<PAGE> 1
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 September 30, 1999.
------------------
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
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STARTEK, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 84-1370538
- --------------------------------------------------------------- ---------------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value-- 13,985,701 shares as of November 14, 1999.
<PAGE> 2
STARTEK, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Operations - Three months ended
September 30, 1998 and 1999;
Nine months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,593 $ 20,745
Investments 16,829 25,936
Trade accounts receivable, less allowance for
doubtful accounts of $441 and $774, respectively 20,476 18,235
Inventories 2,772 2,592
Deferred tax assets 1,135 1,772
Prepaid expenses and other 165 217
Prepaid income taxes -- 30
----------- ------------
Total current assets 60,970 69,527
Property, plant and equipment, net 19,171 21,660
Investment in Good Catalog Company, at cost -- 2,606
Note receivable from Good Catalog Company -- 7,818
Other assets 60 171
=========== ============
Total assets $ 80,201 $ 101,782
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,433 $ 17,474
Accrued liabilities 2,092 4,441
Income taxes payable 1,944 --
Current portion of capital lease obligations 46 33
Due to Good Catalog Company -- 10,424
Current portion of long-term debt 906 950
Other 213 606
----------- ------------
Total current liabilities 22,634 33,928
Capital lease obligations, less current portion 77 51
Long-term debt, less current portion 3,196 2,488
Deferred income taxes 144 620
Other 17 --
Stockholders' equity:
Common stock 138 139
Additional paid-in capital 41,661 44,267
Cumulative translation adjustment 167 109
Unrealized loss on investments available for sale (606) (546)
Retained earnings 12,773 20,726
----------- ------------
Total stockholders' equity 54,133 64,695
=========== ============
Total liabilities and stockholders' equity $ 80,201 $ 101,782
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------- ----------------------------------
1998 1999 1998 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 31,617 $ 52,279 $ 80,630 $ 138,852
Cost of services 25,796 42,589 65,561 112,969
-------------- --------------- --------------- --------------
Gross profit 5,821 9,690 15,069 25,883
Selling, general and administrative
expenses 3,483 5,576 9,500 15,207
-------------- --------------- --------------- --------------
Operating profit 2,338 4,114 5,569 10,676
Net interest income and other 436 752 1,680 2,022
-------------- --------------- --------------- --------------
Income before income taxes 2,774 4,866 7,249 12,698
Income tax expense 987 1,830 2,612 4,745
============== =============== =============== ==============
Net income $ 1,787 $ 3,036 $ 4,637 $ 7,953
============== =============== =============== ==============
Earnings per share:
Basic $ 0.13 $ 0.22 $ 0.34 $ 0.57
Diluted $ 0.13 $ 0.21 $ 0.34 $ 0.57
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
STARTEK, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,637 $ 7,953
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,982 3,399
Deferred income taxes (241) (205)
(Gain) loss on sale of assets (113) 3
Changes in operating assets and liabilities:
Purchases of trading securities, net -- (3,341)
Accounts receivable (137) 2,241
Inventories (842) 180
Prepaid expenses and other assets (295) (163)
Prepaid income taxes -- (30)
Accounts payable 2,304 41
Income taxes payable 93 (1,944)
Accrued and other liabilities 309 2,793
-------- --------
Net cash provided by operating activities 7,697 10,927
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (12,767) (5,980)
Proceeds from disposition of property, plant and equipment 181 2
Purchases of investments available for sale (5,937) (19,206)
Proceeds from disposition of investments available for sale -- 13,532
-------- --------
Net cash used in investing activities (18,523) (11,652)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised -- 2,607
Proceeds from (principal payments on) borrowings, net 101 (664)
Principal payments on capital lease obligations (63) (13)
-------- --------
Net cash provided by financing activities 38 1,930
Effect of exchange rate changes on cash 12 (53)
-------- --------
Net (decrease) increase in cash and cash equivalents (10,776) 1,152
Cash and cash equivalents at beginning of period 26,960 19,593
-------- --------
Cash and cash equivalents at end of period $ 16,184 $ 20,745
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 23 $ 214
Income taxes paid $ 2,375 $ 5,808
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Change in unrealized loss on investments available for sale,
net of tax $ (648) $ 60
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999, or for any other interim
period of 1999.
The balance sheet as of December 31, 1998 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 further information, refer to the
consolidated financial statements and footnotes thereto included in StarTek,
Inc.'s annual report on Form 10-K for the year ended December 31, 1998.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, ("SFAS No. 133") "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting treatment. SFAS No. 133 is effective
for fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements and has not determined the timing or method of adoption of
SFAS No. 133.
3. EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using the "treasury
stock" method. The components of basic and diluted earnings per share were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (A) $ 1,787 $ 3,036 $ 4,637 $ 7,953
----------- ----------- ----------- -----------
Weighted average shares of common stock (B) 13,828,571 13,856,554 13,828,571 13,839,226
Dilutive effect of stock options -- 334,806 -- 172,354
----------- ----------- ----------- -----------
Common stock and common stock equivalents (C) 13,828,571 14,191,360 13,828,571 14,011,580
=========== =========== =========== ===========
Earnings per share:
Basic (A/B) $ 0.13 $ 0.22 $ 0.34 $ 0.57
Diluted (A/C) $ 0.13 $ 0.21 $ 0.34 $ 0.57
</TABLE>
6
<PAGE> 7
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
4. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, ("SFAS No. 130") "Reporting Comprehensive Income", which was effective in
1998 for the Company. SFAS 130 establishes 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 $1,322 and $2,815 for the three months ended September
30, 1998 and 1999, respectively. Comprehensive income was $4,001 and $7,955 for
the nine months ended September 30, 1998 and 1999, respectively.
5. INVESTMENTS
The following is a summary of investments available for sale as of
December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds $ 8,987 $ 80 $ (239) $ 8,828
Foreign government bonds 2,915 150 (308) 2,757
Bond mutual funds 4,005 1 (132) 3,874
Other debt securities 286 -- (138) 148
Equity securities 1,598 -- (376) 1,222
--------- ---------- ---------- ---------
Total $ 17,791 $ 231 $ (1,193) $ 16,829
========= ========== ========== =========
</TABLE>
The following is a summary of investments available for sale as of
September 30, 1999:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds $ 14,898 $ 48 $ (364) $ 14,582
Foreign government bonds 4,416 121 (199) 4,338
Bond mutual funds 1,300 6 (5) 1,301
Equity securities 2,851 126 (603) 2,374
--------- ---------- ---------- ---------
Total $ 23,465 $ 301 $ (1,171) $ 22,595
========= ========== ========== =========
</TABLE>
The amortized cost and estimated fair value of investments available
for sale as of September 30, 1999, by contractual maturity, are:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
-------- ------------
<S> <C> <C>
Corporate bonds and foreign government bonds
maturing within:
One year $ 5,644 $ 5,589
Two to five years 11,234 10,985
Due after five years 2,436 2,346
-------- ------------
19,314 18,920
Bond mutual funds 1,300 1,301
Equity securities 2,851 2,374
-------- ------------
Total $ 23,465 $ 22,595
======== ============
</TABLE>
Bond mutual funds are primarily invested in investment grade bonds of U.S.
and foreign issuers denominated in U.S. and foreign currencies, and interests in
floating or variable rate senior collateralized loans to corporations,
partnerships, and other entities in a variety of industries and geographic
regions. Equity securities consist of real estate investment trusts, equity
mutual funds, and publicly traded common stock of U.S. based companies.
Investments available for sale are reported at fair value, with the gross
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity.
7
<PAGE> 8
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
5. INVESTMENTS (CONTINUED)
As of September 30, 1999, the Company was also invested in trading
securities which, in the aggregate, had an original cost and fair market value
of approximately $3,071 and $3,341, respectively. Trading securities are
recorded on a trade date basis and are carried at fair market values. Fair
market values are determined by the most recently traded price of the security
as of the balance sheet date. Gross unrealized gains and losses are reflected in
income currently, and as part of interest income and other in the accompanying
unaudited consolidated statements of operations. Trading securities consist
primarily of publicly traded common stock of U.S. based companies and
international equity mutual funds, together with certain hedging securities, and
various forms of derivative securities.
6. INVENTORIES
The Company frequently purchases components of its clients' products as
an integral part of its process management services. At the close of an
accounting period, packaged and assembled products (together with other
associated costs) are reflected as finished goods inventories pending shipment.
The Company generally has the right to be reimbursed from its clients for unused
inventories. Client-owned inventories are not reflected in the Company's balance
sheet. Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
---------------- --------------
<S> <C> <C>
Purchased components and
fabricated assemblies $ 2,313 $ 1,709
Finished goods 459 883
---------------- --------------
$ 2,772 $ 2,592
================ ==============
</TABLE>
7. GOOD CATALOG COMPANY
Effective September 15, 1999, the Company, through its wholly-owned
subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution
agreement (the "Contribution Agreement") and stockholders agreement with The
Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company,
previously a wholly-owned subsidiary of Reader's Digest. On November 8, 1999,
pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the
outstanding common stock of Good Catalog Company for approximately $2,606 in
cash. Reader's Digest owns the remaining 80.1% of the outstanding common stock
of Good Catalog Company. The Contribution Agreement provides for; (i) an
assignment from Domain.com to Good Catalog Company of Domain.com's right, title,
and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good
Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has
the right to designate at least one member of Good Catalog Company's board of
directors, which will consist of at least five directors. Effective November 1,
1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan
agreement pursuant to which Domain.com advanced an unsecured loan of $7,818 and
Reader's Digest advanced an unsecured loan of $18,433 to Good Catalog Company (
the "Loans"). The Loans mature November 1, 2002, bear interest at a rate equal
to a three month LIBO rate plus 2% per annum, and interest is payable quarterly.
Currently, Good Catalog Company, doing business as Gifts.com, provides an
Internet Web site accessed through the URL www.gifts.com that sells gifts
on-line. The Company agreed to perform certain fulfillment services for Good
Catalog Company in connection with certain products and services to be sold in
connection with gifts.com.
8. PRINCIPAL CLIENT
One client accounted for approximately 75.5% and 80.3% of the Company's
revenues during the three months ended September 30, 1998 and 1999,
respectively. The loss of its principal client or a substantial decrease in the
amount of revenues derived from its principal client would have a material
adverse effect on the Company's business, operating results, and financial
condition.
8
<PAGE> 9
STARTEK, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
(unaudited)
9. SUBSEQUENT EVENTS
On October 14, 1999, the Company purchased an 88,000 square-foot
building in Greeley, Colorado for $4,230 in cash. The building is to be used for
E-commerce support operations and telecommunications provisioning management
business.
On October 22, 1999, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., completed an equipment loan arrangement with a finance
company, which matures on October 22, 2003. In connection with the equipment
loan, the Company received cash of $2,031 in exchange for providing, among other
things, certain collateral which generally consisted of computer hardware and
software, various forms of telecommunications equipment, and furniture and
fixtures whose estimated cost was equal to the principal amount of the equipment
loan. The equipment loan arrangement provides for interest at the prime rate
minus 1.60% (6.65% on October 22, 1999), and forty-eight consecutive monthly
payments. StarTek USA, Inc. is required, from time to time, to maintain certain
operating ratios. As of the date of this Form 10-Q, StarTek USA, Inc. was in
compliance with these financial covenants.
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 (as
defined in the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. Forward-looking statements are preceded by
terms such as "may", "will", "should", "anticipates", "expects", "believes",
"plans", "future", "estimate", "continue", and similar expressions. 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 the Company's principal client, the loss or
delayed implementation of a large project which could cause quarterly variation
in the Company's revenues and earnings, difficulties of managing rapid growth,
dependence on key personnel, dependence on key industries and the 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, the year 2000 issue, both as a computer malfunction and distortion of
order patterns of the Company's clients, and highly competitive markets. These
factors include risks and uncertainties beyond the Company's ability to control;
and, in many cases, the Company and its management cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by use of forward-looking statements. All forward-looking statements
herein are qualified in their entirety by the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"--"Factors That May Affect Future Results" section of StarTek, Inc.'s
annual report on Form 10-K for the year ended December 31, 1998.
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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1999 1998 1999
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services 81.6 81.5 81.3 81.4
------------ ------------ ---------- ----------
Gross profit 18.4 18.5 18.7 18.6
Selling, general and
administrative expenses 11.0 10.7 11.8 10.9
------------ ------------ ---------- ----------
Operating profit 7.4 7.8 6.9 7.7
Net interest income and other 1.4 1.5 2.1 1.5
------------ ------------ ---------- ----------
Income before income taxes 8.8 9.3 9.0 9.2
Income tax expense 3.1 3.5 3.2 3.4
------------ ------------ ---------- ----------
Net income 5.7% 5.8% 5.8% 5.8%
============ ============ ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Revenues increased $20.7 million, or 65.4%, from $31.6 million
during the three months ended September 30, 1998 to $52.3 million during the
three months ended September 30, 1999. This increase was primarily from existing
and new clients, partially offset by decreases in the volume of services
provided to other existing clients. Also, management believes changes in the
timing of the volume of services provided to the Company's clients due to year
2000 buying patterns contributed to the increase in revenues experienced by the
Company during the three months ended September 30, 1999 by accelerating
significant revenue into the third quarter revenues that may have otherwise
occurred in the fourth quarter.
Cost of Services. Cost of services increased $16.8 million, or 65.1%, from
$25.8 million during the three months ended September 30, 1998 to $42.6 million
during the three months ended September 30, 1999. As a percentage of revenues,
cost of services was 81.6% and 81.5% during the three months ended September 30,
1998 and 1999, respectively. This percentage amount remained relatively
consistent from period to period.
Gross Profit. Due to the foregoing factors, gross profit increased $3.9
million, or 66.5%, from $5.8 million during the three months ended September 30,
1998 to $9.7 million during the three months ended September 30, 1999. As a
percentage of revenues, gross profit was 18.4% and 18.5% during the three months
ended September 30, 1998 and 1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.1 million, or 60.1%, from $3.5 million
during the three months ended September 30, 1998 to $5.6 million during the
three months ended September 30, 1999, primarily as a result of increased
personnel costs and related expansion costs incurred to service increasing
business. As a percentage of revenues, selling, general and administrative
expenses decreased from 11.0% during the three months ended September 30, 1998
to 10.7% during the three months ended September 30, 1999, generally reflecting
a lesser relative increase in selling, general and administrative expenses as
compared to the increase in revenues.
10
<PAGE> 11
Operating Profit. As a result of the foregoing factors, operating profit
increased from $2.3 million during the three months ended September 30, 1998 to
$4.1 million during the three months ended September 30, 1999. As a percentage
of revenues, operating profit increased from 7.4% during the three months ended
September 30, 1998 to 7.8% during the three months ended September 30, 1999.
Net Interest Income and Other. Net interest income and other was
approximately $0.4 million and $0.8 million during the three months ended
September 30, 1998 and 1999, respectively. A substantial portion of net interest
income and other continues to be derived from cash equivalents and investment
balances, partially offset by interest expense incurred as a result of the
Company's various debt arrangements.
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $2.1 million, or 75.4%, from $2.8 million during
the three months ended September 30, 1998 to $4.9 million during the three
months ended September 30, 1999. As a percentage of revenues, income before
income taxes increased from 8.8% during the three months ended September 30,
1998 to 9.3% during the three months ended September 30, 1999.
Income Tax Expense. Income tax expense during the three months ended
September 30, 1998 and 1999 reflects a provision for federal, state, and foreign
income taxes at an effective rate of 35.6% and 37.6%, respectively.
Net Income. Based on the factors discussed above, net income increased $1.2
million, or 69.9%, from $1.8 million during the three months ended September 30,
1998 to $3.0 million during the three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues. Revenues increased $58.3 million, or 72.2%, from $80.6 million
during the nine months ended September 30, 1998 to $138.9 million during the
nine months ended September 30, 1999. This increase was primarily from existing
and new clients, partially offset by decreases in the volume of services
provided to other existing clients. Also, management believes changes in the
timing of the volume of services provided to the Company's clients due to year
2000 buying patterns during the three months ended September 30, 1999
contributed to the increase in revenues experienced by the Company during the
nine months ended September 30, 1999 by accelerating significant revenue into
the third quarter revenues that may have otherwise occurred in the fourth
quarter.
Cost of Services. Cost of services increased $47.4 million, or 72.3%, from
$65.6 million during the nine months ended September 30, 1998 to $113.0 million
during the nine months ended September 30, 1999. As a percentage of revenues,
cost of services was 81.3% and 81.4% during the nine months ended September 30,
1998 and 1999, respectively. This percentage amount remained relatively
consistent from period to period.
Gross Profit. Due to the foregoing factors, gross profit increased $10.9
million, or 71.8%, from $15.0 million during the nine months ended September 30,
1998 to $25.9 million during the nine months ended September 30, 1999. As a
percentage of revenues, gross profit was 18.7% and 18.6% during the nine months
ended September 30, 1998 and 1999, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.7 million, or 60.1%, from $9.5 million
during the nine months ended September 30, 1998 to $15.2 million during the nine
months ended September 30, 1999, primarily as a result of increased personnel
and related expansion costs incurred to service increasing business. As a
percentage of revenues, selling, general and administrative expenses decreased
from 11.8% during the nine months ended September 30, 1998 to 10.9% during the
nine months ended September 30, 1999, generally reflecting a lesser relative
increase in selling, general and administrative expenses as compared to the
increase in revenues.
Operating Profit. As a result of the foregoing factors, operating profit
increased from $5.6 million during the nine months ended September 30, 1998 to
$10.7 million during the nine months ended September 30, 1999. As a percentage
of revenues, operating profit increased from 6.9% during the nine months ended
September 30, 1998 to 7.7% during the nine months ended September 30, 1999.
Net Interest Income and Other. Net interest income and other was $1.7
million during the nine months ended September 30, 1998 and $2.0 million during
the nine months ended September 30, 1999. A substantial portion of net interest
income and other continues to be derived from cash equivalents and investment
balances, partially offset by interest expense incurred as a result of the
Company's various debt arrangements.
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<PAGE> 12
Income Before Income Taxes. As a result of the foregoing factors, income
before income taxes increased $5.4 million, or 75.2%, from $7.3 million during
the nine months ended September 30, 1998 to $12.7 million during the nine months
ended September 30, 1999. As a percentage of revenues, income before income
taxes increased from 9.0% during the nine months ended September 30, 1999 to
9.2% during the nine months ended September 30, 1999.
Income Tax Expense. Income tax expense during the nine months ended
September 30, 1998 and 1999 reflects a provision for federal, state and foreign
income taxes at an effective rate of 36.0% and 37.4%, respectively.
Net Income. Based on the factors discussed above, net income increased $3.4
million, or 71.5%, from $4.6 million during the nine months ended September 30,
1998 to $8.0 million during the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed an initial public offering of its
common stock, which yielded net proceeds to the Company of approximately $41.0
million. The Company applied such proceeds to repay substantially all of its
then outstanding debt, and for working capital and other general corporate
purposes, including capital expenditures to expand its operating capacity. Since
fully applying the net proceeds received from its June 1997 initial public
offering, the Company has primarily financed its operations, liquidity
requirements, capital expenditures, and capacity expansion through cash flows
from operations and, to a lesser degree, through various forms of debt financing
and leasing arrangements. The Company has a $5.0 million line of credit with
Norwest Bank Colorado, N.A. (the "Bank"), which matures on April 30, 2001.
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 $25.0 million. The Company may not
pay dividends in an amount which would cause a failure to meet these financial
covenants. As of September 30, 1999 and the date of this Form 10-Q, the Company
was in compliance with these financial covenants. Collateral for the line of
credit is trade accounts receivable of certain of the Company's wholly-owned
subsidiaries. As of September 30, 1999 and the date of this Form 10-Q, no amount
was outstanding under the $5.0 million line of credit.
On February 16, 1999, the Company entered into a lease agreement for
building space in Grand Junction, Colorado, to be used for a call center,
general office use and other services offered by the Company (the "Grand
Junction Facility"). The term of the lease agreement commenced on May 1, 1999
and unless earlier terminated or extended, continues until April 30, 2009.
Pursuant to the terms of the lease agreement, the Company was granted, among
other things: (i) a right of first refusal to purchase the property, of which
the leased space is a part, during the lease term; and (ii) a right to terminate
the lease agreement anytime after the end of the fifth year, by giving the
landlord 180 day prior written notice to terminate. Assuming the lease agreement
is not terminated after the end of the fifth year, total minimum rental
commitments, in the aggregate, excluding certain taxes and utilities as defined,
are approximately $1.1 million and are payable on a monthly basis from May 1999
through April 2009.
On July 16, 1999, the Company entered into a lease agreement for building
space in Hartlepool, England, to be used for the continuing operations of
StarTek Europe, Ltd. (a wholly-owned subsidiary of the Company). The term of the
lease agreement commenced on May 1, 1998 and unless earlier terminated,
extended, or otherwise revised, continues until April 30, 2013. If the Company
and the landlord do not complete a new lease agreement for additional premises,
as defined, the Company was granted the right to terminate the lease agreement
on May 1, 2003 by giving the landlord at least six months written notice to
terminate. Additionally, if a new lease agreement for additional premises, as
defined, is consummated, the Company was granted the right to terminate the
lease agreement on May 1, 2008 by giving the landlord at least six months
written notice to terminate. Pursuant to the terms of the lease agreement, the
Company was granted an option, which commences on May 1, 2008 and expires on
July 31, 2008, to purchase the leased property at market value as determined at
such time. The lease agreement provides for quarterly lease payments which, in
the aggregate for the periods described, are: 106,000 British Pounds from May 1,
1998 through April 30, 1999, all of which the Company has paid; 584,000 British
Pounds from May 1, 1999 through April 30, 2003, a portion of which the Company
has paid pursuant to the quarterly lease payment schedule provided for in the
lease agreement; and 1,095,000 British Pounds from May 1, 2003 through April 30,
2008. Quarterly lease payments from May 1, 2008 through April 30, 2013 are lease
payments as agreed to between the landlord and the Company, or by formula in the
absence of such an agreement.
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<PAGE> 13
As of September 30, 1999, the Company had cash, cash equivalents, and
investment balances of $46.7 million, working capital of $35.6 million and
stockholders' equity of $64.7 million. The Company's cash and cash equivalents
are not restricted. The Company's investments available for sale generally
consist of corporate bonds, foreign government bonds denominated in U.S.
dollars, bond mutual funds, real estate investment trusts, equity mutual funds,
and publicly traded common stock of U.S. based companies. The Company's trading
securities generally consist of publicly traded common stock of U.S. based
companies and international equity mutual funds, together with certain hedging
securities, and various forms of derivative securities. The Company's
investments available for sale and trading securities could be materially and
adversely affected by: (i) various domestic and foreign economic conditions,
such as recession, increasing interest rates, adverse foreign currency exchange
fluctuations, foreign and domestic inflation, and other factors; (ii) the
inability of certain corporations to repay their debts, including interest
amounts, to the Company; and (iii) changes in market price of common stocks,
international equity mutual funds, hedging securities, and other derivative
securities held by the Company due to the level of trading in such securities,
and other risks generally attributable to U.S. based publicly traded companies.
See "Quantitative and Qualitative Disclosure About Market Risk" set forth herein
for further discussions regarding the Company's cash, cash equivalents,
investments available for sale, and trading securities.
Net cash provided by operating activities increased from $7.7 million
during the nine months ended September 30, 1998 to $10.9 million during the nine
months ended September 30, 1999. This increase was primarily a result of
increases in net income, accrued and other liabilities, and decreases in
accounts receivable, net deferred income taxes and inventories. The positive
effects of the foregoing were partially offset by decreases in accounts payable,
income taxes payable, and increases in net purchases of trading securities,
prepaid expenses and other assets, and prepaid income taxes.
Net cash used in investing activities was $18.5 million during the nine
months ended September 30, 1998 and $11.7 million during the nine months ended
September 30, 1999. This decrease was primarily due to decreases in net
purchases of property, plant, and equipment, and net purchases of investments
available for sale.
Net cash provided by financing activities during the nine months ended
September 30, 1998 consisted of proceeds received from certain long-term
financing related to the Company's Laramie, Wyoming facility, partially offset
by principal payments on capital lease obligations. Net cash provided by
financing activities during the same period in 1999 was primarily the result of
proceeds received from exercises of employee stock options during the nine
months ended September 30, 1999, partially offset by principal payments on
capital lease and debt obligations.
The effect of currency exchange rate changes on the translation of the
Company's United Kingdom and Singapore operations was not substantial during the
nine months ended September 30, 1998 and 1999. The terms of the Company's
agreements with its clients and its subcontracts are typically in U.S. dollars
except for certain of its agreements related to its United Kingdom and Singapore
operations. As the international portion of the Company's business grows, more
revenues and expenses will be denominated in foreign currencies, and this will
increase the Company's exposure to fluctuations in currency exchange rates. See
"Quantitative and Qualitative Disclosure About Market Risk" set forth herein for
a further discussion of the Company's exposure to foreign currency exchange
risks in connection with certain of its investments.
The Company believes its current cash, cash equivalents, and investment
balances, anticipated cash flows from future operations, and the $5.0 million of
currently 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 Company's ability to retain or successfully and timely replace
its principal client and 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.
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<PAGE> 14
Effective September 15, 1999, the Company, through its wholly-owned
subsidiary Domain.com, Inc. ("Domain.com"), entered into a contribution
agreement (the "Contribution Agreement") and stockholders agreement with The
Reader's Digest Association, Inc. ("Reader's Digest") and Good Catalog Company,
previously a wholly-owned subsidiary of Reader's Digest. On November 8, 1999,
pursuant to the Contribution Agreement, Domain.com purchased 19.9% of the
outstanding common stock of Good Catalog Company for approximately $2.6 million
in cash. Reader's Digest owns the remaining 80.1% of the outstanding common
stock of Good Catalog Company. The Contribution Agreement provides for; (i) an
assignment from Domain.com to Good Catalog Company of Domain.com's right, title,
and interest in and to the URL www.gifts.com; and (ii) an undertaking by Good
Catalog Company to effect a change in its name to Gifts.com, Inc. Domain.com has
the right to designate at least one member of Good Catalog Company's board of
directors, which will consist of at least five directors. Effective November 1,
1999, Domain.com, Reader's Digest, and Good Catalog Company entered into a loan
agreement pursuant to which Domain.com advanced an unsecured loan of $7.8
million and Reader's Digest advanced an unsecured loan of $18.4 million to Good
Catalog Company ( the "Loans"). The Loans mature November 1, 2002, bear interest
at a rate equal to a three month LIBO rate plus 2% per annum, and interest is
payable quarterly. Currently, Good Catalog Company, doing business as Gifts.com,
provides an Internet Web site accessed through the URL www.gifts.com that sells
gifts on-line. The Company agreed to perform certain fulfillment services for
Good Catalog Company in connection with certain products and services to be sold
in connection with gifts.com.
On October 14, 1999, the Company purchased an 88,000 square-foot building
in Greeley, Colorado for $4.2 million in cash. The building is to be used for
E-commerce support operations and telecommunications provisioning management
business.
On October 22, 1999, the Company, through its wholly-owned subsidiary
StarTek USA, Inc., completed an equipment loan arrangement with a finance
company, which matures on October 22, 2003. In connection with the equipment
loan, the Company received cash of $2.0 million in exchange for providing, among
other things, certain collateral which generally consisted of computer hardware
and software, various forms of telecommunications equipment, and furniture and
fixtures whose estimated cost was equal to the principal amount of the equipment
loan. The equipment loan arrangement provides for interest at the prime rate
minus 1.60% (6.65% on October 22, 1999), and forty-eight consecutive monthly
payments. StarTek USA, Inc. is required, from time to time, to maintain certain
operating ratios. As of the date of this Form 10-Q, StarTek USA, Inc. was in
compliance with these financial covenants.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of domestic
and foreign inflation on its operations, the Company does not believe that
inflation has had, or is likely in the foreseeable future to have, a material
adverse effect on its results of operations or financial condition.
RELIANCE ON PRINCIPAL CLIENT RELATIONSHIP
A substantial portion of the Company's revenues is generated from its principal
client and the loss of its principal client could have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company's largest client during the three months ended September 30, 1998 and
1999 was Microsoft Corporation ("Microsoft"). The Company provides various
outsourced services to various divisions of Microsoft, which began its
outsourcing relationship with the Company in April 1996. Microsoft accounted for
approximately 75.5% and 80.3% of the Company's revenues during the three months
ended September 30, 1998 and 1999, respectively. There can be no assurance the
Company will be able to retain its principal client or, if it were to lose its
principal client, it would be able to timely replace its principal client with
clients which generate a comparable amount of revenues. Additionally, the amount
of revenues generated from the Company's principal client in the past is not
necessarily indicative of the amount revenues that may be expected from such
client in the future.
