<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997
REGISTRATION NO. 333-23021
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FULCRUM DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 05-0482699 5961
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER) (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER)
</TABLE>
4321 FULCRUM WAY NE
RIO RANCHO, NM 87124-8447
TELEPHONE: 505-867-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. MICHAEL G. LEDERMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FULCRUM DIRECT, INC.
4321 FULCRUM WAY NE
RIO RANCHO, NM 87124-8447
TELEPHONE: 505-867-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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FREDERICK TANNE, ESQ. JULIA L. DAVIDSON, ESQ.
KIRKLAND & ELLIS COOLEY GODWARD LLP
153 EAST 53RD STREET 5 PALO ALTO SQUARE, 4TH FLOOR
NEW YORK, NEW YORK 10022 PALO ALTO, CA 94306
TELEPHONE: 212-446-4800 TELEPHONE: 415-857-0663
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------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE
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===============================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per share...... 3,450,000 Shares $10.00 $34,500,000 $10,455
===============================================================================================================
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(1) Includes 450,000 shares that the Underwriters have the option to purchase
from the Company to cure overallotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Paid in connection with the original filing of this Registration Statement
on March 10, 1997. Pursuant to Rule 457(o), no additional Registration Fee
is required to be paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT REFERRING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 8, 1997
PROSPECTUS
- ----------------
3,000,000 SHARES
[FULCRUM DIRECT LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being offered by the
Company.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion relating to the factors to be considered in determining the initial
public offering price. The Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol FLCM.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=================================================================================================
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE> 3
[PICTURES TO COME]
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Fulcrum Direct(TM), After the Stork(R), Playclothes(TM), Storybook
Heirlooms(R), zoe(TM), Little Feet(TM), SunSkins(TM), Just for Kids(R) and
Discount Direct(TM) are trademarks of the Company. Trade names and trademarks of
other companies appearing in this Prospectus are the property of their
respective holders.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. The Common Stock offered hereby
involves a high degree of risk. See "Risk Factors." The Company uses a 52- to
53-week fiscal year ending the Saturday nearest to December 31, and all
references in this Prospectus to "fiscal year" refer to the year ended on that
day. The fiscal years ended December 28, 1996 and December 30, 1995 both include
52 weeks. The fiscal year ended December 31, 1994 refers to the period from
inception on March 16, 1994 through December 31, 1994. As used herein, the term
"pro forma" gives effect to the Storybook Acquisition (as defined herein).
THE COMPANY
Fulcrum Direct, Inc. ("Fulcrum" or the "Company") is a leading catalog
retailer of branded apparel, shoes and accessories for children, teens and young
women up to 24 years of age. The Company's strategy is to capitalize on the
large opportunity in the children's and teen apparel catalog markets by building
a portfolio of distinct brands targeting discrete market segments. The Company
believes that its portfolio of brands combined with strong customer
relationships, provide unique cross marketing opportunities that allow the
Company to increase customer lifetime value and decrease customer acquisition
costs. As of June 30, 1997, the Company's housefile included 4.4 million names
of which 1.4 million had made at least one purchase from one of the Company's
brands in the last 24 months.
Since 1994, Fulcrum has introduced eight brands through in-house
development, acquisition or strategic alliance. Each of these brands target
specific style and price point segments of the children's and teen apparel
markets. The Company's first brand, After the Stork, offers value priced, basic
children's apparel made primarily of natural fibers. In contrast, the
Playclothes brand presents value priced, everyday children's novelty outfits
targeting specialty store shoppers. The Company's most recent acquisition,
Storybook Heirlooms, presents an upscale array of dressy outfits and accessories
for girls up to age 12. The Company's other children's brands include Little
Feet, a catalog offering a wide assortment of shoes and hosiery, SunSkins, a
line of sun protective clothing, Discount Direct, the Company's direct mail
liquidation vehicle for all of its brands, and a test catalog with Sears Roebuck
and Co. ("Sears"). In August 1997, the Company entered the teen market with zoe,
which offers popular teen branded apparel to Generation Y girls and young women,
ages 10 to 24 years.
Fulcrum intends to continue growing its portfolio of distinct children's
and teen brands by: maximizing the potential of its brands through targeted
marketing, mailing and merchandising strategies; developing new brands that
appeal to its growing customer base through in-house brand creation and
strategic alliances; developing new markets and product categories that leverage
the Company's large housefile and build strong customer relationships; and
pursuing strategic acquisitions. Since 1995, the Company has made significant
investments in its management team and infrastructure, which it believes
position the Company to support substantial growth.
Fulcrum markets its products to the large U.S. population of 95 million
children, teens and young adults up to age 24 who account for more than
one-third of the U.S. population. Because less than 3% of the $27 billion
children's apparel purchases were made by catalog, as compared to nearly 10% of
the $85 billion women's apparel purchases, the Company believes that the
children's apparel catalog market has been underserved and undermailed.
Furthermore, the Company believes that since women are largely responsible for,
or significantly influence, children's and teen apparel purchase decisions, the
penetration for children's and teen apparel catalog sales should, over time,
grow to more closely approximate the penetration of women's catalog apparel
purchases.
The Company's executive offices are located at 4321 Fulcrum Way NE, Rio
Rancho, New Mexico 87124-8447. Fulcrum's telephone number is (505) 867-7000, its
toll-free order number is (888) 563-FLCM (563-3526), and its e-mail address is
[email protected].
3
<PAGE> 5
THE OFFERING
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Common Stock offered by the Company.......... 3,000,000 shares
Common Stock to be outstanding after the
Offering................................... 11,076,648 shares(1)
Use of proceeds.............................. To repay $10.0 million principal amount of
subordinated debt, plus accrued interest, to
purchase trademarks in connection with certain
of the Company's brands for approximately
$1.75 million, to purchase the Company's
headquarters, call center and distribution
center for approximately $2.5 million in cash,
plus assumed liabilities, to fund potential
acquisitions and for working capital and
general corporate purposes. Approximately $3.2
million of the estimated $24.2 million net
proceeds of the Offering will be paid to
certain officers and directors of the Company
and entities affiliated with them in
connection with the purchase by the Company of
the trademarks and its headquarters. See
"Certain Relationships and Related
Transactions."
Proposed Nasdaq National Market symbol....... FLCM
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i)
765,000 shares of Common Stock reserved for issuance under the Company's
Management Team Equity Plan (the "Option Plan"), of which 404,350 shares
were subject to options outstanding as of June 30, 1997 at a weighted
average exercise price of $5.50 per share and (ii) warrants to purchase
1,576,810 shares of Common Stock outstanding as of June 30, 1997 at a
weighted average exercise price per share of $2.32. See "Capitalization,"
"Management -- Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND PER CATALOG DATA)
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PERIOD OF
MARCH 16, FISCAL YEAR ENDED SIX MONTHS ENDED
(INCEPTION) ------------------------------------------ --------------------------------------
THROUGH PRO FORMA PRO FORMA
DECEMBER 31, DECEMBER 30, DECEMBER 28, DECEMBER 28, JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996 1996(1) 1996 1997 1997(1)
------------ ------------ ------------ ------------- ----------- ----------- -----------
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................ $ 11,997 $ 28,581 $ 36,457 $67,405 $16,815 $ 23,111 $38,074
Gross profit................ 6,910 15,370 20,891 36,730 9,290 13,661 21,630
Income (loss)from
operations................ 293 1,057 843(2) 1,870(2) (402) (4,915)(2) (5,195)(2)
Income (loss) before
cumulative effect of
change in accounting
principle................. 91 320 406 310 (280) (5,124) (5,886)
Cumulative effect of change
in accounting
principle(3).............. -- -- -- -- -- (1,802) (1,802)
Net income (loss)(3)........ $ 91 $ 320 $ 406(2) $ 310(2) $ (280) $ (6,926)(2) $(7,688)(2)
======= ======= ======== ======= ======= ======== =======
Pro forma net loss(3)....... $ (41) $ (189) $ (755)(2) $ (851)(2) $ (590) $ (6,926)(2) $(7,688)(2)
======= ======= ======== ======= ======= ======== =======
Net income (loss) per common
and common equivalent
share before cumulative
effect of change in
accounting
principle(3)(5)........... $ 0.02 $ 0.04 $ (0.02)(2) $ (0.03)(2) $ (0.07) $ (0.62)(2) $ (0.59)(2)
======= ======= ======== ======= ======= ======== =======
Cumulative effect of change
in accounting principle
per common and common
equivalent share(3)....... -- -- -- -- -- $ (0.22) $ (0.18)
Net income (loss) per common
and common equivalent
share(3)(5)(6)............ $ 0.02 $ 0.04 $ (0.02)(2) $ (0.03)(2) $ (0.07) $ (0.84)(2) $ (0.77)(2)
======= ======= ======== ======= ======= ======== =======
Pro forma net loss per
common and common
equivalent share(3)(5).... $ (0.01) $ (0.03) $ (0.16)(2) $ (0.14)(2) $ (0.11) $ (0.84)(2) $ (0.77)(2)
======= ======= ======== ======= ======= ======== =======
Weighted average number of
common and common
equivalent shares
outstanding(4)............ 5,476 5,781 8,266 9,931 7,708 8,294 9,959
CONSOLIDATED SUMMARY
OPERATING DATA:
Total catalogs mailed..... 11,083(6) 14,841 15,544(7) 24,657 6,078 14,051(2) 20,963(2)
Net revenues per catalog
($ per catalog)........ $ 1.08(6) $ 1.93 $ 2.35 $ 2.73 $ 2.77 $ 1.64(2) $ 1.82(2)
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PRO FORMA PRO FORMA
DECEMBER 31, JANUARY 12, JANUARY 1, JANUARY 1, JUNE 30,
1994 1996 1997 1997(1) 1997(1)
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Housefile names(8)..... 710 1,021 3,040 4,228 4,388
Active customers(9).... 347 471 1,049 1,320 1,395
</TABLE>
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JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(10)
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CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents............................................................ $ 4,727 $14,687
Working capital...................................................................... 15,212 25,172
Total assets......................................................................... 59,874 77,284
Long-term debt, net of current portion............................................... 30,915 28,129
Total stockholders' equity........................................................... 13,190 41,706
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(1) Pro forma combined financial and operating information was derived from the
Unaudited Pro Forma Statements of Operations of the Company and gives
effect to the Storybook Acquisition and the June Whitney Investment (as
hereinafter defined), as if such transactions had occurred at the beginning
of the period presented. See "Unaudited Pro Forma Statements of
Operations."
(2) Includes nonrecurring Playclothes start up expenses of $338 and $2,116
before taxes for the fiscal year ended December 28, 1996 and the six months
ended June 30, 1997, respectively. Specifically, a significant portion of
the 1997 expenses relate to the mailing of approximately 3.9 million
catalogs mailed to test the Playclothes housefile. Such catalogs have been
excluded here for purposes of comparison. See Note 2.p. of Notes to
Consolidated Financial Statements.
(3) As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs in connection with the Storybook Acquisition. Storybook
has historically followed a policy of expensing such costs as incurred and,
while practices may vary, the Company has decided to conform to Storybook's
practices and expense such costs as incurred. The pro forma net loss and
net loss per common and common equivalent share represent those amounts as
if the new accounting policy had been applied in all the periods presented.
See Note 2.i. of Notes to Consolidated Financial Statements.
(4) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income per common and
common equivalent share.
(5) Calculated after deducting Preferred Stock dividends of $60 and $583 for
fiscal 1995 and fiscal 1996, respectively. Prior to December 28, 1996, all
shares of Preferred Stock were called or converted to Common Stock.
(6) Includes catalogs mailed by, and net revenues (unaudited) of, the Company's
predecessor for the period January 1, 1994 through March 15, 1994. Net
revenues during this period were $934.
(7) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.
(8) Housefile names include both historical customers and catalog inquirers,
but excludes the Just for Kids list of 3.4 million names (which has not
been validated by the Company or added to its housefile).
(9) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.
(10) As adjusted to reflect the sale of 3,000 shares of Common Stock offered
hereby (the "Offering") at an assumed initial public offering price of
$9.00 per share and application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' overallotment option. See "Description of Capital
Stock," "Underwriting" and Notes to Consolidated Financial Statements.
5
<PAGE> 7
RECENT DEVELOPMENTS
As part of Fulcrum's strategy to build a portfolio of brands it has
recently developed new brands, completed a series of acquisitions and financings
and is testing a strategic alliance, as described below.
zoe. In August 1997, the Company mailed its first zoe catalog targeting
Generation Y girls, ages 10 to 24. zoe features a broad assortment of popular
branded basic and fashionable apparel and accessories. The Company believes that
zoe will leverage the Company's existing customer relationships and provide
significant growth opportunities. See "Risk Factors -- Brand Development and
Strategic Alliance Risks."
Sears Strategic Alliance. In June 1997, the Company and Sears arranged to
test market certain of the Company's brands to select individuals from the Sears
20 million name customer file, who are not existing customers of the Company.
Pursuant to this arrangement, the Sears catalogs mailed by the Company will be
substantially similar to the Company's catalogs, but will have a distinct cover
with the Sears logo. Pending the results of such test, the Company and Sears may
enter into a definitive strategic alliance, although there can be no assurance
that such tests will be successful or that the Company and Sears will enter into
any such strategic alliance. See "Risk Factors -- Brand Development and
Strategic Alliance Risks."
Storybook Acquisition. In June 1997, the Company completed the acquisition
of substantially all of the capital stock of Storybook Heirlooms, Inc.
("Storybook") for $15.0 million (the "Storybook Acquisition"). Pursuant to the
Storybook Acquisition, the Company also acquired the Just For Kids brand and
customer list, which it may test in 1998. The success of the Storybook
Acquisition will depend primarily on the Company's ability to successfully
integrate and consolidate Storybook, which will require substantial management,
financial and other resources and may pose risks with respect to sales, customer
service and market share. See "Risk Factors -- Integration of Storybook
Acquisition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Whitney Financing. In June 1997, the Company completed a private placement
(the "June Whitney Investment") of $10.0 million in subordinated debt with the
Whitney Subordinated Debt Fund ("WSDF") and affiliates of Arnold Greenberg and
Patrick K. Sullivan, directors of the Company, and $10.0 million of Common Stock
with Whitney Equity Partners ("WEP") and affiliates of Messrs. Greenberg and
Sullivan. The private placement also included the sale of warrants to purchase
200,000 shares of Common Stock to WSDF and affiliates of Messrs. Greenberg and
Sullivan. Additionally, the Company is obligated to issue warrants to purchase
up to 200,000 additional shares of Common Stock to such parties in the event
that the subordinated debt is not repaid in full as of certain dates through
December 1998.
Playclothes Acquisition. In December 1996, the Company completed the
acquisition of the Playclothes brand name and related customer information (the
"Playclothes Acquisition") from a subsidiary of The Walt Disney Company ("The
Walt Disney Company") for $1.2 million plus the assumption of customer return
liabilities estimated at $350,000. The assets acquired as part of the
Playclothes Acquisition included (i) all proprietary rights in the Playclothes
brand name, (ii) the Playclothes customer list, (iii) a Canadian wholesale and
license agreement, (iv) the right to mail Fulcrum's catalogs to The Disney
Catalog's customers during 1997 and (v) certain immaterial inventory and fixed
assets. The Company will have no right to mail its catalogs to The Disney
Catalog customer list after 1997, but may continue to mail its catalogs to those
customers that have made purchases from the Company and are therefore included
in the Company's housefile. In January 1997, the Company mailed its first
version of the remerchandised and repositioned Playclothes catalog, which
contained products specifically designed by the Company's design team. The
Company believes that the remerchandised and repositioned Playclothes catalog is
substantially different from the Playclothes catalog as distributed by the prior
owners in that it does not contain any of the products previously offered.
Additionally, the remerchandised and repositioned Playclothes catalog reflects
numerous pricing and style changes implemented by the Company. The success of
the Playclothes Acquisition
6
<PAGE> 8
will depend primarily on the Company's ability to develop and market the
Playclothes brand and product line, which will be largely dependent on the
Company's ability to understand the needs and predict the response of the
existing Playclothes customers, as well as its ability to attract new customers
and to integrate the Playclothes product line into the Company's facilities and
distribution system. In addition, all expenses incurred by the Company in the
repositioning of the Playclothes brand and the reactivation of Playclothes
customers, have been expensed by the Company as incurred, which may result in
certain expenses being recognized in advance of related revenues. See "Risk
Factors -- Development and Integration of the Playclothes Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes to Consolidated Financial Statements.
Fulcrum Brands and Fulcrum Properties Purchases. Immediately following
consummation of the Offering, the Company will exercise an option to purchase
all of the assets of Fulcrum Brands L.P., a Delaware limited partnership
indirectly controlled by Mr. Lederman, the Company's Chairman and Chief
Executive Officer ("Brands"), consisting of certain of the brand trademarks used
by the Company, for aggregate consideration totaling approximately $1.75
million. A portion of the net proceeds of the Offering will be utilized to fund
such purchase. In addition, subject to the consummation of the Offering, the
Company plans to use a portion of the net proceeds of the Offering to purchase
the headquarters, call center and distribution center owned by Fulcrum
Properties L.P., a Delaware limited partnership whose partners include certain
directors and officers of the Company and is indirectly controlled by Mr.
Lederman ("Properties"), for aggregate consideration totaling approximately $2.5
million plus the assumption of $5.6 million of secured debt and related interest
rate swaps. The option and purchase prices for Brands and Properties were
negotiated and determined by disinterested members of the Board (Messrs. Newton,
Unger, Sullivan and Greenberg as they relate to Brands, and Messrs. Unger and
Newton as they relate to Properties). See "Use of Proceeds" and "Certain
Relationships and Related Transactions."
7
<PAGE> 9
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as those discussed elsewhere in this
Prospectus.
Integration of Storybook Acquisition. The integration and consolidation of
Storybook will require substantial management, financial and other resources and
may pose risks with respect to sales, customer service and market share. For
example, the Company will need to successfully relocate its call center and
distribution center to Rio Rancho, New Mexico. The Storybook Acquisition is
significantly larger than any acquisition the Company has previously made, and
there can be no assurance in this regard or that the Company will not experience
difficulties with customers, personnel or other factors. Additionally, there can
be no assurance that the anticipated benefits of the Storybook Acquisition,
including without limitation, expected cost savings, revenue enhancement and
margin improvement, will be realized or that a combination of the Company and
Storybook will be successful. See "Recent Developments -- Storybook
Acquisition."
Development and Integration of the Playclothes Acquisition. In December
1996, the Company completed the Playclothes Acquisition. In January 1997, the
Company mailed its first version of the remerchandised and repositioned
Playclothes catalog. The success of the Playclothes Acquisition will depend
primarily on the Company's ability to continue to develop and market the
Playclothes product line, which will be largely dependent on the Company's
ability to understand the needs and predict the response of the existing
customers of Playclothes, as well as its ability to attract new customers and to
integrate the Playclothes product line into the Company's facilities and
distribution systems. In addition, all expenses incurred by the Company in the
repositioning of the Playclothes brand and the reactivation of Playclothes
customers, shall be expensed by the Company as incurred, which may result in
certain expenses being recognized in advance of the related revenues. The
Company made a substantial investment during the second half of 1996 and the
first half of 1997 to expand its facilities and build its employee base, in
advance of publishing and mailing its first Playclothes catalog. There can be no
assurance that the Company can develop and market a successful Playclothes
catalog, attract new customers or successfully integrate the Playclothes brand
into its current operations. Any failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Recent Developments -- Playclothes Acquisition."
Brand Development and Strategic Alliance Risks. The Company has recently
launched a catalog under the zoe brand name and has arranged with Sears to test
catalogs under the Sears brand name. The creation and development of new brands
and the launch of new catalogs through strategic alliances require substantial
management, financial and other resources and may pose risks with respect to
sales, customer service and market share. There can be no assurance that such
tests will be successful or will result in any catalog launches, and there can
be no assurance that any such launches will be successful or result in enhanced
revenues or operating results. The Company expects significantly lower gross
margins will be associated with revenues from zoe as it consists of popular
third-party branded products, which are typically associated with lower margins
than the proprietary branded products primarily sold in the Company's other
catalogs. In addition to the Sears arrangement, the Company intends to test
catalogs under other brand names through strategic alliances. There can be no
assurance that the Company will identify suitable strategic partners, that any
tests of catalogs under new brands will be successful, that the Company will be
able to enter into definitive agreements for strategic alliances or that the
Company's partners will perform their obligations under any such agreements. See
"Business -- Fulcrum's Portfolio of Brands."
