113 -- (352) 7,761
Equity securities ..................... 2,381 38 (63) 2,356
----------- ----------- ----------- -----------
Total .................................. $ 17,591 $ 73 $ (506) $ 17,158
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of available-for-sale
investments at June 30, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Debt securities maturing within:
One year ....................................... $ 1,702 $ 1,712
Two to five years .............................. 2,147 2,145
Due after five years ........................... 6,163 5,894
------------ ------------
10,012 9,751
Other debt securities ............................ 5,198 5,051
Equity securities ................................ 2,381 2,356
------------ ------------
Total ............................................ $ 17,591 $ 17,158
============ ============
</TABLE>
7
<PAGE> 8
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
5. INVENTORIES
Total inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
Raw materials ............................... $ 2,171 $ 718
Finished goods .............................. 368 129
----------------- -------------
$ 2,539 $ 847
================= =============
</TABLE>
6. COMMON STOCK
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
---------------
<S> <C>
Outstanding at beginning of period ...................... 611,500
Granted ................................................. 20,500
Forfeitures ............................................. (5,500)
-------
Outstanding at end of period ............................ 626,500
=======
Exercisable at end of period ............................ 141,600
=======
</TABLE>
The exercise price for options as of June 30, 1998 was $15.00 per
share, except for 8,000 options exercisable at $13.06 per share, 14,500 options
exercisable at $12.25 per share and 6,000 options exercisable at $12.69 per
share.
There were 13,878,571 shares outstanding for the six months ended June
30, 1998.
7. MANAGEMENT FEE EXPENSE
Historically, certain S corporation stockholders and an affiliate have
been paid certain management fees, bonuses and other fees in connection with
services rendered to the Company which have not been included in selling,
general and administrative expenses, in addition to general compensation for
services rendered. Such management fees are reflected as management fee expenses
as set forth below. Effective with the closing of the Company's initial public
offering in June 1997, these management fees, bonuses and other fees were
discontinued.
After the closing of the initial public offering, all compensation
payable to persons who had been S corporation stockholders of the Company (or an
affiliate of such stockholder) is in the form of advisory fees, salaries and
bonuses (which at current rates will aggregate approximately $516 annually) and
are included in selling, general and administrative expenses. Such advisory fees
and salaries are reflected as selling, general and administrative expense as set
forth below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Selling, general and administrative
expense ........................... $ 129 $ 129 $ 258 $ 258
Management fee expense ................. 2,333 -- 3,126 --
</TABLE>
8
<PAGE> 9
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except share data)
(unaudited)
8. INCOME TAXES
The Company was taxed as an S corporation for federal and state income
tax purposes from July 1, 1992 through June 17, 1997, when S corporation status
was terminated in contemplation of the Company's initial public offering.
Accordingly, the income and expenses of the Company were reportable on tax
returns of the stockholders. Income taxes for the three and six months periods
ended June 30, 1998 reflect a provision for federal, state and foreign income
taxes at an effective rate of 36.3%. The Company is subject to foreign income
taxes on certain of its operations.
9. SIGNIFICANT CLIENTS
Two clients accounted for approximately 62% and 19% of revenues for the
six months ended June 30, 1998. Two clients accounted for approximately 47% and
34% of revenues for the six months ended June 30, 1997. The loss of one or more
of its significant clients could have a material adverse effect on the Company's
business, operating results and financial condition.
10. SUBSEQUENT EVENT
On July 8, 1998, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., entered into certain financing agreements with the Industrial
Development Board of the County of Montgomery, Tennessee, (the "Board") in
connection with the Board's issuance to StarTek USA, Inc. of an Industrial
Development Revenue Note, Series A not to exceed $4,500 (the "Facility Note")
and an Industrial Development Revenue Note, Series B not to exceed $3,500 (the
"Equipment Loan"). The Facility Note bears interest at 9% per annum commencing
on September 1, 1998, which is payable quarterly and matures on July 8, 2008.
Concurrently, the Company advanced $3,575 in exchange for the Facility Note and
correspondingly entered into a lease agreement, maturing July 8, 2008, with the
Board for the use and acquisition of a 305,000 square foot process management
and distribution facility in Clarksville, Tennessee (the "Facility Lease"). The
Facility Lease provides for the Company to pay to the Board lease payments
sufficient to pay, when and as due, the principal of and interest on the
Facility Note due to the Company from the Board. Pursuant to the provisions of
the Facility Lease and upon the Company's payment of the Facility Lease in full,
the Company shall have the option to purchase the 305,000 square foot,
Clarksville, Tennessee facility for a lump sum payment of one hundred dollars.
The Equipment Loan generally contains the same provisions as the Facility Note
and provides for an equipment lease, except the Equipment Loan and lease mature
on January 1, 2004.
As of the date of this Form 10-Q, the Company has not advanced monies
to activate the Equipment Loan and lease. Although the Company is not obligated
to do so, the Company expects to activate the Equipment Loan and lease in the
third quarter of 1998. When the Equipment Loan and lease are activated, the
Board will acquire equipment for lease to the Company on terms similar to the
Facility Lease but maturing January 1, 2004.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" or elsewhere in this Form 10-Q
that are not statements of historical facts are forward-looking statements that
involve substantial risks and uncertainties. Forward-looking statements include
(i) the anticipated level of capital expenditures, (ii) the Company's belief
that existing cash, available for sale investments and available borrowings will
be sufficient to finance the Company's operations; and (iii) statements relating
to the Company or its operations that are preceded by terms such as "may",
"will", "should", "anticipates", "expects", "believes", "plans", "future",
"estimate", or "continue", and similar expressions.
In accordance with the Private Securities Litigation Reform Act of
1995, the following are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements; these include, but are not limited to, general economic conditions
in the Company's markets, the loss of one or more of its significant clients,
the loss or delayed implementation of a large project which could cause
quarterly variations in the Company's revenues and earnings, difficulties of
managing rapid growth, dependence on key personnel, dependence on key industries
and trend toward outsourcing, risks associated with the Company's contracts,
risks associated with rapidly changing technology, risks of business
interruption, risks associated with international operations and expansion,
dependence on labor force, and highly competitive markets. All forward-looking
statements herein are qualified in their entirety by the information set forth
in the "Risk Factors" portion of the Company's Prospectus dated June 18, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited pro forma condensed
consolidated statement of operations data for the three and six month period
ended June 30, 1997 (dollars in thousands, except share data):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- --------------
<S> <C> <C>
Revenues ....................................................................... $ 16,067 $ 32,733
Cost of services ............................................................... 12,541 25,273
------------ ------------
Gross profit ................................................................... 3,526 7,460
SG&A expenses .................................................................. 1,952 4,115
Management fee expense ......................................................... -- --
------------ ------------
Operating profit ............................................................... 1,574 3,345
Net interest expense and other ................................................. (98) (183)
------------ ------------
Income before income taxes ..................................................... 1,476 3,162
Income tax expense ............................................................. 551 1,179
------------ ------------
Net income ..................................................................... $ 925 $ 1,983
============ ============
Pro forma net income per share ................................................. $ 0.08 $ 0.17
Weighted average shares outstanding ............................................ 11,551,647 11,457,300
Computation of weighted shares outstanding:
Shares outstanding after giving effect to 322.1064-for-one
stock split effected by a stock dividend .................................... 10,828,571 10,828,571
Shares deemed outstanding prior to closing of June 1997
initial public offering, representing the number of shares
(at an initial public offering price of $15.00 per share) sufficient to
fund payment of $8,000 note payable to principal
stockholders ................................................................ 492,307 512,707
3 million shares issued in connection with initial public offering completed
June 24, 1998, for days outstanding in the respective
periods ..................................................................... 230,769 116,022
------------ ------------
Weighted average shares outstanding ......................................... 11,551,647 11,457,300
============ ============
</TABLE>
10
<PAGE> 11
This pro forma condensed consolidated statement of operations data
presents the effect on historical consolidated financial statements of the
elimination of management fee expense paid to stockholders and their affiliates,
as these fees were discontinued upon the completion of the Company's initial
public offering, and the provision for related income taxes at an effective rate
of 37.3% as if the Company were taxed as a C corporation.
The following table sets forth, for the periods indicated, certain
unaudited condensed consolidated statement of operations data expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1997 1997 1998 1997 1997 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services ............................ 78.1 78.1 81.0 77.2 77.2 81.1
--------- --------- --------- --------- --------- ---------
Gross profit ................................ 21.9 21.9 19.0 22.8 22.8 18.9
SG&A expenses ............................... 12.1 12.1 13.3 12.6 12.6 12.3
Management fee expense ...................... 14.5 -- -- 9.5 -- --
--------- --------- --------- --------- --------- ---------
Operating profit (loss) ..................... (4.7) 9.8 5.7 0.7 10.2 6.6
Net interest income (expense) and other ..... (0.6) (0.6) 2.8 (0.6) (0.6) 2.5
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (5.3) 9.2 8.5 0.1 9.6 9.1
Income tax expense (credit) ................. (1.3) 3.4 3.1 (0.7) 3.6 3.3
--------- --------- --------- --------- --------- ---------
Net income (loss) ........................... (4.0%) 5.8% 5.4% 0.8% 6.0% 5.8%
========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased $8.6 million, or 53.7%, to $24.7 million
for the three months ended June 30, 1998 from $16.1 million for the three months
ended June 30, 1997. This increase was primarily from existing clients and one
new client.
Cost of Services. Cost of services increased $7.5 million, or 59.5%, to
$20.0 million for the three months ended June 30, 1998 from $12.5 million for
the three months ended June 30, 1997. As a percentage of revenues, costs of
services increased from 78.1% for the three months ended June 30, 1997 as
compared to 81.0% for the three months ended June 30, 1998. Factors pertaining
to this percentage increase were primarily higher overall costs of certain
business at lower relative margins, mix of services performed and training and
start-up expenses related to the new Greeley, Colorado and Laramie, Wyoming call
centers, both of which became operational in the second quarter of 1998.
Gross Profit. As a result of the foregoing factors, gross profit
increased $1.2 million, or 32.8%, to $4.7 million for the three months ended
June 30, 1998 from $3.5 million for the three months ended June 30, 1997. As a
percentage of revenues, gross profit decreased to 19.0% for the three months
ended June 30, 1998 from 21.9% for the three months ended June 30, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
$1.3 million, or 68.3%, to $3.3 million for the three months ended June 30, 1998
from $2.0 million for the three months ended June 30, 1997, primarily as a
result of increased personnel costs incurred to service increasing business and
costs associated with capacity expansion. As a percentage of revenues, SG&A
expenses increased to 13.3% for the three months ended June 30, 1998 from 12.1%
for the three months ended June 30, 1997.
Management Fee Expense. Management fee expense was $2.3 million during
the three months ended June 30, 1997 and zero for the three months ended June
30, 1998. Effective with the closing of the Company's initial public offering in
June 1997, management fees were discontinued.
Operating Profit (Loss). As a result of the foregoing factors,
operating profit increased to $1.4 million for the three months ended June 30,
1998 from an operating loss of $0.8 million for the three months ended June 30,
1997. As a percentage of revenues, operating profit increased to 5.7% for the
three months ended June 30, 1998 from a negative 4.7% for the three months ended
June 30, 1997.
Net Interest Income (Expense) and Other. Net interest income (expense)
and other was $0.7 million income for the three months ended June 30, 1998,
while it was $0.1 million expense for the three months ended June 30, 1997.
There was an $0.6 million increase in net interest earnings in the three months
ended June 30, 1998 which was primarily due to interest earnings from the
retained net proceeds of the Company's initial public offering in June 1997
whereas there were line-of-credit and significantly more capital lease
11
<PAGE> 12
borrowings in the three months ended June 30, 1997. Included in net interest
income (expense) and other is $0.1 million from gain on sale of assets in the
three months ended June 30, 1998.
Income (Loss) Before Income Taxes. As a result of the foregoing
factors, income before income taxes increased $3.0 million, or 345.2%, to $2.1
million for the three months ended June 30, 1998 from a loss of $0.9 million for
the three months ended June 30, 1997. As a percentage of revenues, income before
income taxes increased to 8.5% for the three months ended June 30, 1998 from a
negative 5.3% for the three months ended June 30, 1997.
Income Tax Expense (Credit). The Company was taxed as an S corporation
for federal and state income tax purposes from July 1, 1992 through June 17,
1997, when S corporation status was terminated in contemplation of the Company's
initial public offering. Accordingly, the Company was not subject to federal or
state income taxes through June 17, 1997. The $0.2 million income tax credit for
the three months ended June 30, 1997 is composed of a one-time credit to record
a net deferred tax asset of $0.3 million upon the termination of S corporation
status, less income tax expense on earnings during the June 1997 period when the
Company was taxed as a C corporation as adjusted for a foreign tax credit item.
Income taxes for the three months ended June 30, 1998 reflect a provision for
federal, state and foreign income taxes at an effective rate of 36.3%.
Net Income (Loss). Based on the factors discussed above, net income
increased $1.9 million, or 308.7%, from a net loss of $0.6 million for the three
months ended June 30, 1997 compared to net income of $1.3 million for the three
months ended June 30, 1998. As a percentage of revenues, net income increased to
5.4% for the three months ended June 30, 1998 from a negative 4.0% for the three
months ended June 30, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income for
the three months ended June 30, 1997 compared to actual results for the three
months ended June 30, 1998. No pro forma presentation was applicable to the
three months ended June 30, 1998. Pro forma amounts for the three months ended
June 30, 1997 reflect the elimination of management fees and bonuses to
stockholders and their affiliates as these fees and bonuses were discontinued
upon the closing of the Company's initial public offering, and provide for
related income taxes at 37.3% of pre-tax income as if the Company were taxed as
a C corporation. As a result of the foregoing factors: (i) management fee
expense is zero for the three months ended June 30, 1998 and pro forma
management fee expense is zero for the three months ended June 30, 1997; (ii)
proforma operating profit was $1.6 million for the three months ended June 30,
1997 compared to $1.4 million of actual operating profit for the three months
ended June 30, 1998, while such operating profit represented 9.8% and 5.7% of
revenues, respectively; (iii) income before income taxes increased $0.6 million,
or 42.3%, to $2.1 million for the three months ended June 30, 1998 from $1.5
million pro forma income before income taxes for the three months ended June 30,
1997; (iv) income taxes increased $0.2 million, or 38.5%, to $0.8 million for
the three months ended June 30, 1998 from $0.6 million pro forma income tax
expense for the three months ended June 30, 1997; and (v) net income increased
$0.4 million, or 44.7%, to $1.3 million for the three months ended June 30, 1998
from $0.9 million pro forma net income for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
Revenues. Revenues increased $16.3 million, or 49.7%, to $49.0 million
for the six months ended June 30, 1998 from $32.7 million for the six months
ended June 30, 1997. This increase was primarily from existing clients and one
new client.
Cost of Services. Cost of services increased $14.5 million, or 57.3%,
to $39.8 million for the six months ended June 30, 1998 from $25.3 million for
the six months ended June 30, 1997. As a percentage of revenues, costs of
services increased to 81.1% for the six months ended June 30, 1998 from 77.2%
for the six months ended June 30, 1997. Factors pertaining to this percentage
increase were primarily higher overall costs of certain business at lower
relative margins, mix of services performed and training and start-up expenses
related to the new Greeley, Colorado and Laramie, Wyoming call centers, both of
which became operational in the second quarter of 1998.
Gross Profit. As a result of the foregoing factors, gross profit
increased $1.8 million, or 24.0%, to $9.3 million for the six months ended June
30, 1998 from $7.5 million for the six months ended June 30, 1997. As a
percentage of revenues, gross profit decreased to 18.9% for the six months ended
June 30, 1998 from 22.8% for the six months ended June 30, 1997.
Selling, General and Administrative Expenses. SG&A expenses increased
$1.9 million, or 46.2%, to $6.0 million for the six months ended June 30, 1998
from $4.1 million for the six months ended June 30, 1997, primarily as a result
of increased personnel costs incurred to service increasing business and costs
associated with capacity expansion. As a percentage of revenues, SG&A expenses
decreased to 12.3% for the six months ended June 30, 1998 from 12.6% for the six
months ended June 30, 1997.