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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 substantially lower in the quarters preceding the
fourth quarter due to the timing of its clients' marketing programs and product
launches, which are typically geared toward the holiday buying season. However,
the Company's revenues and operating results for the first nine months of 1999
are not necessarily indicative of the results that may be expected for the
fourth quarter of 1999. 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; (v) the cyclical nature of certain high technology
clients' businesses; (vi) changes in the amount of revenues generated from the
Company's principal client; and (vii) changes in the timing of the volume of
services provided to the Company's clients due to year 2000 buying patterns .
Revenues for the three months ended June 30, 1999 and September 30, 1999
were approximately $45.7 million and $52.3 million, respectively. Typically, the
Company's revenues have been lower in the quarters preceding the fourth quarter
due to the seasonal nature of its clients' businesses. The Company recognizes
the likelihood that certain of the revenues generated during the three months
ended September 30, 1999 were partially due to year 2000 buying patterns, which
resulted in acceleration of significant revenue into the third quarter that
management believes would have otherwise occurred in the fourth quarter.
Additionally, the growth rate of the Company's revenues for the first three
quarters of 1999 are not necessarily indicative of the growth rate in revenues
that may be expected for the fourth quarter of 1999.
Gross profit as a percent of revenues remained relatively consistent for
each of the three month periods ended June 30, 1999 and September 30, 1999.
Selling, general and administrative expenses increased from the three
months ended June 30, 1999 to the three months ended September 30, 1999 as a
result of increases in certain operating expenses associated with increases in
revenues, and increases in personnel and related expansion costs incurred to
service increasing business. As a percentage of revenues, selling, general and
administrative expenses remained relatively consistent for the three months
ended June 30, 1999 and September 30, 1999.
Subsequent to September 30, 1999 and to date, in connection with the
Company's participation in the formation of the Gifts.com, together with the
purchase of an 88,000 square-foot building in Greeley, Colorado, the Company has
used approximately $14.6 million of its internal funds. As a result, net
interest income and other can be expected to be proportionally affected during
the remainder of 1999.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Some of the
Company's older computer programs and technologies fall into this category. As a
result, those programs have time-sensitive applications that recognize a date
using "00" as the year 1900 rather than the year 2000. This could cause system
failures or miscalculations causing disruption of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in other normal business activities.
The Company formally created a year 2000 project team (the "Y2K Team")
during the first quarter of 1998. The Y2K Team reports directly to the Company's
executive committee and periodically provides the executive committee status
updates of its year 2000 compliance efforts. To date, the Y2K Team has, among
other things, completed its assessment of the Company's year 2000 compliance
issues, identified non year 2000 compliant computer hardware and software,
communicated with applicable third party vendors in order to gather information
on year 2000 matters beyond the Company's internal information technologies,
fixed identified problems, scheduled and completed year 2000 testing of the
Company's applicable information systems, and completed development and testing
of the Company's year 2000 contingency plan for applicable systems and
processes. This contingency planning consists of implementing alternative work
processes in the event of possible system or process failures for applicable
operations. It should be pointed out that approximately 20% of the Company's
revenues are dependent on year 2000 compliance by outside vendors for which
there is no internal contingency plan. The total cost of the Company's year 2000
compliance efforts is estimated to be approximately $150,000.
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<PAGE> 16
The Company uses certain of its clients' software applications in
performing its outsourced services. Such client-owned software used by the
Company, if not year 2000 compliant, could cause significant interruptions and
delays in the Company's services, revenues, and cash receipts. Management is
unaware of any specific year 2000 issues related to client-owned software used
in the Company's day to day operations. Management believes, based on its
current year 2000 compliance planning, the year 2000 issue will not pose
material adverse problems to the Company's business. However, if the Company's,
its third party vendors', subcontractors', and/or clients' year 2000 compliance
efforts are not successful, or not completed in a timely manner, the year 2000
issue could have a material adverse effect on the operations of the Company.
The Company's clients' future revenues may be adversely and materially
impacted due to slowing demand for their products and services caused by
uncertainties surrounding the year 2000 issue. Similarly, the effect the year
2000 issue may have on the Company's revenues and gross profits is difficult to
estimate but is a significant risk to be considered in evaluating the future
growth of the Company, especially in the fourth quarter of 1999 and first
quarter of 2000.
In a recent Securities and Exchange Commission release regarding year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case year 2000 scenario. Although
it is not possible to assess the likelihood of any of the following events, each
must be included in a consideration of worst case scenarios: widespread failure
of electrical and similar supplies serving the Company; widespread disruption of
services and functions provided by the Company's telephone, software, and
hardware systems; widespread disruption of the services provided by common
communications carriers and power grids serving the Company's domestic and
international operations; similar disruption to the means and modes of
transportation for the Company and its employees, suppliers, and customers;
significant disruption to the Company's ability to gain access to, and remain
working in, office buildings and other facilities; the failure of the Company's
customers' and its suppliers' critical computer hardware and software systems;
and the failure of outside entities' systems, including systems related to
banking and finance. These and other outages would cause major challenges and
would significantly and negatively impact the Company's ability to generate
revenues.
Although management believes the Company's systems are year 2000 compliant,
it cannot predict the outcome or success of its efforts to become year 2000
compliant, or that third party systems are or will be year 2000 compliant, or
that the costs required to address the year 2000 issue, or that the impact of a
failure to achieve substantial year 2000 compliance, will not have a material
adverse effect on the Company's business, financial condition, or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to
changes in interest rates and other general market risks, equity market prices
and other general market risks, and foreign currency exchange rates. All of the
Company's investment decisions are supervised or managed by its Chairman of the
Board. On May 19, 1999 and as amended on August 19, 1999, the Company's Board of
Directors approved the Company's current investment portfolio policy which
provides for, among other things, investment objectives, and investment
portfolio allocation guidelines. This discussion contains forward-looking
statements that are subject to risks and uncertainties. Actual results could
vary materially as a result of a number of factors, including but not limited
to, changes in interest rates and other general market risks, equity market
prices and other general market risks, foreign currency exchange rates, and
those set forth in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations"--"Factors That May Affect Future Results"
section of the Company's annual report on Form 10-K for the year ended December
31, 1998.
Interest Rate Sensitivity and Other General Market Risks
Cash and Cash Equivalents. As of September 30, 1999, the Company had cash
and cash equivalents of approximately $20.7 million, none of which is
restricted, and which consisted of: (i) approximately $19.3 million invested in
various money market funds, overnight investments, and various commercial paper
securities at a combined weighted average interest rate of approximately 4.8%;
and (ii) approximately $1.4 million in various non-interest bearing accounts.
Management considers cash equivalents to be short-term, highly liquid
investments that are readily convertible to known amounts of cash, and so near
their maturity that they present insignificant risk of changes in value because
of changes in interest rates. The Company does not expect any material loss with
respect to its cash and cash equivalents as a result of interest rate changes,
and the estimated fair value of its cash and cash equivalents approximates
original cost.
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Investments Available for Sale. As of September 30, 1999, the Company had
investments available for sale of $22.6 million. These investments available for
sale generally consist of corporate bonds, foreign government bonds denominated
in U.S. dollars, bond mutual funds, real estate investment trusts, equity mutual
funds, and publicly traded common stock of U.S. based companies. The Company's
investment portfolio is subject to interest rate risk and will fall in value if
interest rates increase.
The fair market value of and the estimated cash flows from the Company's
investments in corporate bonds are substantially dependent upon the credit
worthiness of certain corporations that are expected to repay their debts,
including interest, as they become due, to the Company. If such corporations'
financial condition and liquidity adversely changes, the Company's investments
in their debts can be expected to be materially and adversely affected.
The Company's investments in foreign government bonds denominated in U.S.
dollars entail special risks of global investing, these include, but are not
limited to: (i) currency exchange fluctuations which could adversely affect the
ability of foreign governments to repay their debts in U.S. dollars; (ii)
foreign government regulations; and (iii) the potential for political and
economic instability. The fair market value of such investments in foreign
government bonds (denominated in U.S. dollars) can be expected to be more
volatile than that of U.S. government bonds. These risks are intensified for the
Company's investments in debt of foreign governments located in countries
generally considered to be emerging markets.
The table below provides information about maturity dates and corresponding
weighted average interest rates with regard to certain of the Company's
investments available for sale as of September 30, 1999.
<TABLE>
<CAPTION>
WEIGHTED EXPECTED MATURITY DATE
AVERAGE --COST--
INTEREST RATES (DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------------- -----------
1 year 2 years 3 years 4 years 5 years Thereafter Total FAIR VALUE
---------- ------- ------- ------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate bonds 5.2% $ 3,664 -- -- -- -- -- $ 3,664 $ 3,597
Foreign government bonds 6.3% 1,980 -- -- -- -- -- 1,980 1,992
Corporate bonds 7.0% -- $ 6,694 -- -- -- -- 6,694 6,707
Corporate bonds 8.1% -- -- $ 1,930 -- -- -- 1,930 1,945
Corporate bonds 5.3% -- -- -- $ 781 -- -- 781 720
Corporate bonds 5.1% -- -- -- -- $ 1,829 -- 1,829 1,613
Foreign government bonds 9.1% -- -- -- -- -- 2,436 2,436 2,346
---------- ------- ------- ------- ------- --------- -------- -----------
Total 6.7% $ 5,644 $ 6,694 $ 1,930 $ 781 $ 1,829 $ 2,436 $ 19,314 $ 18,920
========== ======= ======= ======= ======= ========= ======== ===========
</TABLE>
Management believes the Company currently has the ability to hold these
investments until maturity, and therefore, if held to maturity, the Company
would not expect the future proceeds from these investments to be affected, to
any significant degree, by the effect of a sudden change in market interest
rates. Declines in interest rates over time will, however, reduce the Company's
interest income derived from future investments.
As of September 30, 1999 and as part of its investments available for sale
portfolio, the Company also was invested in: (i) various bond mutual funds
which, in the aggregate, had an original cost and fair market value of
approximately $1.3 million; and (ii) real estate investment trusts, equity
mutual funds, and publicly traded common stock of U.S. based companies which, in
the aggregate, had an original cost and fair market value of approximately $2.9
million and $2.4 million, respectively.
Such bond mutual funds, as of September 30, 1999: (i) had a weighted
average yield of approximately 8.9%, and a weighted average maturity of
approximately 3 years; (ii) are primarily invested in investment grade bonds of
U.S. and foreign issuers denominated in U.S. and foreign currencies, and
interests in floating or variable rate senior collateralized loans to
corporations, partnerships, and other entities in a variety of industries and
geographic regions; (iii) include certain foreign currency risk hedging
instruments which are intended to reduce fair market value fluctuations; (iv)
are subject to interest rate risk and will fall in value if market interest
rates increase; and (v) are subject to the quality of the underlying securities
within the mutual funds. The Company's investments in such bond mutual funds
entail special risks of global investing, including, but not limited to: (i)
currency exchange fluctuations; (ii) foreign government regulations; and (iii)
the potential for political and economic instability. The fair market value of
the Company's investments in such bond mutual funds can be expected to be more
volatile than that of a U.S.-only fund. These risks are intensified for certain
investments in debt of foreign governments (included in bond mutual funds) which
are located in countries generally considered to be emerging markets.
Additionally, certain of the bond mutual fund investments are also subject to
the effect of leverage, which in a declining market can be expected to result in
a greater decrease in fair market value than if such investments were not
leveraged.
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Outstanding Debt of the Company. As of September 30, 1999, the Company had
outstanding debt of approximately $3.4 million, approximately $3.0 million of
which bears interest at an annual fixed rate of 7.0%. On October 22, 1999, the
Company completed a $2.0 million equipment loan arrangement whereby the Company
is expected to repay its debt at a variable rate of interest over a forty-eight
month period. However, since the majority of the interest on the Company's debt
is fixed, management believes that a hypothetical 10.0% decrease in interest
rates would not have a material adverse effect on the Company. Increases in
interest rates could, however, increase interest expense associated with the
Company's existing variable rate $2.0 million equipment loan and future
borrowings by the Company, if any. For example, the Company may from time to
time effect borrowings under its $5.0 million line of credit for general
corporate purposes, including working capital requirements, capital expenditures
and other purposes related to expansion of the Company's capacity. Borrowings
under the $5.0 million line of credit bear interest at the lender's prime rate.
As of September 30, 1999, the Company had no outstanding line of credit
obligations. The Company has not hedged against interest rate changes.
Equity Price Risk and Other General Market Risks
Investments Available for Sale. As of September 30, 1999, the Company held
in its investments available for sale portfolio, certain equity securities with
original costs and fair market values, in the aggregate, of $2.9 million and
$2.4 million, respectively. The Company's investments in equity securities
consist of real investment trusts, equity mutual funds, and publicly traded
common stock of U.S. based companies. A substantial decline in the value of
equity securities and equity prices in general could have a material adverse
effect on the Company's equity investments. Also, the price of common stock held
by the Company could be materially and adversely affected by poor management,
shrinking product demand, and other risks that may affect single companies, as
well as groups of companies. The Company has partially hedged against some
equity price changes.
Trading Securities. As of September 30, 1999, the Company was also invested
in trading securities which, in the aggregate, had an original cost and fair
market value of approximately $3.1 million and $3.3 million, respectively.
Trading securities, which consist primarily of publicly traded common stock of
U.S. based companies and international equity mutual funds, together with
certain hedging securities, and various forms of derivative securities are held
to meet short-term investment objectives. The Company enters into hedging and
derivative securities in an effort to maximize its return on investments in
trading securities while managing risk. As part of trading securities and as of
September 30, 1999, the Company was invested in derivative securities which
consist of: (i) written put options for a total of 1,200 shares of common stock
of a certain U.S. based publicly traded company each with an exercise price of
$30.00 per share, all of which had a contractual expiration date of October 15,
1999; (ii) written call options for a total of 1,200 shares of common stock of a
certain U.S. based publicly traded company each with an exercise price of $30.00
per share, all of which had a contractual expiration date of October 15, 1999;
and (iii) purchased call options for a total of 9,000 shares of a certain U.S.
based publicly traded company each with an exercise price of $15.00 per share,
all of which had a contractual expiration date of January 21, 2000. Management
believes the risk of loss to the Company in the event of nonperformance by any
party under these agreements is not substantial. Because of the potential
limited liquidity of some of these instruments, the recorded values of these
transactions may be different than the values that might be realized if the
Company were to sell or close out the transactions. Management believes such
differences are not substantial to the Company's results of operations,
financial condition, or liquidity. A substantial decline and/or change in the
value of equity securities, equity prices in general, international equity
mutual funds, hedging securities, and derivative securities could have a
material adverse effect on the Company's trading securities. Also, the price of
common stock, hedging securities, and other derivative securities held by the
Company as trading securities could be materially and adversely affected by poor
management, shrinking product demand, and other risks that may affect single
companies, as well as groups of companies.
Foreign Currency Exchange Risk
Approximately 14.4% of the Company's revenues during the nine months ended
September 30, 1999 were derived from arrangements whereby the Company received
payments from its clients in currencies other than U.S. dollars. The terms of
the Company's agreements with its clients and its subcontracts are typically in
U.S. dollars except for certain of its agreements related to its United Kingdom
and Singapore operations. If an arrangement provides for the Company to receive
payments in a foreign currency, the ultimate revenues realized from such an
arrangement may be less if the value of such foreign currency declines.
Similarly, if an arrangement provides for the Company to make payments in a
foreign currency, the ultimate cost of services and operating expenses for such
an arrangement may be more if the value of such foreign currency increases. For
example, a 10% change in the relative value of such foreign currency could cause
a related 10% change in the Company's previously expected revenues, cost of
services and operating expenses. As the international portion of the Company's
business grows, more revenues and expenses will be denominated in foreign
currencies, and this will increase the Company's exposure to fluctuations in
currency exchange rates. In the past, the Company has not hedged against foreign
currency exchange rate changes related to its day to day operations in the
United Kingdom and Singapore.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
The Company did not issue or sell any unregistered securities
during the three months ended September 30, 1999, except as
follows:
On August 19, 1999, the Company granted options to
purchase 6,600 shares of common stock, in the
aggregate, to six employees pursuant to the Company's
Stock Option Plan. These options vest at a rate of
20% per year beginning August 19, 2000, expire on
August 19, 2009, and are exercisable at $31.00 per
share, which was the market value of the Company's
common stock on the date the options were granted;
and
On September 13, 1999, the Company granted options to
purchase 93,350 shares of common stock, in the
aggregate, to 169 employees pursuant to the Company's
Stock Option Plan. These options vest at a rate of
20% per year beginning September 13, 2000, expire on
September 13, 2009, and are exercisable at $42.75 per
share, which was the market value of the Company's
common stock on the date the options were granted.
The foregoing stock option grants were made in reliance upon
exemptions from registration provided by Section 4 (2) and
3(b) of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.19 Promissory Note of StarTek USA, Inc. dated October
26, 1998 in the principal amount of $3,629,367.67
payable to the order of Norwest Equipment Finance,
Inc., Security Agreement dated October 26, 1998 by
and between StarTek USA, Inc. and Norwest Equipment
Finance, Inc., and Security Agreement dated October
26, 1998 by and between StarTek USA, Inc. and Norwest
Equipment Finance, Inc.
10.20 Contribution Agreement dated September 15, 1999 among
Good Catalog Company, The Reader's Digest
Association, Inc., and Domain.com, Inc.
10.21 Stockholders Agreement dated September 15, 1999 by
and among Good Catalog Company, The Reader's Digest
Association, Inc., and Domain.com, Inc.
10.22 Loan Agreement dated November 1, 1999 with respect to
loans to be extended by The Reader's Digest
Association, Inc. and Domain.com, Inc. to Good
Catalog Company.
10.23 Promissory Note of Good Catalog Company dated
November 1, 1999 in the principal amount of
$7,816,875.00 payable to the order of Domain.com,
Inc.
10.24 Promissory Note of StarTek USA, Inc. dated October
22, 1999 in the principal amount of $2,030,565.67
payable to the order of KeyCorp Leasing, a division
of Key Corporate Capital, Inc., Security Agreement
dated October 13, 1999 by and between StarTek USA,
Inc. and KeyCorp Leasing, and Amendment No. 1 to
Security Agreement dated October 13, 1999.
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 September 30, 1999.
19
<PAGE> 20
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: November 15, 1999 /s/ MICHAEL W. MORGAN
--------------------- --------------------------------------------
Michael W. Morgan
President and Chief Executive Officer
Date: November 15, 1999 /s/ DENNIS M. SWENSON
--------------------- --------------------------------------------
Dennis M. Swenson
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.19 Promissory Note of StarTek USA, Inc. dated October 26, 1998 in the
principal amount of $3,629,367.67 payable to the order of Norwest
Equipment Finance, Inc., Security Agreement dated October 26, 1998
by and between StarTek USA, Inc. and Norwest Equipment Finance,
Inc., and Security Agreement dated October 26, 1998 by and between
StarTek USA, Inc. and Norwest Equipment Finance, Inc.
10.20 Contribution Agreement dated September 15, 1999 among Good Catalog
Company, The Reader's Digest Association, Inc., and Domain.com, Inc.
10.21 Stockholders Agreement dated September 15, 1999 by and among Good
Catalog Company, The Reader's Digest Association, Inc., and
Domain.com, Inc.
10.22 Loan Agreement dated November 1, 1999 with respect to loans to be
extended by The Reader's Digest Association, Inc. and Domain.com,
Inc. to Good Catalog Company.
10.23 Promissory Note of Good Catalog Company dated November 1, 1999 in
the principal amount of $7,816,875.00 payable to the order of
Domain.com, Inc.
10.24 Promissory Note of StarTek USA, Inc. dated October 22, 1999 in the
principal amount of $2,030,565.67 payable to the order of KeyCorp
Leasing, a division of Key Corporate Capital, Inc., Security
Agreement dated October 13, 1999 by and between StarTek USA, Inc.
and KeyCorp Leasing, and Amendment No. 1 to Security Agreement dated
October 13, 1999.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.19
- --------------------------------------------------------------------------------
Norwest Equipment Finance, Inc. PROMISSORY NOTE
NORWEST EQUIPMENT Investors Building, Suite 300
FINANCE 733 Marquette Avenue
Minneapolis, MN 55479-2048
- --------------------------------------------------------------------------------
Dated as of October 26, 1998
Contract Number 17657-709
For value received, the undersigned, hereby promises to pay to the order of
Norwest Equipment Finance, Inc. (the "Lender") at its office in Minneapolis,
Minnesota, or at such other place as may be designated from time to time by the
holder hereof, the sum of $4,171,667.04 in installments according to the
schedule set forth below; provided, however, that the undersigned and the Lender
may agree to any other payment schedule, in which case only variations shall be
set forth in the space provided for additional provisions. The first payment
period shall begin on the 15th day of the month in which Lender disburses the
loan proceeds if disbursement is made on or before the 15th day of such month,
and the first payment period shall begin on the last day of such month if
disbursement is made during the balance of such month. The first installment
shall be payable on the first payment due date set forth below (which may be the
same as the date the first payment period begins). Subsequent installments shall
be payable on the first day of each payment period beginning after the first
payment period. The undersigned agrees that the date the first payment period
begins may be left blank when this Note is executed and hereby authorizes Lender
to insert such date based upon the date the loan proceeds are disbursed.
PAYMENT SCHEDULE:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
Date first payment period begins: November 30, 1998 First payment due: December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
Number of installments: 48 Amount of each installment: $86,909.73
- -------------------------------------------------------------------------------------------------------------------------
Payment period: MONTHLY Annual interest rate used in computing payment
schedule: 7.00%
- -------------------------------------------------------------------------------------------------------------------------
Principal amount of loan proceeds disbursed: $3,629,367.67
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to installment payments as set forth above, the undersigned agrees
to pay Lender interim interest on the loan proceeds disbursed hereunder from the
date of disbursement to the date the first payment period begins at the annual
interest rate set forth above used in computing the payment schedule. Interim
interest shall be due and payable on the date the first payment period begins.
If any installment is not paid when due, then in addition to any other remedy
Lender may have hereunder, Lender may impose and, if imposed, the undersigned
shall pay a late charge of 5% of the amount of the delinquent installment but in
any event not more than permitted by applicable law.
Payments thereafter received shall be applied first to delinquent installments
and then to current installments.
This Note may be prepaid in whole or in part at anytime and from time to time
but only if accompanied by a prepayment premium of 2% of the principal amount
prepaid if prepaid during months 1 - 12, 1% during months 13 - 24 and 0%
thereafter. Any partial prepayment shall be applied to the last maturing
installment or installments. Upon any prepayment in full, the unearned portion
of the interest will be refunded using the simple interest method. The following
shall constitute an Event of Default hereunder: (a) failure to pay any
installment hereunder when due; (b) the occurrence of an event of default as
defined in any security agreement or mortgage securing this Note; (c) the
commencement of any bankruptcy or insolvency proceedings by or against the
undersigned or any guarantor of this Note; and (d) any indebtedness the
undersigned may now or hereafter owe to Norwest Bank Minnesota, National
Association or any affiliate thereof shall be accelerated following a default
thereunder or, if any such indebtedness is payable on demand, payment thereof
shall be demanded. Upon the occurrence of an Event of Default, Lender may do any
one or more of the following as it may elect: (i) upon written notice to the
undersigned, declare the entire unpaid balance of the Note to be immediately due
and payable, and the same (less unearned interest computed using the simple
interest method as if this Note had been paid in full on the date it became due
and payable) shall thereupon be and become immediately due and payable; (ii)
exercise any one or more of the rights and remedies available to it under any
security agreement or mortgage securing this Note or under any other agreement
or by law.
The undersigned hereby waives presentment, notice of dishonor, and protest. The
undersigned agrees to pay all costs of collection of this Note, including
reasonable attorneys' fees. The holder hereof may change the terms of payment of
the Note by extension, renewal or otherwise, and release any security for, or
party to, this Note and such action shall not release any accommodation maker,
endorser, or guarantor from liability on this Note. Notwithstanding anything to
the contrary contained herein, if the rate of interest, late payment fee,
prepayment premium or any other charges or fees due hereunder are determined by
a court of competent jurisdiction to be usurious, then said interest rate, fees
and/or charges shall be reduced to the maximum amount permissible under
applicable law and any such excess amounts shall be applied towards the
reduction of the principal balance of this Note.
This Note shall be construed and enforced in accordance with, and the rights of
the parties shall be governed by, the laws of the State of Minnesota without
regard to conflicts of law rules.
If this Note is signed by more than one person as Debtor, then the term "Debtor"
shall refer to each of them separately and to all of them jointly, and each such
person shall be liable hereunder individually in full and jointly with the
others.
IN WITNESS WHEREOF the Debtor has signed this Agreement as of the date first
above written.
StarTek USA, Inc.
- ---------------------------------
Debtor
/s/ DENNIS M.SWENSON
- ---------------------------------
By
Executive Vice President
- ---------------------------------
Title
Exhibits and Schedules not filed
<PAGE> 2
- --------------------------------------------------------------------------------
Norwest Equipment Finance, Inc. SECURITY AGREEMENT
NORWEST EQUIPMENT Investors Building, Suite 300
FINANCE 733 Marquette Avenue
Minneapolis, MN 55479-2048
- --------------------------------------------------------------------------------
Dated as of October 26, 1998
Contract Number 17657-709
Name and Address of Debtor:
StarTek USA, Inc.
111 Havana Street
Denver, CO 80010
1. SECURITY INTEREST AND COLLATERAL. TO SECURE THE PAYMENT AND PERFORMANCE OF
EACH AND EVERY DEBT, LIABILITY AND OBLIGATION OF EVERY TYPE AND DESCRIPTION
WHICH Debtor may now or at any time hereafter owe to Norwest Equipment
Finance, Inc. ("Secured Party") (whether such debt, liability or obligation
now exists or is hereafter created or incurred, whether it is currently
contemplated by the Debtor and Secured Party, whether any documents
evidencing it refer to the Security Agreement, and whether it is or may be
direct or indirect, due or to become due, absolute or contingent, primary
or secondary, liquidated or unliquidated, or joint, several or joint and
several; all such debts, liabilities and obligations being herein
collectively referred to as the "Obligations"), Debtor hereby grants
Secured Party a security interest (herein call the "Security Interest") in
the following property (herein called the "Collateral"):
SEE ATTACHED SCHEDULE A
together with all substitutions and replacements for and products of the
Collateral, all proceeds, accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with
the Collateral.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and
agrees that:
(A) AUTHORIZATION. If Debtor is a corporation, a partnership or a limited
liability company, the execution, delivery and performance of this
Agreement has been duly authorized by all necessary action on the part
of the Debtor and will not violate any provision of the Debtor's
articles of incorporation or bylaws, partnership agreement or articles
of organization or management agreement, as the case may be.
(B) OFFICE LOCATION. Debtor's chief executive office (if Debtor is a
corporation, a partnership or a limited liability company) is located
at the address for Debtor shown above. Debtor will not change the
location of its chief executive office or his/her residence, as the
case may be, without first giving Secured Party at least 10 days prior
written notice of the new location.
(C) BUSINESS PURPOSE, LAWFUL USE. The Equipment will be used primarily for
business purposes as opposed to personal, family or household purposes.
Debtor will comply with all laws and regulations applicable to the
Equipment and its use.
3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents,
warrants and agrees that:
(a) Debtor has (or will have at the time Debtor acquires rights in
Collateral hereafter arising) absolute title to each item of Collateral
free and clear of all security interests, liens and encumbrances,
except the Security Interest and will defend the Collateral against all
claims or demands of all persons other than Secured Party. Debtor will
not sell or otherwise dispose of the Collateral or any interest therein
without the prior written consent of Secured Party. If Debtor is a
corporation, this Agreement has been duly and validly authorized by all
necessary corporate action, and, if Debtor is a partnership or a
limited liability company, the partner(s) or manager(s) executing this
Agreement has (have) authority to act for the partnership or the
limited liability company.
(b) Debtor will not permit any Collateral to be located in any state (and,
if county filing is required, in any county) in which the financing
statement covering such Collateral is required to be, but has not in
fact been, filed in order to perfect the Security Interest.