Seasonal and Quarterly Fluctuations. The Company's business is subject to
seasonal fluctuations. Given the historical seasonality of the Company's
business, the Company anticipates that a significant portion of its net revenues
will be derived from the first and fourth quarters of each fiscal year. As a
result, the Company expects its sales and results of operations generally to be
lower in the second and
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third quarters than in the first and fourth quarters of each fiscal year, which
include Easter, Back-to-school and Holiday purchases. The Company's quarterly
results may fluctuate as a result of numerous factors, including the timing,
quantity and cost of catalog mailings, the response rates to such mailings, the
timing of merchandise deliveries, market acceptance of the Company's merchandise
(including new merchandise categories or products introduced), the mix, pricing
and presentation of products offered and sold, the hiring and training of
additional personnel, the timing of other revenues such as integrated program
and mail list revenues, the timing of inventory writedowns, currency rate
fluctuations, integration of acquisitions and related expenses, the incurrence
of other operating costs and factors beyond the Company's control, such as
general economic conditions and actions of suppliers and competitors.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarter. There can be no assurance that the Company will achieve or
maintain profitability in any future period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fixed Cost Structure. The Company believes that its success depends
predominately on the success of its catalog operations. Catalog mailings entail
substantial paper, postage, merchandise acquisition and human resource costs,
including costs associated with catalog development and increased inventories,
virtually all of which are incurred prior to the mailing of each catalog. As a
result, the Company is not able to adjust the costs being incurred in connection
with a particular mailing to reflect the actual performance of the catalog. In
addition, the Company continues to expand its facilities and operations based on
planned growth.
Response Rate Fluctuations. Response rates to the Company's mailings, and
sales generated by such mailings, can be affected by factors such as customer
preferences, economic conditions, the timing and mix of catalog mailings, the
proportion of prospect mailing, and changes in the merchandise mix, some of
which may be outside the Company's control. The Company has historically
experienced fluctuations in the response rates to its catalog mailings and
expects to continue to experience such fluctuations in the future. For example,
in the first half of fiscal 1997, response rates decreased as a result of the
Company's decision to circulate widely the remerchandised and repositioned
Playclothes catalog to test the newly acquired Playclothes customer list and to
expand the After the Stork customer base. Any inability of the Company to
accurately target the appropriate segment of its market or to achieve adequate
response rates could result in lower sales and lower margins. If, for any
reason, the Company were to experience a significant shortfall in anticipated
revenue from a particular mailing or growth does not occur as planned, the
Company's business, financial condition and results of operations would be
disproportionately and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fashion Trends and Industry Risks. The Company believes that its success
depends, in part, on the Company's ability to anticipate the fashion tastes of
its customers and to offer merchandise that appeals to their preferences on a
timely and affordable basis. The fashion tastes of the Company's customers are
expected to change frequently, and the failure of the Company to anticipate,
identify or react to changes in styles, trends or brand preferences of its
customers could lead to, among other things, excess inventories and price
markdowns. In addition, merchandising misjudgments could adversely affect the
Company's image with its customers. Any of these factors could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Merchandising and Product Design."
Merchandise Returns. As part of its customer service commitment, the
Company maintains an unconditional return policy which allows customers to
return any children's merchandise, at any time and for any reason, regardless of
merchantable condition. The Company is developing its return policy for zoe. The
Company maintains reserves consistent with historical experience in its
financial statements for anticipated merchandise returns. Because the Company's
reserves are based on historical return rates, there can be no assurance that
the introduction of new merchandise in existing catalogs, the introduction of
new catalogs, changes in the merchandise mix, the introduction of catalogs in
international markets, introduction of new distribution channels or other
factors, will not cause actual returns to exceed return reserves. Prior to June
1997, Japanese customers who wished to
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return merchandise had to ship such merchandise to the Company in New Mexico. In
the second half of 1997, the Company is testing a third-party call and return
center in Tokyo, Japan. The Company believes that this will result in an
increased merchandise return rate for Japanese sales. Merchandise returns have
not had a material adverse effect on the Company's business, financial condition
and results of operations to date. However, any significant increase in
merchandise returns or merchandise returns that exceed the Company's allowance
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Ability to Manage and Sustain Growth; Possible Future Acquisitions. The
recent growth in the Company's revenue and operating income has resulted largely
from increases in the volume of catalogs the Company mails and the number of
products included in its catalogs, increases in response rates, the introduction
and acquisition of new brands and strategic alliances. This growth has placed
significant demands on the Company's management, administrative, operational and
financial resources and has required the Company to devote substantial
management and financial resources to building its infrastructure. The Company's
future growth, if any, is dependent in large part on its ability to acquire new
customers at a reasonable cost. There can be no assurance that the Company will
continue to grow or effectively manage growth. The Company may, when and if the
opportunity arises, acquire other businesses involved in activities or having
service and product lines that are compatible with the Company's business,
although the Company has no understanding, agreement or arrangement to make any
such acquisitions currently. Any acquisition opportunities will require the
devotion of substantial management resources and, potentially, capital
expenditures. Furthermore, any such acquisitions will be subject to the many
risks inherent in the integration of new business enterprises into the Company's
existing operations. There can be no assurance that any acquisition
opportunities will be realized within the time frames and budgets contemplated
or at all, or that they will yield anticipated benefits. If any acquisitions are
not realized within the planned time frames and budgets, or do not yield
anticipated benefits, they could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that any acquisitions completed will be successfully integrated into
the Company's operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
International Operations. The Company recently introduced its catalogs to
the Japanese market. Gross revenues from Japan, on a pro forma basis reflecting
the Storybook Acquisition, accounted for 11.5%, 19.1% and 11.4% of gross
revenues in fiscal 1995, fiscal 1996 and the six months ended June 30, 1997,
respectively. Fluctuations causing the value of the U.S. dollar to increase
relative to foreign currency have in the past and may in the future have a
material adverse effect on the Company's business, financial condition and
results of operations. During the six months ended June 30, 1997, the Company
experienced a decline in net revenues from Japan, which was primarily the result
of adverse Japanese currency fluctuations. Over the long term, the Company
intends to increase its catalog mailings in Japan and may consider entering
other international markets as well. The Company expects net revenues from Japan
as a percentage of net revenues to continue to fluctuate from period to period
in part as a result of currency fluctuations. The Company's business is subject
to risks generally associated with doing business abroad, such as foreign
government regulations, economic conditions, currency fluctuations, duties and
taxes, political unrest and disruptions or delays in shipments. These factors,
among others, could influence the Company's ability to sell its merchandise in
international markets. If any such factors were to render the conduct of the
business in a particular country undesirable or impracticable, there could be a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the majority of the Company's sales are
derived from the U.S., and most of the Company's current information on buying
patterns and customer preferences are based on its customers in the U.S. As a
result, predicting foreign consumer demand may be more difficult for the Company
than predicting U.S. consumer demands. There can be no assurance that the
Company's merchandise or marketing efforts will be successful in foreign
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Growth Strategy."
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Catalog Distribution. The Company attempts to deliver its catalogs to its
customers at timely seasonal intervals. The distribution of such catalogs is
performed by the Company's third-party printers. As a result, the timely
distribution of such catalogs may be affected by factors beyond the Company's
control. In the past, the Company has experienced disruptions in the mailing of
catalogs and minor postal delays, which resulted in revenue shortfalls. The
Company may realize such delays and disruptions in the future. Failure of the
Company to deliver catalogs on a timely basis could affect the demand for the
Company's products and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Other Revenue Risk. The Company currently derives significant revenues from
integrated programs through which the Company distributes the marketing and
promotional materials of other companies to its customers. In addition, the
Company rents its customer lists to other catalog and consumer product
companies. There are no significant incremental costs associated with such
revenues, which directly result in improved operating results for the Company.
There can be no assurance that the Company will continue its integrated programs
or that the Company will continue to rent its customer lists. The failure to
continue such programs could result in a decline in revenues and have a
disproportionate impact on the Company's operating results.
Order Fulfillment. The Company's ability to provide exceptional customer
service and successfully fulfill orders depends, to a large extent, on the
efficient and uninterrupted operation of its call center, distribution center,
management information systems and on the timely performance of third parties,
including shipping companies and the U.S. Postal Service. In early 1997, the
Company consolidated the majority of its outbound shipping with the U.S. Postal
Service, but the Company also continues to utilize several private shippers as
well. There can be no assurance that the Company will receive adequate service
from the U.S. Postal Service or such private shipping services. Any material
disruption or slowdown in the Company's order processing or fulfillment systems
resulting from telephone down times, electrical outages, mechanical problems,
human error or accidents, strikes, work slowdowns, fire, natural disasters or
comparable events could cause delays in the Company's ability to receive and
distribute orders and could cause orders to be lost or to be shipped or
delivered late. As a result, customers may cancel orders or refuse to receive
goods due to late shipments, which could result in a reduction of net revenues
and could mean increased administrative and shipping costs as well as increased
inventory. Disruption in the Company's ability to fulfill its orders on a timely
basis could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Customer Service and
Fulfillment."
Fluctuations in Postage and Paper Expenses. While the Company has
historically passed on to customers the costs of overnight and ground delivery
of merchandise, it has not passed on, and does not intend to pass on, the costs
of catalog mailings and paper to its customers. Material increases in paper or
catalog delivery costs or the inability to pass on the costs of overnight and
ground delivery of merchandise could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Suppliers and Raw Materials."
Dependence on Key Personnel. The Company believes that its success depends
upon the efforts and abilities of its senior management team including Michael
G. Lederman, the Company's Chairman and Chief Executive Officer, and Scott A.
Budoff, the Company's President and Chief Operating Officer. The loss of one or
more of its key employees could have a material adverse effect on the Company.
Several of the Company's key employees have working relationships with Messrs.
Lederman and Budoff that predate their tenure with the Company. The departure of
either of Mr. Lederman or Mr. Budoff could result in the departure of additional
key employees. The Company has entered into employment agreements with Messrs.
Lederman and Budoff which provide for, among other things, the Company to be a
beneficiary of $1.0 million of life insurance benefits with respect to each of
Messrs. Lederman and Budoff. See "Management -- Employment Agreements." In
addition, the direct marketing and apparel experience of a significant number of
the Company's senior management personnel is limited to their experience with
the Company. The Company's future success will depend on the ability of the
Company's management to both retain key managers and to employ additional
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<PAGE> 13
qualified senior management. There can be no assurance that the Company will be
successful in attracting or retaining qualified senior management.
Competition. The children's and teen apparel market is highly competitive
with few barriers to entry, and the Company expects competition in this market
to increase. The Company's competitors include other children's apparel
catalogers such as Biobottoms, Children's Wear Digest, Hanna Andersson and The
Wooden Soldier, as well as traditional apparel manufacturers and retailers of
children's clothing, including such brands as The Gap (including its Baby Gap,
Gap Kids and Old Navy brands), Gymboree, L.L. Bean, Lands' End, OshKosh B'Gosh
and J.C. Penney. With the introduction of zoe, the Company will also compete
with teen apparel catalogers and retailers, including The Limited, Gadzooks,
Delia's, The WetSeal, Urban Outfitters, Buckle and Charlotte Russe. Many of the
Company's competitors are larger, have longer operating histories, substantially
greater financial, distribution and marketing resources and significantly
greater name recognition than the Company. Increased competition could result in
pricing pressures, unexpected marketing expenditures and loss of market share,
and could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to maintain or increase market share in the future.
The Company expects that the direct marketing industry will be affected by
technological changes in distribution and marketing methods, such as on-line
catalogs, retail kiosks and Internet shopping. The Company believes its success
will depend, in part, on its ability to adapt to new technologies and to respond
to competitors' actions in these areas. Adapting to new technologies could
require significant capital expenditures by the Company. There can be no
assurance that the Company will remain competitive in response to technological
changes. See "Business -- Competition."
Dependence on Management Information Systems. The Company depends on its
management information systems to process orders, provide rapid response to
customer inquiries, manage inventory and accounts receivable collections,
purchase and efficiently sell and ship products on a timely basis and maintain
cost-efficient operations. During Summer 1996, the Company replaced and upgraded
its systems and continuously makes certain changes and upgrades. It is common
for system defects, shutdowns, slowdowns or other problems to occur in
connection with conversion, or otherwise, to new data-processing equipment.
While the Company has taken a number of precautions against certain events that
could disrupt the operation of its management information systems, including in
connection with systems upgrades, there can be no assurance that the Company
will not experience systems failures or interruptions, which could have a
material adverse effect on its business, financial condition and results of
operations. The Company also depends on statistical models developed to measure
the effectiveness of its marketing programs and on its employees who are
knowledgeable about such models. The loss of employees knowledgeable about the
Company's statistical models or a disruption in the Company's direct marketing
operations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Information
Systems."
Reliance on Unaffiliated Manufacturers. The Company currently relies on
approximately 147 unaffiliated factories and suppliers to produce its products,
with no one factory or supplier responsible for more than 5.0% of the Company's
products in fiscal 1996 on a pro forma basis. The Company has no long-term
contracts with its manufacturing sources and competes with other companies for
production facilities and import quota capacity. In the event any of the
Company's key manufacturers were unable or unwilling to continue to manufacture
the Company's products, the Company would have to rely on other current
manufacturing sources or identify and qualify new unaffiliated manufacturers. In
such event, there can be no assurance that the Company would be able to qualify
such manufacturers for existing or new products in a timely manner or that such
manufacturers would allocate sufficient capacity to the Company in order to meet
its requirements. Any significant delay in the Company's ability to obtain
adequate supplies of its products from its current or alternative sources could
materially and adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that these manufacturers will
continue to produce products that are consistent with the Company's standards.
In this regard, the Company has occasionally received, and may in the future
receive, shipments of products from unaffiliated manufacturers that fail to
conform
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to the Company's quality control standards. In such event, unless the Company is
able to obtain replacement products in a timely manner, the Company risks the
loss of revenue resulting from the sale of such products and related increased
administrative and shipping costs. The failure of any key unaffiliated
manufacturer to supply products that conform to the Company's standards could
materially and adversely affect the Company's business, financial condition and
results of operations, as well as its reputation in the marketplace. Although
the Company believes that it has good relationships with its principal
manufacturing sources, the Company's future success is substantially dependent
upon its ability to maintain such relationships. If the Company experiences
significant increased demand, which cannot be assured, or if an existing
unaffiliated manufacturer needs to be replaced, the Company will need to
significantly expand its manufacturing capacity, both from current and new
manufacturing sources. There can be no assurance that such additional
manufacturing capacity will be available when required on terms that are
acceptable to the Company. See "Business -- Manufacturing" and "-- Suppliers and
Raw Materials."
International Suppliers. During the past 18 months, the Company purchased
33.6% of its merchandise directly from international vendors, and the Company
expects that it will continue to purchase merchandise from international
suppliers in the future. Accordingly, the Company's operations are subject to
the customary risks of doing business abroad, including fluctuations in the
value of currencies, export duties, quotas, work stoppages and, in certain parts
of the world, political instability.
Accounting for Acquired Customer Lists. The direct costs of acquired
customer lists are deferred and amortized over a period of up to five years. The
Company establishes amortization rates for these capitalized assets based on the
anticipated attrition rate of its customers. Rates of amortization are compared
from time to time with actual attrition rates in order to assess whether the
amortization rates appropriately match the direct costs of acquired customer
lists with the related sales. If the Company were to experience a material
increase in customer attrition, it could be required to accelerate the rate of
amortization of capitalized acquired customer lists expenditures. An increase in
attrition rates could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Government Regulation. The Company's direct mail operations are subject to
regulation by the U.S. Postal Service, the Federal Trade Commission and various
national, state, local and private consumer protection and other regulatory
authorities. In general, these regulations govern the manner in which orders may
be solicited, the form and content of advertisements, information which must be
provided to prospective customers, the time within which orders must be filled,
obligations to customers if orders are not shipped within a specified period of
time and the time within which refunds must be paid if the ordered merchandise
is unavailable or returned. From time to time, the Company has modified its
methods of doing business and its marketing operations in response to such
regulation. To date, such changes have not had an adverse effect on the
Company's business, financial condition or results of operations. However, there
can be no assurance that future regulatory requirements or actions will not do
so in the future. See "Business -- Environmental Issues."
Dependence on Intellectual Property. There can be no assurance that the
actions taken by the Company to establish and protect its trademarks and other
proprietary rights will prevent imitation of its products and services or
infringement of its intellectual property rights by others. In addition, there
can be no assurance that others will not claim infringement by the Company or
seek to block sales of the Company's products as violative of their trademark
and other proprietary rights. See "Business -- Fulcrum's Portfolio of Brands"
and "Business -- Intellectual Property."
List Development and Maintenance. The Company mails catalogs to names in
its proprietary housefile and to potential customers whose names are obtained
from purchased and rented lists. In fiscal 1996 and the six months ended June
30, 1997, 50.8% and 41.0%, respectively, of the Company's catalogs were mailed
to prospective customers and 49.2% and 59.0%, respectively, were mailed to names
derived from the Company's housefile. Names derived from purchased or rented
lists have historically generated lower response rates than names derived from
the Company's housefile. Accordingly, the Company anticipates that overall
response rates would decline if it increased its use of purchased and rented
lists relative to its use of names from its housefile. However, the Company
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must also constantly update its mailing lists to identify prospective new
customers. Failure to maintain an appropriate balance between mailing to
prospective customers and maintaining response rates could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Marketing."
State Sales and Use Tax. Many states impose taxes on the sale or use of
products and the sale of certain services within the taxing state's borders. To
the extent a seller of taxable products or services is subject to the
jurisdiction of a taxing state, the state may impose a sales tax directly on the
seller or may impose a duty on the seller to collect a sales or use tax from the
seller's customers. A seller is generally considered subject to the jurisdiction
of a taxing state for sales or use tax purposes when the seller has an in-state
presence that is beyond de minimis. An in-state presence can include
solicitation of orders for sales in the taxing state either in-person or through
an employee or other agent. The Company currently collects and pays sales tax
only with respect to shipments to the state of New Mexico. The Company has
structured its operations so as to minimize the likelihood that it has more than
a de minimis physical presence in any state other than New Mexico. However, if a
state taxing authority determines that the Company has established more than a
de minimis physical presence in that particular state, the Company could be
obligated to collect a sales or use tax (or pay a sales tax in states that
impose a tax on the seller) on some sales of its services and products. Should
the Company be found liable by a state taxing authority for unpaid historical
sales and use taxes, such liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations. From time
to time, legislation has been introduced in the U.S. Congress that, if enacted
into law, would impose a state sales or use tax collection obligation on
out-of-state mail-order companies such as the Company. Enactment of any such
legislation, or other changes in the basis on which sales and use taxes are
applied, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Control by Principal Stockholders. Based on shares of Common Stock
outstanding as of June 30, 1997, upon completion of the Offering, Michael G.
Lederman, the Chairman and Chief Executive Officer of the Company, will
beneficially own, on an aggregate basis, 49.3% of Fulcrum Common Stock (53.0%
assuming exercise of all options and warrants beneficially owned by him) and, as
a result, will effectively control the election of directors of the Company and
the outcome of all issues requiring a majority vote of stockholders of the
Company. Based on shares of Common Stock outstanding as of June 30, 1997, upon
completion of the Offering all officers and directors as a group will
beneficially own, on an aggregate basis 70.5% of Fulcrum Common Stock, (74.2%
assuming exercise of all options and warrants beneficially owned by them) and as
a result, will control all issues submitted to a vote of the stockholders of the
Company. The foregoing, may make it more difficult for a third party to acquire,
and may discourage acquisition bids for, the Company and could limit the price
that certain investors might be willing to pay for shares of Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."
Anti-Takeover Provisions. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation and By-laws may make it more difficult for
a third party to acquire, or may discourage acquisition bids for, the Company
and could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. These provisions, among other
things, (i) provide for a classified board of directors, (ii) require the
affirmative vote of the holders of at least 66 2/3% of the shares to remove a
director, and even then, only for cause (as defined in the Amended and Restated
Certificate of Incorporation), (iii) require the affirmative vote of the holders
of at least 66 2/3% of the shares to amend or repeal certain provisions of the
Amended and Restated Certificate of Incorporation, (iv) require the affirmative
vote of the holders of at least 66 2/3% of the shares or two-thirds of the
members of the board of directors (the "Board") to amend or repeal the By-laws
of the Company, (v) prohibit stockholders from taking action by written consent
in lieu of a meeting, (vi) provide that meetings of stockholders may be called
only pursuant to a resolution adopted by a majority of the Board or by the
Chairman of the Board and (vii) establish an advance notice procedure before
stockholder proposals may be brought before an annual meeting of the
stockholders of the Company, including proposed nominations of persons for
election to the Board. In addition, the rights
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<PAGE> 16
of holders of Common Stock will be subject to, and may be adversely affected by,
the rights of any holders of Preferred Stock that may be issued in the future
without stockholder approval and that may be senior to the rights of the holders
of Common Stock. Under certain conditions, Section 203 of the General
Corporation Law of the State of Delaware could prohibit the Company from
engaging in a "business combination" with an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) for a period of three years. See "Description of Capital Stock."