12
<PAGE> 13
Management Fee Expense. Management fee expense was $3.1 million during
the six months ended June 30, 1997 and zero for the six months ended June 30,
1998. Effective with the closing of the Company's initial public offering in
June 1997, management fees were discontinued.
Operating Profit. As a result of the foregoing factors, operating
profit increased to $3.2 million for the six months ended June 30, 1998 from
$0.2 million for the six months ended June 30, 1997. As a percentage of
revenues, operating profit increased to 6.6% for the six months ended June 30,
1998 from 0.7% for the six months ended June 30, 1997.
Net Interest Income (Expense) and Other. Net interest income (expense)
and other was $1.2 million income for the six months ended June 30, 1998, while
it was $0.2 million expense for the six months ended June 30, 1997. The increase
in net interest earnings in the six months ended June 30, 1998 was primarily due
to interest earnings from the retained net proceeds of the Company's initial
public offering in June 1997 whereas there were line-of-credit and significantly
more capital lease borrowings in the six months ended June 30, 1997. Included in
net interest income (expense) and other is $0.1 million from gain on sale of
assets in the six months ended June 30, 1998.
Income Before Income Taxes. As a result of the foregoing factors,
income before income taxes increased $4.4 million for the six months ended June
30, 1998 from approximately zero for the six months ended June 30, 1997. As a
percentage of revenues, income before income taxes increased to 9.1% for the six
months ended June 30, 1998 from approximately 0.1% for the six months ended June
30, 1997.
Income Tax Expense (Credit). The Company was taxed as an S corporation
for federal and state income tax purposes from July 1, 1992 through June 17,
1997, when S corporation status was terminated in contemplation of the Company's
initial public offering. Accordingly, the Company was not subject to federal or
state income taxes through June 17, 1997. The $0.2 million income tax credit for
the six months ended June 30, 1997 is composed of a one-time credit to record a
net deferred tax asset of $0.3 million upon the termination of S corporation
status, less income tax expense on earnings during the June 1997 period when the
Company was taxed as a C corporation as adjusted for a foreign tax credit item.
Income taxes for the six months ended June 30, 1998 reflect a provision for
federal, state and foreign income taxes at an effective rate of 36.3%.
Net Income. Based on the factors discussed above, net income increased
$2.6 million to $2.9 million for the six months ended June 30, 1998 from $0.3
million for the three months ended June 30, 1997. As a percentage of revenues,
net income increased to 5.8% for the six months ended June 30, 1998 from 0.8%
for the six months ended June 30, 1997.
Pro Forma Management Fee Expense; Pro Forma Operating Profit; Pro Forma
Income Before Income Taxes; Pro Forma Income Taxes and Pro Forma Net Income for
the six months ended June 30, 1997 compared to actual results for the six months
ended June 30, 1998. No pro forma presentation was applicable to the six months
ended June 30, 1998. Pro forma amounts for the six months ended June 30, 1997
reflect the elimination of management fees and bonuses to stockholders and their
affiliates as these fees and bonuses were discontinued upon the closing of the
Company's initial public offering, and provide for related income taxes at 37.3%
of pre-tax income as if the Company were taxed as a C corporation. As a result
of the foregoing factors: (i) management fee expense is zero for the six months
ended June 30, 1998 and pro forma management fee expense is zero for the six
months ended June 30, 1997; (ii) proforma operating profit was $3.4 million for
the six months ended June 30, 1997 compared to $3.2 million of actual operating
profit for the six months ended June 30, 1998 while such operating profit
represented 10.2% and 6.6% of revenues, respectively; (iii) income before income
taxes increased $1.3 million, or 41.5%, to $4.5 million for the six months ended
June 30, 1998 from $3.2 million pro forma income before income taxes for the six
months ended June 30, 1997; (iv) income taxes increased $0.4 million, or 37.8%,
to $1.6 million for the six months ended June 30, 1998 from $1.2 million pro
forma income tax expense for the six months ended June 30, 1997; and (v) net
income increased $0.9 million, or 43.7%, to $2.9 million for the six months
ended June 30, 1998 from $2.0 million pro forma net income for the six months
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering in June 1997, the Company funded
its operations and capital expenditures primarily through cash flow from
operations, borrowings under various lines of credit, capital lease
arrangements, short-term borrowings from its stockholders and their affiliates,
and additional capital contributions by its stockholders. In November 1997, the
Company replaced its previous $3.5 million line of credit with Norwest Business
Credit, Inc. with a $5.0 million revolving line of credit with Norwest Bank (the
"Bank"), which matures on April 30, 1999. Borrowings under the line of credit
bear interest at the Bank's prime rate. Under this line of credit, the Company
is required to maintain working capital of $17.5 million and tangible net worth
of $25 million.
13
<PAGE> 14
The Company may not pay dividends in an amount which would cause a failure to
meet these financial covenants. Collateral for the line of credit is the
accounts receivable of the Company and subsidiaries.
The Company closed an initial public offering of common stock on June
24, 1997. The net proceeds, after deducting underwriting discounts and
commissions and offering expenses, were approximately $41.0 million. From the
net proceeds, the Company repaid substantially all of its outstanding
indebtedness, which included approximately $5.0 million of bank and mortgage
indebtedness, $1.8 million of capital lease obligations and $8.0 million of
notes payable to principal stockholders arising from an S corporation dividend
in an amount approximating the additional paid-in capital and retained earnings
of the Company as of the closing date. The balance of the net proceeds
(approximately $26.2 million) is for working capital and other general corporate
purposes, including approximately $8.0 million for capital expenditures to
expand into new facilities and build-out its existing facilities, and to
potentially make strategic acquisitions of complementary businesses.
During the six months ended June 1998, the Company acquired land and
completed substantially all of the construction of a new 35,000 square foot call
center facility in Greeley, Colorado (the "Greeley Facility"). The Company
purchased the Greeley Facility in order to expand its call center capacity. The
estimated cost of the Greeley Facility and equipment is approximately $3.5
million (excluding land). The Company financed the land for the Greeley Facility
through a $0.3 million non-interest bearing ten year promissory note. The ten
year promissory note shall decline on an equal basis, without payment, over ten
years so long as the Company does not sell or transfer the land or fail to
continuously operate a customer service center thereon. The Greeley Facility
became operational during the three months ended June 30, 1998.
The Company has purchased a total of approximately $1.7 million in
equipment, leasehold improvements and other fixed assets in order to operate a
22,000 square foot call center facility in Laramie, Wyoming (the "Laramie
Facility"). The Laramie Facility also became operational during the three months
ended June 30, 1998.
During June 1998, the Company selected a software solution to enable
multi-national customer support and product order fulfillment operations (the
"Fulfillment Software"). The Company expects the Fulfillment Software will
provide an integrated customer support and product order fulfillment solution
which will provide its clients' customers with immediate assistance for a wide
variety of requests and other value-added capabilities. The Company has expended
approximately $0.9 million for the purchase of the Fulfillment Software, other
related applications, training, consulting and support services.
On July 8, 1998, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., entered into certain financing agreements with the Industrial
Development Board of the County of Montgomery, Tennessee, (the "Board") in
connection with the Board's issuance to StarTek USA, Inc. of an Industrial
Development Revenue Note, Series A not to exceed $4.5 million (the "Facility
Note") and an Industrial Development Revenue Note, Series B not to exceed $3.5
million (the "Equipment Loan"). The Facility Note bears interest at 9% per annum
commencing on September 1, 1998, which is payable quarterly and matures on July
8, 2008. Concurrently, the Company advanced approximately $3.6 million in
exchange for the Facility Note and correspondingly entered into a lease
agreement, maturing July 8, 2008, with the Board for the use and acquisition of
a 305,000 square foot process management and distribution facility in
Clarksville, Tennessee (the "Facility Lease"). The Facility Lease provides for
the Company to pay to the Board lease payments sufficient to pay, when and as
due, the principal of and interest on the Facility Note due to the Company from
the Board. Pursuant to the provisions of the Facility Lease and upon the
Company's payment of the Facility Lease in full, the Company shall have the
option to purchase the 305,000 square foot, Clarksville, Tennessee facility for
a lump sum payment of one hundred dollars. The Equipment Loan generally contains
the same provisions as the Facility Note and provides for an equipment lease,
except the Equipment Loan and lease mature on January 1, 2004.
As of the date of this Form 10-Q, the Company has not advanced monies
to activate the Equipment Loan and lease. Although the Company is not obligated
to do so, the Company expects to activate the Equipment Loan and lease in the
third quarter of 1998. When the Equipment Loan and lease are activated, the
Board will acquire equipment for lease to the Company on terms similar to the
Facility Lease but maturing January 1, 2004.
As of June 30, 1998, the Company had cash, cash equivalents and
investments available for sale of $30.7 million, working capital of $35.1
million and net worth of $48.7 million. As of June 30, 1998, the Company held in
its investments available for sale portfolio corporate bonds, other debt
securities and various equity securities. Such investments held by the Company
could be materially and adversely effected by various economic conditions, such
as recessions, increasing interest rates, adverse foreign currency exchange
fluctuations, foreign and domestic inflation and other factors.
14
<PAGE> 15
Net cash provided by operating activities increased to $3.9 million
during the six months ended June 30, 1998 from $2.6 million for the same period
in the prior year. This was primarily the result of (i) an increase in net
income and (ii) a reduction in inventories, partially off-set by relatively
smaller decreases in accounts receivable and reductions in accounts payable.
Net cash used in investing activities was $25.6 million and $17.3
million for the six months ended June 30, 1997 and 1998, respectively. This
reduction was principally due to a reduced level of investment purchases ($15.1
million) partially off-set by increased purchases of property, plant and
equipment ($6.8 million).
Net cash used in financing activities during the six months ended June
30, 1998 consisted entirely of principal payments for capital lease obligations.
Net cash provided by financing activities during the same period in 1997 was
primarily the result of net proceeds received from the June 1997 Offering
together with contributed capital from certain S corporation stockholders prior
to the June 1997 Offering, partially off-set by repayments of various debt
obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom operations was not significant during the six months
ended June 30, 1997 and 1998. The terms of the Company's agreements with its
clients and its foreign subcontracts are typically in US dollars except for
certain of its agreements related to its United Kingdom operations. Therefore,
management currently believes the Company's exposure to currency exchange risks
is minimal.
The Company believes its current cash and investments available for
sale balances, anticipated cash flows from future operations and available
financing under its line of credit, will be sufficient to support its
operations, capital expenditures and various repayment obligations under its
debt and lease agreements for the foreseeable future. However, liquidity and
capital requirements depend on many factors including, but not limited to, the
rate at which the Company expands its business, whether internally or through
acquisitions and strategic alliances. To the extent the funds generated from the
sources described above are insufficient to fund the Company's activities in the
short or long term, the Company will be required to raise additional funds
through public or private financing. No assurance can be given that additional
financing will be available or that, if available, it will be available on terms
favorable to the Company.
RELIANCE ON PRINCIPAL CLIENT RELATIONSHIPS
A substantial portion of the Company's revenue is generated from
relatively few clients and the loss of a significant client or clients could
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's two largest clients during the six months
ended June 30, 1998 were Microsoft Corporation ("Microsoft") and Hewlett-Packard
Company ("Hewlett Packard"). Microsoft, which began its outsourcing relationship
with StarTek in April 1996, accounted for approximately 62% of the Company's
total revenues during the six months ended June 30, 1998. The Company provides
various outsourced services to various divisions of Hewlett Packard, each of
which the Company considers to be separate clients since each division acts
through a relatively autonomous decision maker. Hewlett Packard's various
divisions accounted for approximately 19% of the Company's total revenues during
the six months ended June 30, 1998. Hewlett Packard began its outsourcing
relationship with the Company in 1987. There can be no assurance that the
Company will be able to retain its significant clients or that, if it were to
lose one or more of its significant clients, it would be able replace such
clients with clients that generate a comparable amount of revenues.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's business is highly seasonal and is, at times, conducted
in support of product launches for new and existing clients. Historically, the
Company's revenues have been significantly lower in the first and second
quarters due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying seasons.
Additionally, the Company has experienced, and expects to continue to
experience, quarterly variations in operating results as a result of a variety
of factors, many of which are outside the Company's control, including: (i) the
timing of existing and future client product launches; (ii) the expiration or
termination of existing client projects; (iii) the timing and amount of costs
incurred to expand capacity in order to provide for further revenue growth from
current and future clients; (iv) the seasonal nature of certain clients'
businesses; and (v) the cyclical nature of certain high technology clients'
businesses.
Revenues for the three months ended March 31, 1998 were approximately
$24.3 million and revenues for the three months ended June 30, 1998 were
approximately $24.7 million. Typically, the Company's revenues have been lower
in the first and second quarters due to the seasonal nature of various clients'
businesses.
Gross profit as a percent of revenues remained relatively constant for
both the first and second quarter of 1998.
15
<PAGE> 16
The increase in selling, general and administrative expenses from the
first quarter of 1998 compared to the second quarter of 1998 was primarily a
result of increased personnel costs incurred to service increasing business and
costs associated with capacity expansion.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Some of the
Company's older computer programs fall into this category. As a result, those
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The total Year
2000 project cost is currently estimated at approximately $0.1 million.
The project is estimated to be completed not later than December 31,
1998, which is prior to any anticipated negative affect on its operating
systems. The Company believes, with modifications to existing software and
conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed in a timely manner, the Year
2000 Issue could have a material adverse impact on the operations of the
Company.
The anticipated cost and timing to complete the Year 2000 modifications
are based on management's best estimates, which were derived using numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of
inflation on its operations, the Company does not believe that inflation has
had, or is likely in the foreseeable future to have, a material effect on its
results of operations or financial condition.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered securities
during the quarter ended June 30, 1998, except as follows:
(i) In April 1998, the Company granted options to purchase 14,500
shares of common stock, in aggregate, to three employees
pursuant to the Company's 1997 Stock Option Plan. These
options vest at a rate of 20% per year beginning in April
1999, expire in April 2008 and are exercisable at $12.25 per
share.
(ii) In May 1998, the Company also granted an option to purchase
3,000 shares of common stock to each of two non-employee
directors pursuant to the Company's 1997 Director Stock Option
Plan. These options are immediately and fully vested upon the
date of grant, expire in May 2008 and are exercisable at
$12.69 per share.
The stock option grants in Item 2.(c) above were made in reliance upon
the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
(d) Use of proceeds
The Company filed a Registration Statement (Commission file no.
333-20633) for the public offering of 3,666,667 shares of common
stock with the Securities and Exchange Commission, which became
effective June 19, 1997. The managing underwriters were Donaldson,
Lufkin & Jenrette Securities Corporation and Morgan Stanley Dean
Witter.
The shares were sold for $15.00 per share for an aggregate amount
of $55,000,005. Of the shares sold, 3,000,000 shares ($45,000,000
aggregate amount) were sold by the Company and 666,667 shares
($10,000,005 aggregate amount) were sold by five selling
stockholders, each of whom owned in excess of ten percent of the
outstanding shares prior to the offering. Offering and distribution
costs associated with the offering amounted to approximately
$4,000,000. The Company received net proceeds of approximately
$41,000,000 in connection with the offering.
As of June 30, 1998, the Company has applied the net proceeds from
the offering as follows (in thousands):
<TABLE>
<S> <C>
Repayment of indebtedness:
Bank and mortgage indebtedness ....................... $ 4,932
Capital lease obligations ............................ 1,767
Notes payable to S corporation stockholders .......... 8,000
----------
14,699
Capital expenditures .................................... 8,000
Working capital ......................................... 18,343
----------
$ 41,042
==========
</TABLE>
17
<PAGE> 18
PART II. OTHER INFORMATION (CONTINUE)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 20, 1998, the Company held its 1998 annual meeting of
shareholders (the "Annual Meeting").