(c) Debtor will (i) keep all Collateral in good repair, working order and
condition, normal depreciation excepted, and will, from time to time,
replace any worn, broken or defective parts thereof; (ii) promptly pay
all taxes and other governmental charges levied or assessed upon or
against any Collateral or upon or against the creation, perfection or
continuance of the Security Interest; (iii) keep all Collateral free
and clear of all security interests, liens and encumbrances except the
Security Interest; (iv) at all reasonable times, permit Secured Party
or its representatives to examine or inspect any Collateral, wherever
located, and to examine, inspect and copy Debtor's books and records
pertaining to the Collateral and its business and financial condition;
(v) keep accurate and complete records pertaining to Debtor's business
and financial condition and submit to Secured Party such periodic
reports concerning Debtor's business and financial condition as Secured
Party may from time to time reasonably request; (vi) promptly notify
Secured Party of any loss of or material damage to any Collateral;
(vii) at all times keep all Collateral insured against risks of fire
(including so-called extended coverage), theft, collision (in case of
Collateral consisting of motor vehicles) and such other risks and in
such amounts as Secured Party may reasonably request, with any loss
payable to Secured Party to the extent of its interest, (viii) from
time to time execute such financing statements as Secured Party may
reasonably require in order to perfect the Security Interest and, if
any Collateral consists of a motor vehicle, execute such documents as
may be required to have the Security Interest properly noted on a
certificate of title; (ix) pay when due or reimburse Secured Party on
demand for all costs of collection of any of the Obligations and all
other out-of-pocket expenses (including in each case all reasonable
attorneys' fees) incurred by Secured Party in connection with the
creation, perfection, satisfaction, protection, defense or enforcement
of the Security Interest or the creation, continuance, protection,
defense or enforcement of this Agreement or any or all of the
Obligations, including expenses incurred in any litigation or
bankruptcy or insolvency proceedings; (x) execute, deliver or endorse
any and all instruments, documents, assignments, security agreements
and other agreements and writings which Secured Party may at any time
reasonably request in order to secure, protect, perfect or enforce the
Security Interest and Secured Party's rights under this Agreement; (xi)
not use or keep any Collateral, or permit it to be used or kept, for
any unlawful purpose or in violation of any federal, state or local
law, statute or ordinance; and (xii) not permit any Collateral to
become part of or to be affixed to any real property without first
assuring to the reasonable satisfaction of Secured Party that the
Security Interest will be prior and senior to an interest or lien then
held or thereafter acquired by any mortgagee of such real property or
the owner or purchaser of any interest therein. If Debtor at any time
fails to perform or observe any agreement contained in this Section
3(c), and if such failure shall continue for a period of ten calendar
days after Secured Party gives Debtor written notice thereof (or, in
the case of the agreements contained in clauses (vii) and (viii) of
this Section 3(c), immediately upon the occurrence of such failure,
without notice or lapse of time), Secured Party may (but need not)
perform or observe such agreement on behalf and in the name, place and
stead of Debtor (or, at Secured Party's option, in Secured Party may
(but need not) perform or observe such agreement on behalf and in the
name place and stead of Debtor (or, at Secured Party's option, in
Secured Party's own name) and may (but need not) take any and all other
actions which Secured Party may reasonably deem necessary to cure or
correct such failure (including, without limitation, the payment of
taxes, the satisfaction of security interests, liens, or encumbrances,
the procurement and maintenance of insurance, the execution of
financing statements, the endorsement of instruments, and the
procurement of
<PAGE> 3
repairs, transportation or insurance); and except to the extent that
the effect of such payment would be to render any loan or forbearance
of money usurious or otherwise illegal under any applicable law
Debtor shall thereupon pay Secured Party on demand the amount of all
moneys expended and all costs and expenses (including reasonable
attorneys' fees) incurred by Secured Party in connection with or as a
result of Secured Party's performing or observing such agreement or
taking such actions, together with interest thereon from the date
expended or incurred by Secured Party at the highest rate then
applicable to any of the Obligations. To facilitate the performance
or observance by Secured Party of such agreements of Debtor, Debtor
hereby irrevocably appoints (which appointment is coupled with an
interest) Secured Party, or its delegate, as the attorney-in-fact of
Debtor with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file, in the name and
on behalf of Debtor, any and all instruments, documents, financing
statements, applications for insurance and other agreements and
writings required to be obtained, executed, delivered or endorsed by
Debtor under this Section 3.
4. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of Debtor under
or with respect to, any and all policies of insurance covering the
Collateral, and Debtor hereby directs the issuer of any such policy to pay
any such moneys directly to Secured Party. Both before and after the
occurrence of an Event of default, Secured Party may (but need not), in its
own name or in Debtor's name, execute and deliver proofs of claim, receive
all such moneys, endorse checks and other instruments representing payment
of such moneys, and adjust, litigate, compromise or release any claim
against the issuer of any such policy.
5. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an
event of default under this Agreement (herein called "Event of Default"):
(i) Debtor shall fail to pay any or all of the Obligations when due or (if
payable on demand) on demand, or shall fail to observe or perform any
covenant or agreement herein binding on it; (ii) any representation or
warranty by Debtor set forth in the Agreement or made to Secured Party in
any financial statements or reports submitted to Secured Party by or on
behalf of Debtor shall prove materially false or misleading; (iii) a
garnishment, summons or a writ of attachment shall be issued against or
served upon the Secured Party for the attachment of any property of Debtor
or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any
Obligation shall (A) be or become insolvent (however defined); or (B)
voluntarily file, or have filed against it involuntarily, a petition under
the United States Bankruptcy Code; or (C) if a corporation, partnership, or
organization, be dissolved or liquidated or, if a partnership, suffer the
death of a partner or,i f an individual, die; or (D) go out of business;
(v) if Debtor is a corporation, more than 50% of the shares of voting stock
of Debtor shall become owned by a shareholder or shareholders who were not
owners of voting stock of Debtor on the date of this Agreement or, if
Debtor is a partnership, more than 50% of the partnership interests in the
Debtor shall become owned by a partner or partners who were not partners of
Debtor on the date of this Agreement; or (vi) Debtor shall consolidate with
or merge into, or sell all or substantially all of its assets to, any
individual, corporation, or other entity.
6. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default
under Section 5 and at any time thereafter, Secured Party may exercise any
one or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon
be immediately due and payable, without presentment or other notice or
demand; (ii) exercise and enforce any or all rights and remedies available
upon default to a secured party under the Uniform Commercial Code,
including but not limited to the right to take possession of any
Collateral, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which Debtor hereby expressly
waives), and the right to sell, lease or otherwise dispose of any or all of
the Collateral, and in connection therewith, Secured Party may require
Debtor to make the Collateral available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties,
and if notice to Debtor of any intended disposition of Collateral or any
other intended action is required by law in a particular instance, such
notice shall be deemed commercially reasonable if given (in the manner
specified in Section 7) at least 10 calendar days prior to the date of
intended disposition or other action; (iii) exercise or enforce any or all
other rights or remedies available to Secured Party by law or agreement
against the Collateral, against Debtor or against any other person or
property. Upon the occurrence of the Event of Default described in Section
5(iv)(B), all Obligations shall be immediately due and payable without
demand or notice thereof.
7. MISCELLANEOUS. This Agreement can be waived, modified, amended, terminated
or discharged, and the Security Interest can be released, only explicitly
in a writing signed by Secured Party. A waiver signed by Secured Party
shall be effective only in the specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise
or enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised
singularly or concurrently, at Secured Party's option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to
nor bar the exercise or enforcement of any other. All notices to be given
to Debtor shall be deemed sufficiently given if delivered or mailed by
registered or certified mail, postage prepaid, to Debtor at its address set
forth above or at the most recent address shown on Secured Party's records.
Secured Party's duty of care with respect to Collateral in its possession
(as imposed by law) shall be deemed fulfilled if Secured Party exercised
reasonable care in physically safekeeping such Collateral or, in the case
of Collateral in the custody or possession of a bailee or other third
person, exercises reasonable care in the selection of the bailee or other
third person, and Secured Party need not otherwise preserve, protect,
insure or care for any Collateral. Secured Party shall not be obligated to
reserve any rights Debtor may have against prior parties, to realize on the
Collateral at all or in any particular manner or order, or to apply any
cash proceeds of Collateral in any particular order of application. This
Agreement shall be binding upon and inure to the benefit of Debtor and
Secured Party and their respective heirs, representatives, successors and
assigns and shall take effect when signed by Debtor and delivered to
Secured Party, and Debtor waives notice of Secured Party's acceptance
hereof. Secured Party may execute this Agreement if appropriate for the
purpose of filing, but the failure of Secured Party to execute this
Agreement shall not affect or impair the validity or effectiveness of this
Agreement. A carbon, photographic or other reproduction of this Agreement
or of any financing statement signed by the Debtor shall have the same
force and effects as the original for all purposes of a financing
statement. Except to the extent otherwise required by law, this Agreement
shall be governed by the internal laws of the State of Minnesota. If any
provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this
Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive
the execution, delivery and performance of this Agreement and the creation
and payment of the obligations. If this Agreement is signed by more than
one person as Debtor, the term "Debtor" shall refer to each of them
separately and to both or all of them jointly; all such persons shall be
bound both severally and jointly with other(s); and the Obligations shall
include all debts, liabilities and obligations owned to Secured Party by
any Debtor solely or by both or several or all Debtors jointly or jointly
and severally, and all property described in Section 1 shall be included as
part of the Collateral, whether it is owned jointly by both or all Debtors
or is owned in whole or in part by one (or more) of them. There shall be
(1) counterpart of this Agreement and it will be market "Original." To the
extent that this Agreement constitutes chattel paper (as that terms is
defined by the Uniform Commercial Code), a security interest only may be
created in the Agreement marked "Original."
StarTek USA, Inc.
- ---------------------------------
Debtor
/s/ DENNIS M.SWENSON
- ---------------------------------
By
Executive Vice President
- ---------------------------------
Title
Exhibits and Schedules not filed
<PAGE> 4
- --------------------------------------------------------------------------------
Norwest Equipment Finance, Inc. SECURITY AGREEMENT
NORWEST EQUIPMENT Investors Building, Suite 300
FINANCE 733 Marquette Avenue
Minneapolis, MN 55479-2048
- --------------------------------------------------------------------------------
Dated as of October 26, 1998
Name and Address of Debtor:
StarTek USA, Inc.
111 Havana Street
Denver, CO 80010
1. SECURITY INTEREST AND COLLATERAL. To secure the payment and performance of
each and every debt, liability and obligation of every type and description
which Debtor may now or at any time hereafter owe to Norwest Equipment
Finance, Inc. ("Secured Party") (whether such debt, liability or obligation
now exists or is hereafter created or incurred, whether it is currently
contemplated by the Debtor and Secured Party, whether any documents
evidencing it refer to the Security Agreement, and whether it arises with
our without any documents (e.g. obligations to Secured Party created by
checking overdrafts), and whether it is or may be direct or indirect, due
or to become due, absolute or contingent, primary or secondary, liquidated
or unliquidated, or joint, several or joint and several; all such debts,
liabilities and obligations being herein collectively referred to as the
"Obligations"), Debtor hereby grants Secured Party a security interest
(herein call the "Security Interest") in the following property (herein
called the "Collateral"):
ACCOUNTS AND OTHER RIGHTS TO PAYMENT:
Each and every right of Debtor to the payment of money, whether such
right to payment now exists or hereafter arises, whether such right to
payment arises out of a sale, lease or other disposition of goods or
other property by Debtor, out of a rendering of services by Debtor, out
of a loan by Debtor, out of the overpayment of taxes or other liabilities
of Debtor, or otherwise arises under any contract or agreement, whether
such right to payment is or is not already earned by performance, and
howsoever such right to payment may be evidenced, together with all other
rights and interests (including all liens and security interests) which
Debtor may at any time have by law or agreement against any account
debtor or other obligor obligated to make any such payment or against any
of the property of such account debtor or other obligor; all, including
but not limited to, present and future debt instruments, chattel papers,
accounts, loans and obligations receivable and tax refunds
together with all substitutions and replacements for and products of the
foregoing property not constituting consumer gods and together with
proceeds of any and all of the foregoing property and, in the case of all
tangible Collateral, together with all accessions and, except in the case
of consumer goods, together with (i) all accessories, attachments, parts,
equipment and repairs now or hereafter attached or affixed to or used in
connection with any such goods, and (ii) all warehouse receipts, bills of
lading and other documents of title now or hereafter covering such goods.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and
agrees that:
A) AUTHORIZATION. If Debtor is a corporation, a partnership or a limited or
a limited liability company, the execution, delivery and performance of
this Agreement has been duly authorized by all necessary action on the part
of the Debtor and will not violate any provision of the Debtor's articles
of incorporation or bylaws, partnership agreement or articles of
organization or management agreement, as the case may be.
B) OFFICE LOCATION. Debtor's chief executive office (if Debtor is a
corporation, a partnership or a limited liability company) is located at
the address for Debtor shown above. Debtor will not change the location of
its chief executive office or his/her residence, as the case may be,
without first giving Secured Party at least 10 days prior written notice of
the new location.
C) BUSINESS PURPOSE, LAWFUL USE. The Equipment will be used primarily for
business purposes as opposed to personal, family or household purposes.
Debtor will comply with all laws and regulations applicable to the
Equipment and its use.
3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents,
warrants and agrees that:
a) Debt has (or will have at the time Debtor acquires rights in Collateral
hereafter arising) absolute title to each item of Collateral free and clear
of all security interests, liens and encumbrances, except the Security
Interest and will defend the Collateral against all claims or demands of
all persons other than Secured Party. Debtor will not sell or otherwise
dispose of the Collateral or any interest therein without the prior written
consent of Secured Party, except that until the occurrence of an Event of
Default and the revocation by Secured Party of Debtor's right to do so,
Debtor may sell any inventory constituting Collateral to buyers in the
ordinary course of business and use and consume any farm products
constituting Collateral in Debtor's farming operation. If Debtor is a
corporation, this Agreement has been duly and validly authorized by all
necessary corporate action, and, if Debtor is a partnership or a limited
liability company, the partner(s) or manager(s) executing this Agreement
has (have) authority to act for the partnership or the limited liability
company.
b) Debtor will not permit any tangible Collateral to be located in any
state (and, if county filing is required, in any county) in which the
financing statement covering such Collateral is required to be, but has not
in fact been, filed in order to perfect the Security Interest.
c) Each right to payment and each instrument, document, chattel paper and
other agreement constituting or evidencing Collateral is (or will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, set-off or counterclaim (other than those arising in
the ordinary course of business) of the account debtor or other obligor
named therein or in Debtor's records pertaining thereto as being obligated
to pay such obligation. Debtor will neither agree to any material
modification or amendment nor agree to any cancellation of any such
obligation without Secured Party's prior written consent, and will not
subordinate any such right to payment to claims of other creditors of such
account debtor or other obligor.
d) Debt will (i) keep all tangible Collateral in good repair, working order
and condition, normal depreciation excepted, and will, from time to time,
replace any worn, broken or defective parts thereof; (ii) promptly pay all
taxes and other governmental charges levied or assessed upon or against any
Collateral or upon or against the creation, perfection or continuance of
the Security Interest; (iii) keep all Collateral free and clear of all
security interests, liens and encumbrances except the Security Interest;
(iv) at all reasonable times, permit Secured Party or its representatives
to examine or inspect any Collateral, where ever located, and to examine,
inspect and copy Debtor's books and records pertaining to the Collateral
and its business and financial condition and to discuss with account
debtors and other obligors requests for verifications of amounts owed to
Debtor; (v) keep accurate and complete records pertaining to the Collateral
and pertaining to Debtor's business and financial condition and submit to
Secured Party such periodic reports concerning the Collateral and Debtor's
business and financial condition as Secured Party may from time to time
reasonably request; (vi) promptly notify Secured Party of any loss of or
material damage to any Collateral; (vii) if Secured Party at any time so
requests (whether the request is made before or after the occurrence of an
Event of Default), promptly deliver to Secured Party any instrument,
document or chattle paper constituting Collateral, duly endorsed or
assigned by debtor; (viii) at all times keep all tangible Collateral
insured against risks of fire (including so-called extended coverage),
theft, collision (in case of Collateral consisting of motor vehicles) and
such other risks and in such amounts as Secured Party may reasonably
request, with any loss payable to Secured Party to the extent of its
interest, (ix) from time to time execute such financing statements as
Secured Party may reasonably require in order to perfect the Security
Interest and, if any Collateral consists of a motor vehicle, execute such
documents as may be required to have the Security Interest properly noted
on a certificate of title; (x) pay when due or reimburse Secured Party on
demand for all costs of collection of any of the Obligations and all other
out-of-pocket expenses (including in each case all reasonable attorneys'
fees) incurred by Secured Party in connection with the creation,
perfection, satisfaction, protection, defense or enforcement of the
Security Interest or the creation, continuance, protection, defense or
enforcement of this Agreement or any or all of the Obligations, including
expenses incurred in any litigation or bankruptcy or insolvency
proceedings; (xi) execute, deliver or endorse any and all instruments,
documents, assignments, security agreements and other agreements and
writings which Secured Party may at any time reasonably request in order to
secure, protect, perfect or enforce the Security Interest and Secured
Party's rights under this Agreement; (xii) not use or keep any Collateral,
or permit it to be used or kept, for any unlawful purpose or in violation
of any federal, state or local law, statute or ordinance; (xiii) permit
Secured Party at any time and from time to time to send requests (both
before and after the occurrence of an Event of Default) to account debtors
or other obligors for verification of amounts owed to Debtor; and (xiv) not
permit any Collateral to become part of or to be affixed to any real
property without first assuring to the reasonable satisfaction of Secured
Party that the Security Interest will be prior and senior to an interest or
lien then held or thereafter acquired by any mortgagee of such real
property or the owner or purchaser of any interest therein. If Debtor at
any time fails to perform or observe any agreement contained in this
Section 3(d), and if such failure shall continue for a period of ten
calendar days after Secured Party gives Debtor written notice thereof (or,
in the case of the agreements contained in clauses (viii) and (ix) of this
Section 3(d), immediately upon the occurrence of such failure, without
notice or lapse of time), Secured Party may (but need not) perform or
observe such agreement on behalf and in the name, place and stead of Debtor
(or, at Secured Party's option, in Secured Party's own name) and may (but
need not) take any and all other actions which Secured Party may reasonably
deem necessary to cure or correct such failure (including, without
limitation, the payment of taxes, the satisfaction of security interests,
liens, or encumbrances, the performance of obligations under contracts or
agreements with account debtors or other obligors, the procurement and
maintenance of insurance, the execution of financing statements, the
endorsement of instruments, and the procurement of repairs, transportation
or insurance); and, except to the extent that the effect of such payment
would be to render any loan or forbearance of money usurious or otherwise
illegal under any applicable law Debtor shall thereupon pay Secured Party
on demand the amount of all moneys expended and all costs and expenses
(including reasonable attorneys' fees) incurred by Secured Party in
connection with or as a result of Secured Party's performing or observing
such agreement or taking such actions, together with interest thereon from
the date expended or incurred by Secured Party at the highest rate then
applicable to any of the Obligations. To facilitate the performance or
<PAGE> 5
observance by Secured Party of such agreements of Debtor, Debtor hereby
irrevocably appoints (which appointment is coupled with an interest)
Secured Party, or its delegate, as the attorney-in-fact of Debtor with the
right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file, in the name and on behalf of Debtor, any
and all instruments, documents, financing statements, applications for
insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by Debtor under this Section 3 and
Section 4.
4. LOCKBOX, COLLATERAL ACCOUNT. If Secured Party so requests at any time
(whether before or after the occurrence of an Event of Default), Debtor
will direct each of its account debtors to make payments due under the
relevant account or chattel paper directly to a special lock box to be
under the control of Secured Party. Debtor hereby authorizes and directs
Secured Party to deposit into a special collateral account to be
established and maintained with Secured Party all checks, drafts and cash
payments, received in said lock box. All deposits in said collateral
account shall constitute proceeds of Collateral and shall not constitute
payment of any Obligation. At its option, Secured Party may, at any time,
apply finally collected funds on deposit in said collateral account to the
payment of the Obligations in such order of application as Secured Party
may determine, or permit Debtor to withdraw all or any part of the balance
on deposit in said collateral account. If a collateral account is so
established, Debtor agrees that it will promptly deliver to Secured Party,
for deposit into said collateral account, all payments on accounts and
chattel paper received by it. All such payments shall be delivered to
Secured Party in the form received (except for Debtor's endorsement where
necessary). Until so deposited, all payments on accounts and chattel paper
received by Debtor shall be held in trust by Debtor for and as the property
of Secured Party and shall not be commingled with any funds or property of
Debtor.
5. COLLECTION RIGHTS OF SECURED PARTY. Notwithstanding Secured Party's rights
under Section 4 with respect to any and all debt instruments, chattel
papers, accounts, and other rights to payment constituting Collateral
(including proceeds), Secured Party may, at any time (both before and after
the occurrence of an Event of Default) notify any account debtor, or any
other person obligated to pay any amount due, that such chattel paper,
account, or other right to payment has been assigned or transferred to
Secured Party for security and shall be paid directly to Secured Party. If
Secured Party so requests at any time. Debtor will so notify such account
debtors and other obligors in writing and will indicate on all invoices to
such account debtors or other obligors that the amount due is payable
directly to Secured Party. At any time after Secured Party or Debtor gives
such notice to an account debtor or other obligor, Secured Party may (but
need not), in its own name or in Debtor's name, demand, sue for, collect or
receive any money or property at any time payable or receivable on account
of, or in securing, any such chattel paper, account, or other right to
payment, or grant any extension to, make any compromise or settlement with
or otherwise agree to waive, modify, amend or change the obligations
(including collateral obligations) of any such account debtor or other
obligor.
6. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as
additional security for the payment of the Obligations, any and all moneys
(including but not limited to proceeds of insurance and refunds of unearned
premiums) due or to become due under, and all other rights of Debtor under
or with respect to, any and all policies of insurance covering the
Collateral, and Debtor hereby directs the issuer of any such policy to pay
any such moneys directly to Secured Party. Both before and after the
occurrence of an Event of default, Secured Party may (but need not), in its
own name or in Debtor's name, execute and deliver proofs of claim, receive
all such moneys, endorse checks and other instruments representing payment
of such moneys, and adjust, litigate, compromise or release any claim
against the issuer of any such policy.
7. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an
event of default under this Agreement (herein called "Event of Default"):
(i) Debtor shall fail to pay any or all of the Obligations when due or (if
payable on demand) on demand, or shall fail to observe or perform any
covenant or agreement herein binding on it; (ii) any representation or
warranty by Debtor set forth in the Agreement or made to Secured Party in
any financial statements or reports submitted to Secured Party by or on
behalf of Debtor shall prove materially false or misleading; (iii) a
garnishment, summons or a writ of attachment shall be issued against or
served upon the Secured Party for the attachment of any property of Debtor
or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any
Obligation shall (A) be or become insolvent (however defined); or (B)
voluntarily file, or have filed against it involuntarily, a petition under
the United States Bankruptcy Code; or (C) if a corporation, partnership, or
organization, be dissolved or liquidated or, if a partnership, suffer the
death of a partner or, if an individual, die; or (D) go out of business;
(v) if Debtor is a corporation, more than 50% of the shares of voting stock
of Debtor shall become owned by a shareholder or shareholders who were not
owners of voting stock of Debtor on the date of this Agreement or, if
Debtor is a partnership, more than 50% of the partnership interests in the
Debtor shall become owned by a partner or partners who were not partners of
Debtor on the date of this Agreement; or (vi) Debtor shall consolidate with
or merge into, or sell all or substantially all of its assets to, any
individual, corporation, or other entity.
8. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default
under Section 7 and at any time thereafter, Secured Party may exercise any
one or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon
be immediately due and payable, without presentment or other notice or
demand; (ii) exercise and enforce any or all rights and remedies available
upon default to a secured party under the Uniform Commercial Code,
including but not limited to the right to take possession of any
Collateral, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which Debtor hereby expressly
waives), and the right to sell, lease or otherwise dispose of any or all of
the Collateral, and in connection therewith, Secured Party may require
Debtor to make the Collateral available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both parties,
and if notice to Debtor of any intended disposition of Collateral or any
other intended action is required by law in a particular instance, such
notice shall be deemed commercially reasonable if given (in the manner
specified in Section 10) at least 10 calendar days prior to the date of
intended disposition or other action; (iii) exercise or enforce any or all
other rights or remedies available to Secured Party by law or agreement
against the Collateral, against Debtor or against any other person or
property. Upon the occurrence of the Event of Default described in Section
7(iv)(B), all Obligations shall be immediately due and payable without
demand or notice thereof. Secured Party is hereby granted a nonexclusive,
worldwide and royalty-free license to use or otherwise exploit all
trademarks, trade secrets, franchises, copyrights and patents of Debtor
that Secured Party deems necessary or appropriate to the disposition of any
Collateral.
9. OTHER PERSONAL PROPERTY. Unless at the time Secured party takes possession
of any tangible Collateral, or within seven days thereafter, Debtor gives
written notice to Secured Party of the existence of any goods, papers or
other property of Debtor, not affixed to or constituting a part of such
Collateral, but which are located or found upon or within such Collateral,
describing such property, Secured Party shall not be responsible or liable
to Debtor for any action taken or omitted by or on behalf of Secured Party
with respect to such property without actual knowledge of the existence of
any such property or without actual knowledge that it was located or to be
found upon or within such Collateral.
10. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, or
chattel paper. Debtor agrees that each provision whose box is checked is
part of this Agreement. This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by Secured Party. A waiver signed by Secured
Party shall be effective only in the specific instance and for the specific
purpose given. Mere delay or failure to act shall not preclude the exercise
or enforcement of any of Secured Party's rights or remedies. All rights and
remedies of Secured Party shall be cumulative and may be exercised
singularly or concurrently, at Secured Party's option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to
nor bar the exercise or enforcement of any other. All notices to be given
to Debtor shall be deemed sufficiently given if delivered or mailed by
registered or certified mail, postage prepaid, to Debtor at its address set
forth above or at the most recent address shown on Secured Party's records.
Secured Party's duty of care with respect to Collateral in its possession
(as imposed by law) shall be deemed fulfilled if Secured Party exercised
reasonable care in physically safekeeping such Collateral or, in the case
of Collateral in the custody or possession of a bailee or other third
person, exercises reasonable care in the selection of the bailee or other
third person, and Secured Party need not otherwise preserve, protect,
insure or care for any Collateral. Secured Party shall not be obligated to
reserve any rights Debtor may have against prior parties, to realize on the
Collateral at all or in any particular manner or order, or to apply any
cash proceeds of Collateral in any particular order of application. This
Agreement shall be binding upon and inure to the benefit of Debtor and
Secured Party and their respective heirs, representatives, successors and
assigns and shall take effect when signed by Debtor and delivered to
Secured Party, and Debtor waives notice of Secured Party's acceptance
hereof. Secured Party may execute this Agreement if appropriate for the
purpose of filing, but the failure of Secured Party to execute this
Agreement shall not affect or impair the validity or effectiveness of this
Agreement. A carbon, photographic or other reproduction of this Agreement
or of any financing statement signed by the Debtor shall have the same
force and effects as the original for all purposes of a financing
statement. Except to the extent otherwise required by law, this Agreement
shall be governed by the internal laws of the State of Minnesota. If any
provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this
Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive
the execution, delivery and performance of this Agreement and the creation
and payment of the Obligations. If this Agreement is signed by more than
one person as Debtor, the term "Debtor" shall refer to each of them
separately and to both or all of them jointly; all such persons shall be
bound both severally and jointly with the other(s); and the Obligations
shall include all debts, liabilities and obligations owed to Secured Party
by any Debtor solely or by both or several or all Debtors jointly or
jointly and severally, and all property described in Section 1 shall be
included as part of the Collateral, whether it is owned jointly by both or
all Debtors or is owned in whole or in part by one (or more) of them. There
shall be (1) counterpart of this Agreement and it will be market
"Original." To the extent that this Agreement constitutes chattel paper (as
defined by the Uniform Commercial Code), a security interest only may be
created in the Agreement marked "Original."
StarTek USA, Inc.
- ---------------------------------
Debtor
/s/ DENNIS M.SWENSON
- ---------------------------------
By
Executive Vice President
- ---------------------------------
Title
Exhibits and Schedules not filed
<PAGE> 1
EXHIBIT 10.20
CONTRIBUTION AGREEMENT
AGREEMENT, dated as of September 15, 1999 (the "Agreement"), among GOOD
CATALOG COMPANY, a Delaware corporation (the "Company") THE READER'S DIGEST
ASSOCIATION, INC., a Delaware corporation ("RDA"), and DOMAIN.COM, INC., a
Delaware corporation ("Domain").
W I T N E S S E T H:
WHEREAS, RDA and StarTek, Inc., the parent company of Domain, have
entered into a letter agreement, dated August 12, 1999, pursuant to which RDA
has agreed to cause the Company, its wholly-owned subsidiary, to sell and issue
shares of its Common Stock, $1.00 par value (the "Common Stock") to StarTek or
its subsidiary, in return for certain cash investments and the contribution of
the domain name and URL www.gifts.com; and
WHEREAS, Domain owns all right, title and interest in and to the domain
name and URL www.gifts.com;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements and covenants herein set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. CONTRIBUTION OF STOCK
1.1 Contribution by Domain. On the terms and subject to the
conditions of this Agreement, Domain agrees at the Closing (as defined in
Section 1.4) to contribute or cause to be contributed to the Company all of
Domain's and all of its affiliates' right, title and interest in and to the
domain name and URL www.gifts.com, the name "gifts.com," including all
trademarks related thereto, all trademark applications therefore and all
goodwill associated therewith (the "Gifts.com Rights").