Absence of Prior Public Market; Possible Volatility of Stock Price. There
has been no public market for the Common Stock prior to the Offering, and there
can be no assurance that an active public market for the Common Stock will
develop or continue after the Offering. The initial public offering price for
the Common Stock will be determined by negotiations among the Company and the
representatives of the Underwriters. There can be no assurance that the market
price of the Common Stock will not decline below the initial public offering
price. The Company believes factors such as announcements by the Company and its
competitors, quarterly variations in results of operations, changes in economic
market conditions, changes in analysts' estimates and fluctuations in the stock
market could cause the market price of the Common Stock to fluctuate
significantly. Further, the stock market has historically experienced volatility
that sometimes has been unrelated to operating performance. In addition, future
sales of Common Stock by the Company's existing stockholders following the
completion of the Offering and the expiration of the 180-day lock-up period
applicable to all existing stockholders of the Company could have an adverse
effect on the market price of the Common Stock. See "Shares Eligible for Future
Sale" and "Underwriting."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have 11,076,648 shares of Common Stock outstanding. The 3,000,000
shares of Common Stock sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), unless held by an "affiliate" of the Company, as that
term is defined under Rule 144 of the Securities Act, which shares will be
subject to certain resale limitations of Rule 144. In addition, certain existing
stockholders, including holders of restricted Common Stock, have registration
rights with respect to Common Stock held by them. In connection with the
Offering, existing stockholders holding in the aggregate 8,076,648 shares (or
72.9% of total outstanding shares after the Offering) have agreed not to dispose
of any shares for a period of 180 days from the date of this Prospectus, subject
to certain limited exceptions, and the Company has agreed not to dispose of any
shares (other than shares sold by the Company in the Offering or issuances by
the Company of certain employee stock options and shares pursuant to exercise
thereof) for a period of 180 days from the date of this Prospectus, without the
prior written consent of Hambrecht & Quist LLC. Upon expiration of such 180-day
period, 6,416,953 of these shares of Common Stock will be eligible for sale
subject, in certain cases, to certain volume and other limitations of Rule 144
under the Securities Act applicable to "affiliates" of the Company. In addition,
the Company intends to file a registration statement on Form S-8 under the
Securities Act to register the sale of the 765,000 shares of Common Stock
reserved for issuance under the Management Team Equity Plan (as defined). As a
result, any shares issued upon exercise of stock options granted under such
plans will be available, subject to limitations on sales by affiliates under
Rule 144, for resale in the public market after the effective date of such
registration statement, subject to applicable lock-up arrangements. No
prediction can be made as to the effect, if any, that market sales of shares of
Common Stock or the availability of shares of Common Stock for sale will have on
the market price of the Common Stock from time to time. The sale of a
substantial number of shares held by the existing stockholders, whether pursuant
to a subsequent public offering or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
Dilution. Investors in the Offering will incur an immediate dilution in net
tangible book value per share of Common Stock of $7.35 (based on an assumed
initial public offering price of $9.00). See "Dilution."
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THE COMPANY
Fulcrum is a leading direct retailer of branded apparel, shoes and
accessories for children, teens and young women up to 24 years of age. The
Company's portfolio of brands includes After the Stork, Playclothes, Storybook
Heirlooms, zoe, Little Feet, SunSkins, Discount Direct and a test of strategic
alliance with Sears.
In January 1993, NewStork, Inc. a New Mexico corporation ("NewStork"),
purchased the business and assets, and assumed certain liabilities, of After the
Stork, Inc., a New Mexico corporation and a wholly owned subsidiary of Specialty
Catalog Corp., a Delaware corporation. After the Stork, Inc. was founded in
1980.
On March 31, 1994, all of the outstanding stock of NewStork was acquired by
FCP Direct, Inc., a Delaware corporation ("FCP Direct") and a wholly owned
subsidiary of Fulcrum Capital Partners L.P., a Delaware limited partnership
("FCP"), for cash consideration of $2.7 million. Fulcrum was incorporated in
February 1995 and in March 1995, FCP contributed to Fulcrum all common shares of
FCP Direct. On December 30, 1995, to simplify Fulcrum's ownership structure,
NewStork was merged into FCP Direct, and FCP Direct was merged into Fulcrum.
In Spring 1995, Fulcrum developed its SunSkins brand and introduced the
After the Stork brand in Japan. In Spring 1996, Fulcrum introduced Discount
Direct and purchased a catalog customer list of 93,000 names from OshKosh
B'Gosh. In Fall 1996, Fulcrum introduced its Little Feet brand in the U.S. and
Japan.
On December 31, 1996, the Company acquired, for $1.2 million plus the
assumption of $350,000 of customer returns liabilities, certain assets relating
to the Playclothes brand, previously part of a portfolio of brands marketed by
The Walt Disney Company. Assets acquired included (i) all proprietary rights in
the Playclothes brand name, (ii) the Playclothes customer list, (iii) a Canadian
wholesale and license agreement, (iv) the right to mail Fulcrum's catalogs to
The Disney Catalog's customers in 1997 and (v) certain immaterial inventory and
fixed assets.
In March 1997, the Company acquired a catalog list of 30,000 names from
Gymboree Corporation. In June 1997, the Company acquired for $15.0 million,
substantially all of the outstanding common stock of Storybook, a catalog
retailer of girls' clothing, and the owner of the Just For Kids brand name and
the Just For Kids housefile of 3.4 million names (which has not yet been
validated by the Company or added to its housefile). In addition, the Company
entered into an arrangement with Sears to test market the Company's brands to
individuals from the Sears 20 million name housefile.
The Company's executive offices are located at 4321 Fulcrum Way NE, Rio
Rancho, New Mexico 87124-8447. Fulcrum's telephone number is (505) 867-7000, its
toll-free order number is (888) 526-FLCM (526-3526) and its e-mail address is
[email protected].
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to be received from the sale of the 3,000,000 shares of
Common Stock offered hereby at an assumed initial offering price of $9.00 per
share are estimated to be $24,210,000 ($27,976,500 if the Underwriters'
over-allotment option is exercised in full.) The Company intends to use the net
proceeds (i) to repay $10.0 million principal amount of subordinated debt, plus
accrued interest, (ii) to purchase trademarks in connection with certain of the
Company's brands for approximately $1.75 million and (iii) to purchase the
Company's headquarters, call center and distribution center for approximately
$2.5 million in cash plus assumed liabilities. The Company intends to use the
remainder of the net proceeds to fund its growth strategy, develop its existing
and new brands, fund potential acquisitions and for working capital and general
corporate purposes. The Company has not made a determination of the extent and
amount of the net proceeds to be allocated to various aspects of working capital
or general corporate purposes. Approximately $3.2 million of the net proceeds
will be paid to certain officers and directors of the Company, and entities
affiliated with them, in connection with the purchase by the Company of the
trademarks and its headquarters, call center and distribution center.
Approximately $1.4 million of the net proceeds out of the $10.0 million used to
repay subordinated debt will be paid to directors of the Company with respect to
debt owed to them. See "Certain Relationships and Related Transactions." The
Company currently has no understandings, agreements or arrangements to make
acquisitions. Pending the application of the net proceeds as described above,
such net proceeds will be placed in short-term, interest-bearing investment
grade securities.
DIVIDEND POLICY
Since its inception, the Company has not declared or paid any cash or other
dividends on its Common Stock and does not expect to pay dividends for the
foreseeable future. The Company anticipates that for the foreseeable future,
earnings, if any, will be reinvested in the business. The Company's existing
loan agreements with its lenders generally restrict the Company's ability to pay
dividends or make other distributions on its Common Stock without the prior
approval of its lenders. The Company anticipates that any future credit facility
or other indebtedness that the Company may enter into or incur may contain a
similar restriction. The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors of the Company (the
"Board"). Any future determination to pay dividends will depend on the Company's
results of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant by the Board.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) on an actual basis and (ii) as adjusted to give effect to the sale
of the 3,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share and the application of the estimated
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................ $ 2,000 $ 2,000
Current portion of long-term debt...................... 399 399
Long-term debt, net of current portion(1).............. 30,915 28,129
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
5,000,000 shares authorized; none issued or
outstanding..................................... -- --
Common Stock, par value $0.01 per share;
25,000,000 shares authorized; 8,076,648 shares
issued and outstanding, actual; 11,076,648
shares issued and outstanding, as adjusted(2)... 81 134
Additional paid-in capital........................ 20,035 49,805
Accumulated deficit(3)............................ (6,926) (8,233)
------- -------
Total stockholders' equity...................... 13,190 41,706
------- -------
Total capitalization......................... $46,504 $72,234
======= =======
</TABLE>
- ---------------
(1) The long-term debt, net of current portion, as adjusted, reflects the
payment of the $10.0 million principal amount of subordinated debt (net of
discount of $1.6 million) and the assumption of $5.6 million of liabilities
in connection with the Company's purchase of its headquarters, call center
and distribution center.
(2) Based on the number of shares outstanding as of June 30, 1997. Excludes (i)
765,000 shares of Common Stock reserved for issuance under the Option Plan,
of which 404,350 shares were subject to options outstanding as of June 30,
1997 at a weighted average exercise price of $5.50 per share and (ii)
warrants to purchase 1,576,810 shares of Common Stock outstanding as of June
30, 1997 at a weighted average exercise price per share of $2.32. See
"Management -- Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements. Includes, as adjusted, the sale of 3,000,000 shares of
Common Stock.
(3) The accumulated deficit, as adjusted, reflects the effect of an
extraordinary item representing the write-off of unamortized debt discount
of $1.0 million, net of taxes, the write-off of deferred financing costs of
$0.3 million, net of taxes, and the differences between the fair market
values and historical costs of the purchases from related parties of
trademarks of $1.1 million and the Company's headquarters of $1.2 million.
18
<PAGE> 20
DILUTION
As of June 30, 1997, the Company had a net tangible book value of approximately
$(5,937,000), or $(0.74) per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding. Without taking into
account any other changes in the net tangible book value after June 30, 1997,
other than to give effect to the receipt by the Company of the net proceeds from
the sale of the 3,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $9.00 per share, the pro forma net tangible
book value of the Company as of June 30, 1997 would have been approximately
$18,273,000, or $1.65 per share. This represents an immediate increase in net
tangible book value of $2.39 per share to the existing stockholders and an
immediate dilution of $7.35 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $9.00
Net tangible book value per share before the Offering.......... $(0.74)
Increase per share attributable to new investors............... 2.39
------
Pro forma net tangible book value per share after the Offering...... 1.65
-----
Dilution per share to new investors................................. $7.35
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 8,076,648 72.9% $20,116,000 42.7% $ 2.49
New investors............ 3,000,000 27.1 27,000,000 57.3 9.00
---------- ----- ----------- -----
Total.......... 11,076,648 100.0% $47,116,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of stock options and warrants
after June 30, 1997. As of June 30, 1997, there were outstanding stock options
and warrants to purchase an aggregate of 1,981,160 shares of Common Stock at a
weighted average exercise price of approximately $2.97 per share. If all of the
foregoing options had been exercised at June 30, 1997, the net tangible book
value per share of Common Stock at such date would have been $(0.01) and the pro
forma net tangible book value per share after giving effect to the Offering
would have been $1.85, representing an immediate dilution to new investors of
$7.15 per share and an immediate increase in net tangible book value of $1.86
per share attributable to the Offering.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from the financial statements of the Company set forth elsewhere in this
Prospectus (except Consolidated Selected Operating Data), which has been
prepared in accordance with generally accepted accounting principles. The
following selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus. The data at December 31, 1993, December 31, 1994, December 30, 1995
and December 28, 1996 and for each of the fiscal periods ended December 31,
1993, December 31, 1994, December 30, 1995 and December 28, 1996 are derived
from the Company's Consolidated Financial Statements which have been audited by
Arthur Andersen LLP, independent public accountants, which Consolidated
Financial Statements are included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD OF
PERIOD OF MARCH 16,
JANUARY 27, 1993 1994
(INCEPTION) (INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH THROUGH -------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1993 (PREDECESSOR) 1994 1995 1996 1996 1997
------------------ ------------ ------------ ------------ ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Net revenues.......................... $ 11,432 $ 11,997 $ 28,581 $ 36,457 $16,815 $23,111
Gross profit.......................... 5,431 6,910 15,370 20,891 9,290 13,661
Income (loss) from operations......... (1,380) 293 1,057 843(2) (402) (4,915)(2)
Income (loss) before cumulative effect
of change in accounting principle... (989) 91 320 406(2) (280) (5,124)(2)
Cumulative effect of change in
accounting principle(3)............. -- -- -- -- -- (1,802)
Net income (loss)(3).................. $ (989) $ 91 $ 320 $ 406(2) $ (280) $(6,926)(2)
======= ======= ======= ======= ======= =======
Pro forma net loss(3)................. $ -- $ (41) $ (189) $ (755)(2) $ (590) $(6,926)(2)
======= ======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share before
cumulative effect of change in
accounting principle(3)(5).......... $ (1.32) $ 0.02 $ 0.04 $ (0.02)(2) $ (0.07) $ (0.62)(2)
======= ======= ======= ======= ======= =======
Cumulative effect of change in
accounting principle per common and
common equivalent share(3).......... -- -- -- -- -- $ (0.22)
Net income (loss) per common and
common equivalent share(3)(5)....... $ (1.32) $ 0.02 $ 0.04 $ (0.02)(2) $ (0.07) $ (0.84)(2)
======= ======= ======= ======= ======= =======
Pro forma net loss per common and
common equivalent share(3)(5)....... $ -- $ (0.01) $ (0.03) $ (0.16)(2) $ (0.11) $ (0.84)(2)
======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares
outstanding(4)...................... 750 5,476 5,781 8,266 7,708 8,294
CONSOLIDATED SELECTED OPERATING DATA(1):
Total catalogs mailed................. --(6) 11,083(7) 14,841 15,544(8) 6,078 14,051(2)
Net revenues per catalog.............. --(6) $ 1.08(7) $ 1.93 $ 2.35 $ 2.77 $ 1.64(2)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 12, JANUARY 1,
1994 1996 1997
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Housefile names(9).................... 710 1,021 3,040
Active customers(10).................. 347 471 1,049
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30,
1993 (PREDECESSOR) 1994 1995 1996 1997
------------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash and cash equivalents............. $ 477 $ 112 $ 196 $ 140 $ 4,727
Working capital....................... 1,525 900 3,227 9,934 15,212
Total assets.......................... 3,426 5,023 14,860 25,565 59,874
Long-term debt, net of current
portion............................. 713 39 702 11,754 30,915
Total stockholders' equity............ 784 2,190 5,817 7,923 13,190
</TABLE>
- ---------------
(1) Financial information relating to the fiscal periods prior to January 27,
1993, relate to Specialty Catalog Corp. (the "SC Information"), the owner
of After the Stork prior to NewStork Inc. NewStork, Inc. was a New Mexico
corporation formed on January 27, 1993 and was a predecessor to the
Company. The Company is not authorized to reprint the SC Information
herein, however such information may be obtained by potential investors as
part of the public securities filings of Specialty Catalog Corp. The
Company does not incorporate such information herein and makes no claims
regarding the accuracy or completeness of such information. See "The
Company."
(2) Includes nonrecurring Playclothes start up expenses of $338 and $2,116
before taxes for the fiscal year ended December 28, 1996, and the six
months ended June 30, 1997, respectively. Specifically, a significant
portion of the fiscal 1997 expenses relate to the mailing of approximately
3.9 million catalogs to test the Playclothes housefile. Such catalogs have
been excluded herein for purposes of comparison. See Note 2.p. of Notes to
Consolidated Statements.
(3) As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs in connection with the Storybook Acquisition. Storybook
has historically followed a policy of expensing such costs as incurred and,
while practices may vary, the Company has decided to conform to Storybook's
practices and expense such costs as incurred. The pro forma net loss and
net loss per common and common equivalent share represent those amounts as
if the new accounting policy had been applied in all the periods presented.
See Note 2.i. of Notes to Consolidated Financial Statements.
(4) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net income per share.
(5) Calculated after deducting Preferred Stock dividends of $60, $583 and $291
for fiscal 1995, fiscal 1996 and for the six month period ended June 30,
1996, respectively. Prior to December 28, 1996, all shares of Preferred
Stock were called or converted to Common Stock.
(6) Not available.
(7) Includes catalogs mailed by, and net revenues (unaudited) of, the Company's
predecessor for the period January 1, 1994 through March 15, 1994. Net
revenues during this period were $934.
(8) Excluding Playclothes catalogs mailed by The Walt Disney Company in 1996.
(9) Housefile names include both historical purchasers and catalog inquirers
but exclude the Just For Kids list of 3.4 million names (which has not been
validated by the Company or added to its housefile).
(10) Active customers include customers who have purchased from one of the
Company's brands within the preceding 24-month period.
20
<PAGE> 22
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
The following unaudited pro forma statements of operations have been
prepared by combining the historical consolidated financial statements of the
Company for the fiscal year ended December 28, 1996 and the six months ended
June 30, 1997 with the historical statements of operations of Storybook for the
fiscal year ended December 28, 1996 and the six months ended June 27, 1997,
respectively, and give effect to the Storybook Acquisition and the related
financing which were completed as of June 27, 1997 and June 30, 1997,
respectively.
The Company believes that the pro forma adjustments give appropriate effect
to the assumptions described in the notes to the unaudited pro forma financial
statements and that the adjustments are properly applied in the pro forma
financial statements, and provide a reasonable basis for presenting all the
significant effects of the Storybook Acquisition by the Company. The acquisition
related adjustments include (i) inclusion of the historical statements of
operations of Storybook, (ii) the allocation of the purchase price for the
Storybook Acquisition and (iii) the impact of the financing related to the
Storybook Acquisition.
The unaudited pro forma statements of operations have been prepared based
upon available information and on the assumptions described in the notes thereto
and include assumptions relating to the allocation of the consideration paid for
the assets and liabilities of Storybook based on preliminary estimates of fair
value. The Company expects that the significant assets in the final allocation
will be goodwill, trademarks, inventory and customer lists and that there will
be no significant additional liabilities.
The unaudited pro forma statements of operations should be read in
conjunction with the respective financial statements of the Company and
Storybook and notes thereto included elsewhere in this Prospectus. Certain
reclassifications among line items have been made to Storybook's historical
income statements and balance sheets to conform with Fulcrum's financial
statement presentation. The unaudited pro forma condensed statements of
operations are not necessarily indicative of what the consolidated statement of
operations actually would have been had the transactions occurred at January 1,
1996, nor are they indicative of the results of future operations of the
Company.
21
<PAGE> 23
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 28, 1996
------------------------------------------------------------------
FULCRUM STORYBOOK
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ------------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.............................................. $ 36,457 $30,948 $ -- $ 67,405
Cost of goods sold........................................ 15,566 15,109 -- 30,675
---------- ------- ------- ----------
Gross profit.............................................. 20,891 15,839 -- 36,730
Advertising and catalog costs............................. 7,089 6,246 -- 13,335
General and administrative expenses....................... 12,621 7,547 1,019(a)(b)(c) 21,187
Nonrecurring Playclothes start up costs................... 338 -- -- 338
---------- ------- ------- ----------
Income (loss) from operations............................. 843 2,046 (1,019) 1,870
Other income.............................................. 866 278 -- 1,144
Interest expense.......................................... (820) (153) (1,010)(d) (1,983)
Other expense............................................. (253) -- -- (253)
---------- ------- ------- ----------
Income (loss) before income taxes......................... 636 2,171 (2,029) 778
Income tax expense (benefit).............................. 230 766 (528)(e) 468
---------- ------- ------- ----------
Net income (loss)......................................... $ 406 $ 1,405 $ (1,501) $ 310
========== ======= ======= ==========
Net income (loss) applicable to common stockholders....... $ (177)(f) $ 1,405 $ (1,501) $ (273)(f)
========== ======= ======= ==========
Pro forma net income (loss) applicable to common
stockholders............................................ $ (755)(c)(g) $ 1,405 $ (1,501) $ (851)(c)(f)(g)
========== ======= ======= ==========
Weighted average number of common and common equivalent
shares outstanding...................................... 8,266 9,931
========== ==========
Net loss per common and common equivalent shares.......... $ (0.02) $ (0.03)
========== ==========
Pro forma net loss per common and common equivalent
shares.................................................. $ (0.16)(c)(g) $ (0.14)(c)(g)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------
FULCRUM STORYBOOK
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------- ----------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.................................................... $ 23,111 $14,963 $ -- $ 38,074
Cost of goods sold.............................................. 9,450 6,994 -- 16,444
---------- ------- ------- ----------
Gross profit.................................................... 13,661 7,969 -- 21,630
Advertising and catalog costs................................... 7,303 3,700 -- 11,003
General, and administrative expenses............................ 9,157 4,039 510(a)(b)(c) 13,706
Non recurring Playclothes start up costs........................ 2,116 -- -- 2,116
---------- ------- ------- ----------
Income (loss) from Operations................................... (4,915) 230 (510) (5,195)
Other Income.................................................... 371 -- -- 371
Interest expense................................................ (1,022) (70) (505)(d) (1,597)
Other expense................................................... -- (179) -- (179)
---------- ------- ------- ----------
Loss before income taxes and cumulative effect of change in
accounting principle.......................................... (5,566) (19) (1,015) (6,600)
Income tax benefit.............................................. (442) (3) (269)(e) (714)
---------- ------- ------- ----------
Loss before cumulative effect of change in accounting
principle..................................................... $ (5,124) $ (16) $ (746) $ (5,886)
========== ======= ======= ==========
Pro forma net loss before cumulative effect of change in
accounting principle.......................................... $ (5,124) $ (16) $ (746) $ (5,886)
========== ======= ======= ==========
Weighted average number of common and common equivalent shares
outstanding................................................... 8,294 9,959
========== ==========
Loss per common and common equivalent shares before cumulative
effect of change in accounting principle...................... $ (0.62) $ (0.59)
========== ==========
Pro forma net loss per common and common equivalent share before
cumulative effect of change in accounting principle........... $ (0.62) $ (0.59)
========== ==========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Represents amortization of a trademark which is being amortized using the
straight-line method over 15 years.