(b) One matter voted on at the Annual Meeting was the election of
all four directors of the Company. The four nominees, who were
all existing directors of the Company, were re-elected at the
Annual Meeting as directors of the Company, receiving the
number and percentage of votes for election as set forth
below:
<TABLE>
<CAPTION>
NOMINEES FOR ELECTION AGAINST ELECTION ABSTENTIONS
- ------------------------ ------------ ---------------- -----------
<S> <C> <C> <C>
A. Emmet Stephenson, Jr. 12,246,187 (99.96%) -- (--%) 5,471 (00.04%)
---------- ---------------- -----
Michael W. Morgan 12,246,187 (99.96%) -- (--%) 5,471 (00.04%)
---------- ---------------- -----
Thomas O. Ryder 12,246,187 (99.96%) -- (--%) 5,471 (00.04%)
---------- ---------------- -----
Ed Zschau 12,246,187 (99.96%) -- (--%) 5,471 (00.04%)
---------- ---------------- -----
</TABLE>
(c) The only other matter voted upon at the Annual Meeting was a
proposal to ratify and approve the selection of Ernst & Young
LLP as the Company's independent auditors for 1998. This
proposal, which was approved, received the number and
percentage of votes as set forth below:
<TABLE>
<CAPTION>
VOTES PERCENTAGE
------------ ------------
<S> <C> <C>
For 12,223,400 99.77%
------------ ------------
Against 27,258 00.22%
------------ ------------
Abstain 1,000 00.01%
------------ ------------
</TABLE>
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Facility lease agreement dated as of July 8,
1998 between StarTek USA, Inc. (a wholly owned
subsidiary of the Company) and the Industrial
Development Board of the County of Montgomery,
Tennessee and Industrial Development Revenue
Note, Series A dated as of July 8, 1998 and
issued by the Industrial Development Board of
the County of Montgomery, Tennessee
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three months ended June 30, 1998.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STARTEK, INC.
-----------------------------------
(Registrant)
Date: August 14, 1998 /s/ MICHAEL W. MORGAN
--------------------------- -----------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: August 14, 1998 /s/ DENNIS M. SWENSON
--------------------------- ------------------------------------
Dennis M. Swenson
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE> 20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14 Facility lease agreement dated as of July 8, 1998 between
StarTek USA, Inc. (a wholly owned subsidiary of the Company)
and the Industrial Development Board of the County of
Montgomery, Tennessee and Industrial Development Revenue Note,
Series A dated as of July 8, 1998 and issued by the Industrial
Development Board of the County of Montgomery, Tennessee
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.14
THE INDUSTRIAL DEVELOPMENT BOARD OF
THE COUNTY OF MONTGOMERY, TENNESSEE
and
STARTEK USA, INC.
________________________
FACILITY LEASE AGREEMENT
________________________
DATED AS OF JULY 8, 1998
<PAGE> 2
TABLE OF CONTENTS
Parties 1
Preamble 1
ARTICLE I
DEFINITIONS
Section 1.1. Definitions 2
Section 1.2. References to Lease 5
Section 1.3. References to Articles, Sections, Etc. 5
Section 1.4. Headings 5
ARTICLE II
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 2.1. Representations, Warranties, and Covenants
of the Issuer 7
Section 2.2. Representations, Warranties, and Covenants
of the Company 8
ARTICLE III
DEMISING CLAUSE; TERM
Section 3.1. Demise of Facility 9
Section 3.2. Lease Term 9
ARTICLE IV
ACQUISITION OF THE FACILITY
Section 4.1. Agreement to Construct the Project 10
Section 4.2. Issuance of Series A Note 10
Section 4.3. Costs of the Project 10
Section 4.4. Company Required to Pay Project Costs
in Event Loan Insufficient 11
Section 4.5. Payment of Expenses of Loan 11
Section 4.6. Other Amounts Payable by the Company 12
<PAGE> 3
ARTICLE V
RENTAL PROVISIONS; PREPAYMENT
<TABLE>
<S> <C>
Section 5.1. Quiet Enjoyment 13
Section 5.2. Rental Payments; Basic Rental Payments; and
Additional Rental Payments 13
Section 5.3. Credits Toward Basic Rental Payments 14
Section 5.4. General Obligation; Obligations of
Company Unconditional 14
Section 5.5. Prepayment of Rental Payments 15
Section 5.6. Rights and Obligations of Company upon Full
Prepayment of Rental Payments 15
ARTICLE V
MAINTENANCE, MODIFICATIONS,
TAXES AND INSURANCE
Section 6.1. Maintenance of the Facility 16
Section 6.2. Modification of the Facility 16
Section 6.3. Improvements as Part of the Facility 16
Section 6.4. Taxes, Assessments, and Utility Charges 16
Section 6.5. Insurance Required 17
Section 6.6. Insurers and Policies 18
Section 6.7. Application of Net Proceeds of Insurance 18
Section 6.8. Advances by Issuer
Section 6.9. Obligation of Company to Maintain Insurance
Regardless of Approval 18
ARTICLE VII
DAMAGE, DESTRUCTION, CONDEMNATION, ETC.
Section 7.1. Damage or Destruction 20
Section 7.2. Condemnation 20
ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. No Warranty of Condition or Suitability; Use
of Project 22
Section 8.2. Indemnity and Hold Harmless Provisions 22
</TABLE>
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<TABLE>
<S> <C> <C>
Section 8.3. Reimbursement of Issuer 22
Section 8.4. Right of Access to the Project 23
Section 8.5. Project as a Public Facility 23
Section 8.6. Compliance with Orders, Ordinances, Etc. 23
Section 8.7. Discharge of Liens and Encumbrances 23
Section 8.8. Restriction Against Certain Religious Activities 24
Section 8.9. Further Assurances and Corrective Instruments 24
Section 8.10. Granting of Easements 24
Section 8.11. Release of Certain Land 25
ARTICLE IX
ASSIGNMENT; REMOVAL OF EQUIPMENT; ETC.
Section 9.1. Assignment and Subleasing 26
Section 9.2. Consent to Assignment 26
Section 9.3. Restrictions on Mortgage or Sale of Project
by Issuer 26
Section 9.4. Removal of Fixtures 26
Section 9.5. Installation of Company's Own Machinery 28
Section 9.6. References to Loan Ineffective After Paid 28
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined 29
Section 10.2. Remedies on Default 30
Section 10.3. Remedies Cumulative 31
Section 10.4. Agreement to Pay Attorneys' Fees and Expenses 31
Section 10.5. Delay or Omission Not a Waiver 31
Section 10.6. Interpretation of any Conflicting Provisions 31
Section 10.7. Force Majeure Provision 31
ARTICLE XI
OPTIONS; PURCHASE OF FACILITY; ETC.
Section 11.1. Options to Terminate 33
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 11.2. Option to Purchase Facility Prior to Payment
of the Loan 33
Section 11.3. Option to Purchase Facility After Payment
of the Loan 33
Section 11.4. Conveyance on Exercise of Option to Purchase Project 33
Section 11.5. Payments Upon, and Conditions For, Early Termination 33
Section 11.6. Continuation of Certain Provisions 34
ARTICLE XII
MISCELLANEOUS
Section 12.1. Certificates and Opinions 35
Section 12.2. Limited Liability of the Issuer 35
Section 12.3. Notices 35
Section 12.4. Binding Effect 36
Section 12.5. Severability 36
Section 12.6. Limitation of Rights 36
Section 12.7. Execution of Counterparts 36
Section 12.8. Applicable Law 36
Section 12.9. Table of Contents and Section Headings
Not Controlling 37
Section 12.10. No Liability of the County of Montgomery, Tennessee 37
Section 12.11. Net Lease 37
Section 12.12. Not Partners 37
Signatures 38
Acknowledgments 39
Exhibits
Exhibit "A" Description of Land A-1
Exhibit "B" Requisition for Payment B-1
</TABLE>
<PAGE> 6
FACILITY LEASE AGREEMENT
THIS FACILITY LEASE AGREEMENT, dated as of July 8, 1998, by and between
THE INDUSTRIAL DEVELOPMENT BOARD OF THE COUNTY OF MONTGOMERY, TENNESSEE (the
"Issuer"), a public, nonprofit corporation organized and existing under the
laws of the State of Tennessee, and STARTEK USA, INC., a Colorado corporation
(the "Company") (the Issuer and the Company being herein called, collectively,
the "Parties").
W I T N E S S E T H:
WHEREAS, the Issuer is a public, nonprofit corporation and a public
instrumentality of the County of Montgomery, Tennessee and is authorized under
Chapter 53, Title 7, Tennessee Code Annotated, as amended (the "Act"), to enter
into lease agreements with manufacturing, industrial, commercial, and financial
enterprises with respect to one or more projects for such payments and upon
such terms and conditions as the Board of Directors of the Issuer may deem
advisable in accordance with the provisions of the Act in order to maintain and
increase employment opportunities by inducing such enterprises to locate in or
to remain in the State of Tennessee (the "State");
WHEREAS, to induce the Company to locate a manufacturing facility in the
County of Montgomery, Tennessee, the Company was informed that the Issuer would
undertake to cause the Company to acquire additional land for and renovate a
certain manufacturing facility on certain land owned by the Issuer (the land
and building being referred to as the "Facility"), and to cause the Company to
equip said Facility with such furniture, fixtures and equipment as it needs or
desires for its operations (the "Equipment"), in Montgomery County, Tennessee,
which Facility is to be owned by the Issuer and leased by the Issuer to the
Company, and which Equipment is to be owned by the Issuer and leased by the
Issuer to the Company and the Issuer now proposes to cause the Facility to be
renovated and to lease the same to the Company, pursuant to a certain Equipment
Lease Agreement (the "Equipment Lease"); and
WHEREAS, the Board of Directors of the Issuer, pursuant to Section
7-53-102 of the Act, has found and determined that the agreement by the Issuer
to acquire, equip and lease such manufacturing facility will develop trade and
commerce in and adjacent to the County of Montgomery, Tennessee, will
contribute to the general welfare, will alleviate conditions of unemployment
and will induce the Company to locate in Montgomery County, Tennessee;
WHEREAS, the Issuer has not made and does not intend to make any profit by
reason of its business or venture in which it may engage or by reason of its
entering into this Lease, and no part of the Issuer's net earnings, if any,
will ever inure to the benefit of any person, firm or corporation except the
County of Montgomery, Tennessee; and,
<PAGE> 7
WHEREAS, the Issuer is authorized by law and has deemed it necessary to
borrow money for the purpose of acquiring the Facility and to that end has duly
authorized and directed the issuance of its not exceeding Four Million Five
Hundred Thousand and No/100 Dollars ($4,500,000.00) Industrial Development
Revenue Note, Series A (StarTek USA Project) (the "Series A Note"); and
WHEREAS, the Issuer has executed a certain Collateral Assignment of
Facility Lease (the "Assignment of Facility Lease") and a certain Deed of
Trust, Assignment of Leases and Security Agreement (the "Deed of Trust") to
secure, inter alia, the loan of the indebtedness (the "Facility Loan")
evidenced by the Series A Note; and
WHEREAS, the Issuer is authorized by law and has deemed it necessary to
borrow money for the purpose of acquiring the Equipment and to that end has duly
authorized and directed the issuance of its not exceeding Three Million Five
Hundred Thousand and No/100 Dollars ($3,500,000.00) Industrial Development
Revenue Note, Series B (StarTek USA Project) (the "Series B Note"); and
WHEREAS, the Issuer has executed a certain Collateral Assignment of
Equipment Lease (the "Assignment of Equipment Lease") and a certain Security
Agreement (the "Security Agreement") to secure, inter alia, the loan of the
indebtedness (the "Equipment Loan") evidenced by the Series B Note; and
WHEREAS, the Issuer is authorized by law and has deemed it necessary to
acquire and renovate the Facility and acquire the Equipment (the Facility and
the Equipment being sometimes referred to as the "Project") as aforesaid, which
acquisition of the Facility has occurred of even date herewith; and
WHEREAS, the Issuer proposes to lease the Facility to the Company and the
Company desires to lease the Facility from the Issuer upon the terms and
conditions set forth herein.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions of Terms. In addition to the words and terms
defined in the preamble hereto and elsewhere defined in this Lease, the
following words and terms as used herein, whether or not the words have initial
capitals, shall have the following meaning, unless the context or use indicates
another or different meaning or intent, and such definitions shall be
2
<PAGE> 8
equally applicable to both the singular and plural forms of any of the words
and terms herein defined:
"Act" means Chapter 53, Title 7, Tennessee Code Annotated, as amended and
supplemented from time to time.
"Additional Rental Payments" means that portion of the Rental Payments
described in Section 5.2(b) of this Lease.
"Authorized Representative" means, in the case of the Issuer, the
Chairman, the Vice Chairman, the Secretary or any Assistant Secretary of the
Issuer; in the case of the Company, President, any Vice President, the
Secretary or the Treasurer; and, in the case of either of them, such additional
persons as, at the time, are designated to act on behalf of the Issuer or the
Company, as the case may be, by written certificate furnished to the Issuer, or
to the Company, as the case may be, containing the specimen signature of each
such person and signed on its behalf by a previously Authorized Representative.
"Basic Rental Payments" means that portion of the Rental Payments
described in Section 5.2(a) of this Lease.
"Building" means all buildings, structures, improvements, and fixtures
located on the Land, the acquisition of which is financed with the proceeds of
the Facility Loan, but not with the proceeds of the Equipment Loan.
"Company" means (a) StarTek USA, INC., a corporation organized and
existing under the laws of the State of Colorado, (b) any successors and
assigns of said corporation, and (c) any surviving, resulting or transferee as
permitted herein.
"Condemnation" means the taking of title to, or the use of, the Facility
under the exercise of the power of eminent domain by any governmental entity or
any other person acting under governmental authority.
"Costs of the Project" means all of those costs and expenses enumerated in
Section 4.3 hereof.
"Equipment" means those items of furniture, fixtures and equipment and
related property acquired by the Issuer with the proceeds of the Series B Note,
and any equipment acquired in substitution therefor and any renewals or
replacements thereof pursuant to the Equipment Lease.
"Equipment Lender" means StarTek USA, Inc., or any subsequent owner of the
Series B Note.
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<PAGE> 9
"Equipment Loan Documents" means, collectively, the Series B Note, the
Assignment of Equipment Lease, and the Security Agreement.
"Event of Default" or "Default" means any of those events defined as
Events of Default by Section 10.1 of this Lease.
"Facility" means, collectively, the Land and Building.
"Facility Loan Documents" means, collectively, the Series A Note, the
Assignment of Facility Lease, and the Facility Deed of Trust.
"Fiscal Year" means the fiscal year, as such from time to time exists, of
the Company.
"Independent Counsel" means an attorney or attorneys duly admitted to
practice law before the highest court of any state of the United States of
America or the District of Columbia, and shall include counsel for the Issuer
and counsel for the Company.
"Issuer" means The Industrial Development Board of the County of
Montgomery, Tennessee, and its lawful successors and assigns.
"Land" means the real estate and interests in real estate described in
Exhibit "A" hereto annexed and by this reference made a part hereof, less such
real estate and interest in real estate as may be taken by the exercise of the
power of eminent domain as provided in Article VII of this Lease and less such
real estate and interest in real estate as may be sold to the Company pursuant
to Article XI of this Lease.
"Lease" means this Facility Lease Agreement, as from time to time
supplemented or amended.
"Lender" means StarTek USA, Inc., or any subsequent owner of the Series A
Note.
"Lien" means any interest in Property securing an obligation owed to
anyone, whether such interest is based on the common law, statute, or contract,
and including, but not limited to, the security interest arising from a
mortgage, encumbrance, pledge, conditional sale, trust receipt, lease,
consignment, or bailment for security purposes. The term "Lien" also includes
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions, leases, and other similar title exceptions and
encumbrances, including, but not limited to, mechanics', materialmen's,
warehousemen's, carriers', and other similar encumbrances affecting real
property. For the purposes of this Lease, one shall be deemed to be the owner
of any Property which he, she, or it has acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in someone else for security purposes.