1.2 Cash Investment. On the terms and subject to the conditions of
this Agreement, Domain agrees at the Closing to invest in the Company cash in
the amount of $2,605,625.
1.3 Consideration. In consideration of Domain's contribution to
the Company described in Section 1.1 and 1.2 above, Domain shall receive at the
Closing 199 shares of Company Common Stock.
1.4 The Closing. The contribution of assets described in Sections
1.1 and 1.2, and the exchange of consideration therefor pursuant to this Article
1 shall be held at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York,
New York on November 1, 1999 or at such other place and time as the parties
shall mutually agree (the "Closing" Date).
<PAGE> 2
1.5 Deliveries by Domain. At the Closing, Domain shall deliver the
following:
(a) An instrument of assignment substantially in the form of
Exhibit A hereto, assigning all of Domain's right, title and interest in and to
the Gifts.com Rights to the Company, duly executed, by Domain (the
"Assignment");
(b) The Stockholders Agreement, among Domain, RDA and the
Company substantially in the form of Exhibit B hereto (the "Stockholders
Agreement"), duly executed by Domain;
(c) A Fulfillment Services Agreement between StarTek and the
Company, substantially in the form of Exhibit C hereto (the "Fulfillment
Agreement"), duly executed by StarTek;
(d) UCC financing statements in accordance with Section 4.B.
of the Fulfillment Agreement;
(e) $2,605,625 cash contribution pursuant to Section 1.2, by
wire transfer of immediately available funds to a bank account of the Company
designated to Domain as set forth in Exhibit A to the Loan Agreement (as defined
herein);
(f) The Loan Agreement among Domain and RDA, as lenders, and
the Company, as borrower, substantially in the form of Exhibit D hereto duly
completed (the "Loan Agreement") duly executed by Domain;
(g) A loan to the Company pursuant to the Loan Agreement in
the aggregate principal amount of $7,816,875;
(h) A certificate of a duly authorized officer of Domain and
StarTek as to the satisfaction of the conditions to the Closing set forth in
Sections 3.2(a) and (b) hereof; and
(i) An opinion of Otten, Johnson, Robinson, Neff & Ragonetti,
P.C., counsel to StarTek and Domain, substantially in the form of Exhibit E.
1.6 Deliveries by the Company and RDA. The Company and RDA shall
deliver the following:
(a) a certificate representing 199 shares of Company Common
Stock, registered in the name of Domain;
(b) The Services Agreement between RDA and the Company,
substantially in the form of Exhibit F hereto (the "Services Agreement"), duly
executed by the Company and RDA;
(c) The Stockholders Agreement, duly executed by the Company
and RDA;
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<PAGE> 3
(d) The Fulfillment Services Agreement, duly executed by the
Company;
(e) The Loan Agreement, duly executed by RDA and the Company;
(f) A loan by RDA in the aggregate principal amount of
$18,433,125, as reduced by all amounts previously loaned by RDA to the Company
as contemplated in the Loan Agreement;
(g) Promissory notes payable to Domain and RDA, in
substantially the form provided in the Loan Agreement (the "Notes"), duly
completed and executed by the Company;
(h) A certificate of a duly authorized officer of RDA and the
Company as to the satisfaction of the conditions to the Closing set forth in
Sections 3.1(a) and (b) hereof; and
(i) Opinion of Loeb & Loeb LLP, counsel to the Company and
RDA, substantially in the form of Exhibit G hereto.
1.7 Transaction Documents. As used herein, "Transaction Documents"
shall mean the Assignment, the Stockholders Agreement, the Guarantee, the
Services Agreement, the Fulfillment Agreement, the Loan Agreement, the Notes and
any other ancillary or related documents.
2. REPRESENTATIONS AND WARRANTIES
2.1 RDA. RDA represents and warrants that, as of the date hereof:
(a) Business Plan. RDA has contributed to the Company all of
RDA's right title and interest in and to the FY: '00 Business Plan of Gifts.com
dated May 14, 1999, free and clear of all liens, security interests, pledges,
charges, encumbrances or restrictions of any kind whatsoever ("Encumbrances").
(b) Cash Contributions and Prepaid Expenses. RDA has
contributed to the equity capital of the Company cash and prepaid expenses in
the amount of $6,144,375, representing costs incurred or committed by, or cash
funding of the development by the Company of, an Internet Web site to sell gifts
on-line. RDA has contributed to the Company all right, title and interest in and
to all property acquired or developed by RDA on behalf of the Company with such
prepaid expenses free and clear of all Encumbrances.
(c) Authorization, Execution and Delivery. The execution,
delivery and performance by RDA of this Agreement and the Transaction Documents
to which it is a party, and the consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary action
on the part of RDA. This Agreement constitutes and, effective upon execution and
delivery by RDA, each Transaction Document to which it is a party will
constitute, legal, valid and binding obligations of RDA, enforceable
3
<PAGE> 4
against RDA in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity regardless of whether considered in a proceeding in equity
or at law.
(d) No Violation. Neither the execution or delivery by RDA of
this Agreement or any of the Transaction Documents to which RDA is a party nor
the consummation of the transactions contemplated herein or therein will: (i)
violate any provision of the Certificate of Incorporation or bylaws of RDA; (ii)
violate, or constitute a default under, permit the termination or acceleration
of the maturity of or cause the loss of any rights or options under, any
material contract to which RDA is a party; (iii) require any authorization,
consent or approval of, exemption or other action by, or notice to, any party to
any material contract to which RDA is a party; or (iv) violate any law to which
RDA is subject.
(e) Regulatory Approvals. No consent, approval, authorization,
notice, filing, exemption or other requirement of RDA must be obtained from any
governmental authority in order for (i) the execution or delivery by RDA of this
Agreement or any of the Transaction Documents or (ii) the consummation by RDA or
the Company of the transactions contemplated herein or therein.
(f) Company. To the knowledge of RDA, without investigation,
the representations and warranties of the Company in Section 2.3 are true and
correct as of the dated deemed made.
2.2 Domain and A. Emmet Stephenson, Jr. Domain represents and
warrants and, with respect to Sections 2.2(a) and 2.2(b), Domain and A. Emmet
Stephenson, Jr., to his knowledge without investigation, jointly and severally
represent and warrant, as of the date hereof and the Closing Date:
(a) Ownership of Gifts.com Rights. Domain has the sole right
in and to the URL www.gifts.com registered with InterNIC, free and clear of all
Encumbrances, and to Domain's and A. Emmet Stephenson, Jr.'s knowledge, without
investigation, Domain is the owner of the other Gifts.com Rights, free and clear
of all Encumbrances, except rights which the corporation formed in Delaware (or
any other state) under the name "gifts.com" may have acquired and any rights
J.C. Penney may have acquired by registering and using the domain name
"gift.com" (collectively, the "Known Conflicts").
(b) Non-Infringement. To the knowledge of Domain and A. Emmet
Stephenson, Jr., without investigation, the use by the Company of the Gifts.com
Rights following the Closing will not infringe any trademark, service mark,
trade or business name or other right of any other Person, except to the extent
any of the Gifts.com Rights are found to infringe on any of the Known Conflicts.
(c) Authorization, Execution and Delivery. The execution,
delivery and performance by Domain of this Agreement and the Transaction
Documents to which it is a party, and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of Domain. This
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<PAGE> 5
Agreement constitutes and, effective upon execution and delivery by Domain, each
Transaction Document to which it is a party will constitute, legal, valid and
binding obligations of such party, enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and subject, as
to enforceability, to general principles of equity regardless of whether
considered in a proceeding in equity or at law.
(d) No Violation. Neither the execution or delivery by StarTek
or Domain of this Agreement or any of the Transaction Documents to which either
is a party nor the consummation of the transactions contemplated herein or
therein will: (i) violate any provision of the Certificate of Incorporation or
bylaws of StarTek or Domain; (ii) violate, or constitute a default under, permit
the termination or acceleration of the maturity of or cause the loss of any
rights or options under, any material contract to which StarTek or Domain is a
party; (iii) require any authorization, consent or approval of, exemption or
other action by, or notice to, any party to any material contract to which
StarTek or Domain is a party; or (iv) violate any law to which StarTek or Domain
is subject.
(e) Regulatory Approvals. No consent, approval, authorization,
notice, filing, exemption or other requirement must be obtained from any
governmental authority in order for (i) the execution or delivery by StarTek or
Domain of this Agreement or any of the Transaction Documents and (ii) the
consummation by StarTek or Domain of the transactions contemplated herein or
therein.
(f) Obtaining Shares Entirely for Own Account. Domain is
acquiring the Common Stock for investment for Domain's own account, not as a
nominee or agent, and not with a view to, or for the resale or distribution of
any part thereof. Domain has no present intention of selling, granting any
participation in, or otherwise distributing the Common Stock. Domain further
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participation to such
person or to any third person, with respect to any of the shares of the Common
Stock, except as set forth in the Stockholders Agreement.
(g) Disclosure Information. Domain has received from the
Company and RDA all information which it and its representatives have requested
and consider necessary or appropriate in deciding whether to make its
contribution to the Company in consideration of Common Stock as described in
Article 1. The foregoing does not limit or modify the representations and
warranties in Sections 2.1 and 2.3 or the right of Domain to rely thereon.
(h) Investment Experience. Domain (i) fully understands that
an investment in the Company is highly speculative and that it may lose its
entire investment, (ii) is experienced in evaluating and investing in companies
such as the Company and businesses such as an on-line gifts business, (iii) is
capable of evaluating the merits and risks of its investment; (iv) is able to
bear the economic risk of a loss of the entire amount of its investment; and (v)
is prepared to hold the Common Stock received pursuant hereto for an indefinite
period of time.
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<PAGE> 6
(i) Accredited Investor. Domain is an "accredited investor"
within the meaning of Securities and Exchange Commission Rule 501 of Regulation
D, as presently in effect.
(j) Restricted Shares. Domain acknowledges that, because the
Common Stock issued in connection with this Agreement has not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), the Common
Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. Domain is
aware of the provisions of Rule 144 promulgated under the Securities Act which
permits limited resale of shares purchased in a private transaction subject to
the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than one (1)
year after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market maker" (as provided by Rule 144(f)) and the number of shares being sold
during any three (3) month period not exceeding specified limitations (unless
the sale is within the requirements of Rule 144(k)).
2.3 The Company. The Company represents and warrants that, as of
the date hereof and the Closing Date:
(a) Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware;
has all requisite power to own, lease and operate its assets, properties and
business and to carry on its business as presently conducted; and is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in every jurisdiction in which the nature of its business or the
location of its properties requires such qualification or licensing, except for
such jurisdictions where the failure to so qualify or be licensed would not have
a material adverse effect on the Company.
(b) Capitalization. The authorized capital stock of the
Company consists solely of 5000 shares of common stock, $1.00 par value per
share, of which 801 shares are issued and outstanding and owned by RDA. Upon
issuance of the Common Stock issuable to Domain on the Closing Date, such shares
shall be validly issued, fully paid and non-assessable. Except as contemplated
in this Agreement, there are no outstanding options, warrants, rights or
agreements for the purchase or acquisition from the Company of any shares of
capital stock.
(c) Authorization, Execution and Delivery. The execution,
delivery and performance by the Company of this Agreement and the Transaction
Documents to which it is a party, and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of the Company. This Agreement constitutes and,
effective upon execution and delivery by the Company, each Transaction Document
to which it is a party will constitute, legal, valid and binding obligations of
the Company, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and subject, as to enforceability, to
general principles of equity regardless of whether considered in a proceeding in
equity or at law.
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<PAGE> 7
(d) No Violation. Neither the execution or delivery by the
Company of this Agreement or any of the Transaction Documents to which the
Company is a party nor the consummation of the transactions contemplated herein
or therein will: (i) violate any provision of the Certificate of Incorporation
or bylaws of the Company; (ii) violate, or constitute a default under, permit
the termination or acceleration of the maturity of or cause the loss of any
rights or options under, any material contract to which the Company is a party;
(iii) require any authorization, consent or approval of, exemption or other
action by, or notice to, any party to any material contract to which the Company
is a party; or (iv) violate any law to which the Company is subject.
(e) Regulatory Approvals. No consent, approval, authorization,
notice, filing, exemption or other requirement of the Company must be obtained
from any governmental authority in order for the execution or delivery by the
Company of this Agreement or any of the Transaction Documents.
(f) Subsidiaries. The Company does not own any interest in any
other corporation, limited liability company, partnership or other entity.
(g) Financial Statements. Attached hereto as Exhibit H are the
unaudited balance sheets (the "Most Recent Balance Sheet") and the related
statements of income, changes in stockholders' equity, and cash flow
(collectively, the "Financial Statements") as of and for the nine months ended
June 30, 1999 (the "Most Recent Fiscal Month End") for the Company. The
Financial Statements (including the notes thereto) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby and present fairly the financial condition of the Company as of
such dates and the results of operations of the Company for such period, subject
to normal year-end adjustments (which will not be material individually or in
the aggregate) and lack footnotes and other presentation items. Since the Most
Recent Fiscal Month End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Company.
(h) Undisclosed Liabilities. The Company does not have any
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due, including any liability for
taxes), except for (i) liabilities set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) and (ii) liabilities which have
arisen after the Most Recent Fiscal Month End in the ordinary course of
business.
(i) Legal Compliance. The Company has complied with all
applicable laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of federal, state,
local and foreign governments (and all agencies thereof), and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand or notice
has been filed or, to the knowledge of the Company, commenced against it
alleging any failure so to comply, except where the failure to comply would not
have a material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of the Company.
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<PAGE> 8
(j) Tax Matters.
(i) The Company has filed all Tax Returns that it was required
to file. All such Tax Returns were correct and complete in all material
respects. All Taxes owed by the Company (whether or not shown on any Tax Return)
have been paid. The Company is not the beneficiary of any extension of time
within which to file any Tax Return.
(ii) For purposes of this agreement, "Tax" or "Taxes" means
federal, state, county, local, foreign or other income, gross receipts, ad
valorem, franchise, profits, sales or use, transfer, registration, excise,
utility, environmental, communications, real or personal property, capital
stock, license, payroll, wage or other withholding, employment, social security,
severance, stamp, occupation, alternative or add-on minimum, estimated and other
taxes of any kind whatsoever (including, without limitation, deficiencies,
penalties, additions to tax, and interest attributable thereto) whether disputed
or not. "Tax Return" means any return, information report or filing with respect
to Taxes, including any schedules attached thereto and including any amendment
thereof.
(k) Litigation. The Company (i) is not subject to any
outstanding injunction, judgment, order, decree, ruling, or charge, and (ii)
there is no material claim, action, proceeding or investigation pending or, to
the knowledge of the Company, threatened against or relating to the Company
before any court or quasi-judicial or administrative agency of any federal,
state, local or foreign jurisdiction or before any arbitrator.
(l) Year 2000 Compliance. To the Company's knowledge, none of
the computer software, computer firmware, computer hardware (whether general or
special purposes) or other similar or related items of automated, computerized
or software systems that are used or relied on directly by the Company in the
conduct of its business will malfunction, will cease to function, will generate
incorrect data or will produce incorrect results when processing, providing or
receiving (a) date-related data from, into and between the twentieth and
twenty-first centuries or (b) date-related data in connection with any valid
date in the twentieth and twenty-first centuries ("Year 2000 Compliance"), in
each instance in such a manner as to cause material adverse harm to the Company
and the Company will not be required to incur any further material expense in
order to become Year 2000 Compliant. The Company believes that it will not be
subject to any material liability or claims by its customers or employees due to
its failure to be Year 2000 Compliant. The Company has developed reasonable
contingency plans to deal with the possibility that some of its customers and
suppliers may not be Year 2000 Compliant.
(m) Acquisition of Assets. To the best of the Company's
knowledge, no material breach of any representation, warranty or covenant exists
under that certain Asset Purchase Agreement by and between the Company (f/k/a
Reader's Digest Sub Six, Inc.), as buyer, and Good Catalog Company, an Oregon
corporation, as seller and since the closing of such agreement there has not
been any adverse change in the Company's assets, liabilities or the Company's
relationship with its employees which change could be reasonably expected to
have a material adverse effect on the Company's business or property.
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<PAGE> 9
(n) Neither this Agreement nor any of the documents or other
information made available to Domain or its Affiliates, attorneys, accountants,
agents or representatives pursuant hereto in connection with Domain's due
diligence review of the Company or the transactions contemplated by this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements contained therein not misleading; provided that information as of a
later date shall be deemed to modify information as of an earlier date.
3. CONDITIONS TO CLOSING
3.1 Conditions to the Obligations of Domain. The obligations of
Domain under Section 1.5 of this Agreement are subject to the fulfillment, or
written waiver by Domain party, on or before the Closing, of each of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of RDA and the Company contained in Section 2 shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing Date.
(b) Authorizations. All authorizations, permits and approvals
(including Board of Directors and stockholder approvals) required for RDA's and
the Company's consummation of the transactions contemplated hereby as of the
date of the Closing shall have been received. RDA and the Company shall have
performed and complied in all material respects with all agreements, covenants
and conditions contained herein and in all other documents contemplated hereby
that are required to be performed or complied with by such party on or before
the Closing.
(c) Consents; No Restrictions. RDA and the Company shall have
received all consents, approvals, waivers and authorizations required from any
government authority for any party to consummate the transactions contemplated
hereby, and such consents, approvals, waivers and authorization shall be in full
force and effect. No injunction or other order issued by any government
authority, nor any statute, rule, regulation or decree which declares any
Transaction Document invalid in any respect or prevents the consummation of the
transactions contemplated hereby or thereby shall be in effect.
(d) Deliveries. RDA and the Company shall have made all
deliveries required by Section 1.6.
3.2 Conditions to the Obligations of RDA and the Company. The
obligations of each of RDA and the Company under Section 1.6 of this Agreement
are subject to the fulfillment, or written waiver by such party, on or before
the Closing, of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Domain and A. Emmet Stephenson, Jr., contained in Section 2 shall
be true on and as of the Closing with the same effect as though such
representations and warranties had been made on and as of the Closing Date.
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<PAGE> 10
(b) Authorizations. All authorizations, permits and approvals
(including Board of Directors and stockholder approvals) required for StarTek's
and Domain's consummation of the transactions contemplated hereby as of the date
of the Closing shall have been received. Domain shall have performed and
complied in all material respects with all agreements, covenants and conditions
contained herein and in all other documents contemplated hereby that are
required to be performed or complied with by such party on or before the
Closing.
(c) Consents; No Restrictions. StarTek and Domain shall have
received all consents, approvals, waivers and authorizations required from any
government authority for any party to consummate the transactions contemplated
hereby, and such consents, approvals, waivers and authorization shall be in full
force and effect. No injunction or other order issued by any government
authority, nor any statute, rule, regulation or decree which declares any
Transaction Document invalid in any respect or prevents the consummation of the
transactions contemplated hereby or thereby shall be in effect.
(d) Deliveries. StarTek and Domain shall have made all
Deliveries required by Section 1.5.
4. COVENANTS
4.1 Transfer of URL with NSI. The Company agrees that it shall
take no action to amend, transfer or change the registration of the URL
www.gifts.com with Network Solutions, Inc. until the Company has completed the
name change provided for in Section 4.2.
4.2 Name Change, Etc. RDA and the Company agree that they shall
use their reasonable commercial efforts as promptly as practicable to effect a
change of the name of the Company to "Gifts.com, Inc." or "Gifts.com." Such name
change may be effected by amendment to the Certificate of Incorporation of the
Company or merger of the Company with and into another corporation (including a
corporation organized in another jurisdiction), with the surviving corporation
having the name "Gifts.com, Inc." or "Gifts.com."
5. MISCELLANEOUS PROVISIONS
5.1 Survival of Representations and Warranties. All of the
representations and warranties of the Company, RDA, Domain and with respect to
Section 2.2(a) and 2.2(b) A. Emmet Stephenson, Jr., contained in this Agreement
shall survive the Closing for a period of one year.
5.2 Confidentiality. Each party (the "receiving party") agrees to
keep in confidence all information about the other party (the "disclosing
party") obtained in connection with the transactions proposed hereby
("Confidential Information") except for Confidential Information which (i) is
public knowledge, (ii) is required to be disclosed by law or under the rules of
the New York Stock Exchange, (iii) was independently developed by the receiving
party, or (iv) was already in the receiving party's possession from a source
which the receiving party reasonably believed, after due inquiry, owed no duty
of confidentiality to the disclosing party. In addition, the receiving party
agrees that it will not use the Confidential Information for any purpose other
than for the purpose of performing its obligations under this
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<PAGE> 11
Agreement or the Transaction Documents, as applicable. The parties agree that,
in view of the unique nature of the confidential Information to be disclosed
hereunder, irreparable loss could be sustained by the disclosing party in the
event of an unauthorized disclosure of Confidential Information and the
disclosing party would not have an adequate remedy at law in such event.
Therefore, the parties agree that each party hereto shall be entitled to
injunctive relief, including specific enforcement, to enforce the provisions of
this Section 5.2, in addition to any remedy to which a disclosing party may be
entitled to at law, and the receiving party against whom injunctive relief is
sought agrees not to raise the defense that there is an adequate remedy at law.
5.3 Communications. Unless otherwise provided therein, all notices
and other communications or designations required or permitted by this Agreement
shall be in writing, and,
If to RDA, to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: Thomas D. Gardner, Senior Vice President
Facsimile: 914-244-6832
With a copy to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: General Counsel
Facsimile: 914-244-5644
or at such other address as RDA may designate in a written notice
to Domain.
If to the Company, to:
Good Catalog Company
c/o The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: Senior Vice President, Business Planning and Development
Facsimile: 914-238-6932
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With a copy to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570-7000
Attention: General Counsel
Facsimile: 914-244-5644
or to such other address as the Company may designate in a written
notice to Domain.
If to Domain, to:
Domain.com, Inc.
c/o StarTek, Inc..
100 Garfield Street, 4th Floor
Denver, CO 80206
Attention: Chairman
Facsimile: (303) 329-9107
With a copy to:
StarTek, Inc.
1250 H Street
Greeley, CO 80631
Attention: President and Chief Executive Officer
Facsimile: (970) 346-5401
and a copy to:
Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
950 Seventeenth Street, Suite 1600
Denver, Colorado 80202
Attention: Karen Barsch, Esq.
Facsimile: (303) 825-6525
or to such other address as Domain may designate in a written notice to
RDA and the Company.
All notices and other communications required or permitted by this Agreement
shall be deemed to have been duly given if personally delivered to the intended
recipient at the proper address determined pursuant to this Section 5.3 or sent
to such recipient at such address by air courier, facsimile transmission,
followed by delivery by overnight courier, or by hand and will be deemed given,
unless earlier received: (a) if sent by courier when recorded on the records of
the courier as received by the receiving party; (b) if sent by facsimile, upon
transmission if on a Business Day and during business hours in the country of
receipt, otherwise, at 9:00 a.m. on the
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<PAGE> 13
next Business Day in the location of receipt, subject to receipt of a facsimile
machine generated confirmation, and (c) if delivered by hand, on the date of
receipt.
5.4 References.
(a) Except as otherwise specified in this Agreement, all
references in this Agreement (i) to any Person shall be deemed to include such
Person's permitted heirs, personal representatives, successors and assigns; (ii)
to any agreement, document or other written instrument shall be a reference to
such agreement, document or instrument together with all exhibits, schedules,
attachments and appendices, thereto, in each case as amended, restated,
supplemented or otherwise modified from time to time in accordance with the
terms thereof and hereof; and (iii) to any law, statute or regulation
specifically defined or referred to in this Agreement shall be deemed references
to such law, statute or regulation as the same may be supplemented, amended,
consolidated, superseded or modified from time to time.
(b) The words "including," "includes" and "include" shall be
deemed to be followed by the words "without limitation." The words "herein,"
"hereof" and "hereunder" and words of similar import, when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and references to "Article," "Section," "Exhibit,"
"Schedule," and "Appendix" are references to this Agreement unless otherwise
specified. Whenever the context so requires, words importing any gender include
the other gender. Any of the terms defined in this Agreement may, unless the
context otherwise requires, be used in the singular or the plural depending on
the reference; the singular includes the plural and the plural includes the
singular.
5.5 StarTek's Indemnification. StarTek shall indemnify the Company
and RDA from and against any losses, costs, damages, claims or liabilities,
including costs of defense and fees and expenses of counsel (each a "Loss") (but
not any punitive, exemplary, expectancy or consequential damages) actually
incurred by the Company and/or RDA directly arising out of any breach of the
representations and warranties made by Domain in Section 2.2 of this Agreement,
up to a maximum aggregate indemnification liability of $5,000,000.
The Company and/or RDA shall notify StarTek of any loss, liability,
claim or damage incurred, threatened or commenced by or against such party which
is covered by this Agreement with reasonable promptness. StarTek shall have, at
its election made on a timely basis, the right to compromise, defend or cure
with regard to any such claim, suit or proceeding involving an actual or
potential Loss (a "Claim") through counsel of its own choosing at StarTek's sole
expense if the reasonably foreseeable liability is less than $5,000,000;
provided, however, StarTek shall not be entitled to settle or compromise any
Loss, without the prior written consent of the Company, unless such settlement
provides for a complete release of any and all claims by the third-party to the
URL www.gifts.com. On any Claim involving a potential loss in which StarTek has
the right and chooses to defend an indemnified party hereunder, the indemnified
party shall have the right to engage separate counsel of its choosing and to
participate in the prosecution, defense, compromise or settlement thereof or to
conduct its own defense. In the event StarTek undertakes to compromise, defend
or cure a Claim, StarTek shall so notify the Company and RDA on or before
fifteen (15) days after the receipt of the above
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<PAGE> 14
notice furnished by the Company and/or RDA setting forth its intention to do so
and the Company and RDA shall reasonably cooperate in all respects with StarTek
in defending or curing any such Claim.
5.6 Consent to Jurisdiction; Service of Process. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts made and to be performed in that State. The
Company, Domain and RDA irrevocably and unconditionally (i) agree that any suit,
action or proceeding against such party arising out of this Agreement may be
brought in any New York State or Federal court sitting in New York, New York or
Westchester County, New York, or in any Colorado State or Federal court sitting
in the City and County of Denver, Colorado, (ii) waive, to the fullest extent
such party may effectively do so, any objection which such party may have to
laying of venue of any such suit, action or proceeding and (iii) submit to the
non-exclusive jurisdiction of such courts in any suit, action or proceeding and
agree that any process or notice of motion or other application to any court may
be served on such party within or outside such court's territorial jurisdiction
by registered or certified mail or by personal service at such party's address
set forth above.
5.7 Binding Effect; Successors and Assigns; Entire Agreement.
Except as expressly provided in this Agreement, nothing in this Agreement,
express or implied, is intended or shall be construed to confer upon or give any
Person (including creditors and affiliates of any party) other than the parties
hereto any remedy or claim under or by reason of this Agreement or any term,
covenant or condition hereof, all of which shall be for the sole and exclusive
benefit of the parties. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties and their respective
successors, legal representatives and permitted assigns; provided, however,
that, except as otherwise specifically permitted by this Agreement, neither this
Agreement nor any of the rights, interests or obligations of any party hereunder
shall be assigned or delegated without the prior written consent of the party
which is the non-assigning or non-delegating party, which consent shall not be
unreasonably withheld or delayed. Notwithstanding the foregoing, any party shall
have the right to assign its rights and obligations hereunder without the other
parties' consent to a wholly-owned subsidiary or in the event of a merger or
sale of all or substantially all of the assets of such party, including the
merger contemplated pursuant to Section 4.2. This Agreement sets forth the
entire agreement and understanding among the parties hereto as to the subject
matter hereof and merges and supersedes all prior discussions and agreements
between the parties.
5.8 Amendments and Waivers. This Agreement may not be amended,
modified or supplemented unless approved in writing by each party to this
Agreement. No waiver of any right or remedy or of compliance with any provisions
hereof, and no consent provided for herein, shall be effective unless evidenced
by an instrument in writing executed by the party sought to be charged with such
waiver or consent. The rights and remedies herein expressly provided are
cumulative and not exclusive of any other rights or remedies which any party
hereto would otherwise have at law, in equity, by statute or otherwise.
5.9 Headings. The headings of the Sections contained in this
Agreement are solely for convenience of reference, are not part of the agreement
of the parties and shall not affect the meaning or interpretation of this
Agreement.