(b) Represents goodwill amortization of $9,264 on a straight-line basis over 20
years.
(c) Represents amortization of customer lists of $626 on a straight line basis
over five years. As of December 29, 1996, the Company changed its policy of
capitalizing list rental costs in connection with the Storybook Acquisition.
Storybook has historically followed a policy of expensing such costs as
incurred and, while practices may vary the Company has decided to conform to
Storybook's practices and expense such costs as incurred.
(d) Represents interest expense incurred as a result of the June Whitney
Investment.
(e) Reflects the impact of pro forma adjustments at applicable statutory tax
rates and goodwill amortization on a straight-line basis of $9,264.
(f) Calculated after deducting Preferred Stock dividends of $583.
(g) The pro forma net loss and net loss per common and common equivalent share
represent those amounts as if the new accounting policy had been applied in
all the periods presented. See Note 2.i. of Notes to Consolidated Financial
Statements.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from those
discussed here and will differ materially as a result of the Storybook
Acquisition. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below and in the section entitled "Risk
Factors," as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Since 1994, Fulcrum has introduced eight brands through in-house
development and acquisition, and expanded its business by entering new
geographic markets, testing a strategic alliance and adding new customer names
through list acquisition and rental. In March 1994, Fulcrum acquired the After
the Stork brand and, by fiscal year-end 1994, remerchandised and repositioned
the catalog. Simultaneously with repositioning After the Stork, the Company
began employing sophisticated housefile regression modeling techniques to
improve its housefile and prospect response rates and increase its investment in
customer prospecting and reactivation. In Spring 1995, Fulcrum developed its
SunSkins line of sun protective clothing and introduced the After the Stork
brand in Japan. In Spring 1996, Fulcrum introduced Discount Direct, a catalog
liquidation vehicle for its children's brands, and purchased the OshKosh B'Gosh
catalog customer list, which consisted of 93,000 names. In Fall 1996, Fulcrum
also introduced its Little Feet brand in the U.S. and Japan.
In December 1996, Fulcrum acquired the Playclothes brand name and related
customer information and other assets from a subsidiary of The Walt Disney
Company for $1.2 million plus the assumption of customer return liabilities
estimated at $350,000. During the second half of 1996, Fulcrum began to
remerchandise and reposition Playclothes which included increasing its design
staff, and expanding its call center and distribution center. In January 1997,
the Company mailed its first issue of Playclothes in the U.S. and Japan. Under
Playclothes' previous owner, historical net revenues related to the Playclothes
brand for 1994, 1995 and 1996 were $36.6 million, $33.3 million and $28.8
million, respectively. Fulcrum acquired certain specific assets rather than an
ongoing business, and any future revenues will be largely dependent on the
Company's ability to understand the needs and predict the response of the
existing customers of Playclothes, as well as its ability to attract new
customers and to integrate the Playclothes product line into the Company's
facilities and distribution systems. As a result, historical net revenues
generated by the Playclothes catalog may not be indicative of future net
revenues.
In June 1997, the Company completed the acquisition of substantially all of
the capital stock of Storybook Heirlooms, Inc., a catalog retailer of girls'
clothing and the owner of the Just for Kids brand name and the Just for Kids
customer list of 3.4 million names (which have not yet been validated by the
Company or added to its housefile). The Company plans to integrate Storybook by:
(i) eliminating redundant corporate staff including select executives and
accounting, human resources, and marketing and manufacturing staffs, (ii)
consolidating duplicate distribution center and call center facilities primarily
into Fulcrum's Rio Rancho, New Mexico facility and the closing of the Foster
City, California facility; and (iii) consolidating corporate printing, freight,
toll-free phone service and credit card processing contracts, manufacturing and
merchandising. The success of the Storybook Acquisition will depend primarily on
the Company's ability to successfully integrate and consolidate Storybook
Heirlooms, which will require substantial management, financial and other
resources and may pose risks with respect to sales, customer service and market
share. See "Risk Factors -- Integration of Storybook Acquisition."
23
<PAGE> 25
In addition, the Company has also recently acquired a catalog list of
30,000 names from Gymboree Corporation and entered into an arrangement with
Sears to test market the Company's brands during the second half of 1997 to
select individuals from the over 20 million customer file of Sears.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's statement of operations expressed as a percentage of net
revenues. Any trends reflected by the following table may not be indicative of
future results.
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
--------------------------------------------------------------------
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- ---------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
-------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... 42.4 46.2 42.7 44.8 40.9
----- ----- ----- ----- -----
Gross profit......................... 57.6 53.8 57.3 55.2 59.1
Advertising and catalog costs........ 38.7 18.0 19.4 21.1 31.6
General and administrative
expenses........................... 16.5 32.1 34.7 36.5 39.6
Nonrecurring Playclothes start up
costs.............................. -- -- 0.9 -- 9.2
----- ----- ----- ----- -----
Income (loss) from operations........ 2.4 3.7 2.3 (2.4) (21.3)
Other income......................... 0.4 0.6 2.4 3.7 1.6
Interest expense..................... (0.5) (2.7) (2.2) (2.5) (4.4)
Other expense........................ (0.9) -- (0.7) (1.5) --
----- ----- ----- ----- -----
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............... 1.4 1.6 1.7 (2.6) (24.1)
Income tax expense (benefit)......... 0.7 0.5 0.6 (0.9) (1.9)
----- ----- ----- ----- -----
Net income (loss) before cumulative
effect of change in accounting
principle.......................... 0.8 1.1 1.1 (1.7) (22.2)
===== ===== ===== ===== =====
Cumulative effect of change in
accounting principle, net of tax
benefit............................ -- -- -- -- (7.8)
----- ----- ----- ----- -----
Net income (loss).................... 0.8 1.1 1.1 (1.7) (30.0)
===== ===== ===== ===== =====
Net income (loss) applicable to
common stockholders................ 0.8% 0.9% (0.5)% (3.4)% (30.0)%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1997
Net revenues. Net revenues increased 37.4% from $16.8 million in the first
six months of fiscal 1996 to $23.1 million in the first six months of fiscal
1997. Net revenues increased as a result of (i) the Company's introduction of a
newly merchandised and positioned Playclothes brand, (ii) the roll out of Little
Feet and (iii) an increase in domestic circulation for After the Stork. The
increase in net revenues was partially offset by a decrease in net revenues from
Japan due largely to adverse currency exchange rate fluctuations. Despite the
increase in net revenues, net revenues per catalog mailed decreased 40.8% from
$2.77 to $1.64 (after reducing circulation by 3.9 million catalogs mailed to
test the newly acquired Playclothes customer list) primarily due to lower
response rates than experienced in the prior year due to test mailing the
Playclothes catalog, expansion of After the Stork circulation and the decline in
Japanese order volume due to adverse currency exchange rate fluctuations.
Gross profit. Gross profit, which is net of merchandise cost, inbound
freight and design, development, manufacturing and production costs, among other
things, increased 47.1% from $9.3 mil-
24
<PAGE> 26
lion in the first six months of fiscal 1996 to $13.7 million in the first six
months of fiscal 1997 while gross margin increased from 55.2% to 59.1% for the
same periods. This increase was due primarily to a shift in product mix towards
higher margin merchandise and improved management of the manufacturing process.
This increase was partially offset by the decrease in net revenues in Japan,
where products are sold at higher retail prices. The Company expects that lower
gross margins will be associated with revenues from zoe, as it consists of
popular third-party branded products, which are typically associated with lower
margins than the proprietary branded products primarily sold in the Company's
other catalogs.
Advertising and catalog costs. Advertising and catalog costs, which
consist of all direct mail costs, including printing, paper, postage, fixed
catalog creative costs, list rental expense and other advertising expenses
increased by 105.7% from $3.6 million in the first six months of fiscal 1996 to
$7.3 million in the first six months of 1997. This increase was primarily a
result of the change in accounting for list rental expense, investments made to
expand its customer base through increased domestic circulation of After the
Stork and an advertising campaign launched in Japan to acquire new customer
names for the After the Stork and Playclothes catalogs and to refine the
Playclothes database. These costs were partially offset by a decrease in catalog
production costs per book as a result of economies of scale and improved
management.
General and administrative expenses. General and administrative expenses,
which consist of distribution center, facilities, order entry, customer service
and staffing and administrative overhead costs associated with brand management,
marketing and analytical services, information services, finance, accounting and
human resources, increased 49.1%, from $6.1 million in the first six months of
fiscal 1996 to $9.2 million in the first six months of fiscal 1997. This
increase was due to investments in management, training, facilities, and systems
to support expansion of the Company's portfolio of brands and initiation of the
Company's wholesale operations, which are expected to commence operations in
fiscal 1998. Partially offsetting the increase in fixed costs were (i) an
improvement in variable cost pricing per package primarily attributable to lower
shipping costs and (ii) variable cost efficiency gains achieved by shipping
fewer packages per order. These improvements represent the benefits experienced
from the investment in management, infrastructure and systems. The Company does
not believe that the increase in general and administrative expenses represents
a material trend.
Non-recurring Playclothes start-up costs. The Company incurred start up
costs for the Playclothes Acquisition of $2.1 million in the first six months of
fiscal 1997. The Walt Disney Company ceased operations relating to the
Playclothes brand prior to the acquisition of the Playclothes assets, and as a
result, significant costs were incurred to restaff, improve the assets and start
up the Playclothes business. This amount in the first six months of 1997
included the costs of recruiting, training and moving employees and other costs
associated with the start up of the Playclothes operation. Also included were
expenses which represented list testing costs. These costs were additional costs
related to advertising and catalogs used to establish detailed prospecting
history and confirm customer response rates contained in the purchased customer
list.
Other income. Other income includes state training grants and interest
income from marketable securities. Other income decreased from $629,000 in the
first six months of fiscal 1996 to $371,000 in the first six months of fiscal
1997, primarily as a result of a $347,000 gain attributable to the sale of
marketable securities in the first six months of fiscal 1996.
Interest expense. Interest expense increased from $412,000 in the first
six months of fiscal 1996 to $1.0 million in the first six months of fiscal
1997. This increase was primarily a result of the issuance of $10.0 million
principal amount of subordinated debt in October 1996 and increases in amounts
outstanding under the Company's credit facility and capitalized lease
obligations, partially offset by lower interest rates.
Other expense. Other expense of $253,000 in the first six months of fiscal
1996 consisted primarily of relocation expenses of the Company's operations. In
the first six months of fiscal 1997, there were no other expenses.
25
<PAGE> 27
Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased from a benefit of $158,000 in the first six months of fiscal 1996 to a
benefit of $442,000 in the first six months of fiscal 1997 due to operating
losses incurred by the Company largely associated with non-recurring expenses
and a valuation adjustment to the Company's net operating loss carry forwards.
Cumulative effect of change in accounting principle, net of tax
benefit. Effective as of January 1, 1997, the Company has changed its policy of
capitalizing list rental costs. This change was made in accordance with
Storybook's policy of expensing such costs as incurred. Furthermore, while
practices vary, the Company has decided to expense these costs as incurred. The
cumulative effect of the change was recorded as of December 29, 1996 and
approximated $(1.8 million) or $(0.22) per share, net of tax benefit of $1.2
million.
COMPARISON OF FISCAL YEARS 1995 AND 1996
Net revenues. Net revenues increased 27.6%, from $28.6 million in fiscal
1995 to $36.5 million in fiscal 1996. Net revenues increased primarily as a
result of (i) changes in merchandise mix, (ii) select price increases and an
increase in the proportion of Japanese orders which historically have had a
higher average order size than domestic orders and (iii) use of housefile
regression modeling techniques to refine mailings and an increase in Japanese
circulation. Notably, while net revenues increased by 27.6%, circulation
increased by only 4.7% from 14.8 million in fiscal 1995 to 15.5 million in
fiscal 1996, increasing net revenue per catalog mailed by 21.8% from $1.93 to
$2.35, respectively. Net revenues were also positively affected by the
introduction of the Company's Discount Direct and Little Feet catalogs in Spring
and Fall 1996, respectively.
Gross profit. Gross profit increased 35.9% from $15.4 million in fiscal
1995 to $20.9 million in fiscal 1996, while gross margin increased from 53.8% to
57.3% in the same period. This increase was due primarily to the Company's
ability to spread certain fixed costs over a larger revenue base. Additionally,
by bringing the management of the manufacturing process in-house in fiscal 1995,
the Company has over time been able to reduce merchandise costs, improve
inventory controls, improve product quality (which reduces return rates) and
reduce inbound freight rates.
Advertising and catalog costs. Advertising and catalog costs, which consist
of all direct mail costs, including printing, paper, postage and fixed catalog
creative costs, increased by 37.9% from $5.1 million in fiscal 1995 to $7.1
million in fiscal 1996. This increase was primarily a result of increased
circulation in Japan and an unexpected mailing delay caused by a third-party
printer.
General and administrative expenses. General and administrative expenses
increased by 37.6%, from $9.2 million in fiscal 1995 to $12.6 million in fiscal
1996. This increase was due to the Company's decision to invest in
infrastructure in order to take advantage of its opportunities for possible
future growth in new markets and channels, as well as to integrate new brands.
As a result in fiscal 1995 and fiscal 1996, the Company made a substantial
investment in infrastructure. Operating expenses also increased in fiscal 1996
as the Company added management personnel and infrastructure to its marketing,
design, development, merchandising, manufacturing and production departments in
anticipation of the introduction of its Playclothes and zoe brands. The Company
does not believe that the increase in general and administrative expenses
represents a material trend.
Non-recurring Playclothes start-up costs. The Company incurred start up
costs for the Playclothes Acquisition of $338,000 in the last six months of
1996. The Walt Disney Company ceased operations relating to the Playclothes
brand prior to the Playclothes Acquisition and as a result, significant costs
were incurred to restaff, improve the assets and start up the Playclothes
business. This entire amount represents the costs of recruiting, training and
moving employees and other costs associated with the start up of the Playclothes
operation.
Other income. Other income includes income from state training grants and,
in fiscal 1996, the realization of a gain on the disposition of marketable
securities. Other income increased from $177,000 in fiscal 1995 to $869,000 in
fiscal 1996. This increase was primarily attributable to a full year's
26
<PAGE> 28
utilization of the state training grants and a one-time gain attributable to the
sale of marketable securities.
Interest expense. Interest expense increased from $762,000 in fiscal 1995
to $820,000 in fiscal 1996. This increase was primarily a result of the issuance
of $10.0 million principal amount of subordinated debt in October 1996 and
increases in the Company's credit facilities and capitalized lease obligations,
partially offset by reduced interest rates on the Company's revolving credit
facility.
Other expense. Other expense increased from $1,000 in fiscal 1995 to
$256,000 in fiscal 1996. Other expense consisted primarily of operations
relocation expenses.
Provision (benefit) for income taxes. Provision (benefit) for income taxes
increased from an expense of $151,000 in fiscal 1995 to an expense of $230,000
in fiscal 1996 primarily due to increased profit before income taxes.
COMPARISON OF MARCH 16, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994 AND FISCAL
YEAR 1995
Net revenues. Net revenues increased 138.2%, from $12.0 million in fiscal
1994 to $28.6 million in fiscal 1995. Net revenues increased primarily due to
increases in catalog productivity and in circulation, as well as the inclusion
of a full year of results, the introduction of the Company's SunSkins brand and
the introduction of catalog mailings in Japan in Spring and Summer 1995,
respectively. Net revenues per catalog mailed increased 78.7% from $1.08 to
$1.93 in calendar year 1994, primarily as a result of changes in product mix,
select price increases and the use of housefile regression modeling techniques
to refine mailing. Circulation increased 33.3% from 11.1 million catalogs in
calendar 1994 to 14.8 million catalogs in fiscal 1995, which was attributable to
the Company's investments in new customer lists and increased mailings to
existing customers, as well as the inclusion of a full year of results. The
Company increased circulation based on its belief that its housefile had
previously been undermailed.
Gross profit. Gross profit increased by 122.4% from $6.9 million in fiscal
1994 to $15.4 million in fiscal 1995, while gross margins decreased from 57.6%
to 53.8%. This decrease was primarily attributable to increased investment in
infrastructure made by the Company in connection with its decision to bring the
management of the manufacturing process in-house, and to clearance programs
undertaken in an effort to improve inventory mix. The decrease was partially
offset by the remerchandising and repositioning of the After the Stork
Fall/Winter 1994 catalog, which reduced merchandise costs and return rates.
Advertising and catalog costs. Advertising and catalog costs, which consist
of all direct mail costs, printing, paper, postage and fixed catalog creative
costs, increased by 10.9% from $4.6 million in fiscal 1994 to $5.1 million in
fiscal 1995 but decreased as a percentage of net revenues from 38.7% in fiscal
1994 to 18.0% in fiscal 1995. The dollar increase in costs was due to increased
circulation, partially offset by a decrease in paper prices and more efficient
shipping and distribution processes, while the decrease as a percentage of net
revenues was the result of the ability to spread costs over a larger revenue
base.
General and administrative expenses. General and administrative expenses
increased by 363.4%, from $2.0 million in fiscal 1994 to $9.2 million in fiscal
1995. This increase was the result of higher customer service and distribution
costs attributed to the Company's commitment to improve customer satisfaction
following the acquisition of After the Stork. Additionally, the Company began to
make substantial investments in new systems and facilities in fiscal 1995, of
which the full year impact was not recognized until fiscal 1996.
Other income. Other income increased from $52,000 in fiscal 1994 to
$177,000 in fiscal 1995. This increase was partially attributable to dividend
income from marketable securities acquired in fiscal 1995 and the benefits from
state training grants, as well as the inclusion of a full year of results.
27
<PAGE> 29
Interest expense. Interest expense increased from $63,000 in fiscal 1994 to
$762,000 in fiscal 1995 primarily as a result of increased outstanding debt
balances, as well as the inclusion of a full year of results.
Provision (benefit) for income taxes. Provision for income taxes increased
from an expense of $79,000 in fiscal 1994 to an expense of $151,000, due to
increased profit before income taxes.