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<PAGE> 10
"Loan" means, collectively, the Facility Loan and the Equipment Loan.
"Loan Documents" means, collectively, the Facility Loan Documents, and the
Equipment Loan Documents.
"Loan Payment Date" means each date on which interest, principal, if any,
or any of the foregoing, shall be payable on the Facility Loan.
"Net Proceeds" means so much of the gross proceeds with respect to which
that term is used as remains after payment of all expenses, costs, and taxes,
including reasonable attorney's fees and extraordinary expenses, incurred in
obtaining such gross proceeds.
"Permitted Encumbrances" means: (a) all Liens, if any, of record; (b)
utility, access, and other easements and rights of way, restrictions, leases
and exceptions that do not, in the written opinion of the Authorized
Representative of the Company, materially impair the utility or value of the
Property affected thereby for the purposes for which it is intended; (c)
mechanics', materialmen's, warehousemen's, carriers', and other similar Liens
to the extent permitted by Section 8.7 of this Lease; and (d) Liens for taxes
at the time not delinquent.
"Project" means collectively: (a) the Facility and (b) the Equipment.
"Property" means any interest in any kind of property or assets, whether
real, personal, or mixed, tangible or intangible.
"Rental Payments" means, collectively, the Basic Rental Payments and the
Additional Rental Payments, as described in Section 5.2 of this Lease.
"State" means the State of Tennessee.
"Substitute Facilities" means such facilities as defined in Section 7.2(a)
of this Lease.
"Term" means the term of this Lease as specified in Section 3.3 hereof.
Section 1.2 References to Lease. The words "hereof," "herein,"
"hereunder," and other words of similar import refer to this Lease as a whole.
Section 1.3 References to Articles, Sections, Etc. References to
Articles, Sections, and other subdivisions of this Lease are to the designated
Articles, Sections, and other subdivisions of this Lease as originally executed.
Section 1.4 Headings. The headings of this Lease are for convenience
only and shall not define or limit the provisions hereof.
5
<PAGE> 11
(END OF ARTICLE I)
6
<PAGE> 12
ARTICLE II
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 2.1. Representations, Warranties, and Covenants of the Issuer.
The Issuer hereby represents, warrants, and covenants as follows as the basis
for the undertakings on its part herein contained:
(a) That the Issuer: (1) was legally created and exists under
the provisions of the Act; (2) has the power under the provisions of the Act to
enter into the transactions contemplated by this Lease and to carry out its
obligations hereunder; and, (3) has been duly authorized, by proper action, to
execute, deliver and perform this Lease and the Loan Documents;
(b) That the Project constitutes a "project" within the meaning
of the Act, and that the Issuer is entering into the Loan Documents to aid in
the financing of the Project to accomplish the public purposes of the Act;
(c) That the Issuer will finance the costs incurred in the
acquisition of the Project in accordance with the terms and provisions hereof
and of the Equipment Lease, in order to induce and cause the Company to provide
a manufacturing facility in Montgomery County, Tennessee, such facility upon its
completion, to be leased to or occupied by (i) industrial, commercial, financial
or service enterprises; (ii) nonprofit domestic corporations or enterprises
whose purpose is the promotion, support and encouragement of either agriculture
or commerce in the State or whose purpose is the promotion of the health,
welfare and safety of the citizens of the State; or (iii) similar corporations
or enterprises, thereby maintaining and increasing employment opportunities,
and furthering the welfare of the residents of the County of Montgomery and of
the State;
(d) That in order to finance the costs of the Project, the
Issuer is entering into the Loan Documents;
(e) That to the Issuer's knowledge, the Project, as designed,
complies with all presently applicable building and zoning ordinances;
(f) That the Issuer will not pledge the rentals and other
amounts derived from the Project other than to secure the Loan and will not
mortgage or encumber the Project;
(g) That nothing in this Lease shall be construed to require
Issuer to operate the Project other than as lessor; and
(h) That all requirements of the Act have been complied with.
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<PAGE> 13
Section 2.2. Representations, Warranties, and Covenants of the Company.
The Company hereby represents, warrants, and covenants as follows as the basis
for the undertakings on its part herein contained:
(a) That the Company: (i) is a corporation duly organized and validly
existing under the laws of the State of Colorado; (ii) has the power and
authority to enter into this Lease; and (iii) has duly authorized the
execution, delivery, and performance of this Lease; and
(b) That the execution and delivery of this Lease and the Facility
Loan Documents will be valid and binding on the Company and that neither the
execution nor delivery of the foregoing documents, nor the consummation of the
transactions contemplated thereby, nor the fulfillment of or compliance with
the terms and conditions hereof or thereof, will conflict with or result in a
breach of any of the terms, conditions, or provisions of any agreement or
instrument to which the Company is now a party or by which it is bound, or
constitute a default hereunder or under any of the foregoing, or result in the
creation or imposition of any Lien upon any Property of the Company under the
terms of any instrument or agreement, other than the respective Liens, if any,
under the Loan Documents and under this Lease; and
(c) That throughout the Term, the Company will not take, permit to
be taken, fail to take, or permit to fail to be taken, any action which would
cause the Project not to constitute a "project" within the meaning of the Act;
and
(d) That the financing by the Issuer of the costs of acquiring the
Project will induce and cause the Company to provide said Project; and
(e) That all of the proceeds of the Facility Loan will be used for
the payment of the Costs of the Project; and
(f) That to the knowledge of the Company, the execution, delivery
and performance in accordance with the respective terms of this Lease, the Loan
Documents and any other documents executed and delivered in connection with
this transaction do not and will not (i) violate any applicable law or (ii)
conflict with, result in a breach of or constitute a default under any
indenture, agreement or other instrument to which the Company is a party or by
which Company or any of the Company's properties may be bound; and
(g) That there is no action, suit, proceeding or, to the Company's
knowledge, any inquiry or investigation at law or in equity or before or by any
public board or body pending or, to the Company's knowledge, threatened against
or affecting the Company or the Company's property, wherein an unfavorable
decision, ruling or finding would have a material, adverse effect on the
validity or enforceability of the Loan, this Lease, or the Loan Documents,
which has not been previously disclosed.
(END OF ARTICLE II)
8
<PAGE> 14
ARTICLE III
DEMISING CLAUSE; TERM
Section 3.1. Demise of Facility. The Issuer demises and leases to the
Company, and the Company leases from the Issuer, the Facility, subject only to
Permitted Encumbrances, in accordance with the provisions of this Lease, to
have and to hold for the Term.
Section 3.2 Lease Term. The Term of this Lease shall commence as of the
date hereof and shall terminate July 8, 2008, unless earlier terminated
pursuant to the provisions of Article XI hereof; PROVIDED, HOWEVER, that in no
event shall this Lease be terminated (except pursuant to Section 10.2(a)(4)
hereof), but the Term hereof shall continue on a month-to-month basis, until:
(a) the principal of the Loan and the interest theron, shall have been paid in
full or provisions made for such payment; (b) all liabilities, reasonable
costs, and reasonable expenses of the Issuer, including those of its legal
counsel, incurred pursuant to, or in connection with, this Lease shall have
been fully paid and discharged to the satisfaction of the Issuer; and, (c) all
other reasonable liabilities, costs, and expenses which the Company herein
assumes or agrees to pay shall have been fully paid or satisfactory provision
made therefor.
(END OF ARTICLE III)
9
<PAGE> 15
ARTICLE IV
ACQUISITION OF THE FACILITY
Section 4.1. Agreement to Construct the Project. The Issuer and the
Company agree to take the following steps:
(a) The Company agrees that it shall commence or will continue if such
work shall have theretofore commenced, the renovation of the Building on behalf
of itself and the Issuer, and the installation of the Equipment therein. Such
renovation and installation shall be in a good and workmanlike manner. The
Company shall have the sole responsibility for, and the Issuer hereby appoints
the Company its agent with respect to, the renovation and equipping of the
Building and may perform the same itself or through agents, contractors and
others selected by it, and may make or issue such contracts, orders, receipts
and instructions, and in general do or cause to be done all such other things,
as it may in its sole discretion consider requisite or advisable for the
renovation of the Building, installing the Equipment and fulfilling its
obligations under this Section 4.1. The Company shall have full authority and
the sole right under this Lease to supervise and control, directly or
indirectly, all aspects of the renovation of the Building.
(b) In order to effectuate the purposes of this Lease, as and when
requested by the Company, the Issuer will make, execute, acknowledge and
deliver any contracts, orders, receipts, writings and instructions with any
other persons, firms or corporations and in general do all things which may be
requisite or proper, all for construction and equipping and completion of the
Project, and for evidencing the Issuer's ownership thereof.
(c) Disbursements of Loan proceeds shall be made to the Company by the
Lender form time to time only upon receipt of a Requisition for Payment in the
form attached hereto as Exhibit B.
Section 4.2. Issuance of Series A Note. In order to provide funds for the
purpose of financings the cost of acquiring the Facility, the Issuer has issued
the Series A Note, and has entered into the other Loan Documents. The Issuer
and the Company agree that the proceeds of the Facility Loan shall be used to
pay for Coasts of the Project. It is agreed and understood that throughout the
Term, the Facility shall be owned by the Issuer, and leased to the Company
pursuant to this Lease.
Section 4.3. Costs of the Project. The proceeds of the Facility Loan shall
be drawn by the Company on behalf of the Issuer to pay for Costs of the
Project. For purposes of this Lease, "Costs of the Project" shall consist of
all costs of acquiring, improving, and installing the Facility as the same may
be available therefor and financed pursuant to the Facility Loan Documents,
including, without limitation:
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<PAGE> 16
(i) all costs of preparing, developing, grading and improving the
Land and constructing the Building, including architectural, engineering,
development, consulting, marketing and supervisory services with respect
to acquisition of the Facility, and all other costs of providing the
Facility permissible under the Act, and capitalized interest heretofore
accrued or paid in connection with the temporary financing of all or any
part of the costs of any of the foregoing;
(ii) all fees, taxes, charges, and other expenses for recording or
filing, as the case may be, this Lease, the Facility Loan Documents or any
additional documents, instruments or agreements relating thereto, to the
development of the Project, or to the Facility Loan or this Lease;
(iii) all costs of entering into the Facility Loan, including, but
not limited to, all legal, accounting, feasibility study, financial
advisory, legal investment, and any other fees, discounts, costs, and
expenses incurred in connection with the preparation, reproduction,
authorization, execution, and delivery of the Facility Loan, the Facility
Loan Documents, this Lease, and any and all additional documents,
instruments or agreements related thereto, and the payment of any premium
for title insurance;
(iv) reimbursement to the Company for any of the above enumerated
items of cost or expense paid by it.
Nothing contained in this Lease, or in any related documents, shall impose upon
the Issuer to see to the proper application of the proceeds of the Loan or any
disbursement thereof.
Section 4.4. Company Required to Pay Project Costs in Event Loan
Insufficient. If the moneys in the Facility Loan available for payment of the
Costs of the Project should not be sufficient to pay the costs thereof in full,
the Company agrees to complete the Facility and to pay all that portion of the
cost of the Project as may be in excess of the moneys available therefor in the
Loan. The Issuer does not make any warranty, either express or implied, that the
moneys under the Facility Loan and which, under the provisions of this Lease,
will be available for payment of the Costs of the Project, will be sufficient to
pay all costs which will be incurred in that connection. The Company agrees
that, if after exhaustion of the moneys in the Facility Loan, the Company should
pay any portion of the Costs of the Project pursuant to the provisions of this
Section, it shall not be entitled to any reimbursement therefor from the Issuer,
nor shall it be entitled to any diminution in or postponement of the payments
required to be made hereunder.
Section 4.5. Payment of Expenses of Loan. The Company agrees to be
liable and pay for recording expenses, reasonable legal fees, and other
reasonable fees and expenses incurred or to be incurred by or on behalf of the
Issuer in connection with or as an incident to the Facility Loan or the
Facility Loan Documents.
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Section 4.6. Other Amounts Payable by the Company. The Company agrees to
pay all reasonable costs and expenses (including reasonable attorney's fees),
not otherwise paid under the terms of this Lease reasonably incurred by the
Issuer in connection with, or as a direct or indirect result of, or in
connection with the administration or enforcement of, and compliance with, this
Lease and the Facility Loan, or otherwise in regard to the Facility. The
Company may, however, without creating a default hereunder, contest in good
faith the necessity, and the reasonableness of, any costs, expenses, fees,
amounts, liabilities and obligations referred to in this Section 4.6 and in
Section 8.2 hereof.
(END OF ARTICLE IV)
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ARTICLE V
RENTAL PROVISIONS; PREPAYMENT
Section 5.1. Quiet Enjoyment. The Issuer hereby covenants and agrees that
it will not take any action, other than pursuant to Section 8.4 or Article X of
this Lease, to prevent the Company from having quiet and peaceable possession
and enjoyment of the Project during the Term and will, at the request of the
Company, and at the requesting person's cost, to the extent that it may
lawfully do so, join in any legal action in which the Company or asserts its
right to such possession and enjoyment.
Section 5.2. Rental Payments; Basic Rental Payments; and Additional
Rental Payments. The Company covenants and agrees to pay, or cause to be paid,
as and for rental and for use of the Project, throughout the Term, the Basic
Rental Payments and the Additional Rental Payments as provided in this Section,
in funds which constitute lawful monies of the United States of America for the
payment of public and private debts, as at the time of payment.
(a) Basic Rental Payments. The Company shall, throughout the Term,
pay, or cause to be paid, as Basic Rental Payments, the following amounts:
(1) On or prior to any installment payment date for the Facility
Loan under the Series A Note, until the principal of, and interest on the
Facility Loan shall have been fully paid, a sum which will enable the
Issuer to pay the amount payable on such date as principal of (whether at
maturity, or upon acceleration or otherwise), and interest upon the Series
A Note as provided in the Facility Loan Documents.
(b) Additional Rental Payments. The Company shall from time to time
pay, as Additional Rental Payments, within thirty (30) days of receipt of
written demand therefor from the person entitled to payment thereof, an amount
sufficient to pay the following costs and expenses to the extent such costs and
expenses are not paid from the proceeds of the Facility Loan:
(1) The reasonable fees and other costs incurred for services of such
engineers, architects, attorneys, and independent accountants as are
employed to make examinations, opinions, and reports required under, or
contemplated by, this Lease;
(2) The reasonable fees and other costs, not otherwise paid under
this Lease, incurred by the Issuer by reason of its leasing of the Project
or in connection with its administration and enforcement of, and compliance
with, this Lease, or otherwise in connection with the Project; and,
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(3) All amounts advanced by the Issuer under authority of this Lease
or otherwise and which the Company is obligated to repay.
The Issuer hereby directs the Company to make the Basic Rental Payments to
the Lender for payment of the Facility Loan, and such payments shall be made in
a timely manner so that the Issuer can comply with the provisions of the
Facility Loan Documents.
Payments of Additional Rental Payments shall be made by the Company
directly to the persons entitled to such payment.
In the event the Company shall fail to make any payment required by this
Section, the payment so in default shall continue as an obligation hereunder of
the Company until the amount in default shall have been fully paid, and the
Company shall pay, or cause to be paid, the same with interest thereon from the
date of default until so paid at a rate per annum equal to twelve percent (12%)
or the maximum rate of interest allowable by applicable law, whichever is less.
The Company shall make the payments required by this Section without any
further notice thereof except as may be specifically required by this Section.
Section 5.3 Credits Toward Basic Rental Payments. The following amounts
shall be credited (to the extent, if any, which such amounts shall not have
previously been the basis for such a credit) in the manner specified, against
the Basic Rental Payments, and such Basic Rental Payments shall accordingly be
reduced to the extent of any such credits:
(a) Any amounts paid as a prepayment of Basic Rental Payments
pursuant to Section 5.5 hereof;
(b) Any other amounts paid to the Lender as a prepayment of Basic
Rental Payments or the Facility Loan pursuant to any provisions hereof or the
terms thereof, including, but not necessarily limited to, Section 9.4 hereof.