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<PAGE> 15
5.10 No Implied Waivers. No action taken pursuant to this
Agreement, including, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representations, warranties, agreements, covenants, obligations or
commitments contained herein or made pursuant hereto. The waiver by any party of
a breach of any provision of this Agreement shall not operate or be construed as
a waiver of any preceding or succeeding breach and no failure by any party to
exercise any right, privilege or remedy hereunder shall be deemed a waiver of
such party's rights, privileges or remedies hereunder or shall be deemed a
waiver of such party's rights to exercise the same at any subsequent time or
times hereunder.
5.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original of the party or
parties executing the same and all of which together shall be deemed to
constitute one and the same agreement. A facsimile signature of a counterpart
executed copy of this Agreement shall be treated as an original.
5.12 Further Assurances. Each party shall cooperate and take such
actions as may be reasonably requested by another party in order to carry out
the provisions and purposes of this Agreement and the transactions contemplated
hereby.
5.13 Construction. RDA, the Company and Domain have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by RDA, the Company and Domain and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any of the provisions of this Agreement.
5.14 Expenses. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation execution, and performance of this
Agreement and the Transaction Documents, including all fees and expenses of
agents, representatives, counsel and accountants. In the event of breach of this
Agreement, the obligation of each party to pay its own expenses will be subject
to any rights of such party arising from the breach of this Agreement by another
party and in such case the expenses, including reasonable attorneys fees and
costs, of the enforcement of this Agreement shall be borne by the unsuccessful
party.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GOOD CATALOG COMPANY
By:/s/ James P. Steffensen
--------------------------------------------------
Name: James P. Steffensen
Title: President
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ Thomas D. Gardner
-------------------------------------------------
Name: Thomas D. Gardner
Title: Senior Vice President, Business Planning
and Development
DOMAIN.COM, INC.
By: /s/ A. Emmet Stephenson, Jr.
-------------------------------------------------
Name: A. Emmet Stephenson, Jr.
Title: Chairman and Vice President
The undersigned, A. Emmet Stephenson, Jr., hereby executes this Agreement in
connection with his representation and warranty in Sections 2.2 (a) and 2.2(b)
of this Agreement.
- ------------------------------------
A. Emmet Stephenson, Jr.
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The undersigned, A. StarTek, Inc., hereby executes this Agreement in connection
with its indemnification in Section 5.5 of this Agreement.
STARTEK, INC.
By: /s/ A. Emmet Stephenson, Jr
------------------------------------------
Name: A. Emmet Stephenson, Jr.
Title: Chairman
17
Exhibits and Schedules not filed
<PAGE> 1
EXHIBIT 10.21
GOOD CATALOG COMPANY
STOCKHOLDERS AGREEMENT
This Stockholders Agreement ("Agreement") is made and entered into as
of this 15th day of September, 1999, by and among GOOD CATALOG COMPANY, a
Delaware corporation (the "Company"), THE READER'S DIGEST ASSOCIATION, a
Delaware corporation ("RDA"), and DOMAIN.COM, INC., a Delaware corporation
("Domain").
In consideration of the mutual benefits to be derived herefrom and of
the mutual agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE I
Definitions
Certain defined terms used in this Agreement have the following
meanings:
Agreement. The "Agreement" shall mean this Stockholders Agreement, as
the same may be amended or restated from time to time hereafter.
Affiliate. An "Affiliate" of a Person shall mean a Person directly or
indirectly controlling, controlled by or under common Control with such Person.
Board of Directors. The "Board of Directors" shall mean the Board of
Directors of the Company as the same may be constituted from time to time
hereafter pursuant to applicable law, the Certificate of Incorporation and the
By-Laws.
Board Termination Event. "Board Termination Event" shall mean the first
to occur of an Initial Public Offering, a merger or consolidation of the
Company, or a sale of all or substantially all of the Company's business and
assets in which the stockholders of the Company immediately prior to such merger
or consolidation or sale do not own a majority of the outstanding shares of the
surviving entity or the entity to which such sale is made.
Bona Fide Offer. A "Bona Fide Offer" shall mean an offer in writing to
RDA, offering to purchase all or any part of the Shares owned by RDA and setting
forth all the relevant terms and conditions of the proposed purchase, from an
offeror who is ready, willing and able to consummate the purchase and who is not
a permissible transferee pursuant to Section 3.3.
By-Laws. The "By-Laws" shall mean the By-Laws of the Company in effect
as of the date hereof and as the same may be modified from time to time
hereafter pursuant to applicable law and the Certificate of Incorporation.
Certificate of Incorporation. The "Certificate of Incorporation" shall
mean the Certificate of Incorporation of the Company in effect as of the date
hereof and as the same may
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be modified, amended or replaced from time to time hereafter in compliance with
applicable law and the Company's other obligations with respect thereto.
Commission. The "Commission" shall mean the Securities and Exchange
Commission and any successor commission or agency having similar powers.
Common Stock. The "Common Stock" shall mean the Company's Common Stock,
$1.00 par value per share.
Company. The "Company" shall mean Good Catalog Company, a Delaware
corporation.
Control. "Control" shall mean the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of an
entity, whether through the ownership of voting securities, by contract or
otherwise.
GAAP. "GAAP" shall mean generally accepted United States accounting
principles, applied on a basis consistent with the basis on which the balance
sheet and other financial statements are prepared.
Initial Public Offering. "Initial Public Offering" shall mean an
initial public offering by the Company or any Stockholder of Shares pursuant to
the Securities Act of 1933, as amended.
Outstanding Common Stock. "Outstanding Common Stock" shall mean the
then issued and outstanding shares of the Company's Common Stock, on an
undiluted basis, without regard to outstanding convertible securities or any
options, warrants and rights to acquire Common Stock.
Person. A "Person" shall mean any entity, corporation, company,
association, joint venture, joint stock company, partnership, limited liability
company, trust, organization, individual (including personal representatives,
executors and heirs of a deceased individual), nation, state, government
(including agencies, departments, bureaus, boards, divisions and
instrumentalities thereof), trustee, receiver or liquidator.
Securities Act. The "Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations thereunder.
Shares. The "Shares" shall mean the shares of the Common Stock and
other securities (including, without limitation, options, warrants and other
rights to acquire capital stock) of the Company held by the Stockholders,
together with any other shares of the Common Stock of the Company hereafter
acquired by any Stockholder (whether by purchase, exercise of options or
warrants, or otherwise) and any other shares or securities thereafter issued in
respect of such shares in any reorganization, recapitalization,
reclassification, readjustment or other change in a capital structure of the
Company.
Stockholder. A "Stockholder" shall mean RDA and Domain.
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Transfer. A "Transfer" of Shares or any interest of a Stockholder
therein shall mean any sale, assignment, transfer, disposition, pledge,
hypothecation or encumbrance, whether direct or indirect, voluntary, involuntary
or by operation of law, and whether or not for value, of such Shares or such
interest of a Stockholder therein.
ARTICLE II
Corporate Governance
2.1. Board of Directors.
(a) From and after the date hereof, until the occurrence of a
Board Termination Event, each Stockholder shall take all actions necessary to
cause the Board of Directors to consist of at least five (5) directors.
(i) Prior to the occurrence of a Board Termination Event,
representation of RDA and Domain on the Board of Directors shall be, and each of
the Stockholders shall vote all its Shares to elect members of the Board of
Directors of the Company proportionate to each party's ownership of Shares;
provided, however, that, as long as Domain maintains ownership of at least 2% of
the voting equity of the Company, Domain will have the right to designate at
least one member of the Board of Directors.
(ii) The initial Chairman of the Board of Directors shall be
Thomas O. Ryder and the initial Vice Chairman of the Board of Directors shall be
A. Emmet Stephenson, Jr.
(b) On the date hereof, the following directors have been elected:
Thomas O. Ryder (designated by RDA)
A. Emmet Stephenson, Jr. (designated by Domain)
Thomas D. Gardner (designated by RDA)
George S. Scimare (designated by RDA)
Robert E. Raymond (designated by RDA)
2.2. Voting Following an Initial Public Offering. Following an Initial
Public Offering, each Stockholder shall vote all Outstanding Common Stock owned
by such Stockholder for election to the Board of Directors of the number of
Directors designated by the other Stockholder which represent the percentage of
the total number of Board of Directors as the shares of Outstanding Common Stock
owned by such other Stockholder represents of the total Outstanding Common
Stock. Neither RDA nor Domain shall be obligated to vote its Shares in favor of
the other Stockholder's designee at any time after such Other Stockholder's
ownership of Outstanding Common Stock falls below five percent (5%) of the then
Outstanding Common Stock. At any time after a Stockholder is no longer entitled
to elect at least one director under this Section 2.2, and until such time as
such Stockholder owns less than one percent (1%) of the Outstanding Common
Stock, the Company shall grant such Stockholder Board of Directors observer
status.
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2.3. Removal of Directors; Vacancies. No Stockholder shall vote to
remove any director, except (i) for bad faith or willful misconduct or (ii) with
or without cause at the written instruction of the Person(s) entitled to
designate such director. Upon receipt of such written instruction, each
Stockholder shall take any necessary action to cause the removal of the director
so designated for removal. In the event any director is so removed, or if a
vacancy is created by the death, disability, retirement, resignation or removal
of any director, the vacancy so created shall be filled in accordance with
Section 2.1 hereof by a designee selected by the Person(s) entitled to designate
the director whose position shall have become vacant.
2.4. Covenant to Vote. Prior to a Board Termination Event, each
Stockholder shall take all actions necessary to call, or cause the Company and
the appropriate officers and directors of the Company to call, a special or
annual meeting of stockholders of the Company and, at all times during the term
of this Agreement, to vote all Shares owned or held of record by such
Stockholder at any such annual or special meeting in favor of, or take all
actions by written consent in lieu of any such meeting necessary to cause, the
election as members of the Board of Directors of those individuals so designated
in accordance with, and otherwise to effect the intent of, this Article II. At
all times during the term of this Agreement, each Stockholder shall vote the
Shares owned or held of record by such Stockholder upon any other matter arising
under this Agreement submitted to a vote of the stockholders of the Company in a
manner so as to implement the terms of this Agreement. Except as provided
herein, each Stockholder may vote his Shares on any and all matters presented to
the stockholders of the Company as he may, in his sole discretion, determine.
Nothing herein shall be deemed to create any ownership interest on the part of
any party in any Shares held by any of the other parties.
2.5. Officers. Until the occurrence of a Board Termination Event, RDA
shall have the right to propose the President and Chief Executive Officer for
election to the Company's Board of Directors. RDA will consult with Domain prior
to making such proposal.
2.6. Minority Stockholder Rights.
(a) Domain shall have the right to veto any proposed sale by the
Company of the right, title and interest in and to the domain name and URL
www.gifts.com if such sale is to take place without the concomitant sale of the
online business of the Company related thereto at the time.
(b) Unless the Company first obtains the written consent of
Domain, the Company shall not enter into a transaction in which RDA, in its
capacity as a Stockholder, is granted rights by the new investor and/or the
Company that are not granted to Domain including, without limitation, rights of
first refusal, co-sale rights, first offer rights, registration rights or put
rights. The foregoing shall not limit the grant to RDA, in its capacity as a
Stockholder, of any additional rights, preferences, privileges, priorities or
agreements in connection with any purchase by RDA of Offered Securities (as
defined in Section 5.2(b)) in a transaction governed by Article V hereof. In
addition, the Company must obtain written consent of Domain in order to effect
any amendment to the Company's certificate of incorporation, recapitalization,
merger, sale or consolidation of the Company, unless such transaction provides
rights for Domain as a Stockholder which are identical to those granted to RDA
as a Stockholder.
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2.7. Corporate Opportunities.
(a) The parties hereto agree to the provisions of Section 2.7(b)
and further agree that, at the time the Company changes its name in accordance
with Section 4.2 of the Contribution Agreement, dated as of September 15, 1999,
among RDA, Domain, StarTek, Inc. and the Company, they shall amend the
Certificate of Incorporation of the Company (or its successor as contemplated in
such Section) to insert in such Certificate of Incorporation the provisions set
forth in Section 2.7(b).
(b) For purposes of this Section 2.7(b) "Applicable Stockholder"
shall mean each of RDA and Domain, and each of their respective successors, by
way of merger, consolidation or sale of all or substantially all its assets, and
all corporations, partnerships, joint ventures, associations and other entities
(each a "Subsidiary Entity") in which such Person owns, directly or indirectly,
fifty percent (50%) or more of the outstanding voting stock, voting power or
similar voting interests ("Voting "Interest"), but shall not include the Company
or any Subsidiary Entity in which the Company beneficially owns, directly or
indirectly, fifty percent (50%) or more of the outstanding Voting Interest.
(i) In anticipation that:
(w) Each Applicable Stockholder will remain, for some period
of time, a stockholder of the Company;
(x) the Company and each Applicable Stockholder may engage in
the same or similar activities or lines of business and may have an
interest in the same or similar areas of corporate opportunities;
(y) there will be benefits derived by the Company through its
continued contractual, corporate and business relations with either
Applicable Stockholder (including, without limitation, service of
officers and employees of either Applicable Stockholder as directors,
officers or employees of the Company); and
(z) there will be benefits in providing guidelines for
directors, officers and employees of each Applicable Stockholder and
the Company with respect to the allocation of corporate opportunities
and other matters;
The provisions of this Section 2.7(b) are set forth to regulate, define and
guide the conduct of certain affairs of the Company as they may involve each
Applicable Stockholder and its officers and directors, and the powers, rights,
duties and liabilities of the Company and its directors, officers and employees,
and stockholders in connection therewith.
(ii) Except as an Applicable Stockholder may otherwise
agree in writing, each Applicable Stockholder shall have the right to, and shall
have no duty not to, (1) engage in the same or similar business activities or
lines of business as the Company, (2) do business with any potential or actual
customer or supplier of the Company, or (3) employ or otherwise engage any
officer or employee of the Company. Neither Applicable Stockholder shall be
liable to the Company or its stockholders for breach of any fiduciary duty by
reason of
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any such activities (set forth in the preceding sentence) or of the
participation therein of such Applicable Stockholder. In the event either
Applicable Stockholder acquires knowledge of a potential transaction or matter
that may be a corporate opportunity for such party and the Company, such
Applicable Stockholder shall have no duty to communicate or present such
corporate opportunity to the Company nor shall such Applicable Stockholder be
liable to the Company or its stockholders for breach of any fiduciary duty as a
stockholder of the Company by reason of the fact that such Applicable
Stockholder pursues or acquires such corporate opportunity for itself, directs
such corporate opportunity to another Person, or does not present such corporate
opportunity to the Company.
(iii) In the event that a director, officer or employee of
the Company who is also a director, officer or employee of an Applicable
Stockholder acquires knowledge of a potential transaction or matter that may be
a corporate opportunity for both the Company and such Applicable Stockholder,
such director, officer or employee of the Company (1) shall have fully satisfied
and fulfilled the fiduciary duties of such director, officer or employee to the
Company and its stockholders with respect to such corporate opportunity, (2)
shall not be liable to the Company or its stockholders for breach of any
fiduciary duty by reason of the fact that it pursues or acquires such corporate
opportunity for such Applicable Stockholder or directs such corporate
opportunity to another Person or does not communicate information regarding such
corporate opportunity to the Company, (3) shall be deemed to have acted in good
faith and in a manner such Person reasonably believes to be in and not opposed
to the best interests of the Company, and (4) shall be deemed not to have
breached his or her duty of loyalty to the Company or its stockholders and not
to have derived an improper benefit therefrom, if such director, officer or
employee acts in a manner consistent with the following policy:
(x) a corporate opportunity available to any Person who is a
director but not an officer or employee of the Company and who is also
an officer or employee (whether or not a director) of an Applicable
Stockholder shall belong to such Applicable Stockholder unless such
opportunity is expressly offered in writing to such Person solely in
his or her capacity as a director of the Company, in which case such
opportunity shall belong to the Company;
(y) a corporate opportunity available to any Person who is an
officer or employee (whether or not a director) of the Company and who
is also a director but not an officer or employee of an Applicable
Stockholder shall belong to the Company, unless such opportunity is
expressly offered in writing to such Person solely in his or her
capacity as a director of such Applicable Stockholder, in which case
such opportunity shall belong to such party; and
(z) a corporate opportunity available to any other Person who
is an officer, employee or director of the Company and an Applicable
Stockholder shall belong to such Applicable Stockholder or to the
Company if such opportunity is expressly offered in writing to such
Person solely in his or her capacity as an officer, employee or
director of such Applicable Stockholder or of the Company,
respectively; otherwise, such opportunity shall belong to such
Applicable Stockholder.
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(iv) Any corporate opportunity that belongs to an
Applicable Stockholder or the Company pursuant to the foregoing policy shall not
be pursued by the other, or directed by the other to another Person, unless and
until such Applicable Stockholder or the Company, as the case may be, determines
not to pursue the opportunity. Notwithstanding the preceding sentence, if the
Person to whom the corporate opportunity belongs does not within a reasonable
period of time begin to pursue, or thereafter continue to pursue, such
opportunity diligently and in good faith, the other affected Person may then
pursue such opportunity or direct it to another Person.
(v) For purposes of this Section 2.7(b), "corporate
opportunities" shall consist of business opportunities which (1) the Company is
financially able to undertake, (2) are, from their nature, in the line or lines
of the Company's business and are of practical advantage to it, and (3) are ones
in which the Company has an interest or reasonable expectancy. In addition,
"corporate opportunities" shall not include any transaction in which the Company
or an Applicable Stockholder is permitted to participate pursuant to (a) any
agreement between the Company and such Applicable Stockholder in effect as of
the time any equity security of the Company is held of record by any Person
other than such Applicable Stockholder, as may be amended thereafter with the
approval of a majority of disinterested directors or (b) any subsequent
agreement between the Company and such Applicable Stockholder approved by a
majority of disinterested directors, it being acknowledged that the rights of
the Company under any such agreement shall be deemed to be contractual rights
and shall not be corporate opportunities of the Company for any purpose;
provided, however, that no presumption or implication as to corporate
opportunities relating to any transaction not explicitly covered by such an
agreement shall arise from the existence or absence of any such agreement.
(vi) Any person purchasing or otherwise acquiring any
interest in any shares of stock of the Company shall be deemed to have notice of
and consented to the provisions of this Section 2.7(b).
(vii) For purposes of this Section 2.7(b), the "Company"
shall mean Good Catalog Company and its successors by way of merger,
consolidation or sale of all or substantially all of its assets, and all
corporations, partnerships, joint ventures, associations and other entities in
which the Company beneficially owns, directly or indirectly, fifty percent (50%)
or more of the outstanding voting stock, voting power or similar voting
interests.
(viii) If any contract, agreement, arrangement or
transaction between the Company and an Applicable Stockholder involves a
corporate opportunity and satisfies the criteria set forth in this Section
2.7(b) hereof, then such Applicable Stockholder and its officers and directors
shall also, for the purposes of this Section 2.7(b) and the other provisions of
this Agreement, be deemed to have fully satisfied and fulfilled any fiduciary
duties they may have to the Company and its stockholders. Any such contract,
agreement, arrangement or transaction involving a corporate opportunity not so
approved shall not by reason thereof result in any such breach of any fiduciary
duty, but shall be governed by the other provisions of this Section 2.7(b), this
Agreement, the Bylaws, the applicable corporation law of the jurisdiction of
incorporation of the Company and other applicable law.
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(ix) For purposes of this Section 2.7(b), a Director of
the Company who is Chairman of the Board of Directors of the Company, Vice
Chairman of the Board of Directors of the Company or the Chief Executive Officer
of the Company shall not be deemed to be an officer of the Company by reason of
holding such position (regardless of whether such position is deemed an office
of the Company under the Bylaws of the Company), unless such Person is a
full-time employee of the Company.
ARTICLE III
Restriction on Transfer of Shares
3.1. No Transfer of Shares. No Shares and no interest of a Stockholder
in any Shares may be Transferred except in accordance with the terms of this
Agreement. Any such attempted Transfer in violation of this Agreement shall be
null and void ab initio, and neither the Company nor any transfer agent of the
Company shall give effect to any such attempted Transfer in its stock records or
for any other purpose.
3.2. Restrictions Under Securities Laws. The Shares have been issued in
a non-public offering pursuant to the private offering exemptions under Section
4(2) of the Securities Act and various exemptions from registration requirements
under applicable state securities laws. Accordingly, the Shares have not been
qualified or registered with any federal or state securities regulatory
authority. Notwithstanding anything to the contrary stated in this Agreement, no
Shares may be Transferred unless and until (i) counsel for the Company shall
have determined, or the transferring Stockholder shall have delivered to the
Company an opinion of such Stockholder's counsel reasonably satisfactory to the
Company, that the intended Transfer does not violate the Securities Act or the
rules and regulations of the Commission thereunder, and any applicable state
securities laws; or (ii) the intended Transfer is the subject of a "no-action"
letter from the staff of the Commission and any applicable state securities
regulatory agency to the effect that the intended Transfer without registration
or qualification will not result in a recommendation by the staff of the
Commission or applicable state securities regulatory agency that civil or
criminal action be taken with respect thereto; or (iii) the Shares have been
validly registered under the Securities Act and all applicable state securities
laws. All costs and expenses of counsel to the Company in reviewing the
foregoing matters with respect to an intended Transfer of any Shares shall be
borne by the Stockholder owning such Shares.
3.3. Permissible Transfers. Notwithstanding anything to the contrary
set forth in this Agreement, provided that the Stockholder has first given the
Company written notice of any such Transfer, the restrictions on Transfer
specified herein (other than as set forth in Section 3.2) shall not apply to any
Transfer (a) in connection with a merger, reorganization or the sale of all or
substantially all of the assets of a Stockholder, or (b) to an Affiliate of any
Stockholder. Any permitted transferee shall, prior to such transfer, execute an
instrument in form reasonably satisfactory to the Company, agreeing to be bound
by the terms of this Agreement, with such modifications hereto as the remaining
Stockholder and the Company deem necessary to continue to effectuate the
purposes hereof. In addition, any permitted transferee who is a married natural
person shall also deliver to the Company, prior to transfer, a Spousal Consent
executed by his or her spouse, in the form of Exhibit 1 hereto.
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3.4. Right of First Refusal. Except as provided in Section 3.3, if
either Stockholder ("Selling Stockholder") shall decide to Transfer all or any
part of his Shares or any interest therein ("Offered Shares") for value pursuant
to a bona fide offer from a third party (an "Offer"), the Selling Stockholder
shall first deliver to the Company and the other Stockholder a written notice
(the "Stockholder Sale Notice") of the Selling Stockholder's Offer, together
with all material terms for the Offer and copies of all related agreements and
documents prepared to effect the Offer. Upon receipt of the Stockholder Sale
Notice, the other Stockholder (the "Remaining Stockholder") shall then have the
right and opportunity (the "Right of First Refusal"), for a period ending thirty
(30) days following delivery of the Stockholder Sale Notice, to accept the
Offer. The Right of First Refusal shall be exercised, if at all, by delivery of
written notice to the Selling Stockholder within such thirty (30) day period (an
"Exercise Notice"). The Exercise Notice shall constitute the irrevocable
obligation of the exercising Remaining Stockholder and the Selling Stockholder
to complete the purchase and sale of the Offered Shares in accordance with the
terms of the Offer. The closing of the Transfer of the Offered Shares pursuant
to the terms hereof shall take place not later than the later of the date of
closing set forth in the Stockholder Sale Notice (if any) and sixty (60) days
after the date of delivery of the Stockholder Sale Notice, except as extended by
mutual agreement of the parties thereto.
Notwithstanding the foregoing, however, if the Remaining Stockholder
does not deliver an Exercise Notice within the period required herein, then the
Selling Stockholder shall have the right, for a period of one hundred eighty
(180) days after the date of the Stockholder Sale Notice, to Transfer all of the
Offered Shares to one or more Persons on terms and conditions no less favorable
to the Selling Stockholder than those set forth in the Offer; provided, however,
that any such transferee(s) of the Offered Shares shall take and hold the
Offered Shares subject to this Agreement and to all of the obligations and
restrictions arising hereunder upon the Selling Stockholder and no such Transfer
to a transferee not already a party hereto shall be effective until such
transferee has executed and delivered to the Company an instrument in the form
prescribed by the Company agreeing to be bound by this Agreement, with such
modifications hereto as the remaining Stockholder and the Company deem necessary
to continue to effectuate the purposes hereof. If such transferee is a married
natural person, such transferee shall also deliver a duly executed Spousal
Consent in the form of Exhibit 1 hereto. If no such Transfer is effected within
said one hundred eighty (180) day period, the Offered Shares shall once again be
subject to the provisions of this Section 3.4.
ARTICLE IV
Co-Sale Rights
If RDA proposes to sell any of its Shares pursuant to a Bona Fide
Offer, in a single transaction or a series of related transactions, it shall
comply with the following provisions.
4.1. Notice of Sale. RDA shall deliver or cause to be delivered a
written notice (the "Notice of Sale") to Domain at least thirty (30) days prior
to making any such sale. The Notice of Sale shall state (i) RDA's bona fide
intention to sell, (ii) the name and address of the prospective transferee(s)
(the "Purchase Offeror"), (iii) the number of Shares to be sold, (iv) the
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terms and conditions (including price) of the contemplated sale and (v) the
expected closing date of the transaction.
4.2. Option to Participate. Domain may elect to participate in the
contemplated sale by delivering a written notice (an "Election Notice") to RDA
within twenty (20) days after receipt of such Notice of Sale, and Domain may
elect to sell in the contemplated transaction up to that number of Shares owned
by it as is equal to the number of Shares which RDA proposes to sell multiplied
by a fraction, the numerator of which shall be the number of Shares owned by
Domain, and the denominator of which shall be the aggregate number of Shares
held by Domain and RDA (determined on a fully-diluted, as converted basis). If
Domain fails to timely deliver an Election Notice to RDA, it shall be deemed to
have waived any right to participate in the sale. To the extent that Domain
exercises such right of co-sale in accordance with the terms and conditions
hereof, the number of Shares that RDA may sell shall be correspondingly reduced.
4.3. Consummation of Sale. Any sale made pursuant to this Article IV
shall be consummated within ninety (90) days of the date of the Notice of Sale
given pursuant to Section 4.1. Notwithstanding anything to the contrary set
forth herein, RDA shall have no liability to Domain if any sale proposed to be
made pursuant to this Article IV is not consummated. Nothing contained in this
Article IV shall affect the Right of First Refusal afforded to Domain pursuant
to Section 3.4.
ARTICLE V
First Offer
5.1. First Offer.
(a) In the event the Company proposes to sell any Offered
Securities (as hereinafter defined) in a private financing, each Stockholder
shall have a right of first offer (the "Right of First Offer") to purchase, on
the same terms and conditions as are being offered to other investors, any
number of such Offered Securities up to its Pro Rata Share (as hereinafter
defined) of such Offered Securities.
(b) The Company shall give notice (the "First Offer Notice") to
the Stockholders of the Company's proposed sale of Offered Securities pursuant
to this Section 5.1 specifying the number of such Offered Securities the Company
intends to sell and range of prices, terms and conditions of the proposed sale.
Each Stockholder may exercise its Right of First Offer by delivering notice of
irrevocable acceptance of the proposed sale on the terms specified in the First
Offer Notice to the Company within fifteen (15) business days of receipt of the
First Offer Notice (the "Initial Exercise Period"). The Company shall deliver
the First Offer Notice to the Stockholders as promptly as practicable following
its determination of the terms of such private financing, but in no event shall
the Company deliver the First Offer Notice less than fifteen (15) business days
prior to the completion of the sale of the Offered Securities subject to this
Section 5.1. In the event there is a material change in the terms of any such
private financing following delivery of the First Offer Notice, the Company will
issue a new First Offer Notice and the Stockholders each will have the longer of
(i) the remainder of the Initial Exercise
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Period or (ii) five (5) business days from the date of issuance of the new First
Offer Notice to deliver a new notice of irrevocable acceptance to purchase the
Offered Securities on the new terms specified in such new First Offer Notice.
5.2. Definitions.
(a) "Pro Rata Share" shall mean, with respect to any Stockholder,
a number of Offered Securities determined by multiplying the total number of
Offered Securities offered pursuant to Section 5.1 by a fraction, the numerator
of which is the total number of shares of Outstanding Common Stock owned by such
Stockholder and the denominator of which is the total number of shares of
Outstanding Common Stock at the time, prior to giving effect to the issuance and
sale of such Offered Securities, and rounding such product to the nearest whole
number.