28
<PAGE> 30
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data for the ten quarters ended June 30, 1997, as well as such data expressed as
a percentage of the Company's net revenues for the periods indicated. This data
has been derived from unaudited financial statements that, in the opinion of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
------------------------------------------ ------------------------------------------ -------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 28, MAR. 29, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues...... $3,995 $5,411 $ 7,370 $11,805 $7,157 $9,658 $ 7,223 $12,419 $13,006 $10,105
Cost of goods
sold............ 1,962 2,734 3,121 5,394 3,421 4,104 3,213 4,828 5,481 3,969
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Gross profit...... 2,033 2,677 4,249 6,411 3,736 5,554 4,010 7,591 7,525 6,136
Advertising and
catalog costs... 1,037 744 1,631 1,730 1,407 2,143 1,353 2,186 2,912 4,391
General and
administrative
expenses........ 1,342 1,797 2,266 3,766 2,420 3,722 2,447 4,032 5,176 3,981
Nonrecurring
Playclothes
start up
costs........... -- -- -- -- -- -- -- 338 353 1,763
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss) from
operations...... (346) 136 352 915 (91) (311) 210 1,035 (916) (3,999)
Other income...... 1 14 20 142 116 513 132 108 185 186
Interest
expense......... (50) (117) (342) (253) (231) (181) (150) (258) (503) (519)
Other expense..... -- -- -- (1) (3) (250) -- (3) -- --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes and
cumulative
effect of change
in accounting
principle....... (395) 33 30 803 (209) (229) 192 882 (1,234) (4,332)
Income tax benefit
(expense)....... 134 (11) (10) (264) 75 83 (69) (319) 90 352
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net Income (loss)
before
cumulative
effect of change
in accounting
principle....... $ (261) $ 22 $ 20 $ 539 $ (134) $ (146) $ 123 $ 563 $(1,144) (3,980)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
Cumulative effect
of change in
accounting
principle, net
of tax
benefit......... -- -- -- -- -- -- -- -- (1,802) --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... $ (261) $ 22 $ 20 $ 539 $ (134) $ (146) $ 123 $ 563 $(2,946) $(3,980)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
PERCENTAGE OF NET REVENUES
-----------------------------------------------------------------------------------------------------------
Net revenues...... 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods
sold............ 49.1 50.5 42.3 45.7 47.8 42.5 44.5 38.9 42.2 39.3
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Gross profit...... 50.9 49.5 57.7 54.3 52.2 57.5 55.5 61.1 57.8 60.7
Advertising and
catalog costs... 26.0 13.8 22.1 14.7 19.7 22.2 18.7 17.6 22.4 43.5
General and
administrative
expenses........ 33.6... 33.2 30.8 31.9 33.8 38.5 33.9 32.5 39.7 39.4
Nonrecurring
Playclothes
start up
costs........... -- -- -- -- -- -- -- 2.7 2.7 17.4
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss) from
operations...... (8.7) 2.5 4.8 7.7 (1.3) (3.2) 2.9 8.3 (7.0) (39.6)
Other income...... 0.1 0.3 0.2 1.2 1.6 5.3 1.9 0.9 1.4 1.8
Interest
expense......... (1.3) (2.2) (4.6) (2.1) (3.2) (1.9) (2.1) (2.1) (3.9) (5.1)
Other expense..... -- -- -- -- -- (2.6) -- -- -- --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes and
cumulative
effect of change
in accounting
principle....... (9.9) 0.6 0.4 6.8 (2.9) (2.4) 2.7 7.1 (9.5) (42.9)
Income tax benefit
(expense)....... 3.4 (0.2) (0.1) (2.2) 1.0 0.9 (1.0) (2.6) 0.7 3.5
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income (loss)
before
cumulative
effect of change
in accounting
principle....... (6.5) 0.4 0.3 4.6 (1.9) (1.5) 1.7 4.5 (8.8) (39.4)
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
Cumulative effect
of change in
accounting
principle, net
of tax
benefit......... -- -- -- -- -- -- -- -- (13.8) --
------ ------ ------ ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... (6.5)% 0.4% 0.3% 4.6 % (1.9)% (1.5)% 1.7% 4.5 % (22.6)% (39.4)%
====== ====== ====== ======= ====== ====== ====== ======= ======= =======
</TABLE>
29
<PAGE> 31
The Company's business is subject to seasonal fluctuations. Given the
Company's historical results, and the historical strength of Storybook's first
quarter results, management anticipates that the majority of the Company's net
revenues will be derived from the first and fourth quarters. As a result, the
Company expects its sales and results of operations generally to be lower in the
second and third quarters than in the first and fourth quarters of each fiscal
year, which include Easter, Back-to-School and Holiday purchases. The Company
believes that this seasonality will continue in the future. The Company's
quarterly results may fluctuate as a result of numerous factors, including the
timing, quantity and cost of catalog mailings, the response rates to such
mailings, the timing of merchandise deliveries, market acceptance of the
Company's merchandise (including new merchandise categories or products
introduced), the mix, pricing and presentation of products offered and sold, the
hiring and training of additional personnel, the timing of other revenues such
as integrated program and mail list rental revenues, the timing of inventory
writedowns, the incurrence of other operating costs and factors beyond the
Company's control, such as general economic conditions and actions of suppliers
and competitors. Accordingly, results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full fiscal
year or any future quarter. The Company maintains a policy of deferring the
recognition of costs of mailings and amortizing those costs over the seasons in
which associated revenues will be recognized. Results of operations are affected
not only by the seasonality of the Company's net revenues, but also by seasonal
variations in product mix, the fixed portion of the Company's operating expenses
and the building of additional infrastructure in anticipation of the Company's
growth plans.
The decrease in net revenues and gross profits, and the increased operating
loss in the second quarter of fiscal 1997 compared with the first quarter of
fiscal 1997 were primarily the result of decreased catalog productivity due to
broad circulation of the remerchandised and repositioned Playclothes catalog
required to test the Playclothes database and a decrease in net revenues from
Japan due to adverse currency rate fluctuations to which the Company responded
by decreasing Japanese catalog circulation. Net revenues also declined due to
seasonal fluctuations. The increase in advertising and catalog production costs
and general and administrative expenses as a percentage of net revenues in the
second quarter of fiscal 1997 compared with the first quarter of fiscal 1997 was
primarily the result of increased expenses resulting from brand start-up costs
that are expensed as incurred, and spread over lower net revenues. Additionally,
effective as of January 1, 1997, the Company has changed its policy of
capitalizing list rental costs. This change was made in accordance with
Storybook's policy of expensing such costs as incurred. Furthermore, while
practices vary, the Company has decided to expense these costs as incurred. The
cumulative effect of the change was recorded as of December 29, 1996 and
approximated $3.0 million or $0.38 per share, net of tax benefit of $1.2
million. The net loss for the first quarter of fiscal 1997, as compared with net
income for the fourth quarter of fiscal 1996 was primarily the result of
increased expenses supporting the start-up of the Company's remerchandised and
repositioned Playclothes brand and new zoe brand.
The relatively constant net revenues in the third and fourth quarters of
fiscal 1996 over the comparable quarters in fiscal 1995, were the result of a
number of factors, including (i) the retail slowdown in July and the shift in
summer vacations to August caused by the Olympics, (ii) the "wear now" consumer
trend in the U.S. resulting in the delay of Back-to-School purchases from August
until after Labor Day, (iii) an unexpected mailing delay in November caused by
production problems at one of the Company's third-party printers, coupled with a
post office delay caused by the U.S. presidential elections and (iv) the shorter
Holiday season between Thanksgiving and Christmas in fiscal 1996 as compared to
fiscal 1995.
The Company capitalizes a portion of advertising and catalog costs
including: catalog development, printing, paper and catalog mailing expenses,
and amortizes these expenses in relation to catalog revenues from each catalog
mailing, generally over 12 weeks. The Company's general, and administrative
expenses are also affected by toll-free telephone expense and outbound shipping
costs, which are also related to revenues. As a result, the variable portion of
advertising and catalog costs and general and administrative expense has and may
continue to fluctuate with net revenues.
30
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Fulcrum has historically funded its operations through a combination of
funds generated from operations, bank credit facilities and the private sales of
debt and equity securities. Working capital requirements generally precede the
realization of net revenues. The Company draws on its working capital line to
produce its catalogs and increase inventory levels in anticipation of future
demand and to help ensure faster fulfillment of customer orders. A portion of
the Company's working capital needs for inventory and services are met by
increased accounts payable, extended payment terms and the establishment of
trade credit arrangements.
Net cash used by operating activities was $5.7 million, $5.3 million and
$8.2 million, in fiscal 1995, fiscal 1996 and the six months ended June 30,
1997, respectively. The decrease in fiscal 1996 compared with fiscal 1995 was
primarily due to increased cash flow generated by operations partially offset by
increased investment in management personnel, training and customer name
acquisition. The increase for the six months ended June 30, 1997 was primarily
due to non-recurring Playclothes start-up costs, additional advertising programs
than in the prior year and an increase in inventory relating to Fall
circulation.
Purchases of certain assets were $800,000, $2.5 million and $4.2 million in
fiscal 1995, fiscal 1996 and for the six month period ended June 30, 1997,
respectively. These expenditures were primarily related to investments in the
Company's facilities leased for its headquarters, call center, distribution
center and information systems.
In June 1997, the Company completed a private placement of $10.0 million in
subordinated debt (the "1997 Notes") with WSDF and affiliates of Arnold
Greenberg and Patrick K. Sullivan, directors of the Company, and $10.0 million
of Common Stock with WEP and affiliates of Messrs. Greenberg and Sullivan. The
June Whitney Investment was completed in connection with the Storybook
Acquisition. The 1997 Notes bear interest at a rate of 10.101% and have a
seven-year balloon payment. However, $7.0 million is required to be repaid
within five days of the Offering. See "Use of Proceeds." The Company will incur
an extraordinary expense of approximately $946,000 in connection with debt
extinguishment in the period in which such amount is repaid. See Note 3 of Notes
to Consolidated Financial Statements.
In October 1996, Fulcrum completed a private placement of $10.0 million in
subordinated debt (the "J.H. Whitney Note") and $2.0 million in Common Stock,
and warrants to purchase common stock with the Whitney Subordinated Debt Fund,
and the Whitney Equity Fund affiliate and two directors of the Company to fund
working capital. The J.H. Whitney Note bears interest at a rate of 10.101% and
has a seven-year balloon payment. However, $3.0 million is required to be repaid
within five days of an initial public offering, and such prepayment is therefore
specified as a use of proceeds of the Offering. The Company will incur an
extraordinary expense of approximately $668,000 in connection with debt
extinguishment in the period in which such amount is repaid. See Note 3 of Notes
to Consolidated Financial Statements.
In December 1996, the Company entered into an agreement with SunWest Bank
of Albuquerque, a subsidiary of NationsBank, to expand its credit facility
effective January 1, 1997, and subsequently amended on April 7, 1997 to increase
the borrowing limit from $10.0 million to $15.0 million. The Company's credit
facility bears interest at either a rate of 0.5% over the bank's corporate base
rate or 3.1% above LIBOR, at the Company's election. The Company has elected to
use 3.1% above LIBOR through September 30, 1997, which was 5.63% as of August 1,
1997. This credit facility also includes the right to borrow up to $2.0 million
for the purpose of issuing standby and commercial letters of credit and is
secured by the assets of the Company. The line of credit expires May 31, 1999.
As of June 30, 1997, the Company had outstanding $9.6 million under this line of
credit.
The Company believes that its existing lines of credit, available cash
(including the net proceeds of the Offering) and cash flow from operations will
be sufficient to support its capital requirements through at least fiscal 1998.
The Company may be required to seek additional sources of funds in the
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future, and there can be no assurance that such funds will be available on
satisfactory terms or at all. Failure to obtain such financing on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations.
NET OPERATING LOSSES
As of June 30, 1997, on a tax basis, the Company had net operating losses
of $2.8 million, which may be used to reduce the Company's future income taxes.
Of this amount $800,000 relates to the periods prior to the acquisition of
NewStork, Inc. by FCP Direct, Inc., the successor to the Company by merger. The
Internal Revenue Service has issued a ruling, which the Company is currently
appealing. This ruling would have the effect of reducing the Company's
pre-acquisition net operating losses by up to approximately $500,000. Until such
time as the net operating losses are fully utilized, a higher percentage of cash
generated from operations will be available than would be available if the
Company were unable to use the net operating losses to reduce its taxable
income. See Note 8 of Notes to Consolidated Financial Statements.
INFLATION
Results of operations have not been significantly affected by inflation
since inception. The Company, in the normal course of business, has been able to
offset the impact of increased costs through operating efficiencies and selected
price increases.
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BUSINESS
OVERVIEW
Fulcrum is a leading catalog retailer of branded apparel, shoes and
accessories for children, teens and young women up to 24 years of age. The
Company's strategy is to capitalize on the large opportunity in the children's
and teen apparel catalog market by building a portfolio of distinct brands
targeting discrete market segments. The Company's portfolio of brands includes
After the Stork, Playclothes, Storybook Heirlooms, Little Feet, zoe, SunSkins,
Discount Direct, and a test of a new strategic alliance with Sears. The Company
believes that its portfolio of brands combined with its strong customer
relationships provide unique cross marketing opportunities that allow the
Company to increase customers' lifetime value and decrease customer acquisition
costs. As of June 30, 1997, the Company's housefile included 4.4 million names
of which 1.4 million had made at least one purchase from one of the Company's
brands in the last 24 months. See also "The Company."
Fulcrum intends to continue growing its portfolio of brands by: maximizing
the potential of its brands through targeted marketing, mailing and
merchandising; developing new brands that appeal to its growing customer base
through in-house brand creation and strategic alliances; developing new markets
and product categories that leverage the Company's large database and strong
customer relationships; and pursuing strategic acquisitions. Since 1995, the
Company has made significant investments in its management team and
infrastructure platform, which it believes positions the Company to support
substantial growth.
THE CHILDREN'S AND TEEN APPAREL CATALOG MARKET
With the large "baby boom" generation maturing and having children, the
younger segments of the U.S. population have increased in numbers in recent
years. According to the U.S. Bureau of the Census, this "echo boom" generation
of children, teens and young adults up to age 24 was projected to be at 95
million in 1997 and is anticipated to grow to over 100 million by 2005. The echo
boom generation comprises more than one-third of the total U.S. population.
Furthermore, the U.S. Bureau of the Census estimates annual birth rates will
remain constant at the historically high level of approximately 3.8 million new
births each year until at least 2005.
The U.S. Bureau of Census has reported a significant increase in
dual-income families. In 1994, 61.7% of married women with children under age
six and 75.5% of married women with children ages six to 13, worked (as compared
with 36.7% and 51.8%, respectively, in 1975). The trend of more births to
time-constrained working mothers has resulted in increased demand for children's
direct marketing companies that can provide convenient shopping at home or work,
24 hours a day, 365 days a year.
According to NPD Research, Inc. ("NPD"), in 1996, U.S. children and teen
apparel catalog purchases represented only 2.9% or $791.0 million of total
children's and teen apparel purchases of $26.9 billion, which compares to
women's apparel catalog purchases of 9.6% of total women's apparel purchases of
$85.1 billion. Since women are largely responsible for, or significantly
influence, children and teen apparel purchase decisions, the Company believes
that over time, the penetration for children's and teen catalog sales should
grow to more closely approximate the percentage of women's apparel catalog
purchases.
GROWTH STRATEGY
The Company's strategy is to build on its strong customer relationships by
offering a broad portfolio of branded apparel, shoes and accessories targeting
children's and teen apparel markets. The following are key elements of this
strategy:
Maximize Each Brand. The Company strives to maximize the potential of each
of its brands by developing strong customer relationships and by cross marketing
across multiple brands. The Company employs the Fulcrum Formula, a unique brand
management philosophy, to build these relationships. See "-- Brand Management
Philosophy."
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Develop New Brands. The Company develops targeted brands designed to appeal
to newly defined and evolving segments of its strong customer base through
in-house brand creation and strategic alliances. Recent examples include the
Company's creation and roll-out of Little Feet and zoe and a test of a strategic
alliance with Sears. See "-- Fulcrum's Portfolio of Brands."
Develop New Markets. The Company is constantly evaluating new geographic
markets, distribution channels and product categories to leverage and extend its
strong customer relationships. Recent examples include the testing and
introduction of several of the Company's brands in Japan, in new wholesale
channels and retail outlets and on the Internet. The Company is also evaluating
new product categories such as costumes, dolls, cosmetics and bedding.
Pursue Strategic Acquisitions. As part of the Company's portfolio strategy,
it continuously evaluates the strategic fit of potential acquisition candidates
to leverage its customer relationships and grow its housefile. Recent examples
include the Playclothes Acquisition and the Storybook Acquisition.
BRAND MANAGEMENT PHILOSOPHY
The Company builds strong relationships with its customers and their
families through execution of the Fulcrum Formula. The Company believes that
through consistent execution of the Fulcrum Formula, it increases customer
satisfaction, market penetration, customer lifetime value and the intrinsic
value of each of its Company's brands. Key elements of the Fulcrum Formula are
to (i) understand the Company's target customer, (ii) promise a superior product
and shopping experience, (iii) deliver exceptional customer service and
fulfillment, (iv) measure and analyze the performance of the Company's branded
offerings and (v) refine and improve the product and shopping experience.
[THE FULCRUM FORMULA GRAPHIC]
Understand the Customer. By thoroughly understanding customers' needs and
expectations, Fulcrum strives to continuously improve its branded offerings,
increase the efficiency of its mailings through targeted marketing and identify
new product and market opportunities for brand extensions and new brand
development. The Company regularly refines its understanding of customers' needs
and expectations by using sophisticated statistical modeling and segmentation
techniques; soliciting feedback from its customers; and performing detailed
market research, focus group studies and surveys.
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Promise a Superior Product and Shopping Experience. The Company targets
specific segments of the children's and teen catalog apparel market with
distinctive branded offerings. Each brand has its own voice that is communicated
to the target customer through all elements of the catalog, including
merchandise selection, price points, product quality, layout, lifestyle
photography, catalog production quality, copy and service policies, such that a
highly relevant convenient shopping experience is expected.
Deliver Exceptional Customer Service and Fulfillment. The Company believes
that exceeding customer expectations is the key to building customers
relationships, attracting new customers, increasing customer lifetime value and
reducing operating costs. The Company strives to provide each customer with
prompt, knowledgeable and courteous customer service, and rapid order
fulfillment. The Company's employee training programs, call center, systems,
order fulfillment, unconditional return policy and strict operating procedures
are designed to carry out this strategy.
Measure and Analyze Performance. The Company devotes substantial time and
resources to data collection and measurement and analysis of performance. The
Company uses advanced systems to evaluate historical offer performance, customer
feedback, product performance, sales trends, customer demand, inventory
positions, customer returns and projected sales. The Company also conducts
ongoing analyses of its competitors. These analyses are used to make mailing and
merchandise decisions and to test new product categories and brand extensions.
Refine and Improve the Product and Shopping Experience. The Company
believes that continuous refinement of the shopping experience is required in
order to provide the highest level of customer satisfaction. The Company
continuously refines its catalog mailing plans and merchandise mix based on
ongoing measurement and analysis of performance.
OPERATING STRATEGY
The Company believes that focused execution is critical to its success.
Following are key elements of Fulcrum's operating strategy:
Mail Smarter. The Company's overall mailing strategy is to increase
circulation while improving each brand's contribution to operating results. The
Company seeks to optimize customer mailings by utilizing sophisticated modeling
techniques to increase revenues from catalogs mailed to each segment of its
housefile. The Company also intends to lower the investment per new customer
acquired by utilizing its proprietary marketing model techniques and entering
into strategic alliances.
Expand and Refine the Merchandise Offer. The Company regularly evaluates
and refines merchandise categories in order to generate additional sales per
order. For example, the Company has expanded its existing categories of basics,
boys' clothing and swimwear and has added new categories of counter-seasonal
items, outerwear, special event wear, costumes, dolls and accessories.
Expand Geographic Reach. The Company seeks to continue to develop select
international markets, which to date have included the introduction of After the
Stork, Playclothes, Storybook Heirlooms, zoe and Little Feet in Japan. The
Company also offers its catalogs through internationally published
catalogs-of-catalogs to identify new geographic markets.
Develop New Distribution Channels. The Company believes that by extending
certain brands and product lines to select wholesale channels in the U.S.,
Fulcrum can increase its brand awareness and overall product distribution. For
example, the Company recently introduced its SunSkins brand into select retail
channels and is evaluating the potential for distribution of its other brands
through select wholesale channels. The Company also plans to utilize the
Internet as a vehicle for brand building, to communicate with existing customers
by e-mail, to identify new customers and to provide a convenient shopping forum.
Leverage New Infrastructure. Since 1995, the Company has made significant
investments in its call center, distribution center, management information
systems and operating equipment. Fulcrum believes that its infrastructure is
capable of supporting substantial growth and delivering significant
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operating leverage and efficiencies. Furthermore, Fulcrum's facilities are
modularly expandable to provide the Company with the flexibility to accommodate
future growth.
FULCRUM'S PORTFOLIO OF BRANDS
Fulcrum was founded in 1994 to build a portfolio of brands to capitalize on
the significant growth opportunity in the children's apparel catalog market.
Fulcrum's investments in its portfolio of brands, housefile, management team and
infrastructure were made to provide the Company with significant operating
leverage. The Company's portfolio approach enables it to leverage its customer
relationships by cross mailing a broad base of brands targeting specific
customers' fashion and price point needs. Each of the Company's brands has a
dedicated brand team comprised of a brand manager, brand merchandise manager and
a catalog creative manager. The Company's brand team approach ensures a fresh,
relevant presentation of its products from season to season, while at the same
time maintaining the consistent and distinctive voice of each brand.