Section 5.4 General Obligation; Obligations of Company Unconditional.
The Company shall pay to or upon the order of the Issuer, at or before the time
when payable by the Issuer, all reasonable costs and liabilities incurred by
the Issuer in connection with its financing of the Facility, under the Facility
Loan Documents, or otherwise as a result of the transactions contemplated by
this Lease.
The obligations of the Company to make the payments required in Section
5.2 hereof, and to perform and observe any and all of the other covenants and
agreements on its part contained herein, shall be a general obligation of the
Company and shall be absolute and unconditional irrespective of any defense or
any rights of setoff, recoupment, or counterclaim which the Company otherwise
may have against the Issuer. The Company shall not: (a) suspend, discontinue,
or abate any payment required by Section 5.2 hereof (except as provided in
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Section 5.3); (b) fail to observe any of its other covenants or agreements in
this Lease, the Equipment Loan Documents or the Facility Loan Documents; or, (c)
except as provided in Article XI hereof, terminate this Lease for any cause
whatsoever, including, without limiting the generality of the foregoing,
failure to complete the Project; failure of the Company to occupy or to use the
Project as contemplated in this Lease or otherwise; any change or delay in the
time of availability of the Project; any defect in the title, design,
operation, merchantability, fitness, or condition of the Project or in the
suitability of the Project for the purposes or needs of the Company; failure of
consideration; eviction or constructive eviction; destruction of or damage to
the Project; commercial frustration of purpose; the taking by Condemnation of
title to or the use of all or any part of the Project; any change in the
taxation or other laws of the United States of America or of the State or any
political subdivision of either; any declaration or finding that any portion of
this Lease is invalid or unenforceable; and, any failure to the Issuer, the
Company or the Lender to perform and observe any agreement, whether express or
implied, or any duty, liability, or obligation arising out of or in connection
with this Lease or otherwise.
Nothing contained in this Section shall be construed to release the Issuer
from the performance of any of the agreements on its part contained in this
Lease, and in the event the Issuer should fail to perform any such agreement on
its part, the Company may institute such action against the Issuer, as the
Company may deem necessary to compel performance; provided, however, that
anything contained herein to the contrary notwithstanding, no such action
shall: (a) violate the agreements on the part of the Company contained in the
second paragraph of this Section; (b) diminish the amounts required to be paid
by the Company pursuant to any provision of this Lease; or (c) seek to impose
or impose any pecuniary liability on the Issuer payable from any source other
than as provided in the Loan Documents, or any personal or pecuniary liability
on any officer or director of the Issuer. The Company may, at its own cost and
expense, and in its own name or in the name of the Issuer, prosecute or defend
any action or proceeding or take any action involving third persons which the
Company deems reasonably necessary in order to secure or protect its right to
possession, occupancy, and use of the Project, and in such event the Issuer
shall, provided the Company shall pay, or cause to be paid, all costs
(including attorneys' fees) reasonably incurred by the Issuer in connection
therewith as such costs accrue, cooperate fully with the Company.
Section 5.5. Prepayment of Rental Payments. (a) Basic Rental Payments
may be prepaid in full or in part at any time without premium or penalty.
(b) The amount necessary to prepay the Rental Payments in full, or
to provide for such full prepayment, shall be determined in accordance with the
provisions of Section 11.2 or Section 11.5 of this Lease, as applicable.
Section 5.6. Rights and Obligations of Company upon Full Prepayment of
Rental Payments. In the event the Rental Payments shall have been prepaid in
full, the Company shall have the option to purchase the Project in accordance
with the provisions of Article XI hereof. If such option is not exercised, then
(i) this Lease shall continue in accordance with its terms, and
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(ii) the Company shall have no further obligation to pay Basic Rental Payments
during such paid up period of the Term hereof.
(END OF ARTICLE V)
ARTICLE VI
MAINTENANCE, MODIFICATIONS, TAXES, AND INSURANCE
Section 6.1. Maintenance of the Facility. Throughout the Term, the Company
shall, at its own expense, keep and maintain the Facility, or cause the
Facility to be kept and maintained, in good condition, repair, and working
order (ordinary wear and tear excepted), making, or causing to be made, all
repairs and replacements thereto (whether ordinary or extraordinary, structural
or nonstructural, or foreseen or unforeseen), and operate the Facility, or
cause the Facility to be operated, as deemed necessary and proper by the
Company.
Section 6.2. Modification of the Facility. (a) The Company, at its own
cost and expense, may make such additions, renewals, replacements, or
improvements to or alterations of the Project, or may construct or place on the
Facility, such additional or renewal or replacement facilities, furnishings, or
equipment, as the Company may deem desirable to attain the purposes herein
contemplated, provided that such additions, renewals, replacements,
improvements, alterations, facilities, furnishings, or equipment shall not
impair the fair market value, structural soundness, or usefulness of the
Facility.
(b) At the request of the Company, the Issuer shall join in any
application for such municipal and other governmental permits and
authorizations as the Company may deem necessary or advisable in connection
with any such construction, acquisition or installation, provided that the
Company shall indemnify and hold the Issuer harmless, or cause the Issuer to be
indemnified and held harmless, against and from all costs and expenses,
including attorneys' fees, which may be incurred by the Issuer in connection
with any such joinder or application.
Section 6.3. Improvements as Part of the Facility. All buildings,
structures, improvements, fixtures, accessions and other Property which shall
be constructed, placed, or installed in or upon the Facility as a substitute
for, or in renewal or replacement of, any buildings, structures, improvements,
fixtures, accessions, or other Property constituting part of the Facility,
shall become a part of the Facility.
Section 6.4. Taxes, Assessments, and Utility Charges. (a) The Company
shall pay, or cause to be paid, as the same shall respectively become due: (i)
all taxes, in lieu of tax payments, regulatory fees, and governmental charges
of any kind whatsoever, including ad valorem taxes, that may at any time be
lawfully assessed or levied against or with respect to the Facility and/or any
furnishings, equipment, or other Property installed or brought by the Company
or any other person, therein or thereon, excluding, however, any taxes levied
upon or with respect to the income or revenues of the Issuer from the Facility;
(ii) all utility or other charges, including
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"service charges," incurred or imposed for the operation, maintenance, use,
occupancy, upkeep, and improvement of the Facility; and, (iii) all assessments
and charges of any kind whatsoever lawfully made by any governmental body for
public improvements which are in respect of the Facility or any part thereof.
It is acknowledged and agreed, however, that the Issuer and the Company do not
expect or intend that any ad valorem taxes will be assessed against the
Facility during the Term.
(b) The Company or any other person may, in good faith and at its own
expense, contest any such taxes, in lieu of tax payments, assessments, and
other charges, after giving notice of its intention to do so to the Issuer. In
the event of any such contest, the Company or such other person, as applicable,
may permit the taxes, assessments, or other charges so contested to remain
unpaid during the period of such contest and any appeal therefrom, unless the
Issuer shall notify the Company or such other person, as applicable, that by
nonpayment of any such items the Facility, or any part thereof, may be
imminently subject to loss or forfeiture, in which event such taxes,
assessments, or charges shall be paid promptly or secured by posting a bond in
form and substance satisfactory to the Issuer. The Issuer shall, if requested
by the Company or such other person, as applicable, and provided that the
Issuer shall be indemnified and held harmless against and from all costs and
expenses (including attorneys' fees) which may be reasonably incurred by the
Issuer in connection therewith, cooperate fully with the Company or such other
person, as applicable, in any such contest.
Section 6.5. Insurance Required. (a) At all times throughout the Term,
the Company shall maintain insurance against such risks and for such amounts as
are customarily insured against by businesses of like size and type, paying, as
the same become due and payable, all premiums in respect thereto, including but
not necessarily limited to:
(i) fire insurance with Uniform Standard Extended Coverage
Endorsements or equivalent coverage obtainable through Federal or State
programs, and vandalism and malicious mischief insurance, as may be
approved for issuance in the State, at all times in an amount equal to not
less than 80% of the replacement cost of the Building, exclusive of
excavations and foundations with respect to the Building;
(ii) comprehensive general public liability insurance, insuring
against all claims for personal injury or death on an occurrence basis in
an amount not less than $1,000,000 per occurrence and $1,000,000 per
person, and against all claims for property damage on an occurrence basis
in an amount not less than $500,000 per occurrence; and
(iii) workers' compensation coverage and any other type of
insurance required by the laws of the State.
Any of the insurance required above may provide deductible provisions
in amounts not exceeding that in similar policies carried by businesses of a
size and character similar
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to the Company, and the Company shall be a self-insurer to the extent of the
amount of the deductible obtained.
(b) The Net Proceeds of the insurance carried pursuant to the
provisions of this Section shall be paid and applied as provided by Section
6.7 hereof.
Section 6.6. Insurers and Policies. Each insurance policy required by
Section 6.5 hereof shall be issued by a financially responsible insurer of
recognized standing, legally authorized to provide the respective insurance in
the State. Before the expiration of any such policy, the Company shall furnish
the Issuer and the Lender evidence satisfactory to the Lender that such policy
has been renewed or replaced, or is no longer required by this Lease. Without
limiting the generality of the foregoing, all insurance policies carried
pursuant to Section 6.5 hereof shall name the Company, the Lender and the
Issuer as parties insured thereunder as the respective interest of each of such
parties may appear, and each policy shall provide that losses thereunder shall
be adjusted by the Company, with the insurer on behalf of the insured parties.
Section 6.7. Application of Net Proceeds of Insurance. The Net Proceeds of
the insurance carried pursuant to the provisions of Section 6.5 hereof shall be
applied as follows:
(a) The Net Proceeds of the insurance carried pursuant to Sections
6.5(a)(i) hereof shall be applied as provided in Section 7.1 hereof; and
(b) The Net Proceeds of the insurance carried pursuant to Sections
6.5(a)(ii) and 6.5(a)(iii) hereof shall be applied toward extinguishment or
satisfaction of the liability with respect to which such insurance proceeds may
be paid.
Section 6.8. Advances by Issuer. (a) In the event the Company shall fail
to pay, or fail to cause to be paid, any tax, assessment, or governmental
charge required to be paid by the provisions of Section 6.4 hereof, prior to
the date upon which such tax, assessment or charge would become delinquent, or
maintain, or cause to be maintained, the full insurance coverage required by
the provisions of Section 6.5 hereof, the Issuer, with not less than ten (10)
days' prior written notice to the Company and the Lender, may (but shall be
under no obligation to) pay such tax, assessment, or governmental charge or
obtain or maintain the required policy of insurance, and pay the premium or
premiums on the same.
(b) All amounts so advanced by any person pursuant to subsections (a)
of this Section shall be promptly reimbursed by the Company to the person
making the advance, together with interest thereon from the date of such
advance to the date of reimbursement at a rate per annum equal to twelve
percent (12%) or the maximum rate of interest allowable by applicable law,
whichever is less.
Section 6.9. Obligation of Company to Maintain Insurance Regardless of
Approval. No acceptance or approval of any insurance policy by the Issuer shall
relieve or release the Company from any liability, duty, or obligation under
the provisions of this Lease.
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(END OF ARTICLE VI)
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ARTICLE VII
DAMAGE, DESTRUCTION, CONDEMNATION, ETC.
Section 7.1. Damage or Destruction. In the event the Facility shall be
damaged or destroyed (in whole or in part) at any time during the Term:
(i) the Company shall promptly give, or cause to be given, written
notice of such damage or destruction to the Issuer and the Lender;
(ii) any Net Proceeds of insurance resulting from damage to or
destruction of the Facility shall be applied by the Company, at the option
of the Lender, to the prepayment of all or any portion of Rental Payments
and/or to the repair or replacement of the Facility;
(iii) so long as there shall be outstanding any indebtedness evidenced
by the Loan, the Company shall, if and to the extent required by the
Lender, promptly replace, repair, or restore the Facility to such
condition, value, and utility to allow the Facility to operate as it was
designed to operate prior to such damage or destruction, with such changes,
alterations, and modifications (including the substitution and addition of
other Property), as may be then approved by the Lender.
In the event such Net Proceeds of insurance, or the portion thereof, if
any, are insufficient to pay in full the costs of such replacement, repair,
rebuilding or restoration, the Company shall be obligated to complete such
replacement, repair, or restoration, paying from its own monies that portion of
the costs thereof in excess of such Net Proceeds of insurance.
All such replacements, repairs, or restoration of the Facility made
pursuant to this Section, whether or not requiring the expenditure of monies of
the Company, shall automatically become a part of the Facility the same as if
specifically described herein.
(a) If the Loan, including the interest payable thereon, and all sums
payable pursuant to Section 5.2(b) hereof, have been fully paid, or provision
therefor has been made, all such Net Proceeds of insurance shall be paid as
provided in the Equipment Lease or if no provision with respect thereto is
made, such Net Proceeds shall be paid to the Company.
(b) The Company shall be entitled to any insurance proceeds or
portion thereof made for damage to or destruction of any Property which, at the
time of such damage or destruction, is not part of the Project.
Section 7.2. Condemnation. (a) In the event all or any part of the title
to, or the use of, the Facility shall be taken by Condemnation during the Term:
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(i) the Company shall promptly give, or cause to be given, written
notice of any Condemnation proceedings of, or affecting, the Facility, or
any portion thereof, to the Issuer and the Lender;
(ii) any Net Proceeds of any Condemnation award shall be applied by
the Company, at the option of the Lender, to the prepayment of any portion
of Rental Payments, to the restoration of the Facility, and/or to the
acquisition of Substitute Facilities, as such term is hereinafter defined;
(iii) so long as there shall be outstanding any indebtedness
evidenced by the Loan, the Company shall, to the extent required by the
Lender, (i) promptly restore the Facility (excluding any land taken by
Condemnation) to such condition, value, and utility to allow the Facility
to operate as it was designed to operate prior to such Condemnation, with
such changes, alterations, and modifications (which do not increase
expense, unless the Company pays such additional cost) as may be then
required by the Lender, or (ii) acquire, by construction or otherwise,
facilities (the "Substitute Facilities"), acceptable to the Lender, of such
nature and value to allow the Facility to operate as it was designed to
operate prior to such condemnation, with such changes, alterations, and
modifications as may be then required by the Company.
In the event that such Net Proceeds are not sufficient to pay in full the
costs of such restoration of the Facility or such acquisition of Substitute
Facilities, the Company shall be obligated to complete such restoration or
acquisition, or to acquire such Substitute Facilities, as applicable, and
shall pay from its own monies that portion of the costs thereof in excess of
such Net Proceeds of any condemnation award.
The restored portions of the Facility, or the Substitute Facilities,
whether or not requiring the expenditure of the moneys of the Company, shall
automatically become part of the Facility.
(b) If the Loan, including the interest payable thereon, and all
sums payable pursuant to Section 5.2(b) hereof, have been fully paid, all such
Net Proceeds of any Condemnation award shall be paid as provided in the
Equipment Lease, or if no provision with respect thereto is made, such Net
Proceeds shall be paid to the Company.
(c) The Company shall be entitled to the proceeds of any
Condemnation award or portion thereof made for damage to, or taking of, any
Property which, at the time of such damage or taking, is not part of the
Project.
(END OF ARTICLE VII)
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ARTICLE VIII
SPECIAL COVENANTS
Section 8.1. No Warranty of Condition or Suitability; Use of
Project. The Company acknowledges its full familiarity with the Land and the
Building, and it represents that it is solely responsible for the plan under
which the Facility will be operated and maintained. The Issuer makes no
representations or warranties, either express or implied, as to the condition,
title, design, operation, merchantability, or fitness of the Project, or that
it is, or will be, suitable for the purposes or needs of the Company.