(b) "Offered Securities" shall mean any equity securities of the
Company or any securities, convertible into or exchangeable for equity
securities in the Company, provided, however, that Offered Securities shall not
include (i) options, warrants, rights or shares of Common Stock exercisable
therefor, issued to employees, consultants, vendors or service providers as
compensation for services provided or as incentives to employees or consultants;
(ii) shares of Common Stock issuable upon exercise of options, rights or
warrants which were Offered Securities subject to Section 5.1 at the time of
original issuance; (iii) shares of Common Stock issuable upon the conversion or
exchange of convertible or exchangeable securities which were Offered Securities
subject to Section 5.1 at the time of original issuance or are outstanding as of
the date hereof; and (iv) shares of Common Stock issued as consideration,
whether in whole or in part, for the acquisition of assets or capital stock of
any other Person.
ARTICLE VI
Termination of Agreement
6.1. Termination of Entire Agreement. This Agreement shall
terminate, and the certificates representing the Shares shall be released from
the terms of this Agreement upon the first to occur of the following events:
(a) Liquidation. The liquidation and dissolution of the
Company; or
(b) Bankruptcy. The commencement of proceedings in bankruptcy
or receivership of the Company.
6.2. Termination of Certain Provisions. The provisions of Article
III-VII shall terminate upon the completion of an Initial Public Offering of the
Company's Common Stock pursuant to the Securities Act.
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ARTICLE VII
Legends On Share Certificates
Each of the certificates representing the Shares issued on or
after the date hereof shall bear the following legends:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Securities Act") or
under any state securities laws. No transfer, sale, assignment, or
other disposition of the shares represented by this certificate or any
interest therein may be made except (a) pursuant to an effective
registration statement under the Securities Act and compliance with
applicable state securities laws or (b) if the Company has been
furnished with an opinion of counsel for the holder, satisfactory to
the Company, to the effect that no registration is required because of
the availability of an exemption from registration under the Securities
Act and applicable state securities laws."
"None of the Shares represented by this certificate may be sold,
assigned, transferred, pledged, hypothecated or in any other way
disposed of or encumbered, voluntarily or involuntarily, by gift,
bankruptcy, operation of law, winding up of a corporation or otherwise,
except in accordance with the provisions of a Stockholders Agreement,
dated as of September 15, 1999, as amended or restated from time to
time, a copy of which may be inspected at the principal office of this
Company. All of the provisions of such Stockholders Agreement are
incorporated herein by this reference."
A copy of this Agreement shall be delivered to the Secretary of the Company and
shall be shown by the Secretary to any Person making inquiry concerning it.
ARTICLE VIII
Recapitalizations
In the event the Company is a party to any reorganization,
recapitalization, reclassification, readjustment or other change in its capital
structure wherein any other shares or securities of the Company are issued in
respect of all or part of the Shares, then such other shares or securities shall
likewise be subject to all of the terms and provisions of this Agreement.
ARTICLE IX
Notices
All notices, requests and other communications hereunder shall be
in writing and shall be deemed effectively given (a) upon personal delivery to
the party to be notified, (b) three (3) days after deposit with the United
States Post Office, by registered or certified mail, postage prepaid, or (c)
when received if given by telecopier addressed to the party to be notified at
the
12
<PAGE> 13
address indicated on Schedule A, or at such other address or number as such
party may designate by ten (10) days' advance written notice to the other
parties.
ARTICLE X
Financial Statements
Until an Initial Public Offering, the Company shall deliver to
each Stockholder as soon as available but in no event later than forty-five (45)
days after the end of each month, an unaudited balance sheet as of such month
end and statements of income and of cash flows for such month, prepared in
accordance with GAAP (subject to the absence of period end accruals and
footnotes).
ARTICLE XI
General Provisions
11.1. Effectiveness. This Agreement shall become effective only at
such time as it has been executed by the Company and each Stockholder.
11.2. Press Releases.
(a) Neither Stockholder will, nor will it permit any of its
Affiliates (other than the Company) to, issue any press release or make any
public announcement relating in any way whatsoever to this Agreement, the
Contribution Agreement, dated as of September 15, 1999, among the parties hereto
(the "Contribution Agreement") or any transactions contemplated in the
Contribution Agreement without the consent of the other Stockholder and the
Company (which consent shall not be unreasonably withheld or delayed), unless
required by law or the rules of an applicable stock exchange or over-the-counter
market. If a press release or announcement of this Agreement, the Contribution
Agreement or such transaction is required as aforesaid, the Stockholder issuing
such release will consult with the other Stockholder in advance as to the
contents and timing thereof.
(b) The Company will use its best efforts to not issue any
press release without consulting with the Stockholders in advance as to the
contents thereof.
11.3. Waiver. No waiver of any provision of this Agreement in any
instance shall be, or for any purpose be deemed to be, a waiver of the right of
any party hereto to enforce strict compliance with the provisions hereof in any
subsequent instance.
11.4. Agreement to Perform Necessary Acts. Each party hereto and
the heirs, executors or administrators of the Stockholders shall perform any
further acts and execute and deliver any documents or procure any court orders
that may reasonably be necessary or appropriate to carry out the provisions of
this Agreement.
11.5. Attorneys' Fees. In the event of any litigation or other
proceeding between the parties hereto to enforce any provision or right
hereunder, the unsuccessful party to
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<PAGE> 14
such proceeding shall pay to the prevailing party therein all costs and expenses
actually incurred therein, including, but not limited to, reasonable attorneys'
fees and court costs.
11.6. Modification. Except as otherwise provided herein, this
Agreement may not be modified or amended except by a writing signed by each
Stockholder and by an officer duly authorized to act on behalf of the Company.
In the event of the amendment or modification of this Agreement in accordance
with its terms, the Stockholders shall cause the Board of Directors to meet as
soon as practicable following such amendment or modification for the purpose of
adopting any amendment to the Certificate of Incorporation and By-Laws that may
be required as a result of such amendment or modification to this Agreement,
and, if required, proposing such amendments to the Stockholders entitled to vote
thereon.
11.7. Counterparts. This Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed an original of the
party or parties who executed such counterpart but all of which together shall
constitute one and the same instrument. A facsimile signature of a counterpart
executed copy of this Agreement shall be treated as an original. In making proof
of this Agreement, it shall not be necessary to produce or account for more than
one counterpart or more than a facsimile signature evidencing execution by each
party hereto.
11.8. Severability. Each provision and part thereof of this
Agreement is intended to be severable and if any term or all or part of any
provision hereof is held by judicial decision to be invalid, such invalidity
shall not affect the validity of the remainder of this Agreement, unless the
effect thereof would be to alter materially the effect of this Agreement on the
parties hereto.
11.9. Entire Agreement; Termination of Prior Arrangements. This
Agreement is intended by the parties hereto as a final expression of their
agreement and understanding with respect to the subject matter hereof and as a
complete and exclusive statement of the terms thereof and supersedes any and all
prior and contemporary agreements and understandings.
11.10. Governing Law; Jurisdiction and Venue. This Agreement shall
be construed and interpreted in accordance with the laws of the State of New
York. The parties irrevocably and unconditionally (i) agree that any suit,
action or proceeding against such party arising out of this Agreement may be
brought in any New York State or Federal court sitting in New York, New York or
Westchester County, New York, or any Colorado State or Federal court sitting in
the City and County of Denver, Colorado, (ii) waive, to the fullest extent such
party may effectively do so, any objection that such party may have to laying of
venue of any such suit, action or proceeding and (iii) submit to the
non-exclusive jurisdiction of such courts in any suit, action or proceeding and
agree that any process or notice of motion or other application to any court may
be served on such party within or outside such court's territorial jurisdiction
by registered or certified mail or by personal service at such party's address
set forth above.
11.11. Injunctive Relief. The parties acknowledge and agree that a
violation of any of the terms of Articles II, III, IV, V or X of this Agreement
will cause the parties irreparable injury for which adequate remedy at law is
not available. Therefore, the parties agree that each party shall be entitled to
an injunction, restraining order or other equitable relief from any court
14
<PAGE> 15
of competent jurisdiction, restraining any party from committing any violations
of the provisions of such Articles of this Agreement.
11.12. Section Headings. The headings of the several sections of
this Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
11.13. Construction. When necessary, the masculine shall include
the feminine or neuter and vice versa, and the singular shall include the plural
and vice versa.
11.14. Binding Effect. Subject to the restrictions on Transfer
contained herein, this Agreement shall be binding on and shall inure to the
benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns. In accordance with the provisions of
Section 11.7 hereof, this Agreement shall be binding upon all of the
Stockholders at the time specified in Section 11.1 hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first hereinabove written.
THE COMPANY
GOOD CATALOG COMPANY
By: /s/ James P. Steffensen
-------------------------------
Name: James P. Steffensen
Title: President
15
<PAGE> 16
THE STOCKHOLDERS
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ Thomas D. Gardner
-------------------------------
Name: Thomas D. Gardner
Title: Senior Vice President,
Business Planning and
Development
DOMAIN.COM, INC.
By: /s/ A. Emmet Stephenson, Jr.
-------------------------------
Name: A. Emmet Stephenson, Jr.
Title: Chairman
16
Exhibits and Schedules not filed
<PAGE> 1
EXHIBIT 10.22
As of November 1, 1999
Good Catalog Company
c/o The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, New York 10570
Re: Loan Agreement
Gentlemen:
This letter sets forth our agreement (the "Agreement") with respect to
loans to be extended by The Reader's Digest Association, Inc. ("RDA") and
Domain.com, Inc. ("Domain"; together with RDA, the "Lenders") to Good Catalog
Company, a Delaware corporation ("Borrower").
1. THE LOANS. On the terms and subject to the conditions hereof, the
Lenders severally agree to make loans (each, a "Loan"; collectively, the
"Loans") to Borrower in an aggregate amount not to exceed Twenty Six Million Two
Hundred Fifty Thousand Dollars ($26,250,000). Loans may be borrowed at any time
on or prior to November 1, 1999. The parties acknowledge that, prior to the date
hereof, RDA has made loans to Borrower ("Pre-Closing Loans") in the aggregate
principal amount of approximately $1,430,625. Pre-Closing Loans shall constitute
Loans hereunder from their respective dates made. RDA will make a final
determination within thirty (30) days after the date hereof of all Pre-Closing
Loans made to Borrower and shall specify to Borrower in reasonable detail the
basis for its determination. Upon Borrower's agreement as to the amount of
Pre-Closing Loans advanced prior to the date hereof, any difference between the
estimated amount of Pre-Closing Loans specified in this Section 1 and the actual
amount of Pre-Closing Loans determined by agreement of RDA and Borrower shall be
addressed as follows: (i) the Schedule to the Note (as hereinafter defined) in
favor of RDA will be revised to reflect any adjustments to the amount of
Pre-Closing Loans, (ii) if the actual amount of Pre-Closing Loans exceeds the
estimated amount of Pre-Closing Loans set forth in this Section 1, Borrower
shall immediately repay such excess amount and (iii) if the actual amount of
Pre-Closing Loans is less than the estimated amount of Pre-Closing Loans set
forth in this Section 1, RDA shall immediately disburse a Loan in the amount of
such shortfall and shall change Borrower interest on such additional Loan only
from the date of disbursement (and such additional Loan shall be so reflected on
the revised Schedule to the Note in favor of RDA).
(a) DISBURSEMENTS. The Lenders will make available on the date of
execution and delivery of this Agreement, the full amount of all Loans not
disbursed prior to the date hereof. Disbursements will be made by each Lender as
follows: Domain shall advance a loan of $7,816,875; RDA shall advance a Loan
which, when added to Loans previously outstanding on the date hereof, equals
$18,433,125. Proceeds of all Loan disbursements will be deposited in the account
number specified in Exhibit A hereto or, at RDA's option, RDA may advance its
Loan in accordance with the provisions of the Services Agreement, dated as of
September 15, 1999, between RDA and Borrower.
<PAGE> 2
(b) INTEREST. Each Loan shall bear interest at a rate equal to the rate
applicable to a three month LIBO rate loan plus 2% per annum computed on the
basis of a 360-day year or, if lower, the maximum rate permitted by law.
Interest on each Loan shall be calculated from the date such loan is first
advanced, including Loans advanced prior to the date hereof, and shall be
payable quarterly commencing September 30, 1999.
(c) PAYMENTS. Each Loan shall mature on November 1, 2002.
(d) PREPAYMENTS. Borrower, may at any time or from time to time, prepay
all or any portion of the outstanding Loans in minimum amounts of the lesser of
$100,000 or the outstanding principal amount of the Loans, together with
interest thereon accrued and unpaid to the date of prepayment without premium or
penalty.
(e) PRO RATA APPLICATION. All payments and prepayments of Loans
hereunder shall be applied to repay the Loans of each Lender pro rata based on
the total amount of outstanding Loans made by each Lender.
(f) ACCELERATED MATURITY UPON AN INITIAL PUBLIC OFFERING. At the option
of the Lenders, all Loans shall immediately become due upon the receipt by the
Borrower of proceeds of an initial public offering of its common stock pursuant
to the Securities Act of 1933, as amended.
(g) NO REBORROWING. Loans may not be reborrowed.
(h) NOTE. The obligation of the Borrower to repay the Loans to the
Lenders shall be evidenced by promissory notes to each Lender in the form of
Exhibit B-1 and Exhibit B-2 hereto (the "Notes"). Each Lender is authorized to
complete the grid of the Note issued to it upon any borrowing of a Loan or
payment or prepayment of the principal thereof. Such grid shall, absent manifest
error, be conclusive evidence of the Loan indicated thereon and the other facts
stated therein.
(i) USE OF PROCEEDS. The proceeds of Loans will be used for the
development and operation of the Company's Internet Web site located at the URL
www.gifts.com and related on-line gifts business.
(j) PARI PASSU OBLIGATIONS. The Loans and the obligations of the
Borrower to each Lender under this Agreement and the Notes shall be pari passu
obligations of the Borrower. If and to the extent either Lender receives funds
in payment of Loans in excess of its pro rata share of any payment, such Lender
shall immediately upon becoming aware of such overpayment pay the other Lender
its portion of the overpayment.
2. EVENTS OF DEFAULT. If one or more of the following events shall occur:
(a) Default in the punctual payment in full when due of any principal
amount of the loans; or
(b) Default in the punctual payment in full when due of any amount of
interest; or
2
<PAGE> 3
(c) Borrower shall be insolvent or generally cease paying, or be unable
to pay, its debts as they become due or shall make any admission in writing to
the foregoing effect; or the occurrence of any default or event of default
(after giving effect to any applicable grace or cure periods) under any
instrument or agreement evidencing debt; or a substantial part of the operations
of Borrower shall be suspended; or Borrower shall make an assignment for the
benefit of creditors; or Borrower shall commence, as debtor, a case under the
Federal Bankruptcy Code as now or hereinafter in effect; or shall commence any
proceeding with respect to itself or a substantial portion of its property under
any other insolvency, bankruptcy arrangement, reorganization, liquidation,
dissolution or similar law; or a court of competent jurisdiction shall enter an
order of relief against the Borrower as debtor in a case under the Federal
Bankruptcy Code; or a case under the Federal Bankruptcy Code shall be commenced
against Borrower or any proceeding under any other insolvency, bankruptcy,
reorganization, arrangement, liquidation, dissolution or similar law of the
United States shall be commenced against the Borrower or Borrower shall consent
to or admit the material allegations against it in any such case or proceeding;
or a trustee, receiver or similar officer shall be appointed for all or a
substantial part of the property of Borrower and Borrower shall consent thereto;
(1) Then, upon the happening of any of the foregoing events and at
any time thereafter so long as such events shall be continuing, the Lenders, by
vote of a majority of the principal amount of the Loans advanced by the Lenders,
may by declaration delivered to the Borrower, demand the immediate payment of
the Notes, the Loans and all fees and other amounts payable by Borrower
hereunder, whereupon the same shall become immediately due and payable; provided
that, upon the happening of any event specified in clause (c) above and all
obligations under the Notes, the Loans or otherwise shall be immediately due and
payable, all without declaration or notice to Borrower. Borrower hereby waives,
to the fullest extent permitted by law, (A) all presentations, demands for
performance, notices of non-performance, protests, notices of protests, notices
of intent to accelerate, notice of dishonor in connection with the Notes or any
of the Loans, (B) any requirement of diligence or promptness on the part of the
Lenders, (C) any and all notices of every kind or description that may be
required by statute or law and any defense of any kind that it may now or
hereafter have, and (D) any defense of any kind (except payment) that it may now
or hereafter have with respect to its liability under this Agreement or the
Notes.
3. RELATING TO THE LENDERS. All decisions made and all actions taken by
the Lenders hereunder shall be taken by decision of the Lenders holding the
majority of the unpaid principal amount of the Loans outstanding at the time;
provided that, no amendment, waiver or consent by the Lenders shall be made,
unless in writing and signed by all of the Lenders, to: (1) increase the
commitments of the Lenders to make Loans or subject the Lenders to any
additional obligations or (2) reduce the principal amount of or interest on the
Notes or any fees due such Lender hereunder. Lenders holding the majority of the
unpaid principal amount of Loans may elect to extend the Maturity Date of the
Loans to any date they shall determine in their sole discretion; provided that
the Maturity Date of the Loans may not be extended beyond the date specified in
Section 1(f) without the consent of both Lenders.
(a) APPOINTMENT OF AGENT. In order to expedite and facilitate the
making of Loans of the administration of this Agreement, RDA is hereby appointed
to act as Agent on behalf of the Lenders as hereinafter specified. Domain
irrevocably authorizes and
3
<PAGE> 4
directs RDA, as Agent, to take such action on its behalf under the terms and
provisions of this Agreement and the Notes and to exercise such powers hereunder
and thereunder as are specifically delegated to or required of RDA, as Agent, by
the terms and provisions of this Agreement, together with such powers as may be
reasonably incidental thereto. Domain shall have no authority to take any action
with respect to its Notes; all such action shall be taken by RDA as Agent
pursuant to this Section 3.
(b) NATURE OF AGENT'S DUTIES. The Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement. Neither the
Agent nor any of its officers, directors, employees or Agents shall be liable
for any action taken or permitted to be taken by it hereunder or in connection
herewith except to the extent of its or their own gross negligence or willful
misconduct. The duties of the Agent shall be mechanical and administrative in
nature and the Agent shall not, by reason of this Agreement or the Notes, have a
fiduciary relationship or responsibility to Domain or the Borrower and nothing
in this Agreement, expressed or implied, is intended to impose on such Agent any
obligations except as expressly set forth herein. The Agent shall be entitled to
rely on any note, notice, consent, certificate, affidavit, letter, telegram,
telecopy, email, statement, order or other document reasonably believed by it to
be genuine and correct and to have been signed or sent by the proper person or
persons and, with respect to legal matters, upon the opinion of counsel selected
by Agent (including counsel to Borrower). Without limiting the generality of the
foregoing, the Agent shall, in the absence of knowledge to the contrary, be
entitled to accept any certificate furnished pursuant to this Agreement or the
Notes as conclusive evidence of the facts stated therein.
(c) AGENT IN ITS INDIVIDUAL CAPACITY. RDA, in its individual
capacity, shall have the same rights and powers hereunder and under its Note as
Domain and shall be entitled to exercise the same as though it were not the
Agent.
(d) DEALINGS WITH BORROWER AND ITS AFFILIATE. Nothing herein shall
in any way limit or impair any other relationship of RDA to Borrower, including
any affiliation by ownership of a majority of Borrower's outstanding voting
stock or otherwise.
4. MISCELLANEOUS.
(a) NOTICES. All notices and other communications required or
permitted by this Agreement shall be in writing and shall be sent:
If to Domain to:
Domain.com, Inc.
c/o StarTek, Inc.
100 Garfield Street, 4th Floor
Denver, CO 80206
Attn: Chairman
Facsimile: (303)-329-9107
4
<PAGE> 5
with a copy to:
StarTek, Inc.
1250 H Street
Greeley, Co. 80631
Attention: President and Chief Executive Officer
Facsimile: (970) 346-5401
and a copy to:
Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
950 Seventeenth Street, Suite 1600
Denver, Colorado 80202
Attention: Karen Barsch, Esq.
Facsimile: (303) 825-6525
If to RDA to:
The Reader's Digest Association
Reader's Digest Road
Pleasantville, New York 10570-7000
Attn: Senior Vice President, Business Planning and Development
Facsimile: (914) 238-6932
with a copy to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, New York 10570-7000
Attn: General Counsel
Facsimile: (914) 244-5644
If to Borrower, to:
Good Catalog Company
c/o The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, New York 10570
Attn: Senior Vice President, Business Planning and Development
Facsimile: (914) 238-6932
with a copy to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, New York 10570
Attn: General Counsel
Facsimile: (914) 244-5644
5
<PAGE> 6
If to RDA in its capacity as Agent to:
The Reader's Digest Association
Reader's Digest Road
Pleasantville, New York 10570-7000
Attn: Senior Vice President, Business Planning and Development
Facsimile: (914) 238-6932
with a copy to:
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, New York 10570-7000
Attn: General Counsel
Facsimile: (914) 244-5644
or, in each case, to such other address as any party may from time to time
specify in writing to the other parties hereto. All notices and other
communications required or permitted by this Agreement shall be deemed to have
been duly given if sent to the intended recipient at the proper address
determined pursuant to this Section by courier, facsimile transmission or by
hand and will be deemed given, unless earlier received, (1) if sent by courier,
when recorded on the records of the courier as received by the intended party,
(2) if sent by facsimile, upon transmission if transmitted on a business day of
the intended recipient during business hours and in all other cases, on the next
business day, and (3) if delivered by hand, on the date of receipt.
(b) AMENDMENTS AND MODIFICATIONS. This Agreement and the Notes may
not be modified or amended except by an instrument in writing signed by the
Borrower and each Lender.
(c) WAIVERS. No failure on the part of the Lenders to exercise and
no delay in exercising any right, power or remedy hereunder or under any Note
shall operate as a waiver thereof or as any default, nor shall any single or
partial exercise by either Lender of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any right,
power or remedy. This Agreement and the obligations of the Borrower hereunder
are in addition to and not in substitution of any other obligations held by
either Lender and shall not effect the rights, remedies or powers of either
Lender in respect of any obligations or interest of either Lender. The remedies
herein provided are cumulative and are not exclusive of any remedy provided at
law.
(d) BENEFITS. This Agreement shall inure to the benefit of and shall
be binding upon the respective successors and assigns to the parties hereto.
(e) GOVERNING LAW. This Agreement and the Notes shall be governed
and construed in accordance with the laws of the State of New York without
reference to any conflicts of law principles which would have the substantive
law of any other jurisdiction apply to the subject matter hereof. The Lenders
and the Borrower irrevocably and unconditionally (i) agree that any suit, action
or proceeding against such party arising out of this agreement may be
6
<PAGE> 7
brought in any New York State or Federal court sitting in New York, New York or
Westchester County, New York, or any Colorado State or Federal court sitting in
City and County of Denver, Colorado, (ii) waive, to the fullest extent such
party may effectively do so, any objection which such party may have to laying
of venue of any such suit, action or proceeding and (iii) submit to the
non-exclusive jurisdiction of such courts in any suit, action or proceeding and
agree that any process or notice of motion or other application to any court may
be served on such party within or outside such court's territorial jurisdiction
by registered or certified mail or by personal service at such party's address
set forth above.
(f) COUNTERPARTS. This Agreement may be simultaneously executed in
several counterparts each of which shall be an original and all of which shall
constitute but one and the same instrument. A facsimile signature of a
counterpart executed copy of this Agreement shall be treated as an original.
(g) COSTS, ETC. The Borrower shall pay all expenses, including
reasonable attorneys fees and costs, in connection with the enforcement of this
Agreement and the Notes.
7
<PAGE> 8
Please confirm your agreement to the terms and conditions of this
Agreement by causing a duly authorized officer of the Borrower to execute a
counterpart hereof.
Very truly yours,
THE READER'S DIGEST ASSOCIATION, INC.
By: /s/ Thomas D. Gardner
---------------------------------------
Name: Thomas D. Gardner
Title: Senior Vice President, Business
Planning and Development
DOMAIN.COM, INC.
By: /s/ A. Emmet Stephenson, Jr.
---------------------------------------
Name: A. Emmet Stephenson, Jr.
Title: Chairman and Vice President
AGREED TO THIS 1st
DAY OF NOVEMBER, 1999
GOOD CATALOG COMPANY
By: /s/ James P. Steffensen
---------------------------------------
Name: James P. Steffensen
Title: President
8
Exhibits and Schedules not filed
<PAGE> 1
EXHIBIT 10.23
PROMISSORY NOTE
$7,816,875.00 November 1, 1999
FOR VALUE RECEIVED, the undersigned, Good Catalog Company, a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of Domain.com,
Inc. ("Lender"), on the earlier of November 1, 2002 or the date specified in the
Loan Agreement hereinafter described, at the office of the Lender, c/o StarTek,
Inc., 100 Garfield Street, 4th Floor, Denver, Colorado 80206 (or at such other
place as the holder hereof shall designate by a notice in writing to the
Borrower), the principal sum of SEVEN MILLION EIGHT HUNDRED SIXTEEN THOUSAND
EIGHT HUNDRED AND SEVENTY FIVE DOLLARS ($7,816,875.00) in lawful money of the
United States of America and in immediately available funds, and to pay interest
on the unpaid principal amount of such Loans, at such office, in like money and
funds, from the date of each Loan and until such Loan shall be paid in full, at
the rate per annum provided in the Loan Agreement.
The Lender is hereby authorized by the Borrower to endorse on the
schedule attached to this Note (or any continuation thereof) the amount of each
Loan made by the Lender to the Borrower under the Loan Agreement, the date such
Loan is made and the amount of each payment or prepayment of the principal of
such Loan received by the Lender; provided that any failure by the Lender to
make any such endorsement shall not affect the obligations of the Borrower
hereunder or under the Loan Agreement in respect of such Loan. Each such
endorsement by the Lender shall constitute evidence of the accuracy thereof,
absent manifest error.
This Note is one of the Notes referred to in the Loan Agreement dated
as of November 1, 1999 (said Agreement, as amended from time to time, herein
called the "Loan Agreement"), among the Borrower, The Reader's Digest
Association, Inc. and the Lender. This Note evidences Loans made by the Lender
to the Borrower under the Loan Agreement issued by Lender. Capitalized terms
used in this Note and not defined herein have the respective meanings assigned
to them in the Loan Agreement. This Note is a pari passu obligation of the
Borrower with the other Note referred to in the Loan Agreement and all payments
made hereunder shall be made on a pari passu basis with such other Note based on
the aggregate principal amount outstanding under this Note and such other Note
at the time.
Upon the occurrence of any Event of Default under the Loan Agreement,
the principal hereof and accrued interest hereon shall become, or may be
declared by the Agent under the Loan Agreement to be, forthwith due and payable
in the manner, upon the conditions and with the effect provided in the Loan
Agreement. The Borrower may at its option prepay all or part of the principal of
this Note before maturity upon the terms provided in the Loan Agreement.
<PAGE> 2
This Note shall be governed by, and shall be construed in accordance
with, the laws of the State of New York.
GOOD CATALOG COMPANY
By: /s/ James P. Steffensen
----------------------------
Name: James P. Steffensen
Title: President
2
<PAGE> 1
EXHIBIT 10.24
PROMISSORY NOTE
$2,030,565.67 Funding Date: October 22, 1999(year)
FOR VALUE RECEIVED, STARTEK USA, INC., a a Colorado corporation
("Maker"), promises to pay to the order of KEYCORP LEASING, A DIVISION OF KEY
CORPORATE CAPITAL INC. ("Holder"), the sum of TWO MILLION THIRTY THOUSAND FIVE
HUNDRED SIXTY FIVE DOLLARS AND SIXTY SEVEN CENTS ($2,030,565.67) in lawful money
of the United States of America (the "Principal"), with interest thereon as
hereafter provided ("Interest"), to be paid in the manner set forth herein. This
Note is executed pursuant to that certain security agreement (the "Security
Agreement") dated as of October 13, 1999 between Maker and Holder. Capitalized
terms used herein without definition shall have the meaning given them in the
Security Agreement.
1. Interest Rate; Place of Payment. Interest on the balance of the Principal
outstanding on this Note shall accrue from the Funding Date of this Note and
shall be due and payable at a fixed rate of six and sixty five hundredths
percent (6.65%) per annum (the "Interest Rate") which rate shall be immediately
and correspondingly adjusted (pursuant to 2(b) hereof) with each change in the
Actual Index (as hereinafter defined). Interest shall be calculated on the basis
of a 360-day year consisting of twelve 30-day months. Payment of the Principal
and Interest hereunder shall be made to Holder at P.O. Box 1865, Albany, New
York 12201-1865, or at such other place as Holder may designate from time to
time in writing. Holder reserves the right to require payment on this Note to be
made by wired federal funds or other immediately available funds.