The Company's brands target well-educated, middle to upper, dual-income
parents with children and teens up to 12 years old and girls ages 10 to 24 years
old. The Company's brands cover a broad range of children and teen apparel
merchandise categories, including sweaters, shirts, pants, dresses, jumpers,
underwear, hosiery, shoes, sleepwear, swimwear, outerwear, accessories, personal
care products, costumes, bedding, dolls and related accessories. The following
is a brief overview of each of the Company's brands and its test of a new
strategic alliance:
After the Stork. After the Stork, first published in 1980, presents a high
quality, value-priced, brand to customers interested in purchasing basic and
classically styled clothing made primarily of natural fibers. After the Stork
products are durable and most are 100% cotton, unisex and are generally
available in broad color assortments. The Company's demographic surveys indicate
that the typical After the Stork customer is a college-educated 25 to 44 year
old married woman with a household income over $50,000 and children up to 10
years old. Most After the Stork customers reside either in urban areas or in
rural regions where retail choices are more limited. The Company mailed 15.2
million After the Stork catalogs in fiscal 1996 in 17 distinct editions.
Playclothes. Playclothes, first published in 1991 by The Walt Disney
Company, presents a high quality, value-priced, branded offering of outfits
designed to appeal to customers who want to add fashionable, every day clothing
to their children's wardrobes. Boys and girls apparel is clearly differentiated,
and the merchandise selection is directed more toward girls than boys. The
Company believes that the novelty look of much of the Playclothes merchandise is
especially appealing to specialty store and boutique shoppers. The Company's
demographic surveys indicate that the typical Playclothes customer is a 25 to 40
year old married woman with a household income over $40,000 and children two to
12 years old. Most Playclothes customers reside in suburban areas and are
specialty store and boutique shoppers. As of January 1997, the addition of
Playclothes to the Fulcrum portfolio created a large cross mailing opportunity
as less than 25% of the Playclothes housefile names overlapped with the
Company's existing house file. The Walt Disney Company mailed 18.2 million
Playclothes catalogs in twelve editions in 1996. The Company mailed its first
edition of the Playclothes catalog in January 1997 to prospective customers in
the U.S. and Japan.
Storybook Heirlooms. Storybook Heirlooms mailed its first catalog in
September 1990 and was acquired by the Company in June 1997. Storybook Heirlooms
presents an array of fashionable and dressy, upscale outfits and accessories for
girls ages two to 12 years. The goal of the Storybook Heirlooms catalog is to
"make little girls' dreams come true" through the presentation of unique,
feminine specialty dresses and accessorized outfits in a romanticized setting.
The Storybook Heirlooms brand is designed to offer special occasion outfits for
events including holiday parties and costume days, weddings and communions.
Storybook Heirlooms' typical customer is a 25 to 55 year old working mother with
a household income of $92,000; however, over 34% of Storybook Heirlooms customer
base extends to customers who have household incomes of less than $45,000.
Storybook Heirlooms mailed 10.4 million catalogs in fiscal 1996 in 14 distinct
editions.
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zoe. zoe, which the Company recently developed and first mailed in August
1997, presents a broad assortment of popular branded basic and fashionable
outfits and accessories for Generation Y girls, ages 10 to 24. The Company
believes that zoe provides the Company an attractive opportunity to target a
new, older age segment of its market that can significantly leverage its
customer relationships with mothers. zoe merchandise is sourced primarily from
leading designers. Pending the results of zoe's test mailing, the Company may
expand its mailing of the zoe catalog in 1998. See "Risk Factors -- Brand
Development and Strategic Alliance Risks."
Little Feet. Little Feet was first published in Fall 1996. The Company
believes Little Feet is the only national footwear catalog exclusively for
children. Little Feet offers a broad, mid-priced selection of basic and fashion
shoe styles and a limited selection of coordinating hosiery, outerwear and
apparel items. The Company's demographic surveys indicate that the typical
Little Feet customer is a 25 to 44 year old married woman with children ages six
months to 12 years. The Company believes that Little Feet appeals to a broad
cross section of Fulcrum customers, as well as to the customers of other
children's catalogs. Following an introductory mailing of approximately 400,000
catalogs in fiscal 1996, the Company is expanding circulation of Little Feet in
fiscal 1997.
SunSkins. The SunSkins line was developed by the Company in 1995 in
recognition of its customers' desire to protect their families from the sun. The
SunSkins line is made from a fabric which blocks in excess of 97% of the sun's
harmful UV rays. With skin cancer rates on the rise, federal agencies have
issued strong warnings to parents to protect their children from even routine
daily exposure to the sun. The Company markets SunSkins through its own
catalogs, as well as through other direct marketing channels and select U.S. and
international wholesale channels.
Discount Direct. Discount Direct, the Company's "Warehouse Sale by Mail,"
was first published in Spring 1996 and serves as a direct mail liquidation
vehicle for its brands. Discount Direct offers the Company's customers reduced
prices on discontinued merchandise and is circulated in a variety of formats
including a full size catalog, inserts in the Company's full-price catalogs and
as inserts in packages shipped to customers. The Company mails Discount Direct
as it determines appropriate to manage inventory. The Company also liquidates
merchandise through clearance versions of its other branded catalogs.
Sears. The Company and Sears have arranged to test market certain of the
Company's brands to select individuals from the over 20 million name customer
file of Sears, who are not existing customers of the Company. The catalogs will
be substantially similar to the Company's catalogs, but have a distinct cover
with the Sears logo. Pending the results of this test, the Company may enter
into a definitive strategic alliance with Sears. See "Risk Factors -- Brand
Development and Strategic Alliance Risks."
Just For Kids. In connection with the Storybook Acquisition, the Company
acquired the Just For Kids brand and the Just For Kids customer list of 3.4
million names (which the Company has not yet validated or added to its
housefile). The Just For Kids brand was acquired by Storybook from The Walt
Disney Company in 1996. The Just for Kids brand is expected to present costumes,
dolls and games catering to the year-round dress up and imagination play market.
The Company is evaluating the Just For Kids brand to test the viability of this
concept. Pending the results of test mailings, the Company may expand
circulation of the Just For Kids brand.
COMPANY CULTURE
Fulcrum's culture focuses on delivering total customer satisfaction, a goal
shared by all employees at all levels of the Company. The Company believes that
its people are its most important asset. The Company also believes that it is
management's role to train front-line employees to assume high levels of
responsibility, provide them with appropriate support, and thereby empower them
to serve the Company's customers and achieve excellence. The Company instills in
each employee a strong sense
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that each individual contributes to total customer satisfaction. The Company
believes that its culture is best stated in its corporate belief statement:
WE BELIEVE . . .
OUR CUSTOMERS MUST BE SATISFIED, TOTALLY!
EACH OF OUR FELLOW EMPLOYEES MUST BE TREATED WITH RESPECT
We are dedicated to fostering a work environment where team harmony,
individual growth opportunities and the dignity of every employee are paramount
concerns.
WE MUST ACHIEVE EXCELLENCE
We are dedicated to being the best we can be.
We will constantly redefine excellence and strive to achieve it.
We will not settle for less.
THE QUALITY OF OUR FUTURE DEPENDS ON CONTINUED INVESTMENT IN OUR BUSINESS
We are dedicated to profitable growth.
To create opportunities for our Company, we must invest ourselves in our
business every day.
OUR SUPPLIERS ARE OUR PARTNERS
We are dedicated to fostering mutually beneficial relationships with our
suppliers.
We understand that our futures are linked.
WE MUST SUPPORT OUR COMMUNITIES
We are dedicated to sharing our talents and resources
to improve the communities in which we live and work.
PROPRIETARY HOUSEFILE
As of June 30, 1997, the Company's housefile contained 4.4 million names,
with 1.4 million active customers who have purchased at least once from one of
the Company's brands in the last 24 months. The Company believes its housefile
is the largest of any children's apparel catalog company. The Company is
constantly refining and developing its housefile based on data collected from
customer calls, mailings and orders, as well as the integration of new customer
data purchased from select list brokers and list sources. The Company treats its
customer list as a proprietary asset which has long-term strategic value. From
time to time, however, the Company segments portions of its list to be rented to
select parties at competitive rates which have and may include other leading
consumer companies and other leading direct marketers.
MARKETING
A principal component of the Company's success is its ability to build and
maintain its housefile in order to obtain new customers, retain existing
customers and build brand recognition. The following describes the Company's
principal marketing activities.
"Mining" the Housefile. The Company's housefile contains detailed
information on each customer, including purchase history and demographic,
geographic and psychographic data. This data is used by the Company's
proprietary statistical models to rank each customer's likelihood of responding
to a given offer, with the goal of increasing the contribution to operating
results of each catalog mailing. The Company believes that its sophisticated
statistical modeling and customer segmentation techniques provide it with a
competitive advantage which allows it, over time, to improve net revenues per
catalog mailed on a cost effective basis.
Cross Marketing Opportunities. The Company employs proprietary cross
mailing statistical models which allow it to leverage its housefile and acquired
customer lists and thereby reduce the cost and risk of obtaining new customers.
Beginning in 1997, the Company first applied these models to the After the
Stork, Playclothes, Gymboree Corporation, Osh Kosh B' Gosh, and The Disney
Catalog lists.
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The Company believes that as its housefile grows and new brands are added to its
portfolio, further leverage will be created. The Company continues to develop
and test new models and identify new sources for prospective customers through
strategic database alliances with other leading direct marketers.
Obtaining New Customers. The Company's primary method for obtaining new
customers is to mail catalogs to segmented lists that are determined likely to
provide a positive contribution to operating results. The Company obtains the
names of prospective customers through a variety of sources, including (i)
strategic alliances with leading noncompetitive direct marketers, (ii) customer
lists of children's product, adult apparel, and other lifestyle catalogs, rented
on a one-time basis, (iii) compiled and participatory databases, (iv)
subscribers of children and family-related magazines and (v) magazine and other
advertisements. The use of these outside sources for names of prospective
customers has been and is expected to continue to be a key component of the
Company's efforts to attract new customers. Prospect mailings have historically
generated lower revenues per catalog than names derived from the Company's
housefile. Accordingly, the Company anticipates that overall revenues per
catalog would decline if the Company increased the percentage mix of prospect
names to housefile names in any given mailing plan. However, the Company must
also constantly update its mailing lists by identifying new customer names and
is committed to aggressively prospecting for new customers.
The Company believes it has excellent list exchange relationships. During
fiscal 1996, Fulcrum mailed 15.5 million catalogs, of which 50.8% were mailed to
prospective customers, and 49.2% were mailed to existing customers from the
Company's housefile.
Customer Retention Programs. Fulcrum currently offers customers who have
met certain purchase levels a specialized customer service program called the
"Preferred Shopper Program." Services provided under the Preferred Shopper
Program include a personal shopper, personalized follow-up letters and telephone
calls and special promotions. The Company believes that this program, coupled
with the Company's other customer service strategies, promotes greater customer
loyalty and higher retention rates. The Company continuously tests new customer
retention programs and strategies.
Brand Building Efforts. The Company promotes its brands by providing
editorial material to key print media, conducting ongoing direct media
communications, providing the media with brand-specific press kits, conducting
special promotional programs, and participating in new media, such as the
Internet. The Company publishes a newsletter that provides information, services
and promotional opportunities to certain customers and activities and contests
for their children. Fulcrum is also testing its website as a means to build
brand awareness.
Integrated Marketing Programs. Another aspect of the Company's marketing
strategy is to sell advertising space in its catalogs to well-known consumer
product companies. These programs bring advertising and merchandising together
in a single format, providing the Company with advertising revenue while at the
same time closely associating the Company's brands with well-known consumer
product brands, such as All, BeechNut, Cheer, Dannon and Snuggle.
MERCHANDISING AND PRODUCT DESIGN
The merchandising process starts with a detailed analysis of the Company's
sales history to establish projected sales levels, an assortment plan and gross
margin targets. Fulcrum's marketing and merchandising groups work closely
together to forecast gross merchandise dollars by merchandise category. The
merchandising and design teams develop merchandise lines by studying prior
sales, extensive customer feedback analyses of prior season's merchandise
offerings, customer and merchandiser feedback, reviewing competitor catalogs,
visiting retail stores, surveying trend magazines, evaluating fabric lines and
attending industry shows to determine worldwide market trends. Based on this
research and analysis, trends and color themes are developed, fabric and prints
are selected and products are designed and selected by each brand's merchandise
manager.
The Company's brands consist of a broad assortment of children's and teen
apparel merchandise categories, including sweaters, shirts, pants, dresses,
jumpers, underwear, hosiery, shoes, sleepwear,
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swimwear, outerwear, accessories, personal care products, costumes, bedding,
dolls and related accessories. The Company's seeks to increase average order
values and customer retention rates by providing a broad merchandise assortment
and by regularly adding fresh merchandise and refining existing merchandise
categories. The Company designs most of its own products, but also purchases
branded products from other companies. The Company may increase the page counts
of its catalogs to accommodate the introduction of new, related or similar
merchandise and merchandise categories. The Company's merchandise mix is
analyzed and refined throughout each season as items are introduced,
remerchandised and ultimately replaced if they do not meet the Company's
performance standards.
The Company regularly collects product improvement and merchandise mix
ideas from its customers. Customer service representatives solicit feedback and
comments from the Company's customers are distributed to senior management, each
brand team, marketing, merchandising and production for review. This feedback is
also used to develop merchandise placement pricing and assortment decisions.
INVENTORY MANAGEMENT
The Company currently offers a broad assortment of children's and teen
apparel that is carefully controlled through sophisticated inventory management
techniques. As of July 28, 1997, the Company's inventory management system
contained over 27,000 SKUs. Inventory buy plans are forecasted at the SKU level
using the Company's forecasting system, which takes into account historical
seasonality models, market expectations, product and raw material lead times and
overall category assortment. The Company believes that its centralized
inventory, which is managed by its integrated warehouse management system,
provides the Company with the ability to maintain high levels of inventory
accuracy and to continuously measure and analyze inventory levels and compare
them against demand. This helps the Company to lower inventory levels, increase
turns, maintain high fill rates, reduce markdowns and increase GMROI (gross
margin return on inventory). If an overstock position develops, the Company acts
quickly to dispose of excess inventory at the highest possible margin by moving
the product through several promotional distribution channels, including price
promotions in current season catalogs, end-of-season clearance catalogs,
Discount Direct and sale flyers in outbound packages.
MANUFACTURING
Fulcrum manages most aspects of the manufacturing supply chain, but does
not invest in sewing operations, electing instead to contract cutting and sewing
functions to qualified factories. The Company believes that outsourcing reduces
investments in fixed assets and provides flexibility to source on a worldwide
basis to achieve lower prices and higher quality. In fiscal 1996, the Company
outsourced 66.4% of its manufacturing to suppliers in the U.S. and 33.6% to
international suppliers. Fulcrum currently works with approximately 147
factories and suppliers, with no one exceeding 5.0% of total supplier purchases.
Fulcrum's quality assurance teams inspect production lines to ensure that
Fulcrum's garments are manufactured to the Company's exacting quality
specifications. Fulcrum requires contractors to certify that all applicable
labor laws are being followed and also monitors working conditions for safety
and fairness. Fulcrum believes that continuous communication is critical to the
success of its manufacturing process and, as such, suppliers are reviewed
periodically to identify opportunities to strengthen relationships and improve
communications. Fulcrum evaluates factories on an ongoing basis. In 1997,
Fulcrum implemented a formal supplier communication program with more frequent
and structured feedback, and commenced testing e-mail opportunities with certain
of its suppliers. See "Risk Factors -- Reliance on Unaffiliated Manufacturers."
CUSTOMER SERVICE AND FULFILLMENT
Fulcrum provides exceptional customer service by fulfilling the needs of
its customers in a timely and efficient manner. The Company's daily service
operations revolve around the call center, the distribution center and customer
returns.
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Customer Service. Fulcrum maintains a highly efficient, state-of-the-art
call center at its corporate headquarters in Rio Rancho, New Mexico and an
international call center in the San Francisco, California Bay Area. Once a call
is received by the Company, it is routed to the first available customer service
representative by the Company's modularly expandable, state-of-the-art telephone
system. As of July 28, 1997, the Company had 410 customer service representative
stations installed in its call centers and 565 trained customer service
representatives on staff. The Company closely tracks forecasted demand and hires
and trains new customer service representatives and seasonal customer service
representatives as required to maintain its service standards. All of the
Company's employees undergo a three-month training program and receive ongoing
training. The Company currently receives training grants from the State of New
Mexico to partially offset training costs.
The Company's telephone system keeps customer service representatives
abreast of order volume on a real-time basis. All customer service
representatives are kept apprised of the current status of calls waiting,
average speed to answer, longest wait time, average time to abandon, and the
number of representatives logged in and busy or idle on the phone system.
Customer service representatives are empowered to change work assignments to
meet customer demand and team captains are responsible for monitoring and
adjusting staffing levels as required. Customer service representatives take
orders via the Company's order entry system, which is programmed to guide the
customer through a unique, carefully designed call program, and are empowered to
resolve most customer inquiries without supervisor involvement. For out-of-stock
items, the customer service representative can quote availability directly from
purchase order information on a real-time basis and can instantly recognize all
available in-stock alternatives for the item in question by looking at a matrix
of substitute items. Items received into the Company's distribution center,
through a real-time receiving system, are instantly available to customer
service representatives for sale. Online information is also available to
provide customer service representatives with information on coordinating
outfits, thereby supporting cross-selling opportunities. The Company also
accepts orders by mail, fax and e-mail and accepts payment by credit card,
personal check and money order.
To provide the highest level of customer service to its Japanese customers,
Fulcrum is testing a third-party call center in Tokyo, Japan to take orders and
provide customer service and returns processing in Japan. This center opened in
the first half of 1997 on a test basis and will have a real-time connection to
the Company's computer system. Japanese customer service representatives are
trained by the Company and follow the same customer service standards as
representatives in the Company's U.S. call centers. The Company is also
evaluating moving all international customer service to its San Francisco,
California Bay Area call center in 1998 to reduce the costs associated with
international orders, while maintaining the same high levels of customer service
and satisfaction.
To provide exceptional customer service and redundancy 24 hours a day, 365
days a year, Fulcrum has contracted with a remote call center in Los Angeles,
California, which provides overflow, off hours and disaster support. On a daily
basis Fulcrum uploads, via modem to its remote call center inventory
availability, product descriptions and specifications. The Company also
downloads customer orders taken by its remote call center. The Company's goal is
to answer at least 98% of all domestic calls at its primary call center. There
can be no assurance that the use of the remote call center will provide the
Company with the necessary support or that the Company will be able to
independently answer 98% of all domestic calls now or in the future. See "Risk
Factors -- Integration of Storybook Acquisition."
Fulfillment. All order information is processed through the Company's
computer system and linked to its distribution center, which generally allows it
to ship each order within 24 to 48 hours. During each phase of the shipping
process, the system is updated with the exact status of each customer order,
enabling the call center to provide real-time information regarding customer
orders. Before leaving the warehouse, each package is scanned by a manifesting
system, which is integrated with the order entry, billing and fulfillment
systems. The manifesting system records the exact time that the order left the
building and the method of shipment. This information is immediately available
to the customer through customer service. The customer's credit card is billed
upon shipment, and the Company typically receives funds within two to three
business days. Any disruption in the Company's
41
<PAGE> 43
ability to fulfill its orders on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Order Fulfillment."
Returns. The Company has an unconditional return policy for all of its
children's merchandise. The Company is developing its return policy for zoe. The
Company establishes a reserve for returns in its financial statements based on
historical return rates. Because the Company's return reserves are based on
historical return rates, there can be no assurance that the introduction of new
merchandise in existing catalogs, the introduction of new catalogs, changes in
the merchandise mix or the introduction of new catalogs in international
markets, introduction of new distribution channels or other factors, will not
cause actual returns to exceed return reserves. In the second half of 1997 the
Company is testing a third-party return center in Tokyo, Japan to provide the
same level of service to its Japanese customers as provided in the U.S. See
"Risk Factors -- Merchandise Returns."
INFORMATION SYSTEMS
The Company is committed to investing in information systems to increase
its database utilization, the sophistication of its propriety modeling
techniques and its operating efficiency. The Company believes that investing in
information systems in anticipation of customer and sales growth allows it to
maintain operational flexibility to capture strategic or market opportunities,
including increased sales volumes and shifts in customer preferences. The
Company further believes that continuous data collection and analysis are
central to the competitive success of the Company's business. The Company's
information systems strategy team, which includes all members of senior
management, identifies business challenges and adopts the most appropriate
technology solution. Importantly, such solutions are designed to ensure tight
integration of all existing systems and provide Company-wide communication.
The Company has made, and continues to make, significant investments in
computer systems which support marketing, merchandising, forecasting, customer
service, inventory management, fulfillment, and financial control and reporting.
These systems enable the Company to monitor, on a real-time basis, customer
demand, customer orders, gross margins, inventory and shipping. Specific
investments made in the last 24 months to upgrade Fulcrum's information systems
infrastructure include (i) upgraded computer hardware, (ii) upgraded telephone
hardware, (iii) investments in warehouse efficiency, including bar coding
hardware and software, new conveyor systems and facility expansion and (iv) new
marketing, forecasting, call center, distribution center, MRP and accounting
software.