Section 8.2. Indemnity and Hold Harmless Provisions. The Company
hereby releases the Issuer, its members, agents, employees, and consultants
from; agrees that the Issuer, its members, agents, employees, and consultants
shall not be liable for; and agrees to reimburse and indemnify and hold the
Issuer, its members, agents, employees, and consultants harmless from and
against, any and all: (a) liability for loss or damage to Property or any injury
to or death of any and all persons that may be occasioned by any cause
whatsoever pertaining to the Project or arising by reason of or in connection
with the acquisition, occupation, or use of said Project; (b) liability arising
from, or expense incurred by reason of, the Issuer's leasing of the Project, and
all causes of action and attorneys fees and any other expense incurred in
defending any suits or actions which may arise as a result of any of the
foregoing excluding Issuer's obligations to the Company hereunder; and (c) all
costs and expenses of the Issuer or the officers, directors, or employees
thereof, incurred as a result of carrying out its obligations under this Lease,
the Loan Documents, or any other document herein contemplated; provided,
however, that the foregoing shall not apply to the negligence or wanton or
willful misconduct of the Issuer, its members, agents, consultants and
employees.
Section 8.3. Reimbursement of Issuer. Notwithstanding that it is
the intention of the parties that the Issuer shall not incur any pecuniary
liability by reason of this Lease, or the Loan Documents, or by reason of any
actions, documents, statutes, ordinances, or regulations pertaining to the
foregoing, the Company shall promptly pay any and all reasonable costs and
expenses, as such costs and expenses accrue, which may be incurred by, or
judgments which may be rendered against, the Issuer, or any of its officers,
employees, or agents at any time or times during, or subsequent to the Term: (a)
in enforcing any of the terms, covenants, conditions, or provisions of this
Lease; (b) in defending any action, suit, or proceeding brought against the
Issuer, or any of its respective officers, employees, or agents as a result of
the violation of, or failure to comply with, any present or future Federal,
State, or municipal law, ordinance, regulation, or order, or as a result of any
alleged failure, neglect, misfeasance, or default on the part of the Company, or
any of the employees, servants, agents, or independent contractors of any of the
foregoing in connection with, arising from, or growing out of, this Lease or in
connection with the Loan, the Loan Documents, or the Project, or any operations
conducted in, or any use or occupancy of, said Project, or any action pertaining
to, or connected with, any of the foregoing.
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Section 8.4. Right of Access to the Project. The Lender and its duly
authorized agents shall have the right at all reasonable times to enter upon,
and to examine and inspect, the Project. In addition, the Lender and its duly
authorized agents shall have such rights of access to the Project as may be
reasonably necessary for the proper maintenance and repair of the Project in
the event of any failure by the Company to perform its obligations hereunder.
Section 8.5. Project as a Public Facility. The Company shall, during the
Term, admit, or cause to be admitted, persons; employ, or cause to be employed,
persons at, and render, or cause to be rendered, services at, the Project
without discrimination as to race, religion, creed, color, sex, age, or
national origin.
Section 8.6. Compliance with Orders, Ordinances, Etc. (a) The Company
shall throughout the Term, without expense to the Issuer, promptly comply, or
promptly cause compliance, with all statutes, codes, laws, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, directions, contract provisions, and requirements of all
Federal, State, county, municipal, and other governments, departments,
commissions, boards, companies or associations insuring the premises, courts,
authorities, officials, and officers, foreseen or unforeseen, ordinary or
extraordinary, which now or at any time hereafter may be applicable to the
Project, or any part thereof, or to any of the streets, roads, passageways,
sidewalks, curbs, gutters adjoining the Project, or any part thereof, or to any
use, manner of use, or condition of the Project, or any part thereof.
(b) Notwithstanding the provisions of subsection (a) of this section,
the Company or any other person may, in good faith and at his, her, or its own
expense, upon prior written notice to the Issuer, contest the validity or the
applicability of any requirement of the nature referred to in subsection (a) of
this section. In such event, the Company, or any such person, as applicable, may
fail to comply with the requirement or requirements so contested during the
period of such contest, and any appeal therefrom, unless the Issuer or the
Trustee shall notify the Company, or any such person, as applicable, that by
failure to comply with such requirement or requirements, the Project, or any
part thereof, may be imminently subject to loss or forfeiture, in which event
the Company shall promptly take such action with respect thereto as shall be
satisfactory to the Issuer. The Issuer shall, if requested by the Company or
such other person, as applicable, and provided that the Issuer shall be
indemnified and held harmless against and from all costs and expenses (including
attorneys' fees) which may be reasonably incurred by the Issuer in connection
therewith, cooperate fully with the Company or such other person, as applicable,
in any such contest.
Section 8.7. Discharge of Liens and Encumbrances. (a) The Company shall
not permit or create, or suffer to be permitted or created, any Lien, except
for Permitted Encumbrances, upon the Facility or any part thereof, by reason of
any labor, materials, or services rendered or supplied, or claimed to be
rendered or supplied, with respect to the Facility, or any part thereof. The
Company shall immediately give notice to the Issuer and the Lender of the
filing or assertion of any such Lien of which it has knowledge, and shall,
within thirty (30) days after receipt of actual or constructive notice of the
filing or assertion of any such Lien, satisfy the Lien
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or cause it to be discharged of record or otherwise prevent the enforcement
thereby by payment, deposit, filing the requisite bond, or taking such other
action as shall be reasonably satisfactory to the Lender.
(b) Notwithstanding the provisions of subsection (a) of this section, the
Company or any other person, may, in good faith and at his, her, or its own
expense, upon prior written notice to the Lender and the Issuer, contest any
such Lien. In such event, the Company or any such person, as applicable, may
permit the Lien or encumbrance so contested to remain undischarged and
unsatisfied during the period of such contest, and any appeal therefrom, unless
the Lender shall notify the Company or any such persons, as applicable, that by
nonpayment of such Lien or encumbrance the Project, or any part thereof, may be
imminently subject to loss or forfeiture, in which event, the Company shall
promptly secure payment of such unpaid Lien or encumbrance by filing, or
causing to be filed, the requisite bond, in form and substance satisfactory to
the Lender. The Issuer shall, if requested by the Company or such other person,
as applicable, and provided that the Issuer shall be indemnified and held
harmless against and from all costs and expenses (including attorneys' fees)
which may be reasonably incurred by the Issuer in connection therewith,
cooperate fully with the Company or such other persons, as applicable, in any
such contest.
Section 8.8. Restriction Against Certain Religious Activities. The
Company hereby covenants that, for such period as may be required by law, no
part of the Project shall be used for sectarian instruction, or as a place of
religious worship, or in connection with any part of a program of a school or
department of divinity of any religious denomination.
If at any time the applicable law would permit the Project to be used for
a purpose prohibited by this Section, such prohibition shall, to that extent,
be of no further force or effect. This covenant shall survive any termination
of this Lease.
Section 8.9. Further Assurances and Corrective Instruments. The Issuer
and the Company agree that they will, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, such
supplements hereto and such further instruments as may reasonably be required
for correcting any inadequate or incorrect description of the Project hereby
leased or intended so to be or for carrying out the expressed intention of this
Lease.
Section 8.10. Granting of Easements. The Company may at any time or
times, subject to its leasehold interest, grant easements, licenses, rights of
way (including the dedication of public highways) and other rights or
privileges in the nature of easements with respect to any property or rights
included in the Project, or the Company may release existing easements,
licenses, rights of way and other rights and privileges with or without
consideration, and the Issuer agrees that it shall execute and deliver any
instrument necessary or appropriate to confirm and grant or release any such
easement, license, right of way or other grant or privilege upon receipt of:
(1) a copy of the instrument of grant or release, and (2) a written application
signed by the Authorized Representative of the Company requesting such
instrument and stating (i) that such grant or release is not detrimental to the
proper conduct of the business of the Company, and
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(ii) that such grant or release will not impair the effective use or interfere
with the operation of the Project.
Section 8.11. Release of Certain Land. Notwithstanding any other
provisions of this Lease, the parties hereto reserve the right, at any time and
from time to time, to amend this Lease for the purpose of effecting the release
of or removal from this Lease and the leasehold estate created hereby of (i) any
unimproved part of the Land (on which no part of the Building or other building
or equipment owned by the Company and essential to the continued operation of
the Project is situated), or (ii) any part of the Land with respect to which the
Company proposes to convey fee title or an easement to a railroad, public
utility or public body in order that railroad service, utility services or roads
may be provided for the Project; provided that if at the time any such amendment
is made any of the Loan is outstanding and unpaid such amendment shall not be
effective until and unless the Lender has consented thereto in writing.
(END OF ARTICLE VIII)
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ARTICLE IX
ASSIGNMENT; REMOVAL OF EQUIPMENT; ETC.
Section 9.1. Assignment and Subleasing. (a) This Lease may be assigned and
the Project subleased, as a whole or in part, by the Company without the
necessity of obtaining the consent of the Issuer, subject, however, to each of
the following conditions: (i) no assignment shall relieve the Company from
primary liability for any obligations under this Lease, and in the event of any
such assignment, the Company shall continue to remain primarily liable for
payment of the amounts specified in this Lease and for performance and
observance of the other agreements on its part provided to be performed and
observed by the Company to the same extent as though no assignment had been
made; (ii) the assignee or sublessee shall assume the obligations of the
Company hereunder to the extent of the interest assigned or subleased; (iii)
the Company shall, within thirty (30) days after the delivery thereof, furnish
or cause to be furnished to the Issuer a true and complete copy of each
assignment, assumption of obligation or sublease, as the case may be; and (iv)
the Lender shall have consented to such assignment, assumption of obligation or
sublease.
(b) The Company may contract for the performance by others of
operations or services on, or in connection with, the Project, or any part
thereof, for any lawful purpose; provided, however, that any such contract
shall not be inconsistent with the provisions of this Lease or the Loan
Documents and that the Company shall remain fully obligated and responsible
under this Lease, to the same extent as if such contract had not been executed.
Section 9.2. Consent to Assignment. The Issuer shall assign its rights to
receive certain monies under this Lease to the Lender as security for the
payment of the Loan. Such assignment shall in no way diminish or impair the
obligations, if any, of the Issuer under this Lease and shall be subject and
subordinate to this Lease. The Company hereby agrees and consents to such
assignment by the Issuer, and further agrees and consents to all terms,
provisions, and conditions of the Assignment of Facility Lease.
Section 9.3. Restrictions on Mortgage or Sale of Project by Issuer. The
Issuer agrees that, except for any assignment, mortgage or pledge of its
interest in the rentals hereunder to Lender pursuant to the Deed of Trust and
the Assignment of Lease, it will not mortgage, sell, assign, transfer or convey
the Project or any portion thereof during the Term, except as otherwise
permitted herein.
Section 9.4. Removal of Fixtures. (a) In the event the Company determines
from time to time that any item of fixtures or improvements constituting a
part of the Facility has become inadequate, obsolete, worn out, unsuitable,
undesirable, or unnecessary, the Company may remove such item constituting a
part of the Facility, and may sell, trade-in, exchange, or otherwise dispose of
the same, as a whole or in part, provided that:
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<PAGE> 32
(i) Such removal will not materially impair the overall efficiency of
the operation of the Project, or adversely affect the structural integrity of
the Project; and,
(ii) The Company shall either:
(A) substitute, or cause to be substituted, for such removed item
(by direct payment of the costs thereof), and install, or cause to be
installed, in the Project, other fixtures or related property having
equal or greater value and utility in the operation of the Project
(but not necessarily having the same function), all of which
substituted property shall be free of all Liens, other than Permitted
Encumbrances, and shall become a part of the Project; or,
(B) not make, or cause to be made, any such substitution and
installation, provided that: (i) in the case of the sale of any such
removed item (other than to itself), or in the case of the scrap
thereof, the Company shall pay, or cause to be paid, to the Lender,
the proceeds from such sale of the scrap thereof, as the case may be;
or, (ii) in the case of the trade-in of such removed item for other
property not to be installed in the Project, the Company shall pay, or
cause to be paid, to the Lender, an amount of money equal to the
credit received by it in such trade-in; or, (iii) in the case of the
sale of any such removed item of fixtures, equipment, or improvements
constituting a part of the Project by the Company or in the case of
any other disposition thereof, the Company shall pay to the Lender, an
amount of money equal to the fair market value thereof at the time of
sale or other disposition.
Any monies paid to the Lender pursuant to the provisions of this Section
shall be as a prepayment of the Facility Loan and the Company shall receive a
credit therefor in accordance with the provisions of Section 5.3 hereof.
(b) Notwithstanding any provision of Section 9.4(a) hereof, unless
the Loan Documents require otherwise, the Company without being required to
make the substitution specified in Section 9.4(a)(ii)(A) hereof, or the payment
specified in Section 9.4(a)(ii)(B) hereof, may remove and sell or otherwise
dispose of any item or items of fixtures, or improvements constituting part of
the Facility, and without the necessity of notifying the Lender provided that
the aggregate value of such furnishings, equipment, and improvements so removed
does not exceed: (A) One Hundred Thousand Dollars ($100,000) in any Fiscal
Year; and, (B) Five Hundred Thousand Dollars ($500,000) in all Fiscal Years
during the Term. The value of any such furnishings, equipment, or improvements
so removed pursuant to this subsection (b) shall not be included in the
computations required by Section 9.4(c) hereof.
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<PAGE> 33
(c) The Issuer shall promptly execute any and all instruments deemed
necessary by the Company, in its sole discretion, to fully effectuate the
provisions of this Section.
Section 9.5. Installation of the Company's Own Machinery. The Company
may, from time to time, in its sole discretion and at its own expense, install
machinery, equipment and other tangible and movable property in the Project or
on the Land. All such machinery, equipment and other tangible and movable
property shall remain the sole property of the Company in which the Issuer
shall have no interest.
Section 9.6. References to Loan Ineffective After Paid. Upon payment in
full of the Equipment Loan, all references in this Lease to the Equipment Loan
and to the Equipment Lender shall be ineffective and the Equipment Lender shall
not thereafter have any rights hereunder.
(END OF ARTICLE IX)
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<PAGE> 34
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1. Events of Default Defined. Each of the following shall be
an "Event of Default" under this Lease, and the terms "Event of Default" or
"Default" shall mean, whenever they are used in such Lease, any one or more of
the following events:
(a) The failure by the Company to pay, or cause to be paid,
within thirty (30) days of when due, the Basic Rental Payments, or any part
thereof, specified to be paid under Section 5.2 hereof;
(b) The filing by the Company of a voluntary petition in
bankruptcy or any petition or other pleading seeking any reorganization,
composition, readjustment, liquidation, or similar relief under any present or
future law or regulation, or the seeking of or consent to or acquiescence in
the appointment of any trustee, receiver, or liquidator of all or any
substantial part of its assets or of its interest in the Facility, or the
making of a general assignment for the benefit of creditors, or the admission
in writing of the inability by the Company to pay its debts generally as the
same shall become due;
(c) The adjudication of the Company to be bankrupt or
insolvent, or the filing of a petition or other pleading against the Company
seeking an adjudication of bankruptcy, reorganization, composition,
readjustment, liquidation, or similar relief under any present or future law
or regulation, which shall remain undismissed or unstayed for an aggregate of
sixty (60) days (whether or not consecutive), or the entry of an order or
decree by a court of competent jurisdiction, without the consent or
acquiescence of the Company, appointing a trustee in bankruptcy or
reorganization or a receiver or liquidator of the Company, of all or any
substantial part of its Property, or of the Facility, which order or decree
shall continue unvacated or unstayed on appeal or otherwise and in effect for a
period of ninety (90) days (whether consecutive or not);
(d) The occurrence of a "default" or an "event of default"
under any of the Loan Documents;
(e) Subject to Section 10.7, the failure by the Company to
observe and perform any covenant, condition, or agreement hereunder on its part
to be observed or performed [except obligations referred to in paragraphs (a),
(b) or (c) of this Section for which no such notice must be given] for a period
of thirty (30) days after written notice, specifying such failure and
requesting that it be remedied, is given to the Company by the Issuer and the
Lender, unless the Issuer and the Lender shall agree in writing to an extension
of such time prior to its expiration; provided, however, if the failure stated
in the notice cannot be corrected within the applicable period, the Issuer and
the Lender will not unreasonably withhold its consent to an extension of such
time if corrective action is instituted by the Company within the applicable
period and diligently pursued until the default is corrected.