2. Repayment Terms. (a) The Principal and Interest shall be due and payable in
forty-eight (48) consecutive monthly installments payable in arrears, each in an
amount equal to $48,295.38, commencing and payable on the the date which is one
(1) month after the Funding Date and on the same day of each month thereafter
(each, a "Note Payment Date"). In addition, Maker will pay a late payment charge
of five percent (5%) of any payment due hereunder that is not paid on or before
the date due hereunder.
(b) Make and Holder agree that each Note payment hereunder shall be
increased or decreased (but not below zero), as the case may be, by the Rate
Differential (as hereinafter defined) as follows: if, as of any Note Payment
Date, (i) the Rate Differential is greater than zero, the amount due on such
Note Payment Date shall be increased by such Rate Differential, and (ii) the
Rate Differential is less than zero, the amount of the Note Payment due on such
Note Payment Date shall be decreased by such Rate Differential.
(c) As used herein, the following terms shall have the respective
meanings indicated below:
(1) "Assumed Index" shall mean eight and twenty five
hundredths percent (8.25%).
(2) "Actual Index" shall mean, as of the date of
determination, the "prime rate" announced in The Wall Street
Journal, published on such day, or if The Wall Street Journal
is not published on such day, then the "prime rate" announced
in the most recently published edition of The Wall Street
Journal. If the Actual Index is no longer available, Holder
will choose a new index which is based upon comparable
information and will give Maker notice of such new "Actual
Index."
(3) "Daily Equivalent" shall mean, as of the date of
determination, the product of the following formula:
Daily Equivalent = Actual Index - Assumed Index X Net Investment Balance
----------------------------
360
(4) "Net Investment Balance" shall mean, as of the date of
determination, the outstanding balance (initially calculated
using the Assumed Index minus 160 basis points) reflected on
Holder's lease
Form No: R96-500.999 Page 1 of 4
<PAGE> 2
accounting system (which assumes a 360 day year consisting of
twelve 30 day months), for the Note Payment Date immediately
preceding such day or, if such day is a Note Payment Date, for
such Note Payment Date.
(5) "Rate Differential" shall mean, with respect to any Note
Payment Date, the sum of all Daily Equivalents (calculated on
the basis of a 360 day year consisting of twelve 30 day
months) for the 30 day month to which such Note Payment Date
relates.
3. Security. Payment of the Principal and Interest hereunder, and the
performance and observance by Maker of all agreements, covenants and provisions
contained herein, is secured by a first priority security interest in the
Collateral.
4. Prepayment. Except as contemplated by clause (3) of section 10 of the
Security Agreement, Maker may not prepay, in whole or in part, the principal
outstanding hereunder; provided, however, that commencing on the date following
the twelve month anniversary of the Funding Date, Maker may prepay, in whole but
not in part, the principal outstanding hereunder by paying to Holder such
outstanding principal, together with all accrued and unpaid interest thereon at
the Interest Rate in effect on the Funding Date, plus a prepayment premium
("Prepayment Premium") equal to a percentage of the outstanding principal
calculated as follows:
<TABLE>
<CAPTION>
Months Prepayment Premium
------ ------------------
<S> <C>
1-12 2%
13-24 1/2%**
25-48 0%
</TABLE>
** Notwithstanding the foregoing, in the event Maker prepays this Note in months
13-24, and the source of the proceeds for such prepayment is a secondary public
offering, Makers Prepayment Premium for such prepayment shall be 0%.
5. Transfer or Assignment. Holder may at any time assign or otherwise transfer
or negotiate this Note in whole or in part, without any notice to Maker. The
rights and obligations of Maker may not be assigned or delegated.
6. Application of Payments. Prior to an Event of Default, each payment received
on this Note shall be applied first to all costs of collection, then to unpaid
late payment charges (if any) and Prepayment Premium (if any) hereunder, then to
Interest as of the payment due date and the balance, if any, to the outstanding
Principal as of the date received. Upon the occurrence, and during the
continuance, of an Event of Default, any payments in respect of the Secured
Obligations and any proceeds of the Collateral when received by Holder in cash
or its equivalent, will be applied first to costs of collection and, thereafter,
in reduction of the Secured Obligations in such order and manner as Holder may
direct in its sole discretion, and Maker irrevocably waives the right to direct
the application of such payments and proceeds and acknowledges and agrees that
Holder shall have the continuing and exclusive right to apply any and all such
payments and proceeds in the Holder's sole discretion, notwithstanding any entry
to the contrary upon any of its books and records.
7. Events of Default. (a) Maker shall be in default if any of the following
happens (an "Event of Default"): (1) Maker fails to make any installment of the
Principal or Interest, or any other payment due and owing, under this Note
within ten (10) days after the same becomes due and payable; or (2) Maker fails
to perform any other obligation required to be performed by Maker under this
Note, the Security Agreement or any of the other Loan Documents for thirty (30)
days after written notice from Holder of such failure; or (3) any
representation, warranty or other statement by or on behalf of Maker in
connection with this Note is false or misleading in any material respect; or (4)
an Event of Default has occurred and is continuing under the Security Agreement.
(b) Notwithstanding anything to the contrary contained herein, upon the
occurrence of an Event of Default: (i) Holder may declare the entire outstanding
balance of the Principal, together with all accrued and
Form No: R96-500.999 Page 2 of 4
<PAGE> 3
unpaid Interest thereon, immediately due and payable without notice or demand
which amounts shall, together with all other sums due hereunder, accrue interest
from such acceleration until the date of actual payment at the Default Rate
(provided, however, that should there occur an Event of Default, and if a
voluntary or involuntary petition under the United States Bankruptcy Code is
filed by or against Maker while such default remains uncured, the entire
outstanding balance of the Principal automatically shall be accelerated and due
and payable with interest thereon at the Default Rate), and Holder may exercise
any and all of its remedies hereunder, under the other Loan Documents and under
Applicable Law. The remedies of Holder provided herein, in the Security
Agreement and under Applicable Law shall be cumulative and concurrent and may be
pursued singly, successively or concurrently at the sole discretion of Holder
and may be exercised as often as occasion therefor shall occur. The failure to
exercise, or any delay in the exercise of, any right or remedy shall in no event
be construed as a waiver, release or exhaustion of any such remedies.
8. Collection Costs. In addition to the Principal, Interest, Prepayment Premium
(if any), and late payment charges (if any), Maker shall pay Holder on demand,
and Holder shall be entitled to collect all costs and expenses of collection,
including, without limitation, reasonable attorneys' fees, incurred in
connection with enforcement of its rights and remedies hereunder and under the
other Loan Documents, the protection or realization of the Collateral or in
connection with Holder's collection efforts, or in connection with any
bankruptcy or other judicial proceeding, whether or not suit on this Note or any
foreclosure proceeding is filed. All such costs and expenses shall be payable on
demand and, until paid, shall be Secured Obligations secured by the security
interest granted under the Security Agreement and all other collateral, if any,
held by Holder as security for Maker's obligations under this Note.
9. Governing Law; Binding Agreement. The provisions of this Note shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns. THIS NOTE IS BEING DELIVERED IN THE STATE OF
NEW YORK AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAWS
PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION)
THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE
STATE OF NEW YORK.
10. More than One Signer. If more than one person or entity signs this Note as a
Maker, the obligations contained herein shall be deemed joint and several and
all references to "Maker" shall apply both jointly and severally.
11. General. Maker represents and warrants that this Note evidences a loan for
business or commercial purposes. Prior to signing this Note, Maker read and
understood the provisions hereof, and agrees to all terms and conditions
contained herein.
12. Waiver. MAKER AND ALL ENDORSERS, SURETIES, AND GUARANTORS HEREOF HEREBY
JOINTLY AND SEVERALLY WAIVE PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF
NON-PAYMENT OR DISHONOR, NOTICE OF INTENTION TO ACCELERATE THE MATURITY, NOTICE
OF PROTEST AND PROTEST OF THIS NOTE. HOLDER AND MAKER HEREBY EACH WAIVE THEIR
RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF OR RELATED TO THIS NOTE, THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION OR PROCEEDING TO
WHICH HOLDER OR MAKER MAY BE PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS, OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY ACTION, COUNTERCLAIM
OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY
OR ENFORCEABILITY, OF THIS NOTE OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER IS MADE KNOWINGLY, WILLINGLY AND VOLUNTARILY BY
HOLDER AND THE MAKER WHO EACH ACKNOWLEDGE THAT NO REPRESENTATIONS HAVE BEEN MADE
BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL
Form No: R96-500.999 Page 3 of 4
<PAGE> 4
BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THIS WAIVER SHALL APPLY
TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
NOTE AND THE OTHER LOAN DOCUMENTS.
13. Usury; Partial Invalidity. (a) At no time shall the Interest Rate (or the
Default Rate or other amounts paid or collected hereunder) exceed the highest
rate allowed by applicable law for this type of loan. Should Holder ever collect
interest at a rate that exceeds such applicable legal limit, such excess will be
credited to the Principal.
(b) Whenever possible, each provision of this Note shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited by or invalid under the laws of any
applicable jurisdiction, such provision, as to such jurisdiction, shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Note in any
other jurisdiction.
14. Notices. All notices and other communications under this Note shall be in
writing and shall be addressed: (i) if to Maker, 111 Havana Street, Denver, CO
80010; and (ii) if to Holder, KeyCorp Leasing, a Division of Key Corporate
Capital Inc., 54 State Street, Albany, New York 12207, Attention: Account
Manager, or such other address as either party hereto shall communicate to the
other party at its address specified above. All such notices and other
communications shall be deemed to have been duly given if delivered by hand,
overnight courier or if sent by certified mail, return receipt requested, to the
party to whom such notice is intended to be given, and shall be effective upon
receipt.
15. Funding Date. The Funding Date for this Note shall be the date on which
Holder disburses funds hereunder. TO THE EXTENT THE FUNDING DATE IS LEFT BLANK
ABOVE, OR DOES NOT REFLECT THE ACTUAL DATE THAT HOLDER DISBURSES FUNDS
HEREUNDER, MAKER HEREBY AUTHORIZES HOLDER TO WRITE IN THE CORRECT DATE AT THE
TIME OF DISBURSEMENT.
IN WITNESS WHEREOF, Maker, intending to be legally bound, has caused
this Note to be duly executed on the day and year first above written.
MAKER:
STARTEK USA, INC.
By: /s/ Dennis M. Swenson
---------------------------------
Name: Dennis M. Swenson
Title: Executive Vice President
STATE OF )
) ss.
COUNTY OF )
On this 21 (Day) day of Oct (Month), 99 (Year), before me the
subscriber personally appeared Dennis M. Swenson who being by me duly sworn, did
depose and say that (s)he resides at _____ County, State of Colo: that (s)he is
an officer of StarTek USA, Inc., the corporation described in and which executed
the foregoing instrument; and that (s)he signed his/her name thereto by order of
the Board of Directors of said corporation.
/s/ Deborah Hickson
- --------------------------------------
NOTARY PUBLIC
SEAL
My Commission Expires: 1-12-2002
Form No: R96-500.999 Page 4 of 4
Exhibits and Schedules not filed
<PAGE> 5
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement" or "Security Agreement")
dated as of October 13, 1999 is made by and between STARTEK USA, INC., a a
Colorado corporation having its chief executive office at 111 Havana Street,
Denver, CO 80010 (the "Borrower"), and KEYCORP LEASING, A DIVISION OF KEY
CORPORATE CAPITAL INC. and assigns, having an office at 54 State Street, Albany,
New York 12207 ("KCL").
W I T N E S S E T H:
1. Grant of Security Interest in the Equipment. In consideration of one or more
loans, advances or other financial accommodations at any time before, at or
after the date hereof, made or extended by KCL to or for the account of the
Borrower, directly or indirectly, as principal, guarantor or otherwise and to
secure the prompt payment and performance in full when due, whether by lapse of
time, acceleration or otherwise, of the Secured Obligations, the Borrower hereby
pledges, assigns, transfers hypothecates to KCL and grants to KCL a security
interest in, and acknowledges and agrees that this Agreement shall create a
continuing security interest in, all of Borrower's rights, title and interest in
and to the Collateral.
The Secured Obligations of the Borrower are absolute, irrevocable and
unconditional under any and all circumstances whatsoever and shall not be
subject to any right of set-off, counterclaim, deduction, defense or other right
which the Borrower may have for any reason against any vendor, supplier,
manufacturer, KCL or any other party. All obligations of Borrower hereunder
shall survive the expiration, cancellation or other termination of this
Agreement.
2. Definitions. Unless the context otherwise requires, as used in this
Agreement, the following terms shall have the respective meanings indicated
below and shall be equally applicable to both the singular and the plural forms
thereof:
"Alteration" shall have the meaning specified in Section 6 hereof.
"Applicable Law" shall mean all applicable Federal, state, local and foreign
laws, ordinances, judgments, decrees, injunctions, writs, rules, regulations,
orders, licenses and permits of any Governmental Authority.
"Authorized Signer" shall mean any officer of Borrower, set forth on an
incumbency certificate (in form and substance satisfactory to KCL) delivered by
Borrower to KCL, who is authorized and empowered to execute the Loan Documents.
"Certificate of Acceptance" shall mean a certificate of acceptance, in form and
substance satisfactory to KCL, executed and delivered by Borrower in accordance
with Section 3 hereof.
"Collateral" shall mean the Equipment and any and all substitutions,
replacements or exchanges therefor, and any and all proceeds (both cash and
non-cash) receivable or received from the sale, lease, license, collection, use,
exchange or other disposition of the Collateral, including insurance proceeds,
thereof (including, without limitation, claims of the Borrower against third
parties for Loss or Damage to any such collateral).
"Collateral Schedule" shall mean each collateral schedule now or hereafter
attached hereto and made a part hereof, in substantially the form of Schedule 1
hereto.
"Default" shall mean any event or condition which, with the passage of time or
the giving of notice or both, would constitute an Event of Default.
"Default Rate" shall mean an annual interest rate equal to the lesser of 18% or
the maximum interest rate permitted by Applicable Law.
"Equipment" shall mean an item or items of personal property which are described
on the Collateral Schedule, together with all replacement parts, additions and
accessories incorporated therein or affixed thereto including, without
limitation, any software that is a component or integral part of, or is included
or used in connection with, any Item of Equipment, but with respect to such
software, only to the extent of Borrower's interest therein, if any.
"Equipment Location" shall mean the location of the Equipment, as set forth on
Schedule 1, or such other location (approved in writing by KCL) as Borrower
shall from time to time specify in writing.
"Event of Default" shall have the meaning specified in Section 16 hereof.
Form No: 96-501.999 Page 1 of 11
<PAGE> 6
"GAAP" shall have the meaning specified in Section 2(g) hereof.
"Governmental Action" shall mean all authorizations, consents, approvals,
waivers, filings and declarations of any Governmental Authority, including,
without limitation, those environmental and operating permits required for the
ownership, lease, use and operation of the Equipment.
"Governmental Authority" shall mean any foreign, Federal, state, county,
municipal or other governmental authority, agency, board or court.
"Guarantor" shall mean any guarantor of the Secured Obligations.
"Installment(s)" shall mean the periodic payments due to repay the Note, and,
where the context hereof requires, all such additional amounts as may from time
to time be payable under any provision of the Loan Documents.
"Item of Equipment" shall mean each item of the Equipment.
"Liability" shall have the meaning set forth in Section 18 hereof.
"Loan Documents" shall mean, collectively, this Agreement, the Note, and all
other documents prepared by KCL and now or hereafter executed in connection
therewith.
"Lien" shall mean all mortgages, pledges, security interests, liens,
encumbrances, claims or other charges of any kind whatsoever, except the
security interest of KCL crated by this Agreement.
"Loss or Damage" shall mean any loss, theft, destruction, disappearance or any
condemnation, expropriation or requisition of or damage to any Item of
Equipment.
"Note" shall mean that certain Promissory Note in the original principal amount
of $2,030,565.67 executed in connection herewith, together with any extensions,
modifications, renewals, refinancings or other restructurings thereof.
"Secured Obligations" means all of the following obligations of Borrower,
whether direct or indirect, absolute or contingent, matured or unmatured,
originally contracted with KCL or another party, and now or hereafter owing to
or acquired in any manner partially or totally by KCL or in which KCL may have
acquired a participation, contracted by Borrower alone or jointly or severally:
(1) any and all indebtedness, obligations, liabilities, contracts, indentures,
agreements, warranties, covenants, guaranties, representations, provisions,
terms, and conditions of whatever kind, now existing or hereafter arising, and
however evidenced, that are now or hereafter owed, incurred or executed by
Borrower to, in favor of, or with KCL (including, without limitation, those as
are set forth or contained in, referred to, evidenced by, or executed with
reference to the Loan Documents, any letter of credit agreements, advance
agreements, indemnity agreements, guaranties, lines of credit, mortgage deeds,
security agreements, assignments, pledge agreements, hypothecation agreements,
instruments, and acceptance financing agreements), and including any partial or
total extension, restatement, renewal, amendment, and substitution thereof or
therefor; (2) any and all claims of whatever kind of KCL against Borrower, now
existing or hereafter arising, including, without limitation, any arising out or
in any way connected with warranties made by Borrower to KCL in connection with
any instrument purchased by KCL; and (3) any and all of KCL's fees, costs and
expenses related to the foregoing.
"Supplier" shall mean the manufacturer or the vendor of the Equipment, as set
forth on each Collateral Schedule.
"Term" shall mean the term of the Note.
"UCC" shall have the meaning set forth in Section 16(b)(ii) hereof. Where
applicable and except as otherwise defined herein, terms used in this Agreement
shall have the meaning assigned to them in the UCC.
"Upgrade" shall have the meaning specified in Section 8 hereof.
3. Delivery and Acceptance. Concurrently with execution of the Collateral
Schedule hereunder, Borrower shall execute and deliver to KCL a Certificate of
Acceptance for the Equipment described on such Collateral Schedule. KCL SHALL
HAVE NO OBLIGATION TO ADVANCE ANY FUNDS TO BORROWER UNLESS AND UNTIL KCL SHALL
HAVE RECEIVED A CERTIFICATE OF ACCEPTANCE RELATING TO THE EQUIPMENT EXECUTED BY
BORROWER. Such Certificate of Acceptance shall constitute Borrower's
acknowledgment that such Equipment (a) was received by Borrower, (b) is
satisfactory to Borrower in all respects, (c) is suitable for Borrower's
purposes, (d) is in good order, repair and condition, (e) has been installed and
operates properly, and (f) is subject to all of the terms and conditions of the
Loan Documents. Borrower's execution and delivery of a Certificate of Acceptance
shall be conclusive evidence as between KCL and Borrower that the Items of
Equipment described therein are in all of the foregoing respects satisfactory to
Borrower, and Borrower shall not assert any claim of any nature whatsoever
against KCL based on any of the foregoing matters;
Form No: 96-501.999 Page 2 of 11
<PAGE> 7
provided, however, that nothing contained herein shall in any way bar, reduce or
defeat any claim that Borrower may have against the Supplier or any other person
(other than KCL).
4. Payments. Borrower shall pay the Note on the terms set forth therein. All
Installments shall be payable when due whether or not Borrower has received any
additional notice that such Installments are due. All Installments shall be paid
to KCL at P.O. Box 1865, Albany, New York 12201-1865, or as otherwise directed
by KCL in writing.
5. Location; Inspection. The Equipment shall be delivered to the Equipment
Location and shall not be removed therefrom without KCL's prior written consent.
Borrower shall maintain possession and control of the Equipment at all times.
KCL shall have the right to enter upon the Equipment Location and inspect the
Equipment at any reasonable time. Borrower will promptly give written notice to
KCL of any change in the identity or location of any Item of Equipment which
might require new filings or other action to assure continued perfection of the
security interest of KCL granted hereby. The Borrower owns, and will continue to
own, all Equipment Locations except as otherwise indicated on Schedule 1.
6. Use; Alterations. Borrower shall use the Equipment only in the course of its
business for commercial purposes (and shall not permanently discontinue use of
the Equipment), and in compliance with Applicable law and the requirements of
any applicable insurance policies, and only in the manner for which it was
designed and intended and so as to subject it only to ordinary wear and tear.
Borrower shall comply with all Applicable Law with respect to the Equipment.
Borrower shall immediately notify KCL in writing of any existing or threatened
investigation, claim or action by any Governmental Authority in connection with
any Applicable Law or Governmental Action which could adversely affect the value
of the Equipment or the perfection or priority of the security interest of KCL
in the Collateral. Borrower shall not make any material alterations, additions,
modifications or improvements (each, an "Alteration") to the Equipment without
KCL's prior written consent; provided that Borrower, at its own expense, shall
make Alterations as may be required from time to time to meet the requirements
of Applicable Law or Governmental Action. All such Alterations immediately, and
without further act, shall be deemed to constitute Items of Equipment and fully
be subject to the security interest granted to KCL hereunder.
7. Repairs and Maintenance. Borrower, at Borrower's own cost and expense, shall
(a) keep the Equipment in good repair, operating condition and working order and
in compliance with the manufacturer's specifications and Borrower's standard
practices (but with respect to the latter, in no event less than industry
practices) and (b) enter into and keep in full force and effect during the Term
hereof a maintenance agreement with the manufacturer of the Equipment, or a
manufacturer-approved maintenance organization, to maintain, service and repair
the Equipment as otherwise required herein. Upon KCL's request, Borrower shall
furnish KCL with an executed copy of any such maintenance agreement. An
alternate source of maintenance may be used by Borrower with KCL's prior written
consent. Borrower, at its own cost and expense and within a reasonable period of
time, shall replace any part of any Item of Equipment that is unfit or
unavailable for use from any cause (whether or not such replacement is covered
by the aforesaid maintenance agreement) with a replacement part of the same
manufacture, value, remaining useful life and utility as the replaced part
immediately preceding the replacement (assuming that such replaced part was in
the condition required by this Agreement). Such replacement part shall be free
and clear of all Liens and upon installation, attachment or incorporation in, on
or into such Item of Equipment, such replacement part immediately, and without
further act, shall be deemed to constitute an Item of Equipment and fully be
subject to the security interest granted to KCL hereunder. If KCL repossesses
the Equipment pursuant to its rights under this Agreement and at the time, in
the opinion of KCL, any Item of Equipment fails to meet the standards set forth
above, Borrower agrees to pay on demand all costs and expenses incurred in
connection with repairing or restoring such Item of Equipment so as to meet such
standards and/or assembling and delivering such Item of Equipment.
8. Equipment Upgrades/Attachments. In addition to the requirements of Section 6
hereof, Borrower, at its own expense, may from time to time add or install
upgrades or attachments (each, an "Upgrade") to the
Form No: 96-501.999 Page 3 of 11
<PAGE> 8
Equipment; provided, that such Upgrades are readily removable without causing
material damage to the Equipment, and do not materially adversely affect the
fair market value of the Equipment. Any such Upgrades shall be owned by
Borrower, shall become subject to the security interest crated by this Agreement
and shall be kept free and clear of all Liens so long as attached to the
Equipment.
9. Lease and Assignments. (a) WITHOUT KCL'S PRIOR WRITTEN CONSENT, BORROWER
SHALL NOT (i) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF, THE
EQUIPMENT OR ANY INTEREST THEREIN, OR ASSIGN OR DELEGATE ITS RIGHTS OR
OBLIGATIONS UNDER THE LOAN DOCUMENTS, OR (ii) LEASE OR LEND THE EQUIPMENT TO, OR
PERMIT THE EQUIPMENT TO BE USED BY, ANYONE OTHER THAN BORROWER.
(b) KCL, at any time with or without notice to Borrower, may sell,
transfer, grant participations in, assign and/or grant a security interest in
any or all of KCL's right, title and interest in and to the Loan Documents, or
in KCL's security interest in any Item of Equipment. In any such event, any such
purchaser, transferee, assignee or secured party shall have and may exercise all
of KCL's rights hereunder or thereunder, and BORROWER SHALL NOT ASSERT AGAINST
ANY SUCH PURCHASER, TRANSFEREE, ASSIGNEE OR SECURED PARTY ANY DEFENSE,
COUNTERCLAIM OR OFFSET THAT BORROWER MAY HAVE AGAINST KCL. Borrower agrees that
upon written notice to Borrower of any such sale, transfer, assignment and/or
security interest, Borrower shall acknowledge receipt thereof in writing and
shall comply with the reasonable directions and demands of such purchaser,
transferee, assignee or secured party.
(c) Subject to the foregoing, all covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, KCL and its
successors and permitted assigns and Borrower and its successors and permitted
assigns.
10. Loss of or Damage to Equipment. In the event of Loss or Damage to any Item
of Equipment, Borrower shall immediately notify KCL of same and, at the option
of KCL, as specified in a notice from KCL to Borrower, Borrower shall within
thirty (30) days following such Loss or Damage: (1) place such Item of Equipment
in good condition and repair, in accordance with the terms hereof; (2) replace
such Item of Equipment with replacement equipment (acceptable to KC) in as good
condition and repair, and with the same or better fair market value as such
replaced Item of Equipment immediately preceding the Loss or Damage (assuming
that such replaced Item of Equipment was in the condition required by this
Agreement), which replacement equipment shall immediately, and without further
act, be deemed to constitute Items of Equipment and be fully subject to this
Agreement as if originally pledged as Collateral hereunder and shall be free and
clear of all Liens; or (3) pay to KCL any unpaid Installments and other charges
due prior to the payment date specified in such notice plus an amount, with
respect to an Item of Equipment, equal to the pro rata portion of the
Installments attributable to such item of Equipment under the Loan Documents
after discounting such Installments to present worth as of the payment date
specified in such notice on the basis of a per annum rate of discount equal to
three percent (3%) from the respective dates upon which such Installments would
have been paid but for the operation of this clause, together with interest on
such amount at the Default Rate from the payment date specified in such notice
to the date of actual payment.
Upon KCL's receipt of the payment required under clause (3) above, KCL
shall release its security interest in such Item of Equipment. If Borrower
replaces the Item of Equipment pursuant to clause (2) above, such replacement
shall be deemed to constitute an Item of Equipment and be fully subject to this
Agreement and the security interest granted to KCL hereunder, as if originally
pledged hereunder. If Borrower fails to either restore or replace the Item of
Equipment pursuant to clauses (1) or (2) above, respectively, Borrower shall
make the payment under clause (3) above.
11. Insurance. (a) Borrower, at Borrower's own cost and expense, shall maintain
(1) insurance against all risks of physical loss or damage to the Equipment
(which shall include theft and collision for Equipment consisting of motor
vehicles, and shall not exclude loss resulting from flood or earthquake) in any
amount not less
Form No: 96-501.999 Page 4 of 11
<PAGE> 9
than the full replacement value thereof and (2) comprehensive public liability
insurance including blanket contractual liability for personal and bodily injury
and property damage in an amount satisfactory to KCL.
(b) All insurance policies required hereunder shall (1) require 30
days' prior written notice to KCL of cancellation or material change in coverage
(any such cancellation or change, as applicable, not being effective until the
thirtieth (30th) day after the giving of such notice); (2) name "KeyCorp and its
subsidiaries and affiliated companies, including KeyCorp Leasing, a Division of
Key Corporate Capital Inc., their successors and assigns" as sole loss payee
under the property insurance policies; (3) not require contributions from other
policies held by KCL; (4) waive any right of subrogation against KCL; (5) in
respect of any liability of KCL, except for the insurers' salvage rights in the
event of a Loss or Damage, waive the right of such insurers to set-off, to
counterclaim or to any other deduction, whether by attachment or otherwise, to
the extent of any monies due KCL under such policies; (6) not require that KCL
pay or be liable for any premiums with respect to such insurance covered
thereby; (7) be in full force and effect throughout any geographical areas at
any time traversed by any Item of Equipment; and (8) contain breach of warranty
provisions providing that, in respect of the interests of KCL in such policies,
the insurance shall not be invalidated by any action or inaction of Borrower or
any other person (other than KCL) and shall insure KCL regardless of any breach
or violation of any warranty, declaration or condition contained in such
policies by Borrower or by any other person (other than KCL). Prior to funding
the Note, and thereafter not less than 15 days prior to the expiration dates of
the expiring policies theretofore delivered pursuant to this Section, Borrower
shall deliver to KCL a duplicate original of all policies (or in the case of
blanket policies, certificates thereof issued by the insurers thereunder) for
the insurance maintained pursuant to this Section.
(c) Proceeds of insurance with respect to physical loss or damage to
the Equipment shall be applied, at the option of KCL, to repair or replace the
Equipment or to reduce or satisfy (as applicable) the Secured Obligations.
12. Taxes. Borrower shall pay when due any and all taxes, fees, levies, imposts,
duties, assessments and public and private charges levied or assessed on or with
respect to the Equipment, on the use thereof, or on this Agreement or any of the
other Loan Documents.