The Company uses data warehousing to ensure consistent and timely data
collection and analysis. The Company also utilizes a sophisticated marketing
database, which aids in the collection of transaction information, cross checks
such information for consistency, and enables the Company to perform analysis
and regression modeling.
Disaster Recovery. In order to provide exceptional customer service, the
Company's call center and distribution center are supported by numerous disaster
recovery protocols. The Company has installed two emergency generators that
provides the electricity needed to continue all operations during a power
failure. In addition, each integral system within the Company's operations is
directly connected to battery powered back-up systems and each critical system
is backed up to maintain the Company's ability to take orders and ship orders in
accordance with the Company's service standards. All critical data is
continuously backed up utilizing simultaneous back-up technology and daily back-
ups are stored appropriately to preserve data integrity. There can be no
assurance that the Company's precautions will be sufficient to prevent a delay
in operations and any significant delay could have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Management Information Systems."
SUPPLIERS AND RAW MATERIALS
Fulcrum's raw material needs consist primarily of fabrics and trims for
garments and paper for catalogs. Fulcrum maintains flexible agreements with
suppliers, which are typically for one season and
42
<PAGE> 44
are only active when service standards are met. The Company's growth has
required its suppliers to perform at a consistently high level. Fulcrum shares
analyses and other information with its suppliers to assist them in
understanding the goals of the Company, and thereby empowering them, as
partners, to be an integral part of Fulcrum's success. Fulcrum is not currently
a party to any long-term supply contracts (other than a three-year contract for
"800" service from AT&T), but may enter such contracts in the future. Fulcrum's
growth has strengthened its leverage with suppliers and has helped minimize raw
material cost increases. In the future, Fulcrum may consider bulk purchases of
commodity materials.
Fulcrum prints its catalogs with a third-party catalog printer that
provides printing and mailing services. The Company separately negotiates for
paper purchases on a quarterly basis directly with paper mills. While paper
prices experienced significant increases in 1995, the Company's overall print
costs were not materially affected, as compared to 1994, as a result of cost
containment measures instituted by the Company in the print area subsequent to
the March 1994 acquisition of After the Stork. Paper prices have now receded
from 1995 levels; however, the Company is continuously looking for ways to
control and reduce paper and printing costs. While the Company has historically
passed on to customers the costs of overnight and ground delivery of
merchandise, it has not, and does not intend to pass on, the costs of catalog
mailings and paper to its customers. Material increases in paper or catalog
delivery costs or the inability to pass on the costs of overnight and ground
delivery of merchandise could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has not
taken any steps to hedge commodity price fluctuations. See "Risk
Factors -- Fluctuations in Postage and Paper Expenses."
COMPETITION
The children's and teen apparel market is highly competitive with few
barriers to entry, and the Company expects competition in this market to
increase. The Company's competitors include other children apparel catalogers,
such as Biobottoms, Children's Wear Digest, Hanna Andersson and The Wooden
Soldier, as well as traditional apparel manufacturers and retailers of
children's clothing, including such brands as The Gap (including its Baby Gap,
Gap Kids and Old Navy brands), Gymboree, L.L. Bean, Lands' End, OshKosh B'Gosh
and J.C. Penney's. With the introduction of zoe; the Company will also compete
with teen apparel catalogers and retailers including The Limited, Gadzooks,
Delia's, The WetSeal, Urban Outfitters, Buckle and Charlotte Russe. Many of the
Company's competitors are larger, have longer operating histories, have
substantially greater financial, distribution and marketing resources and have
significantly greater name recognition than the Company.
The Company believes that the principal competitive factors in the
children's and teen apparel market are strength of brand, quality, style, price,
selection, convenience, product availability, and customer service and
fulfillment. While the Company believes that it has been able to compete
successfully on the basis of these factors, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. In
addition, the Company expects that the direct marketing industry will continue
to be affected by technological changes in distribution and marketing methods,
such as online catalogs, retail kiosks and Internet shopping. The Company
believes its success will depend, in part, on its ability to adapt to new
technologies and to respond to competitors' actions in these areas. See "Risk
Factors -- Competition."
EMPLOYEES AND LABOR RELATIONS
As of July 18, 1997, the Company had 667 employees at its Rio Rancho
facility, of whom 141 were salaried, 496 were hourly and 30 were part-time and
220 employees at its Foster City and Hayward facilities of whom 40 were
salaried, 134 were hourly and 46 were part-time. None of the Company's employees
are covered by a collective bargaining agreement. The Company believes that it
provides employees a competitive and attractive salary and benefits packages and
that the general labor market conditions in Rio Rancho, New Mexico and the San
Francisco, California Bay Area are favorable, with
43
<PAGE> 45
the existence of a relatively well-educated and sizable labor pool. The Company
considers its relationship with its employees to be excellent.
PROPERTIES
The Company's 160,000 square foot headquarters building is leased from
Fulcrum Properties L.P., a Delaware limited partnership ("Properties"), pursuant
to a ten-year lease. The headquarters building also houses the call center and
distribution center. The Company also leases a 19,000 square foot facility in
Foster City, California and a 33,500 square foot facility in Hayward, California
acquired as a result of the Storybook Acquisition. The Company plans to
consolidate the functions carried out at its Foster City facility and to
relocate the functions carried out at its Hayward facility to its Rio Rancho
facility, by the end of 1997. The Company has agreed to purchase all of
Properties' rights in the headquarters building (including Property Bond
Purchaser, Inc. and the County Lease, as defined below) upon completion of the
Offering. In 1996, the Company entered into an arrangement with the City of Rio
Rancho whereby the Company is permitted to make certain payments in lieu of
property taxes otherwise due. In order to effect such arrangements, the
Industrial Development Board of Rio Rancho, New Mexico issued industrial
development revenue bonds due 2021 to Property Bond Purchaser, Inc., a New
Mexico corporation which is a wholly owned subsidiary of Properties (the
"Bonds"), and used the proceeds of the Bonds to obtain record title to the
headquarters building used by Fulcrum. The headquarters building is leased to
Properties pursuant to an industrial development revenue bond lease (the "County
Lease") and, in turn, subleased to the Company. See "Summary -- Proceeds of the
Offering" and "Certain Relationships and Related Transactions." The Company
believes its facilities are well-maintained and in good operating condition.
INTELLECTUAL PROPERTY
Certain of the Company's trademarks and trademark applications are held by
Brands and licensed to the Company under terms contained in the Amended and
Restated Trademark License and Option Agreement between Brands and Fulcrum. The
Company has paid a fee equal to 0.05% of its revenues to Brands during fiscal
1996 through the present. The Company's After the Stork, Storybook Heirlooms and
Just For Kids trademarks are registered with the U.S. Patent and Trademark
Office and the Company currently has applications for registration of certain of
its additional trademarks pending in the U.S., Japan and Canada. In addition,
following the acquisition of Playclothes, the Company became a party to a
wholesale and license agreement with Regal Greeting's and Gifts, Inc., a
Canadian licensee ("Regal"). Pursuant to the agreement with Regal, the Company
is entitled to receive guaranteed payments from Regal through December 2000. The
Company is not aware of any pending conflicts concerning its use of its
trademarks. See "Certain Relationships and Related Transactions -- Trademark
Option" and "Risk Factors -- Dependence on Intellectual Property."
ENVIRONMENTAL ISSUES
The Company's activities are subject to various environmental and worker
safety laws. The Company has expended resources, both financial and managerial,
in an effort to comply with applicable environmental and worker safety laws in
its operations and at its facilities, and the Company anticipates that it will
continue to do so in the future. Compliance with environmental laws has not
historically had a material effect on the Company's business, financial
condition or results of operations. There can be no assurance, however, that
future compliance with environmental laws will not have a material adverse
effect on the Company's business, financial condition and results of operations
in the future. See "Risk Factors -- Government Regulation."
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers, directors and key employees of the Company and their
ages as of July 28, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------
<S> <C> <C>
Michael G. Lederman........... 44 Chairman of the Board and Chief Executive Officer
Scott A. Budoff............... 33 President, Chief Operating Officer, Secretary and
Director
Gregory L. Anapol............. 28 Vice President, Operations
Katherine S. Batson........... 41 Vice President, Product Design and Development
Marc Benjamin................. 33 Vice President, Marketing and Analytical Services
Jonathan W. Bruml............. 39 Vice President, Merchandising
Carrie K. Cole................ 34 Vice President, Finance and Accounting, and Chief
Financial Officer
Estelle M. DeMuesy............ 37 Vice President, Market and Channel Development
Rona S. Palmer................ 45 Vice President, Brand Management
John J. De Oliveira........... 32 Executive Director, Information Services
Sean T. Linn.................. 27 Executive Director, Manufacturing and Inventory
Control
Joseph P. Sands............... 30 Treasurer and Director, Finance
Arnold Greenberg(1)........... 64 Director
Ray E. Newton, III(2)......... 33 Director
Patrick K. Sullivan, 44 Director
M.D.(2).....................
Howard Unger(1)............... 36 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Michael G. Lederman has served as Chairman of the Board and Chief Executive
Officer since the Company's inception in March 1994 and devotes substantially
all of his time to his duties as such. Since August 1993, Mr. Lederman has also
been Managing Partner of Fulcrum Capital Partners L.P. ("FCP") and Fulcrum
Capital L.P. ("FC"). From 1990 to June 1993, Mr. Lederman was a general partner
of Japonica Partners, L.P., an investment partnership, during its acquisition of
Sunbeam Corporation ("Sunbeam") from bankruptcy. Mr. Lederman served on
Sunbeam's board of directors and, prior to leaving Sunbeam, was its most senior
officer. He also previously served as a Vice President for Goldman, Sachs &
Company, where he co-founded the firm's reorganization group. He was previously
an attorney with Sidley & Austin and Shearman & Sterling.
Scott A. Budoff has served as President, Chief Operating Officer, Secretary
and a Director of the Company since the Company's inception in March 1994 and
devotes substantially all of his time to his duties as such. Since September
1993, Mr. Budoff has also been a Principal of FCP and FC. From June 1993 to
January 1994, Mr. Budoff was Vice President and Group Counsel of Sunbeam. Before
joining Sunbeam, Mr. Budoff was an attorney with Shearman & Sterling from 1989
to May 1993, specializing in mergers and acquisitions and corporate finance.
Gregory L. Anapol joined Fulcrum in June 1994, and since January 1996, has
been Vice President, Operations. He previously served as Director, Operations
and as an Operations Analyst of the Company. Prior to joining Fulcrum, Mr.
Anapol was a divisional Group Manager of Sunbeam Household Products from 1991 to
June 1994.
Katherine S. Batson joined Fulcrum in November 1994 as Vice President,
Merchandising and Catalog Creative. In July 1997 she became Vice President,
Product Design and Development. Prior to
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<PAGE> 47
joining Fulcrum, Ms. Batson was the head designer for Flapdoodles, a children's
clothing company, from 1991 to October 1994. She was previously a designer for
J.G. Hook, Winsome Togs and The Eagle's Eye.
Marc Benjamin joined Fulcrum in March 1994 as Vice President, Marketing and
Circulation. From January 1996 until July 1996, he was Vice President, Market
Development. In July 1997 he became Vice President, Marketing and Analytical
Services. Prior to joining Fulcrum, Mr. Benjamin worked as a Finance and
Business Development Associate for Japonica and Manager, Business Development
for Sunbeam from 1991 to February 1994. Mr. Benjamin previously worked for J.
Walter Thompson in New York.
Jonathan W. Bruml joined Fulcrum in June 1997 as Vice President,
Merchandising. Prior to joining Fulcrum in connection with the Storybook
Acquisition, Mr. Bruml was Executive Vice President of Merchandising at
Storybook Heirlooms, Inc. ("Storybook") since February 1996. From 1994 until
February 1996, he served as Vice President of Merchandising. Prior to joining
Storybook, Mr. Bruml was Group Vice President of the Better Sportswear division
at R.H. Macy & Co., Inc.
Carrie K. Cole joined Fulcrum in August 1995 as Vice President, Finance and
Accounting, Chief Financial Officer and Treasurer (and served as Treasurer until
July 1997). From 1982 to August 1995, Ms. Cole served in a variety of positions
at Sunbeam, including most recently as Manager of Financial Analysis and
Investor Relations.
Estelle M. DeMuesy joined Fulcrum in June 1997 as Vice President, Market
and Channel Development. Prior to joining Fulcrum in connection with the
Storybook Acquisition, Ms. DeMuesy was President and Chief Executive Officer at
Storybook from February 1996 until June 1997. From January 1995 until February
1996, she served as Chief Operating Officer of Storybook. She previously was
Vice President of Operations of Storybook from January 1994 until January 1995
and was Operations Director of Storybook since February 1993. Prior to joining
Storybook, Ms. DeMuesy was Director of Customer Service at Newport News, Inc., a
catalog company now owned by Spiegel, Inc., from 1988 until 1992.
Rona S. Palmer joined Fulcrum in April 1994, and since January 1996, has
served as Vice President, Brand Management. She previously served as Director,
Marketing and Circulation and Manager, Marketing. Prior to joining After the
Stork, Ms. Palmer was self-employed in the music industry and served in various
positions at PhysioControl Corp., a manufacturer of medical devices and Wall
Data Incorporated, a business software developer.
John J. De Oliveira joined Fulcrum in June 1994, and since January 1997,
has served as Executive Director, Information Services. Prior to joining
Fulcrum, Mr. De Oliveira was a systems analyst with Bank of Bermuda Ltd. from
July 1990 to July 1993. From July 1993 until joining Fulcrum, Mr. De Oliveira
attended a masters program in technology at the University of New Mexico.
Sean T. Linn joined Fulcrum in July 1995, and since January 1997, has been
Executive Director, Manufacturing and Inventory Control. He previously served as
Director of Manufacturing and Manager of Fulfillment. Prior to joining Fulcrum,
Mr. Linn was a divisional manager of Sunbeam Household Products from August 1992
to May 1995.
Joseph P. Sands joined Fulcrum in May 1996 as the Director, Finance and
since July 1997, has also served as the Company's Treasurer. Prior to joining
Fulcrum, Mr. Sands attended Columbia Business School from January 1996 to May
1996. Previously, Mr. Sands was employed by Marsh & McLennan Co., Inc. as an
account executive from 1994 to 1995, and Merrill Lynch as a financial consultant
from 1992 to 1993. Mr. Sands is a Certified Public Accountant.
Arnold Greenberg has served as a Director for the Company since May 1995.
Mr. Greenberg co-founded The Snapple Beverage Corporation, where he served as
its Vice Chairman and Chief Operating Officer from its inception in 1972 until
its sale in 1994.
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<PAGE> 48
Ray E. Newton, III has served as a Director of the Company since October
1996 as a designate of Whitney Equity Partners, L.P., pursuant to the Securities
Purchase Agreement among Fulcrum Direct, Inc., Whitney Subordinated Debt Fund,
L.P. and Whitney Equity Partners, L.P. dated October 21, 1996. Mr. Newton joined
J.H. Whitney & Co., a New York limited partnership ("Whitney") in 1989 and has
been a General Partner since May 1992.
Patrick K. Sullivan, MD has served as a Director of the Company since June
1996. He has been the Director of the Craniofacial Service at Rhode Island
Hospital for over five years.
Howard Unger, has served as a Director of the Company since June 1996. Mr.
Unger formed Saw Mill Capital, a private investment firm, in 1996. From 1989 to
1996, Mr. Unger was a Managing Director and founding partner of Chase Capital,
the private equity division of The Chase Manhattan Bank, N.A. Mr. Unger serves
as a director of a number of private companies.
No executive officer or director of the Company has any relationship by
blood, marriage or adoption to any other executive officer or director.
BOARD COMMITTEES
Audit Committee. In June 1996, the Board established an audit committee,
whose members are directors who are not employees of the Company. The audit
committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls.
Compensation Committee. In June 1996, the Board established a compensation
committee, whose members are directors who are not employees of the Company. The
compensation committee approves the salaries and other benefits of the executive
officers of the Company and administers certain compensation plans of the
Company. In addition, the compensation committee consults with the Company's
management regarding pension and other benefit plans and compensation policies
and practices of the Company.
BOARD OF DIRECTORS
There are currently six members of the Board and one vacancy. The Board is
divided into three classes. Directors of each class are elected at the annual
meeting of stockholders held in the year in which the term for the class expires
and will serve thereafter for three years. The terms of each of the current
directors of the Company is as follows: term expiring in 1997, Michael G.
Lederman, Scott A. Budoff and Ray Newton, III; term expiring in 1998, Patrick K.
Sullivan; and term expiring in 1999, Arnold Greenberg and Howard Unger. See
"Description of Capital Stock -- Anti-Takeover Effect of Provisions of the
Amended and Restated Certificate of Incorporation and By-laws."
DIRECTOR COMPENSATION
The Company intends to reimburse all non-employee directors for their
reasonable out-of-pocket expenses incurred in connection with Board meetings.
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<PAGE> 49
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summarizes the principal components of compensation of the
Company's Chairman and Chief Executive Officer and each other officer whose
compensation exceeded $100,000 for fiscal 1996. The compensation set forth below
fully reflects compensation for work performed on behalf of the Company.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
FISCAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (#) COMPENSATION(1)
- --------------------------------------------------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael G. Lederman................................ 1996 $170,126 105,000 $2,959
Chairman of the Board and Chief Executive Officer
Scott A. Budoff.................................... 1996 $108,895 35,000 $ 752
President and Chief Operating Officer
</TABLE>
- ---------------
(1) Represents contributions by the Company to its 401(k) plan on behalf of the
named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
The following discloses options granted during fiscal 1996 for the named
executives in the compensation table above.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------- RATES
% OF TOTAL OF STOCK PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE TERM($)(2)
OPTIONS FISCAL YEAR OR BASE EXPIRATION -------------------
NAME GRANTED (%) PRICE($)(1) DATE 5% 10%
- -------------------------- ---------- ------------ -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Lederman....... 105,000 28.0 5.00 10/18/06 855,170 1,361,715
Scott A. Budoff........... 35,000 9.3 5.00 10/18/06 285,057 453,906
</TABLE>
- ---------------
(1) The exercise price of all options is the fair market value on the date of
grant. Options granted during each year vest annually on January 10 of each
year following the year of grant at a rate of 10%, 20%, 20%, 25% and 25%,
respectively.
(2) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the option
and that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price.
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<PAGE> 50
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following summarizes exercises of stock options (granted in prior
years) by the named executives in the past year, as well as the number and value
of all unexercised options held by the named officers as of December 28, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)(1)
SHARES ------------- ------------
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Michael G. Lederman................... -- -- 0/105,000 0/0
Scott A. Budoff....................... -- -- 0/35,000 0/0
</TABLE>
- ---------------
(1) Value is based upon the fair market value of the stock of $5.00 as of
December 28, 1996, minus the exercise price of $5.00 (the "Fair Market
Value"). Fair Market Value has been determined in good faith by the Board
based upon historical and projected financial performance.
EMPLOYMENT AND MANAGEMENT INCENTIVE AGREEMENTS
Each of Messrs. Lederman and Budoff has an employment agreement with the
Company, dated as of October 21, 1996, which expires on December 31, 2001,
subject to automatic one year renewals thereafter unless notice of non-renewal
is given by either the Company or Messrs. Lederman and Budoff as the case may
be. Such agreements provide for Mr. Lederman's employment as Chairman and Chief
Executive Officer at a base salary of at least $180,000 and Mr. Budoff's
employment as President and Chief Operating Officer at a base salary of at least
$110,000. Messrs. Lederman and Budoff received an increase in compensation in
1997 to $225,000 and $135,000, respectively. Messrs. Lederman's and Budoff's
employment agreements provide that the Board will review annually the
executive's compensation and that the Board may increase such compensation if it
deems appropriate. The employment agreements also provide for life and
disability insurance for Messrs. Lederman and Budoff of $6.0 million and $4.0
million, respectively, $1.0 million of which is payable in each case to the
Company as beneficiary.
In addition, each of Messrs. Lederman's and Budoff's employment agreements
provides that the Board will annually determine the amount, if any, of a merit
bonus to be paid. Furthermore, the Board has agreed to provide for a management
incentive bonus to be paid to Messrs. Lederman and Budoff and certain other
executive officers in connection with the successful completion of certain
acquisitions, pursuant to a Management Incentive Agreement between the Company
and FCP. Messrs. Lederman and Budoff have elected to receive such compensation
through FCP, a partnership formed by executive officers of the Company in light
of certain tax and structural advantages. Pursuant to the Management Incentive
Agreement, a fee is paid to FCP for the benefit of the Company's senior
management team equal to the greater of $50,000 or 2% of the aggregate
consideration payable by the Company, or to the Company or the Company's
stockholders in connection with the applicable transaction up to a fee of
$400,000, with an incremental fee equal to 1% of the incremental aggregate
consideration thereafter. To date, FCP has received an aggregate of $355,000 in
payments under this agreement, all paid in the form of Common Stock totaling
50,271 shares. The Management Incentive Agreement expires in 2005 or upon a
Change of Control (as defined therein).