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<PAGE> 35
Section 10.2. Remedies on Default. (a) Whenever an Event of Default
shall have occurred and be continuing, the Issuer or the Lender may take any
one or more of the following remedial steps:
(1) Declare, by written notice to the Company, to be immediately
due and payable, whereupon the same shall become due and payable;
(i) all unpaid Rental Payments payable pursuant to Section 5.2
hereof in an amount equal to the amount required to pay, or cause
to be paid, the Loan; and, (ii) all other payments due or to
become due under this Lease;
(2) Withhold any or all further performance under this Lease
(except that the Company may, never-the-less exercise any option
granted pursuant to Article XI hereof, in which event, Issuer
shall perform its obligations thereunder);
(3) Re-enter and take possession of the Project without
terminating this Lease, and sublease the Project for the account
of the Company, holding the Company liable for the difference in
the rent and other amounts payable by such sublessee in such
subleasing and the Rental Payments and other amounts payable by
the Company hereunder;
(4) Terminate the Term, exclude the Company from possession of
the Project and use its best efforts to lease the Project to
another for the account of the Company, holding the Company
liable for all Rental Payments and other payments due up to the
effective date of such leasing and for the difference in the
amounts payable by such new lessee and the amounts payable by the
Company under this Lease; and/or
(5) Take any other action or proceeding permitted by the terms
of this Lease.
(a) Whenever any Event of Default shall have occurred and be
continuing, the Issuer may take, in addition to the above and the following,
whatever action at law or in equity may appear necessary or desirable to
collect the Rental Payments then due and thereafter to become due, or to
enforce performance and observance of any obligation, agreement, warranty or
covenant of the Company under this Lease.
(b) Any sums paid to the Issuer (other than for indemnity for
costs or other expenses) by reason of any remedy specified in this Section,
shall be used to pay all or a portion of the Loan.
(c) No action taken pursuant to this Section shall relieve the
Company from its obligation to make all payments required under Section 5.2
hereof.
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<PAGE> 36
(d) Notwithstanding the foregoing provisions of this Section, until final
action pursuant to this Section shall have been taken which would preclude such
action, the Company may (i) pay all accrued unpaid Rental Payments (exclusive of
such Rental Payments accrued solely by virtue of acceleration thereof as
provided in Section 10.2(a)(1) hereof), in which event, this Lease shall be
fully reinstated as if an Event of Default had not occurred and otherwise fully
cure all Events of Default, and/or (ii) exercise any option granted pursuant to
Article XI hereof.
Section 10.3. Remedies Cumulative. No remedy herein conferred upon or
reserved to the Issuer is intended to be exclusive of any other available
remedy, but each and every such remedy shall be cumulative and in addition to
every other remedy given under this Lease, or now or hereafter existing at law
or in equity. No delay or omission to exercise any right or power accruing upon
any Event of Default shall impair any such right or power or shall be construed
to be a waiver thereof, but any such right and power may be exercised from time
to time and as often as may be deemed expedient. In order to entitle the Issuer
to exercise any remedy reserved to it in this Article, it shall not be
necessary to give any notice, other than such notice as may be herein expressly
required in this Lease.
Section 10.4. Agreement to Pay Attorney's Fees and Expenses. In the event
the Company shall default under any of the provisions of this Lease, and the
Issuer shall employ attorneys or incur other expenses for the collection of
amounts payable hereunder, or the enforcement of performance or observance of
any obligations or agreements on the part of the Company herein contained, the
Company shall, on demand therefor, pay to the Issuer the reasonable fees of
such attorneys and such other expenses so incurred.
Section 10.5. Delay or Omission Not a Waiver. No delay or omission of the
Issuer to exercise any right or power accruing upon any breach of any covenant
or agreement contained herein, or upon the happening of any other Default
hereunder, shall impair any such right or power, or shall be construed to be a
waiver of any such right or power, or shall be construed to be a waiver of any
other Default hereunder, or any acquiescence therein; and every such power,
right, or remedy contained herein of the Issuer may be exercised from time to
time and as often as may be deemed expedient by the Issuer. Any waiver, permit,
consent, or approval of any form or character on the part of the Issuer of any
breach of, or default under, this Lease, or any waiver on the part of the
Issuer or the Lender of any provision or condition herein, must be in writing
and shall be effective only to the extent specifically set forth in such
writing.
Section 10.6. Interpretation of any Conflicting Provisions. In the event
of any conflict between any of the provisions hereof, or between any such
provisions and the provisions of the Loan Documents, except to the extent
otherwise provided in such document, the provisions of the Loan Documents shall
prevail.
Section 10.7. Force Majeure Provision. The provisions of Section 10.1(d)
are subject to the following limitations: if, by reason of force majeure, the
Company is unable in whole or in part to carry out the agreements of the
Company on its part herein contained, the
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<PAGE> 37
Company shall not be deemed in default during the continuance of such
inability. The term "force majeure" as used herein shall mean, without
limitation, the following: acts of God; strikes; lockouts or other industrial
disturbances; acts of public enemies; orders of any kind of any governmental
body, including the government of the United States or of the State or any of
their departments, agencies, or officials, or any civil or military authority;
insurrections; riots; epidemics; landslides; lightning; earthquake; fire;
hurricane; storms; floods; washouts; droughts; arrests; restraint of government
and people, civil disturbances; explosions, breakage or accident to machinery,
transmission pipes, or canals; partial or entire failure of utilities; or any
other cause or event not reasonably within the control of the Company, in each
case which has the effect of making it impossible (as distinguished from
impracticable) for the Company to perform, it being agreed that the settlement
of strikes, lockouts, and other industrial disturbances shall be entirely
within the discretion of the Company, and the Company shall not be required to
make settlement of strikes, lockouts, and other industrial disturbances by
acceding to the demands of the opposing party or parties when such course is,
in the judgment of the Company, unfavorable to the Company.
(END OF ARTICLE X)
32
<PAGE> 38
ARTICLE XI
OPTIONS; PURCHASE OF FACILITY; ETC.
Section 11.1. Options to Terminate. The Company shall have, and is hereby
granted, the following options to terminate this Lease:
(a) At the time of any prepayment of the Rental Payments in whole
pursuant to the provisions of Section 5.5 hereof, the Company may terminate
this Lease (i) by paying to the appropriate person the amounts required by
Section 11.5 hereof, and (ii) by Company giving the Issuer notice in writing of
such termination.
(b) At any time after full payment of the Loan, the Company may
terminate this Lease by giving the Issuer notice in writing of such termination.
Section 11.2. Option to Purchase Facility Prior to Payment of the Loan. The
Company shall have, and is hereby granted, the option to purchase the Facility
prior to the full payment of the Loan at the time of any prepayment of the
Rental Payments in whole pursuant to the provisions of Section 5.5 hereof. The
purchase price payable by the Company in the event of its purchase pursuant to
this Section shall be a sum equal to One Hundred Dollars ($100) plus the
amount necessary to prepay the Rental Payments in whole.
Section 11.3. Option to Purchase Facility After Payment of the Loan. The
Company shall have, and is hereby granted, the further option to purchase the
Facility at any time after full payment of the Loan for a purchase price of One
Hundred Dollars ($100). To exercise the option granted in this Section, the
Company shall notify the Issuer of its intention so to exercise such option not
less than five (5) days nor more than ninety (90) days prior to the proposed
date of purchase and shall on the date of purchase pay such purchase price to
the Issuer.
Section 11.4. Conveyance on Exercise of Option to Purchase Project. At the
closing of any purchase pursuant to this Lease, the Issuer shall upon receipt of
the purchase price deliver to the Company the following: documents (including,
without limitation, a quitclaim deed and bill of sale) conveying to the Company
good and marketable title to said Property as it then exists, subject to the
following: (i) those Liens (if any) to which title to said Property was subject
when conveyed to the Issuer; (ii) those Liens created by the Company or to the
creation or suffering of which the Company consented; (iii) those Liens
resulting from the failure of the Company to perform or observe any of the
agreements on its part contained in this Lease; and (iv) Permitted Encumbrances
other than the Loan Documents.
Section 11.5. Payments Upon, and Conditions For, Early Termination.
Termination by the Company of this Lease pursuant to Section 11.1 hereof or the
purchase of the Project pursuant to Section 11.2 hereof shall not be effective
until the Company shall have made the following payments:
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<PAGE> 39
(a) To the Lender an amount which will be sufficient to pay the
Facility Loan in full;
(b) To the Lender, an amount sufficient to pay all unpaid fees and
expenses of the Lender under the Facility Loan Documents or otherwise;
(c) To the Issuer, an amount certified by the Issuer sufficient to
pay all unpaid fees and expenses (including attorneys' fees) of the Issuer
incurred under this Lease; and
(d) To the appropriate person, an amount sufficient to pay all other
fees, expenses, or charges, if any, due and payable or to become due and
payable under this Lease or the Facility Loan Documents and not otherwise paid
or provided for.
Section 11.6. Continuation of Certain Provisions. Upon termination of
this Lease, the liabilities of the Company under such Lease shall terminate,
except that its liabilities and obligations under Sections 8.2 and 8.3 of this
Lease, and as otherwise herein expressly provided, shall nevertheless survive.
(END OF ARTICLE XI)
34
<PAGE> 40
ARTICLE XIII
MISCELLANEOUS
Section 12.1. Certificates and Opinions. Any certificate or opinion
made or given by an officer or director of the Issuer may be based (whether or
not expressly so stated), insofar as it relates to legal matters, upon a
certificate or opinion of or representations by counsel, unless such officer or
director knows that the certificate or representations with respect to the
matter upon which his or her certificate or opinion may be based are erroneous;
and, any certificate or opinion made or given by counsel may be based (insofar
as it relates to factual matters, information with respect to which is in the
possession of the Issuer) upon the certificate or opinion of, or representation
by, an officer or director of the Issuer, unless such counsel knows that the
certificate or representations with respect to the matters upon which his or
her certificate or opinion may be based as aforesaid are erroneous.
Section 12.2. Limited Liability of the Issuer. No recourse under or
upon any obligation, covenant, agreement or certification contained in the Loan
Documents, in the Loan, or in this Lease, or in any other document whatsoever,
or under any judgment obtained against the Issuer, or by the enforcement of any
assessment or by any legal or equitable proceeding by virtue of any
constitution or statute or otherwise or under any circumstances, under or
independent of the Loan Documents, this Lease or any other document, shall be
had against any incorporator, member, director or officer, as such, past,
present or future, of the Issuer, either directly or through the Issuer or any
receiver thereof, or for the payment of any other sum or for the performance of
any obligation under the Loan Documents, this Lease, or any other document or
certification; provided, however, that the foregoing shall not apply to the
gross negligence or wanton or willful misconduct of the Issuer, its members,
agents, consultants and employees. Any and all personal liability of every
nature, whether at common law or in equity, or by statute or by constitution or
otherwise, of any such incorporator, member, director or officer, as such, to
respond by reason of any act or omission on his part or otherwise, for the
payment for or to the Issuer or any receiver thereof, of any sum that may
remain due and unpaid upon the Loan, is hereby expressly waived and released as
a condition of and consideration for the execution of the Loan Documents and
this Lease.
Section 12.3. Notices. All notices, certificates, and other
communications hereunder shall be in writing, and shall be sufficiently given
and shall be deemed given when delivered and, if delivered by mail, shall be
sent by registered mail or certified mail, return receipt requested, postage
prepaid, addressed as follows:
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<PAGE> 41
To the Issuer:
The Industrial Development Board
of the County of Montgomery, Tennessee
c/o Batson, Nolan, Brice, Harvey & Williamson, PLLC
121 South Third Street
P.O. Drawer O
Clarksville, TN 37041-1334
To the Company:
StarTek USA, Inc.
111 Havana Street
Denver, Colorado 80010
Attention: E. Preston Sumner, Jr.
To the Lender:
StarTek USA, Inc.
111 Havana Street
Denver, Colorado 80010
Attention: E. Preston Sumner, Jr.
Section 12.4. Binding Effect. This Lease shall inure to the benefit
of and shall be binding upon the Issuer, the Company, and the respective heirs,
executors, successors, administrators, and assigns of the foregoing.
Section 12.5. Severability. In the event any provision of this Lease
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
Section 12.6. Limitation of Rights. Except as otherwise expressly
provided herein, nothing in this Lease, express or implied, shall be construed
to confer upon any person, other than the Issuer, the Company, the Equipment
Lender and the Lender, any right, remedy or claim, legal or equitable, under or
by reason of this Lease or any provisions hereof.
Section 12.7. Execution of Counterparts. This Lease may be executed
in several counterparts, each of which shall be an original, and all of which
shall constitute but one and the same instrument.
Section 12.8. Applicable Law. This Lease has been executed and
delivered in the State of Tennessee. It is intended that such Lease shall be
construed and governed exclusively by the applicable laws of the State of
Tennessee and the United States of America.
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<PAGE> 42
Section 12.9. Table of Contents and Section Headings Not Controlling. The
Table of Contents and the headings of the several Sections in this Lease have
been prepared for convenience of reference only and shall not control, affect
the meaning, or be taken as an interpretation of any provision of this Lease.
Section 12.10. No Liability of the County of Montgomery, Tennessee. The
County of Montgomery, Tennessee, shall not in any event be liable for the
payment of the principal of, or interest on, the Loan, or for the performance
of any pledge, mortgage, obligation or agreement of any kind whatsoever herein
contained by or of the Issuer and neither the Loan Documents nor any of the
Issuer's agreements or obligations herein or otherwise shall be construed to
constitute an indebtedness of the County of Montgomery, Tennessee within the
meaning of any constitutional or statutory provision whatsoever.
Section 12.11. Net Lease. This Lease shall be deemed and construed to be a
fully "net lease," and the Company shall pay absolutely net during the Term the
rent and all other payments required hereunder, free of any deductions, and
without abatement, deduction or setoff, other than those herein expressly
provided.
Section 12.12. Not Partners. Nothing contained herein or in any other
document shall be deemed to render Issuer, the Lender, the Equipment Lender or
the Company partners or venturers for any purpose.
(END OF ARTICLE XII)
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<PAGE> 43
IN WITNESS WHEREOF, the Issuer has caused this Lease to be executed in its
corporate name, its official seal to be hereunto affixed and attested by its
duly authorized officer, and the Company has caused this Lease to be executed
in its name and behalf by its authorized officer, all as of the date first
above written.
THE INDUSTRIAL DEVELOPMENT BOARD
OF THE COUNTY OF MONTGOMERY,
TENNESSEE
/s/ [ILLEGIBLE]
--------------------------------------
Chairman
ATTEST:
/s/ [ILLEGIBLE]
- -------------------------------
Secretary
(SEAL)
STARTEK USA, INC.
By: /s/ [ILLEGIBLE]
-----------------------------------
Title: E.V.P.
--------------------------------
38
<PAGE> 44
STATE OF TENNESSEE
COUNTY OF MONTGOMERY
Personally appeared before me, J. Carolyn Loyd, Notary Public, Rufus S.
Johnson and F. Gene Washer, with whom I am personally acquainted (or proved to
me on the basis of satisfactory evidence), and who acknowledged that they
executed the foregoing instrument for the purposes therein contained and who
further acknowledged that they are Chairman and Secretary, respectively, of THE
INDUSTRIAL DEVELOPMENT BOARD OF THE COUNTY OF MONTGOMERY, TENNESSEE, a public,
nonprofit corporation organized and existing under the laws of the State of
Tennessee, the within named bargainer and that they are authorized to execute
this instrument on behalf of said corporation.
WITNESS my hand, at office, this 8th day of July, 1998.
/s/ J. CAROLYN LOYD
--------------------------------
Notary Public
My Commission Expires: 6-15-99
----------
STATE OF TENNESSEE
COUNTY OF MONTGOMERY
Personally appeared before me, J. Carolyn Loyd, Notary Public, E. Preston
Sumner, Jr., with whom I am personally acquainted (or proved to me on the basis
of satisfactory evidence), and who acknowledged that he executed the foregoing
instrument for the purposes therein contained and who further acknowledged that
he is Executive Vice President of STARTEK USA, INC., a Colorado corporation,
and is authorized to execute this instrument on behalf of said corporation.