13. KCL's Right to Perform for Borrower. If Borrower fails to perform any of its
obligations contained in the Loan Documents, KCL may (but shall not be obligated
to) itself perform such obligations, and the amount of the reasonable costs and
expenses of KCL incurred in connection with such performance, together with
interest on such amount from the date paid by KCL until the date repaid by
Borrower to KCL, at the Default Rate, shall be payable by Borrower to KCL upon
demand. No such performance by KCL shall be deemed a waiver of any rights or
remedies of KCL, or be deemed to cure the default of Borrower hereunder. All
such sums and amounts so expended by KCL shall be repayable by the Borrower
immediately without notice or demand, shall constitute additional Secured
Obligations and shall bear interest from the date said amounts are expended at
the Default Rate.
14. Delinquent Payments; Interest. If Borrower fails to pay any of the
Installments on the date when the same becomes due, Borrower shall pay to KCL a
late charge equal to five percent (5%) of such delinquent amount. Such late
charge shall be payable by Borrower upon demand by KCL and shall be deemed part
of the Secured Obligations. In no event shall such late charge exceed the
maximum amounts permitted under Applicable Law.
15. Personal Property; Liens; Warrant of Title. The Borrower is, and will
continue to be, the sole owner of the Equipment, free from any Lien. KCL and
Borrower hereby agree that the Equipment is, and shall at all times remain,
personal property notwithstanding the fact that any Item of Equipment may now
be, or hereafter become, in any manner affixed or attached to real property or
any improvements thereon. Borrower shall at all times keep the Equipment free
and clear from all Liens, and the Borrower shall obtain and deliver to KCL (to
be recorded at the Borrower's expense) from each person having a Lien on any
Equipment Location waivers of any Lien which such person might have or hereafter
obtain or claim with respect to the Equipment. Borrower shall (i) give KCL
Form No: 96-501.999 Page 5 of 11
<PAGE> 10
immediate written notice of any Lien on the Collateral, (ii) promptly, at
Borrower's sole cost and expense, take such action as may be necessary to
discharge any such Lien, and (iii) indemnify and hold KCL, on an after-tax
basis, harmless from and against any loss or damage caused by any such Lien.
Borrower warrants that it has good, valid and marketable title to the Equipment,
and that (i) the security interest in the Collateral granted to KCL hereunder,
when properly perfected by filing, shall constitute a valid and perfected first
priority security interest in the Collateral and, (ii) the Collateral is not
subject to, and Borrower will not grant or permit to exist, any Liens or claims
on or against the Collateral, whether senior, superior, junior, subordinate or
equal to the security interest granted to KCL hereby, or otherwise.
16. Events of Default; Remedies. (a) As used herein, the term "Event of Default"
shall mean any of the following events: (1) Borrower fails to pay any
Installment within ten (10) days after the same becomes due and payable; (2)
Borrower breaches any of its other obligations under any of the Loan Documents
and fails to cure the same within thirty (30) days after written notice thereof;
(3) any dissolution, termination of existence, merger, consolidation, change in
controlling ownership of Borrower or Guarantor, or if Borrower or Guarantor is a
natural person, the death or incompetence of Borrower or Guarantor; (4) Borrower
or any Guarantor fails to pay its debts generally as they become due or becomes
insolvent or makes an assignment for the benefit of its creditors; (5) a
receiver, trustee, conservator or liquidator of Borrower or any Guarantor or of
all or a substantial part of Borrower's or such Guarantor's assets is appointed
with or without the application or consent of Borrower or such Guarantor,
respectively; (6) a petition is filed by or against Borrower or any Guarantor
under any bankruptcy, insolvency or similar legislation; (7) Borrower or any
Guarantor violates or fails to perform any provision of either the Loan
Documents or any other loan, lease or credit agreement or any acquisition or
purchase agreement with KCL or any other party; (8) Borrower violates or fails
to perform any covenant or representation made by Borrower in the Loan
Documents; (9) any representation or warranty made herein or in any of the Loan
Documents, certificates, financial statements or other statements furnished to
KCL (or KCL's parent, subsidiaries or affiliates) shall prove to be false or
misleading in any material respect as of the date on which the same was made;
(10) there is a material adverse change in Borrower's or any Guarantor's
financial condition; (11) Borrower shall fail to satisfy any final judgment
rendered against the Borrower by any court of competent jurisdiction where the
judgment is material in amount as to the Borrower or materially impairs the
financial or business condition of the Borrower; (12) any of the liens created
or granted hereby, or intended to be granted or created hereby, to KCL shall
fail to be valid, first priority perfected liens subject to no prior or equal
lien; or (13) the receipt by KCL of a notice to creditors with regard to a bulk
transfer by the Borrower pursuant to Article 6 of the Uniform Commercial Code;
or (14) an additional Lien attaches to the Equipment or the Equipment becomes
subject to risk of seizure or forfeiture.
(b) (i) Upon the occurrence of an Event of Default, KCL, at its option,
may declare any or all of the Secured Obligations, including, without
limitation, the Note, to be immediately due and payable, without demand or
notice to Borrower or any Guarantor. The obligations and liabilities accelerated
thereby shall bear interest (both before and after any judgment) until paid in
full at the Default Rate. Should there occur a Default and if a voluntary or
involuntary petition under the United States Bankruptcy Code is filed by or
against Borrower while such Default remains uncured, the Secured Obligations
automatically shall be accelerated and due and payable and interest thereon at
the Default Rate automatically shall apply as of the date of the first
occurrence of the Default, without any notice, demand or action of any type on
the part of KCL (including any action evidencing the acceleration or imposition
of the Default Rate). The fact the KCL has, prior to the filing of the voluntary
or involuntary petition under the United States Bankruptcy Code, acted in a
manner which is inconsistent with the acceleration and imposition of the Default
Rate shall not constitute a waiver of this provision or estop KCL from asserting
or enforcing KCL's rights hereunder.
(ii) Furthermore, upon the occurrence of an Event of Default, KCL shall
have, in addition to the rights and remedies provided herein, in the other Loan
Documents or bylaw, the rights and remedies of a secured party under the Uniform
Commercial Code under the laws of the State of New York (the "UCC") (regardless
of whether the UCC is the law of the jurisdiction where the rights and remedies
are asserted and regardless of whether the UCC applies to the affected
Collateral), and further KCL may do any one or more of the following as KCL in
its
Form No: 96-501.999 Page 6 of 11
<PAGE> 11
sole discretion may elect, with or without judicial process or the aid and
assistance of others: (i) enter and remain on any premises on which any of the
Equipment may be located and, without resistance or interference by the
Borrower, without liability to KCL by reason of such entry or taking possession,
take possession of the Equipment, (ii) prepare for sale and sell or otherwise
dispose of any Equipment on any such premises, (iii) require the Borrower to
assemble and make available to KCL at Borrower's expense any Equipment at any
place and time designated by KCL, (iv) remove any Equipment from any such
premises for the purpose of effecting sale or other disposition thereof, (v)
without demand and without advertisement, notice, hearing or process of law, all
of which the Borrower hereby waives, at any place and time or times, sell and
deliver any or all Equipment held by or for it at public or private sale, by one
or more contracts, in one or more parcels, for cash, upon credit or otherwise,
at such prices and upon such terms as KCL deems advisable, in its sole
discretion, or (vi) lease all or any portion of the Equipment on such terms and
conditions as KCL in it sole discretion may determine. In addition to all other
sums due KCL hereunder, the Borrower shall pay KCL all reasonable costs and
expenses incurred by KCL, including reasonable attorneys' fees and court costs,
in obtaining or liquidating the Collateral, in enforcing payment of Secured
Obligations, or in the prosecution or defense of any action or proceeding by or
against KCL or the Borrower concerning any matter arising out of or connected
with the Loan Documents, the Collateral or the Secured Obligations, including
without limitation any of the foregoing arising in, arising under or related to
a case under the United States Bankruptcy Code.
(iii) Borrower's waivers regarding disposition of the equipment. IF AN
EVENT OF DEFAULT OCCURS, BORROWER HEREBY WAIVES ANY DEFENSES, RIGHTS, OFFSETS OR
CLAIMS AGAINST KCL ARISING OUT OF THE REPOSSESSION, RETENTION, SALE, MANNER OR
METHOD OF SALE OR DISPOSITION OF ANY ITEMS OF EQUIPMENT. THE BORROWER AGREES
THAT ANY REQUIREMENT OF REASONABLE NOTICE SHALL BE MET IF SUCH NOTICE IS
PERSONALLY SERVED ON OR MAILED, POSTAGE PREPAID, TO THE BORROWER IN ACCORDANCE
WITH THE NOTICE PROVISIONS HEREOF AT LEAST 10 DAYS BEFORE THE TIME OF SALE OR
OTHER EVENT GIVING RISE TO THE REQUIREMENT OF SUCH NOTICE. KCL SHALL NOT BE
OBLIGATED TO MAKE ANY SALE OR OTHER DISPOSITION OF THE EQUIPMENT REGARDLESS OF
NOTICE HAVING BEEN GIVEN. KCL MAY BE THE PURCHASER AT ANY SUCH SALE. THE
BORROWER HEREBY WAIVES ALL OF ITS RIGHTS OF REDEMPTION FROM ANY SUCH SALE. KCL
MAY POSTPONE OR CAUSE THE POSTPONEMENT OF THE SALE OF ALL OR ANY PORTION OF THE
EQUIPMENT BY ANNOUNCEMENT AT THE TIME AND PLACE OF SUCH SALE, AND SUCH SALE MAY,
WITHOUT FURTHER NOTICE, BE MADE AT THE TIME AND PLACE TO WHICH THE SALE WAS
SCHEDULED. NONE OF KCL'S RIGHTS OR REMEDIES HEREUNDER ARE INTENDED TO BE
EXCLUSIVE OF, BUT EACH SHALL BE CUMULATIVE AND IN ADDITION TO, ANY OTHER RIGHT
OR REMEDY REFERRED TO HEREUNDER OR OTHERWISE AVAILABLE TO KCL OR ITS ASSIGNS AT
LAW OR IN EQUITY, AND MAY BE PURSUED SINGLY, SUCCESSIVELY OR CONCURRENTLY AT THE
SOLE DISCRETION OF LENDER AND MAY BE EXERCISED AS OFTEN AS OCCASION THEREFOR
SHALL OCCUR. THE FAILURE TO EXERCISE, OR ANY DELAY IN THE EXERCISE OF, ANY RIGHT
OR REMEDY SHALL IN NO EVENT BE CONSTRUED AS A WAIVER, RELEASE OR EXHAUSTION OF
ANY SUCH REMEDIES. NO EXPRESS OR IMPLIED WAIVER BY KCL OF ANY EVENT OF DEFAULT
SHALL CONSTITUTE A WAVER OF ANY OTHER EVENT OF DEFAULT OR A WAIVER OF ANY OF
KCL'S RIGHTS UPON THE REOCCURRENCE OF ANY SUCH EVENT OF DEFAULT.
(c) The Borrower hereby authorizes KCL, upon the occurrence and during
the continuation of any Event of Default hereunder, at KCL's option to adjust,
compromise and settle any losses under any insurance afforded, and the Borrower
does hereby irrevocably constitute KCL and each of its designees, as its
attorney-in-fact, with full power and authority, upon the occurrence and during
the continuation of any Event of Default hereunder, to effect such adjustment,
compromise and/or settlement and to endorse any drafts drawn by an insurer of
the Equipment or any part thereof and to do everything necessary to carry out
such purposes and to receive and receipt for any unearned premiums due under
policies of such insurance; but unless or until KCL elects to adjust, compromise
or settle losses as aforesaid, such insurance proceeds shall be subject to the
lien and security interest of KCL hereunder.
Form No: 96-501.999 Page 7 of 11
<PAGE> 12
(d) Upon the occurrence, and during the continuance, of an Event of
Default hereunder, any payments in respect of the Secured Obligations and any
proceeds of the Collateral, when received by KCL in cash or its equivalent, will
be applied first to costs of collection and, thereafter, in reduction of the
Secured Obligations in such order and manner as KCL may direct in it sole
discretion, and the Borrower irrevocably waives the right to direct the
application of such payments and proceeds and acknowledges and agrees that KCL
shall have the continuing and exclusive right to apply any and all such payments
and proceeds in KCL's sole discretion, notwithstanding any entry to the contrary
upon any of its books and records. The Borrower shall remain liable to KCL for
any deficiency. Any surplus remaining after the full payment and satisfaction of
the Secured Obligations shall be returned to the Borrower or to whomsoever a
court of competent jurisdiction shall determine to be entitled thereto.
(e) To the extent that any of the Secured Obligations are now or
hereafter secured by property other than the Collateral, or by a guarantee,
endorsement or property of any other person, then KCL also shall have the right
to proceed against such other property, guarantee or endorsement upon the
occurrence of a default hereunder, and KCL shall have the right, in its sole
discretion, to determine which rights, lines, security interests or remedies KCL
shall at any time pursue, relinquish, subordinate or modify, without in any way
affecting the Secured Obligations or any of KCL's rights under this Agreement.
17. Notices. All notices and other communications hereunder shall be in writing
and shall be transmitted by hand, overnight courier or certified mail (return
receipt requested), postage prepaid. Such notices and other communications shall
be addressed to the respective party at the address set forth above or at such
other address as any party may from time to time designate by notice duly given
in accordance with this Section. Such notices and other communications shall be
effective upon the earlier of receipt or three (3) days after mailing if mailed
in accordance with the terms of this section.
18. General Indemnification. Borrower shall pay, and shall indemnify and hold
KCL and its directors, officers, employees, counsel, agents and advisors
harmless on an after-tax basis from and against, any and all liabilities, causes
of action, claims, suits, penalties, damages, losses, costs or expenses
(including attorneys' fees), obligations, liabilities, demands and judgments,
and Liens, of any nature whatsoever (collectively, a "Liability") arising out of
or in any way related to: (a) the Loan Documents (b) a failure to comply fully
with Applicable Law and (c) Borrower's failure to perform any covenant, or
breach of any representation or warranty under the Loan Documents; provided,
that the foregoing indemnity shall not extend to the Liabilities to the extent
resulting solely from the gross negligence or willful misconduct of KCL.
Borrower shall promptly deliver to KCL (i) copies of any documents received from
the United States Environmental Protection Agency or to any state, county or
municipal environmental or health agency concerning the Equipment or its
operation and (ii) copies of any documents submitted by Borrower or any of its
subsidiaries to the United States Environmental Protection Agency or any state,
county or municipal environmental or health agency concerning the Equipment or
its operation. Borrower further agrees to indemnify KCL against and hold it
harmless from all present and future stamp, transfer, documentary and other such
taxes, levies, fees, assessments or other charges made by any jurisdiction by
reason of the execution, delivery, performance and enforcement of the Loan
Documents.
19. Severability; Captions. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
Applicable Law. If, however, any provision of this Agreement or any of the Loan
Documents shall be prohibited or unenforceable in any jurisdiction, it shall, as
to such jurisdiction, be deemed modified to conform to the minimum requirements
of such law, or if for any reason it is not deemed so modified, it shall be
ineffective only to the extent of such prohibition or unenforceability without
affecting the remaining provisions hereof, and any such prohibition or
unenforceability shall not invalidate or render unenforceable such provision in
any other jurisdiction. Captions are intended for convenience or reference only,
and shall not be construed to define, limit or describe the scope or intent of
any provisions hereof.
20. Financial and Other Data. During the Term hereof, Borrower shall furnish
KCL, as soon as available and in any event within 120 days after the last day of
each fiscal year, financial statements of Borrower and each
Form No: 96-501.999 Page 8 of 11
<PAGE> 13
Guarantor, in each case compiled, reviewed or audited by an independent
certified public accountant as required by KCL. Borrower shall also furnish such
other financial reports, information or data (including federal and state income
tax returns and quarterly or interim financial statements compiled, reviewed or
audited by an independent certified public accountant if required by KCL) as KCL
may reasonably request from time to time.
21. [RESERVED]
22. Representations and Warranties of Borrower. Borrower represents and warrants
that: (a) Borrower is a corporation duly organized and validly existing in good
standing under the laws of the state of its incorporation; (b) the execution,
delivery and performance of this Agreement and all related instruments and
documents: (1) have been duly authorized by all necessary corporate action on
the part of Borrower, (2) do not require the approval of any stockholder,
partner, trustee or holder of any obligations of Borrower except such as have
been duly obtained, and (3) do not and will not contravene any law, governmental
rule, regulation or order now binding on Borrower, or the charter or by-laws of
Borrower, or contravene the provisions of, or constitute a default under, or
result in the creation of any lien or encumbrance upon the property of Borrower
under, any indenture, mortgage, contract or other agreement to which Borrower is
a party or by which it or its property is bound; (c) the Loan Documents, when
entered into, will constitute legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with the terms thereof; (d) there are
no pending actions or proceedings to which Borrower is a party, and there are no
other pending or threatened actions or proceedings of which Borrower has
knowledge, before any court, arbitrator or administrative agency, which, either
individually or in the aggregate, would adversely affect the financial condition
of Borrower, or the ability of Borrower to perform its obligations under the
Loan Documents; (e) Borrower is not in default under any obligation for the
payment of borrowed money, for the deferred purchase price of property or for
the payment of any installments under any lease agreement which, either
individually or in the aggregate, would have the same such effect; (f) under the
laws of the state(s) in which the Equipment is to be located, the Equipment
consists solely of personal property and not fixtures; (g) the financial
statements of Borrower (copies of which have been furnished to KCL) have been
prepared in accordance with generally accepted accounting principles
consistently applied ("GAAP"), and fairly present Borrower's financial condition
and the results of its operations as of the date of and for the period covered
by such statements, and since the date of such statements there has been no
material adverse change in such conditions or operations; (h) the address stated
above is the chief place of business and chief executive office, or in the case
of individuals, the primary residence, of Borrower; (i) Borrower does not
conduct business under a trade, assumed or fictitious name, except as set forth
in Schedule 1; (j) this Agreement creates a valid first priority security
interest in the Collateral securing payment and performance of the Secured
Obligations and all filings and other action necessary to perfect such security
interest have been taken or shall be promptly taken; (k) Borrower has filed or
has caused to have been filed all Federal, state and local tax returns which, to
the knowledge of Borrower, are required to be filed, and has paid or caused to
have been paid all taxes as shown on such returns or on any assessment received
by it, to the extent that such taxes have become due, unless and to the extent
only that such taxes, assessments and governmental charges are currently
contested in good faith and by appropriate proceedings by Borrower and adequate
reserves therefor have been established as required under GAAP and, to the
extent Borrower believes it advisable to do so, Borrower has set up reserves
which are believed by Borrower to be adequate for the payment of additional
taxes for years which have not been audited by the respective tax authorities;
(l) except as previously disclosed in writing to KCL, neither Borrower nor any
of its officers or directors (if a corporation), partners (if a partnership) or
members or managers (if a limited liability corporation) has, directly or
indirectly, any financial interest in the Supplier; and (m) Borrower has
conducted comprehensive review and assessment of the Borrower's computer
applications and made inquiry of the Borrower's key suppliers, vendors and
customers with respect to the "year 2000 problem" (that is, the risk that
computer applications may not be able to properly perform date-sensitive
functions after December 31, 1999) and based on that review and inquiry, the
Borrower does not believe the year 2000 problem will result in a material
adverse change in the Borrower's business condition (financial or otherwise),
operations, properties or prospects, or ability to perform the obligations of
Borrower under this Agreement; (n) Borrower is not in violation of any
Applicable Law, the violation of which would have a material adverse effect on
the conduct of its business, and Borrower has obtained any and all licenses,
permits, franchises or other governmental authorizations
Form No: 96-501.999 Page 9 of 11
<PAGE> 14
necessary for the ownership of its properties and the conduct of its business;
and (o) none of the proceeds of the loan made by KCL will be used, directly or
indirectly, by Borrower for the purpose of purchasing or carrying, or for the
purpose of reducing or retiring any indebtedness which was originally incurred
to purchase or carry any "margin stock" within the meaning of Regulation U (12
CFR Part 221), of the Board of Governors of the Federal Reserve System (herein
called "margin stock") or for any other purpose which might make the
transactions contemplated herein a "purpose credit" within the earning of
Regulation U or cause this Agreement to violate any other regulation of the
Board of Governors of the Federal Reserve System or the Securities Exchange Act
of 1934 or the Small Business Investment Act of 1958, as amended, or any rules
or regulations promulgated under any of such statutes.
23. Further Covenants of Borrower. The Borrower further covenants and agrees
that it will not change its legal name, be a party to a merger, consolidation or
other change in structure or use a trade name in its business without at least
30 days' prior written notice to KCL; and shall execute and deliver to KCL (to
by filed at Borrower's expense) all UCC statements as may be required by KCL in
connection with such event.
24. Miscellaneous. Time is of the essence with respect to this Agreement. ANY
FAILURE OF KCL TO REQUIRE STRICT PERFORMANCE BY BORROWER OR ANY WAIVER BY KCL OF
ANY PROVISION HEREIN SHALL NOT BE CONSTRUED AS A CONSENT OR WAIVER OF ANY
PROVISION OF THIS AGREEMENT. None of the Loan Documents may be amended except by
a writing signed by KCL and Borrower. This Agreement will be binding upon KCL
only if executed by a duly authorized officer or representative of KCL at KCL's
principal place of business as set forth above. This Agreement and all other
Loan Documents shall be executed on Borrower's behalf by Authorized Signers of
Borrower. The Borrower hereby waives presentment, notice of dishonor and protest
of all instruments included in or evidencing any Secured Obligations, and all
other notices and demands whatsoever (except as expressly provided herein). THIS
AGREEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAWS PROVISION OR RULE (WHETHER OF THE STATE OF
NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
25. Jury Trial Waiver. KCL AND BORROWERS HEREBY EACH WAIVE THEIR RESPECTIVE
RIGHTS TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING
OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION OR PROCEEDING TO
WHICH KCL OR BORROWER MAY BE PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS, OR OTHERWISE INCLUDING WITHOUT LIMITATION ANY ACTION, COUNTERCLAIM
OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY
OR ENFORCEABILITY, OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY
PROVISION HEREOF OR THEREOF. THIS WAIVER IS MADE KNOWINGLY, WILLINGLY AND
VOLUNTARILY BY KCL AND THE BORROWER WHO EACH ACKNOWLEDGE THAT NO REPRESENTATIONS
HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN
ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
26. More than One Borrower. If more than one person or entity executes this
Agreement, each of the other Loan Documents, and all addenda or other documents
executed in connection herewith or therewith, as "Borrower," the obligations of
"Borrower" contained herein and therein shall be deemed joint and several and
all references to "Borrower" shall apply both individually and jointly.
27. Entire Agreement. This Agreement together with the other Loan Documents,
collectively constitute the entire understanding or agreement between KCL and
Borrower with respect to the financing of the Equipment,
Form No: 96-501.999 Page 10 of 11
<PAGE> 15
and there is no understanding or agreement, oral or written, which is not set
forth herein or therein. This Agreement shall not be modified except by the
written agreement of KCL and Borrower.
28. Execution in Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
29. Power of Attorney; UCC Filings. BORROWER SHALL EXECUTE AND DELIVER TO KCL
CONCURRENTLY WITH THE EXECUTION OF THIS AGREEMENT, AND AT ANY TIME FROM TIME TO
TIME THEREAFTER, ALL FINANCING STATEMENTS, AMENDMENTS TO FINANCING STATEMENTS,
CHATTEL MORTGAGES, ASSIGNMENTS, AND ALL OTHER INSTRUMENTS, IN FORM SATISFACTORY
TO KCL, AND TAKE ALL OTHER ACTION AS KCL MAY REASONABLY REQUIRED, TO PERFECT AND
CONTINUE PERFECTED, MAINTAIN THE PRIORITY OF OR PROVIDE NOTICE OF KCL'S SECURITY
IN THE COLLATERAL BORROWER HEREBY APPOINTS KCL, OR ITS ASSIGNEE, AND ANY OF
KCL'S OR ASSIGNEE'S OFFICERS OR EMPLOYEES AS ITS TRUE AND LAWFUL ATTORNEY IN
FACT, IRREVOCABLY AND COUPLED WITH AN INTEREST, TO EXECUTE AND FILE ON BEHALF OF
BORROWER ALL UCC FINANCING STATEMENTS WHICH IN KCL'S SOLE DISCRETION ARE
NECESSARY OR PROPER TO SECURE KCL'S INTEREST IN THE EQUIPMENT IN ALL APPLICABLE
JURISDICTIONS. Borrower hereby ratifies, to the extent permitted by law, all
that KCL shall lawfully and in good faith do or cause to be done by reason of
and in compliance with this paragraph.
Lender: Borrower:
KEYCORP LEASING, STARTEK USA, INC.
A DIVISION OF KEY CORPORATE CAPITAL INC.
By: /s/ KRISTA L. SPADA By: /s/ DENNIS M. SWENSON
-------------------------------- -------------------------------
Name: Krista L. Spada Name: Dennis M. Swenson
Title: Regional Business Title: Executive Vice President
Unit Manager
Form No: 96-501.999 Page 11 of 11
Exhibits and Schedules not filed
<PAGE> 16
AMENDMENT NO. 01
TO SECURITY AGREEMENT
THIS AMENDMENT dated as of October 13, 1999 amends that certain
Security Agreement dated as of October 13, 1999 (the "Agreement") between
KEYCORP LEASING, A DIVISION OF KEY CORPORATE CAPITAL INC., a lender, and STARTEK
USA, INC., as Borrower. Unless otherwise specified herein, all capitalized terms
shall have the meanings ascribed to them in the Agreement.
BORROWER'S FINANCIAL COVENANTS. Borrower hereby covenants with Lender as
follows:
On a continuing basis, from the date of the Promissory Note and
Security Agreement until the date on which Lessee's obligations thereunder are
fully paid and performed, Lessee hereby covenants and agrees that:
1. Current Ratio: Lessee shall maintain a ratio of current assets to
current liabilities in excess of 1.25 to 1.00; calculated at end of
each June and December. Current Ratio is defined as Current Assets less
all intercompany transactions, with the exception of StarTek, Inc.
transactions less prepaid expenses divided by Current Liabilities.
2. Operating Cash Flow to Fixed Charge Ratio: Lessee shall maintain either
of the following:
Option A:
A ratio of Operating Cash Flow to Total Fixed Charges of not less than
3.00 to 1.00; calculated semi-annually on a rolling four quarters basis
with NO proforma or other income tax (actual) subtraction. Operating
Cash flow defined as net income BEFORE taxes, and exclusive of
extraordinary gains, gains on asset sales, and other income, plus
depreciation and amortization plus interest expense, plus lease expense
less dividends, and distributions.
Option B:
A ratio of Operating Cash flow to Total Fixed Charges of not less than
2.00 to 1.00; calculated semi-annually on a rolling four quarter basis
with a proforma or other income tax (actual) subtraction. Operating
Cash flow defined as net income AFTER taxes, and exclusive of
extraordinary gains, gains on asset sales, and other income, plus
depreciation and amortization plus interest expense, plus lease expense
less dividends, and distributions.
<PAGE> 17
EXCEPT AS EXPRESSLY MODIFIED HEREBY, ALL OF THE TERMS, COVENANTS AND
CONDITIONS OF THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT AND ARE IN ALL
RESPECTS HEREBY RATIFIED AND AFFIRMED.
IN WITNESS WHEREOF, Lender and Borrower have executed this Amendment as
of the date first written above.
LENDER: BORROWER:
KEYCORP LEASING, STARTEK USA, INC.
A DIVISION OF KEY CORPORATE CAPITAL INC.
By: /s/ KRISTA L. SPADA By: /s/ DENNIS M. SWENSON
----------------------------- ----------------------------
Name: Krista L. Spada Name: Dennis M. Swenson
Title: Regional Business Title: Executive Vice President
Unit Manager
Form No.: 96-508.999 Page 2 of 2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARTEK,
INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 1999
AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 INCLUDED IN STARTEK, INC.'S FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 20,745
<SECURITIES> 25,936
<RECEIVABLES> 19,009
<ALLOWANCES> 774
<INVENTORY> 2,592
<CURRENT-ASSETS> 69,527
<PP&E> 32,412
<DEPRECIATION> 10,752
<TOTAL-ASSETS> 101,782
<CURRENT-LIABILITIES> 33,928
<BONDS> 2,539
0
0
<COMMON> 139
<OTHER-SE> 64,556
<TOTAL-LIABILITY-AND-EQUITY> 101,782
<SALES> 0
<TOTAL-REVENUES> 138,852
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 112,969
<LOSS-PROVISION> 385
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 12,698
<INCOME-TAX> 4,745
<INCOME-CONTINUING> 7,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,953
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