WITNESS my hand, at office, this 8th day of July, 1998.
/s/ J. CAROLYN LOYD
--------------------------------
Notary Public
My Commission Expires: 6-15-99
----------
39
<PAGE> 45
EXHIBIT A
DESCRIPTION OF LAND
Being a tract of land located in the eleventh civil district of
Montgomery County, Tennessee, said tract lying north of and adjacent to U.S.
41-A and west of and adjacent to State Route 76 (41-A to I-24 Connector Road)
and being more fully described as follows:
Beginning at an iron pin found, said pin being located N 73 degrees
29' 43" W 256.78 feet from a concrete monument found at the south end of the
transition of the north right of way of U.S. 41-A and the west right of way of
State Route 76; thence with the north right of way of U.S. 41-A N 73 degrees 29'
43" W 109.88 feet to an iron pin set; thence leaving said right of way and on
two new division lines, N 16 degrees 30' 17" E 185.00 feet to an iron pin set
thence N 73 degrees 29' 43" W 341.39 feet to an iron pin set in the east line of
the J.S. Management property as recorded in ORV. 600, Page 990; thence N 07
degrees 27' 42" E 75.54 feet total, passing the northeast corner of the J.S.
Management property at 5.06 feet, to an iron pin found in the east line of the
Clarksville, Tennessee property; thence with said line N 07 degrees 27' 42" E
305.05 feet to an iron pin found in said east line; thence continuing with said
East N 08 degrees 37' 51" E 376.59 feet to a concrete monument found, said
monument being the southeast corner of the Clarksville-Montgomery County School
System property as recorded in ORV. 174, Page 481; thence with the school
systems east boundary the following three calls; N 05 degrees 58' 56" E 124.65
feet to an iron pin set; thence N 05 degrees 55' 39" E 393.27 feet to an iron
pin set; thence N 07 degrees 57' 32" E 141.74 feet to an iron pin found, said
pin being the southwest corner of the Rufus S. Johnson III Trustee property as
recorded in ORV. 341, Page 1972; thence with Johnson S 82 degrees 02' 28" E
834.03 feet to an iron pin set; thence continuing with Johnson S 01 degrees 50'
00" W 223.74 feet to an iron pin set, said pin being the northwest corner of the
City of Clarksville property as recorded in ORV. 270, Page 813; thence the City
of Clarksville S 01 degrees S 50' 00" W 435.00 feet to an iron pin set; thence
continuing with the City of Clarksville S 45 degrees 23' 55" E 72.25 feet to an
iron pin set in the west right of way of State Route 76; thence with said west
right of way, S 19 degrees 56' 46" w 302.43 feet to an iron pin set; thence
continuing with said right of way, S 10 degrees 47' 35" W 298.24 feet to an iron
pin set, said pin being the northeast corner of the Aubrey Harvey, ET AL
property as recorded in ORV. 626, Page 1103; thence leaving the west right of
way of State Route 76 and with the Aubrey Harvey property the following four
calls: S 83 degrees 32' 25" W 115.31 feet to an iron pin set; thence S 83
degrees 52' 07" W 186.10 feet to an iron pin found; thence S 84 degrees 37' 51"
W 161.90 feet to an iron pin set; thence S 08 degrees 13' 14" W 261.54 feet to
the point of beginning.
Said tract contains 23.638 acres more or less.
The foregoing is a portion of the same property conveyed to Acme
Boot Company, Inc. by deed of record in Official Record Book Volume 139, page
294, in the Register's Office for Montgomery County, Tennessee.
The foregoing is a portion of the same property conveyed to The
Industrial Development Board of the County of Montgomery by deed of record in
Official Record Book Volume 144, page 683, in the Register's Office for
Montgomery County, Tennessee.
The foregoing description was prepared by Billy Ray Suitor, RLS
#1837, King Engineers, LLC dated June 24, 1998.
A-1
<PAGE> 46
EXHIBIT B
REQUISITION FOR PAYMENT
THE INDUSTRIAL DEVELOPMENT BOARD
OF COUNTY OF MONTGOMERY, TENNESSEE
STARTEK USA PROJECT
SERIES A
Certificate No.: _______ Date: _____________
Pay to: StarTek USA, Inc., Agent
Address: _____________________________________________________________________
Wire Transfer or Other Payment Instructions: __________________________________
Amount: $ ________________________________
Purpose: Draw under Series A Note (the "Note")
The undersigned Lessee under that certain Facility Lease Agreement dated
as of July 8, 1998 (the "Lease Agreement") by and between the Industrial
Development Board of the County of Montgomery, Tennessee (the "Issuer") and
StarTek USA, Inc. (the "Lessee"), in its capacity as authorized agent for the
Issuer pursuant to Section 4.1 of the Lease Agreement hereby authorizes and
requests the above stated payment and disbursement as provided in the Lease
Agreement.
The undersigned hereby certifies with respect to this requisition as
follows:
(1) That obligations in the amount stated above have been incurred by or
on behalf of the Lessee for the account of the Issuer and are more fully
described on Schedule 1 hereto, and that each item thereof constitutes a "Cost
of the Project" as defined in the Lease and has not be previously paid or
reimbursed with proceeds of the Note;
(2) That there has not been filed with or served upon the Issuer or the
Lessee notice of any lien, right to lien or attachment upon, or claim affecting
the right of any person to receive payment of the respective amounts stated in
such requisition which has not been released or which will not be released
simultaneously with the payment of such obligation; and
B-1
<PAGE> 47
(3) That such requisition contains no item representing payment on
account of any retained percentage that the Issuer or the Lessee
is at the date of such requisition entitled to retain.
STARTEK USA, INC.,
Agent
By:____________________________________
B-2
<PAGE> 48
THE INDUSTRIAL DEVELOPMENT BOARD
OF THE COUNTY OF MONTGOMERY, TENNESSEE
Industrial Development Revenue Note
Series A
(StarTek USA Project)
$4,500,000.00 July 8, 1998
THE INDUSTRIAL DEVELOPMENT BOARD OF THE COUNTY OF MONTGOMERY, TENNESSEE
(the "Issuer"), a public, nonprofit corporation organized and existing under
the laws of the State of Tennessee, for value received, acknowledges itself
indebted and hereby promises to pay, but solely from the source and special
fund provided therefor, as hereinafter set forth, in the manner hereinafter
provided, to the order of STARTEK USA, INC. (the "Lender"), or its successors,
the principal sum of Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000.00), or so much thereof as has been advanced here against, with
interest thereon at a rate equal to the lessor of nine percent (9%) per annum,
or the maximum rate of interest payable under applicable law, payable in
quarterly installments of interest only, in arrears, on the first (1st) day of
each calendar quarter, commencing with September 1, 1998, with the entire
unpaid principal balance, and all accrued and unpaid interest thereon, being
due and payable on July 8, 2008, without further notice or demand.
The principal hereof and all installments of the interest hereon shall bear
interest from and after their respective due dates (whether by acceleration or
otherwise) at the lesser of twelve percent (12%) per annum or the maximum rate
of interest allowable by applicable law.
The principal hereof and the interest hereon are payable in any coin or
currency of the United States of America which on the date of payment thereof
is legal tender for the payment of public and private debts, and the payment of
such principal and interest shall be made by check, draft, or warrant, of, and
mailed or delivered by, the Issuer to the holder hereof at its office in
Denver, Colorado, or at such other place as may be noticed to the Issuer by
such holder. Upon payment in full of all principal hereof and interest hereon,
this Series A Note shall be surrendered to the Secretary of the Issuer for
cancellation.
<PAGE> 49
This Series A Note is known as the "Industrial Development Revenue Note,
Series A (StarTek USA Project)," which note has been issued by the Issuer in
the principal amount of Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000.00), under a resolution (the "Resolution") of the Issuer dated July
8, 1998. The proceeds of the Series A Note will be used for the purpose of
enabling the Issuer to pay the costs of acquiring additional land for and
renovating a certain manufacturing facility (the site therefor and all
buildings and improvements located thereon being herein called the "Facility"),
located in the County of Montgomery, Tennessee, to be leased by the Issuer to
StarTek U.S.A., Inc., a Colorado corporation (the "Company").
That certain Facility Lease Agreement (the "Lease Agreement"), dated as of
July 8, 1998, whereby the Issuer leases the Facility to the Company, requires,
among other things, that the Company pay to the Issuer or its assigns lease
payments sufficient to pay, when and as due, the principal of and interest on
the Series A Note. As additional security for the observance and performance by
the Issuer of its obligations under the Series A Note, the Issuer has also
executed and delivered (a) a Deed of Trust, Assignment of Leases and Security
Agreement (the "Deed of Trust"), dated as of the date of the Lease Agreement,
under the provisions of which the Issuer has granted a deed of trust lien on
the Issuer's interest in the Land and the Building (as both those terms are
defined in the Lease Agreement), subject only to Permitted Encumbrances (as
defined in the Lease Agreement); and (b) a Collateral Assignment of Facility
Lease (the "Assignment of Facility Lease"), dated as of the date of the Lease
Agreement, assigning to the Lender all of the Issuer's right, title and
interest in and to the Lease Agreement.
Reference is hereby made to the Facility Lease Agreement, the Assignment
of Lease, the Deed of Trust, and the Resolution, and to all amendments thereof
and supplements thereto, for the provisions specifying, among other things, the
nature and extent of the security for the Series A Note, the rights, duties,
and obligations of the Company, the Lender, the Issuer, and the holder of the
Series A Note, and the terms upon which the Series A Note is issued and secured.
The principal of, interest on, and other sums due under the Series A Note
are subject to acceleration at the option of the holder upon any Default or
Event of Default under the Lease Agreement.
Issuer may prepay this Series A Note, in whole or in part, at any time
without premium or penalty.
Subject to the provisions of the next to the last paragraph hereof, in the
event that it is necessary to enforce the payment of the principal of or the
interest on this Series A Note, or to enforce the provisions of the Facility
Lease Agreement, the Deed of Trust or the Assignment of Facility Lease, or to
protect or to enforce the security for this Series A Note, through an attorney
or by means of legal proceedings, the Issuer shall pay all costs reasonably
incurred by the holder hereof in connection therewith, including attorneys'
fees and court costs, and such
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<PAGE> 50
expenses shall be added to, and become a part of, the indebtedness evidenced by
this Series A Note.
Section 67-5-205(3), Tennessee Code Annotated, as amended, provides that
neither the principal nor the interest of any bonds or notes issued by any
incorporated town or city, or any agency thereof, shall be taxed by the State
of Tennessee or by any county or municipality of said State, and that such
shall be so stated on the face of said bonds or notes when issued.
This Series A Note has been negotiated, issued, sold and delivered in the
State of Tennessee and it is intended that such Series A Note shall be governed
by, and construed in accordance with, the laws of said State.
This Series A Note and any and all terms and provisions hereof, including,
but not limited to, those pertaining to the amount, date, and manner of payment
of the principal hereof and the interest hereon, may be modified and amended at
any time by mutual written agreement of, but only by mutual written agreement
of, the Issuer, the Company, and the holder hereof.
All acts, conditions, and things required to happen, exist, and be
performed precedent to the issuance of this Series A Note, and to the execution
of the Deed of Trust, the Assignment of Facility Lease and the Lease Agreement,
have happened, exist, and been performed as so required.
No recourse under or upon any obligation, covenant, or agreement contained
in the Deed of Trust, the Assignment of Facility Lease or the Lease Agreement,
or in this Series A Note, or under any judgment obtained against the Issuer or
by the enforcement of any assessment or by any legal or equitable proceeding by
virtue of any constitution or statute or otherwise or under any circumstances,
under or independent of the Deed of Trust, the Assignment of Facility Lease and
the Lease Agreement, shall be had against any incorporator, member, director, or
officer, as such, past, present, or future, of the Issuer, either directly or
through the Issuer or otherwise, for the payment for or to the Issuer or any
receiver thereof, or for or to the holder of this Series A Note or otherwise, of
any sum that may be due and unpaid by the Issuer upon this Series A Note. Any
and all personal liability of every nature, whether at common law or in equity,
or by statute or by constitution or otherwise, of any such incorporator,
member, director, or officer, as such, to respond by reason of any act or
omission on his or her part or otherwise for, directly or indirectly, the
payment for or to the Issuer or any receiver thereof, or for or to the holder of
this Series A Note, or otherwise, of any sum that may remain due and unpaid
upon this Series A Note, is hereby expressly waived and released as a condition
of and consideration for the execution of the Lease Agreement, the Deed of
Trust, the Assignment of Facility Lease and the issuance of this Series A Note.
The Issuer for itself, its legal representatives and assigns, hereby
waives demand, presentment for payment, notice of dishonor, protest, notice of
protest, and diligence in collection and all other notices or demands
whatsoever with respect to this Series A Note or the enforcement hereof, and
consents that the time of said payments or any part thereof may be extended by
the
- 3 -
<PAGE> 51
holder hereof and assents to any substitution, exchange, or release of
collateral permitted by the holder hereof, all without in any way modifying,
altering, releasing, affecting or limiting its liability.
THIS SERIES A NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED.
This Series A Note and the interest payable hereon are all limited
obligations of the Issuer, and shall not be deemed to constitute a debt or
liability of the Issuer or any political subdivision, except to the extent that
such are payable solely from such special source and funds provided therefor in
accordance with the Lease Agreement, the Deed of Trust and the Assignment of
Facility Lease. The principal of and interest on, this Series A Note are
payable solely from the funds pledged for their payment in accordance with the
Resolution, the Lease Agreement, the Deed of Trust and the Assignment of
Facility Lease. Neither the State of Tennessee nor the County of Montgomery,
Tennessee, shall in any event be liable for the payment of principal of or
interest on this Series A Note or for the performance of any pledge, mortgage,
obligation, stipulation, or agreement of any kind whatsoever undertaken by the
Issuer, and neither this Series A Note nor any of the agreements or
obligations of the Issuer shall be construed to constitute an indebtedness of
the State of Tennessee, or the County of Montgomery, Tennessee, within the
meaning of any constitutional or statutory provision whatsoever; nor shall any
breach of any such pledge, mortgage, obligation, stipulation, or agreement
impose any pecuniary liability upon the Issuer, or upon any officer or director
thereof, or constitute any charge upon the general credit of the Issuer.
IN WITNESS WHEREOF, THE INDUSTRIAL DEVELOPMENT BOARD OF THE COUNTY OF
MONTGOMERY, TENNESSEE has caused this Series A Note to be signed by the manual
signature of the Chairman of the Issuer and the corporate seal of the Issuer to
be affixed hereto, and attested by, the manual signature of the Secretary or
Assistant Secretary of the Issuer, all as of the date above first written.
THE INDUSTRIAL DEVELOPMENT BOARD
OF THE COUNTY OF MONTGOMERY,
TENNESSEE
ATTEST:
[ILLEGIBLE] By: [ILLEGIBLE]
- --------------------------- ---------------------------
Secretary Chairman
(SEAL)
- 4 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, 1998 INCLUDED IN STARTEK, INC'S FORM 10Q FOR THE QUARTER
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,546
<SECURITIES> 17,158
<RECEIVABLES> 10,205
<ALLOWANCES> 415
<INVENTORY> 847
<CURRENT-ASSETS> 42,748
<PP&E> 20,642
<DEPRECIATION> 6,234
<TOTAL-ASSETS> 57,164
<CURRENT-LIABILITIES> 7,661
<BONDS> 497
0
0
<COMMON> 138
<OTHER-SE> 48,547
<TOTAL-LIABILITY-AND-EQUITY> 57,164
<SALES> 0
<TOTAL-REVENUES> 49,013
<CGS> 0
<TOTAL-COSTS> 39,765
<OTHER-EXPENSES> 4,668
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 4,475
<INCOME-TAX> 1,625
<INCOME-CONTINUING> 2,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,850
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