Messrs. Lederman's and Budoff's employment may be terminated by each of
them individually or by the Company with 90 days' notice. Notwithstanding the
preceding sentence, Messrs. Lederman and Budoff may not be terminated without
Cause (as defined therein) except on a Change of Control (as defined therein).
In the event the Company were to terminate Messrs. Lederman or Budoff for other
than Cause or if one of them terminates his employment as a result of an
unacceptable change in his
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<PAGE> 51
duties or for other "Good Reason" (as defined therein), he would be entitled to
severance payments equal to the product of (A) his respective annual base salary
as of the date of such termination plus the amount of the last bonus paid or
payable and (B) 1.5, for a period of the remaining term of the Employment
Agreement, including any one year extension period, as well as certain other
benefits related to his supplemental retirement payment. Messrs. Lederman and
Budoff's employment agreements provide that they will not compete with the
Company during the employment term and for a period of one year following
termination.
In addition to the agreements described above, all other executive
officers, except for Mr. Sands, have employment agreements with the Company,
which provide for employment of such officers. Their positions, responsibilities
and salaries are determined annually by the Board of Directors. The employment
agreements provide that the amount, if any, of bonuses to be paid to the
officers will be determined annually by the Board. The employment of each
officer may be terminated by the individual or the Company with 30 days notice
with or without Cause (as defined therein). The employment agreements provide
that the officers will not compete with the Company during the employment term
and for a period of two years following termination.
FCP WARRANTS
The Company periodically grants warrants to FCP in order to provide
incentive compensation to executive officers of the Company, who hold a portion
of their equity ownership of the Company through FCP. In January 1996, the
Company issued to FCP a warrant to purchase 600,000 shares of Common Stock at an
exercise price equal to $1.00 per share at any time through January 1, 2006. In
June 1997, the Company issued to FCP a warrant to purchase 250,000 shares of
Common Stock at an exercise price equal to $8.24 per share at any time through
June 30, 2007.
STOCK OPTION PLAN
The Board and the Company's stockholders adopted the Management Team Equity
Plan (the "Option Plan") in October 1996. A total of 765,000 shares of Common
Stock are reserved for issuance upon exercise of options granted under the
Option Plan. The purpose of the Option Plan is to attract and retain qualified
personnel and to provide additional incentive to executives and other key
employees of the Company.
The Option Plan provides for the granting to executives and other key
employees of the Company of non qualified stock options ("NQOs"). The Option
Plan is administered by the Compensation Committee which determines the terms of
the options granted under the Option Plan, including the exercise price, number
of shares subject to the option and exercisability. Generally, unless the
Compensation Committee otherwise determines, no option may be transferred by the
optionee other than by will or the laws of descent or distribution. Each option
may be exercised, during the lifetime of the optionee, only by the optionee. The
exercise price of all NQOs issued under the Option Plan was equal to $5.00 per
share through December 31, 1996 and will be the Fair Market Value (as defined in
the Option Plan) for any period thereafter. The Compensation Committee may issue
options in any given year only to the extent that the number of shares of Common
Stock which may be purchased upon the exercise of such options taken in the
aggregate with the number of shares which may be purchased upon the exercise of
all other options pursuant to the Option Plan granted during such year does not
exceed 765,000 shares.
The Option Plan authorizes the Compensation Committee to permit a
participant in whole or in part, and participants may elect to net exercise.
Except as otherwise provided by the Company at the time of grant, if a
participant's employment terminates for any reason, all options, whether vested
or not, granted within the past two years pursuant to the Option Plan terminate
as of such termination date.
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<PAGE> 52
As of June 30, 1997, options to purchase 404,350 shares of Common Stock
were outstanding under the Option Plan at a weighted average exercise price of
$5.50 per share.
EMPLOYEE BENEFIT PLANS
The Company maintains a qualified defined contribution plan (the "401(k)
Plan"), under the provisions of Section 401(k) of the Internal Revenue Code of
1986, as amended, covering substantially all employees. Under the terms of the
401(k) Plan, eligible employees may make contributions equal to up to 10% of
their pay, subject to statutory limitations. The Company may, at its discretion,
make matching contributions. Employee contributions are always fully vested.
Company contributions vest 20% for each completed year of service, becoming
fully vested after five years of service. Matching contributions in the
Company's 401(k) Plan were negligible.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ownership. Based on shares outstanding as of June 30, 1997, upon completion
of the Offering, Fulcrum Capital Partners L.P., a Delaware limited partnership
("FCP"), and Fulcrum Capital L.P., a Delaware limited partnership ("FC"), will
own, on an aggregate basis, 49.3% of Fulcrum's Common Stock, (53.0% assuming
exercise of all options and warrants held by them). The general partners of FCP
and FC are The Fulcrum Group, Inc. and SAB, Inc., corporations solely owned by
Michael G. Lederman, Chairman of the Board and Chief Executive Officer of
Fulcrum, and Scott A. Budoff, President, Chief Operating Officer and a director
of Fulcrum, respectively. Messrs. Lederman and Budoff and their respective
families are the sole limited partners of FC. Mr. Lederman is Managing Partner
of FC and FCP and, pursuant to the terms of the partnership agreements of FC and
FCP, Mr. Lederman, through The Fulcrum Group, Inc., maintains the exclusive
ability to direct the voting and disposition of the shares of Common Stock owned
by such partnerships. FC is the sole limited partner of FCP and FCP has also
issued options to acquire limited partnership interests in FCP to certain of
Fulcrum's executive officers. A capital distribution of $2.3 million was
recorded by the Company in fiscal 1996 to FCP with a corresponding reduction in
retained earnings to reflect the reductions in related party receivables. See
Notes 9 and 10 of Notes to Consolidated Financial Statements.
Real Estate Ownership. The Company's headquarters, call center and
distribution center is leased from Fulcrum Properties L.P., a Delaware limited
partnership ("Properties") (an entity whose partners include certain directors
and officers of the Company and which is indirectly controlled by Mr. Lederman),
pursuant to a ten-year lease. Approximately 38.0% of the partnership capital of
Properties is held by individuals and entities who are not officers, directors
or affiliates owning 10% or more of the Company. Lease payments from Fulcrum to
Properties totalled $724,980 and $373,685 for fiscal 1996 and the six months
ended June 28, 1997, respectively. The Company has entered into an agreement to
purchase all of Properties' rights in the headquarters building (including
Property Bond Purchaser, Inc. and the County Lease) upon completion of the
Offering for an aggregate consideration of approximately $2.5 million, plus
assumption of approximately $5.6 million of mortgage financing and related
interest rate swap agreements. The purchase price was negotiated by Messrs.
Lederman and Budoff on behalf of Properties and a committee composed of certain
disinterested members of the Board (Messrs. Newton and Unger) on behalf of the
Company. The purchase was unanimously approved by the disinterested members of
the Board. A portion of the net proceeds of the Offering will be utilized to
fund such purchase. Because of their ownership interests in Properties, Mr.
Lederman (and entities and persons affiliated with him) will receive $358,286 of
the proceeds of such sale, Mr. Budoff (and persons affiliated with him) will
receive $88,819 of the proceeds of such sale, Mr. Greenberg (and entities
affiliated with him) will receive $808,652 of the proceeds of such sale Mr.
Sullivan (and persons affiliated with him) will receive $147,028 of the proceeds
of such sales and Carrie K. Cole, Vice President Finance and Accounting, and
Chief Financial Officer will receive $73,514 of the proceeds of such sale.
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<PAGE> 53
Trademark Option. Certain of the Company's trademarks and trademark
applications are held by Fulcrum Brands L.P., a Delaware limited partnership
("Brands"), an entity indirectly controlled by Mr. Lederman. Subject to the
consummation of the Offering, the Company will exercise an option (the
"Trademark Option"), which is contained in the Amended and Restated Trademark
License and Option Agreement by and between Brands and Fulcrum dated October 21,
1996 (the "Trademark Agreement"), to purchase from Brands certain of the
trademarks and trademark applications used by Fulcrum for $1.75 million, less
royalties paid under the Trademark Agreement, which are not expected to be
material. The exercise price of the Trademark Option was negotiated by Messrs.
Lederman and Budoff on behalf of Brands and a committee comprised of certain
disinterested members of the Board (Messrs. Newton, Unger, Greenberg and
Sullivan) on behalf of the Company. A portion of the net proceeds of the
Offering will be utilized to fund such purchase. Because of their ownership
interests in Brands, Mr. Lederman (and entities controlled by him) will receive
$1,561,000 of the proceeds of such sale and Mr. Budoff (and entities controlled
by him) will receive $189,000 of the proceeds of such sale. Pursuant to the
Trademark Agreement, which will terminate upon exercise of the Trademark Option,
the Company is obligated to pay Brands an annual fee ("Royalty Payment") equal
to .05% of the Net Revenues (as defined in the Trademark Agreement as Gross
Revenues minus Returns) of Fulcrum in return for the exclusive right to use the
trademarks and licenses owned by Brands.
Retail Option. Fulcrum Retail, Inc., a New Mexico corporation ("Fulcrum
Retail") and a wholly owned subsidiary of FCP, operates four retail stores
(located in Albuquerque, New Mexico; Gilroy, California; Clinton, Connecticut;
and East Brunswick, New Jersey) that distribute certain of the Company's
discontinued or damaged inventory. Two of such stores were acquired from
Storybook. The Company's policy is to sell such inventory at a price that the
Company believes is fair market value, which generally ranges from 25% to 100%
of cost, and is paid within standard industry terms. In fiscal 1995, fiscal 1996
and the six month period ended June 30, 1997, the Company sold $484,000,
$547,000 and $489,000, respectively, of inventory to Fulcrum Retail at an
average markdown of 35%. The Company and Fulcrum Retail intend to execute a
Trademark License Agreement prior to completion of the Offering, pursuant to
which Fulcrum Retail will agree to pay the Company a royalty to be added to the
cost of any goods Fulcrum Retail purchases from the Company for the right to use
the Company's trademarks. In addition, the Company retains the option to
purchase 100% of Fulcrum Retail under certain conditions for a price of
$1,000,000. The value of Fulcrum Retail was negotiated by Mr. Newton on behalf
of WEP and by Messrs. Budoff and Lederman on behalf of Fulcrum Retail and
Messrs. Budoff and Lederman on behalf of the Company. In addition, as part of
the Whitney Investment, WEP and Fulcrum Retail entered into a Retail Option
Agreement dated October 21, 1996 pursuant to which WEP acquired an option to
purchase 10.5% of the stock of Fulcrum Retail (on a fully diluted basis when
exercised) for an aggregate price of $105,000. Such option may be exercised only
after Fulcrum Retail's annual sales exceed $5.0 million and on or before the
earlier of (i) a merger or consolidation of the Company (or a direct or indirect
wholly owned subsidiary of the Company) and Fulcrum Retail, or (ii) December 31,
2006. Sales of Fulcrum Retail have historically been below $5.0 million. The
exercise price of the Company's Option to purchase Fulcrum Retail will not be
adjusted in the event that WEP exercises its option to purchase 10.5% of Fulcrum
Retail.
Lederman Loan and Guarantees. The Fulcrum Group, Inc., a corporation
controlled by Mr. Lederman, made available to the Company a line of credit for
working capital needs of up to $3.0 million beginning April 1, 1994 and ending
December 31, 1995, at an interest rate of 12.0% per annum. An aggregate of
$819,600 in principal and accrued interest was converted into 8,196 shares of
Series B Preferred Stock on January 1, 1996. In addition, since April 1, 1994,
Mr. Lederman has guaranteed an aggregate of up to $6 million at any one time of
indebtedness of the Company to its senior lenders and certain equipment lessors,
which guarantees have been or will be released upon completion of the Offering.
Budoff Guarantees. Mr. Budoff has guaranteed an aggregate of up to $6.0
million at any one time of indebtedness of the Company to its senior lenders and
certain equipment lessors, which guarantees have been or will be released upon
completion of the Offering.
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<PAGE> 54
FCP and FC Guarantees. FCP and FC have guaranteed an aggregate of up to
$6.0 million at any one time of indebtedness of the Company to its senior
lenders and certain equipment lessors, which guarantees have been, or will be
released upon consummation of the Offering. Additionally, FCP has agreed to
guarantee Fulcrum Retail's $1,074,000 debt to the Company.
Messrs. Lederman and Budoff did not receive any consideration for their
guarantees nor did FC or FCP receive any consideration for its guarantees.
Greenberg Loan. Pursuant to a secured loan agreement between the Company
and Mr. Greenberg and affiliated entities dated June 1, 1995, Fulcrum borrowed
$4.0 million under a line of credit from Mr. Greenberg, a director of the
Company. Under the terms of the agreement, Mr. Greenberg made a short-term loan
at an interest rate of 18.0% to the Company to be used to fund working capital.
The line of credit was repaid in full on May 6, 1996.
Whitney Investments. In October 1996, the Company privately placed $10.0
million in subordinated debt and $2.0 million in Common Stock with the Whitney
Subordinated Debt Fund ("WSDF") and Whitney Equity Partners ("WEP")
respectively. These sales of securities included the sale of a warrant to
purchase 405,460 shares of Common Stock sold to WSDF and sale of 394,385 shares
of common stock and a warrant to purchase 121,350 shares of Common Stock sold to
WEP. WSDF was paid a lender's fee of $200,000 and FCP was paid a financing fee
of $50,000 in connection with such financing. In June 1997, the Company
privately placed (the "June Whitney Investment") an aggregate of $10.0 million
in subordinated debt with WSDF and affiliates of Arnold Greenberg and Patrick K.
Sullivan, directors of the Company and an aggregate of $10.0 million in Common
Stock with WEP and affiliates of Messrs. Greenberg and Sullivan, respectively.
These sales of securities included the sale of warrants to purchase 200,000
shares of Common Stock sold to WSDF and affiliates of Messrs. Greenberg and
Sullivan Additionally, the Company is obligated to issue warrants to purchase up
to 200,000 additional shares of Common Stock to such parties in the event that
the subordinated debt is not repaid in full at certain dates. WSDF and
affiliates of Messrs. Greenberg and Sullivan were paid a lender's fee of
$300,000 and FCP was paid a financing fee of $100,000 (which was paid in 14,493
shares of Common Stock), in connection with the June Whitney Investment.
PREFERRED STOCK INVESTMENTS
During fiscal 1995 and fiscal 1996, the Company sold Series A Preferred
Stock and Series B Preferred Stock to certain purchasers, including certain
officers, directors and affiliates of the Company to finance working capital. In
1996, the Company converted the entire amount of debt related to a 12% line of
credit to 8,196 shares, and sold an additional 10,896 shares, of Series B
Preferred Stock for $100 per share. In May 1996, the Company also converted
$500,000 of debt related to the Greenberg Loan to 5,000 shares of Series A
Preferred Stock for $100 per share. All outstanding shares of preferred stock
were converted to Common Stock or redeemed in October 1996. The follow tables
set forth the details of such transactions. See "Principal Stockholders."
Series A Preferred Stock
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
AGGREGATE NUMBER OF CONVERSION DIVIDENDS REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES SHARES PAID (12% COUPON) AMOUNT
- ---------------------------- -------------- ---------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Fulcrum Capital L.P. ....... $3,000,000 30,000(1) 1,800,000 $ 288,493 $ 0
Arnold Greenberg(2)......... 774,825 7,665(3) 275,940 37,884 0
Howard Unger................ 150,000 1,500(3) 54,000 395 0
Patrick K. Sullivan......... 500,000 5,000(4) 54,000 14,038 350,000(4)
</TABLE>
- ---------------
(1) Converted into shares of Common Stock on October 21, 1996 at a ratio of one
share of Series A Preferred Stock for each 60 shares of Common Stock.
(2) Includes shares held by The Greenberg Family Fund LLC and Mr. Greenberg's
wife. The purchase price was partially provided through the conversion of
outstanding indebtedness and accrued interest through the date of conversion
equal to $500,000.
(3) Converted at a ratio of one share of Series A Preferred Stock for each 36
shares of Common Stock.
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<PAGE> 55
(4) Includes 1,500 shares that were converted into shares of Common Stock on
October 21, 1996 at a ratio of one share of Series A Preferred Stock for
each 36 shares of Common Stock and 3,500 shares of Series A Preferred Stock
that were redeemed by the Company on October 21, 1996 for 100% of the
aggregate purchase price, after paying dividends accrued at a rate of 12.0%
per annum and a redemption premium of 8.0% through October 21, 1996
($20,636).
The differential conversion rates were based upon the value of the Company
at the time of such investment.
Series B Preferred Stock
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE NUMBER OF DIVIDENDS REDEMPTION
PURCHASER PURCHASE PRICE PREFERRED SHARES PAID (12% COUPON) AMOUNT(2)
- -------------------------------- -------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
The Fulcrum Group, Inc.(1)...... $1,918,307 19,182 $ 141,223 $1,918,307
Arnold Greenberg(3)............. 1,289,925 12,285 46,649 1,289,925
</TABLE>
- ---------------
(1) The purchase price for the Series B preferred stock acquired by The Fulcrum
Group, Inc. was the conversion of outstanding debt with principal amount and
accrued interest equal to $1,918,307.
(2) All shares of Series B Preferred Stock were redeemed by the Company on
October 21, 1996 for 100% of the aggregate purchase price, after paying
dividends accrued at a rate of 12.0% per annum ($46,649) through October 21,
1996.
(3) Includes shares held by The Greenberg Family Fund LLC.
Related Party Accounts
FCP, FC, Brands, Retail, Properties and Fulcrum Group Inc. (the "Affiliated
Entities") have provided certain financing and services and made inventory and
fixed asset transfers to and from the Company during fiscal 1995 and fiscal
1996. During fiscal 1995, the Company made aggregate payments to the Affiliated
Entities of $81,415 primarily for administrative expenses for Retail, royalty
payments to Brands and transfers of fixed assets. During fiscal 1995, the
Company received payments from the Affiliated Entities of $1,149,013 primarily
for inventory transfers, restructuring costs, merger and acquisition expenses,
loans, administrative expenses and professional fees. During fiscal 1996, the
Company made aggregate payments to the Affiliated Entities of $2,219,880
primarily for loans, administrative expenses and royalty payments. During fiscal
1996, the Company received payments from the Affiliated Entities of $1,465,004
primarily for inventory transfers, professional fees and merger and acquisition
expenses. During the six months ended June 30, 1997, the Company made aggregate
payments to Affiliated Entities of $68,170 primarily for property lease
payments. During the six months ended June 30, 1997, the Company received
payments from Affiliated Entities of $246,823 primarily for inventory purchases
and administrative costs.
The Board has adopted a policy that all future material transactions with
affiliates will be on terms no less favorable to the Company than those
available from unaffiliated third parties and will be approved by a majority of
the disinterested members of the Board.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information regarding ownership of
Common Stock as of June 30, 1997 assuming exercise of options exercisable within
sixty days of such date by (i) each person or entity who owns of record or
beneficially 5% or more of the Common Stock, (ii) each director and named
executive officer and (iii) all executive officers and directors as a group.
Except as indicated, each of such stockholders is assumed to have sole voting
and dispositive power as to the shares shown.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE OF SHARES
OWNED OUTSTANDING
------------------- --------------------------------
NAME NUMBER(1) BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Michael G. Lederman(2)(3)......................... 6,325,263 70.8% 53.0%
4321 Fulcrum Way NE
Rio Rancho, NM 87124
The Fulcrum Group, Inc.(2)(3)..................... 6,314,763 70.7 52.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Fulcrum Capital Partners L.P.(3)(4)............... 4,514,763 50.6 37.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Ray E. Newton III(5).............................. 2,241,195 25.6 19.1
177 Broad Street
Stamford, CT 06091
Fulcrum Capital L.P.(3)........................... 1,800,000 22.3 16.3
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Whitney Equity Partners, L.P.(5).................. 1,675,735 20.4 15.0
177 Broad Street
Stamford, CT 06091
Whitney Subordinated Debt Fund, L.P.(5)........... 565,460 6.5 4.9
177 Broad Street
Stamford, CT 06091
Arnold Greenberg(6)............................... 549,315 6.8 4.9
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Patrick K. Sullivan, M.D.(7)...................... 74,625 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Howard Unger...................................... 54,000 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
Scott A. Budoff(3)(8)............................. 3,500 * *
4321 Fulcrum Way NE
Rio Rancho, NM 87124
All directors and executive officers as a group
(16 persons)(2)(5)(6)(7)(9)..................... 9,411,198 97.3 74.2
</TABLE>
- ---------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with rule of the Securities
and Exchange Commission (the "SEC"). In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
(2) Includes 3,664,763 shares held by FCP, 1,800,000 shares held by FC, warrants
to purchase 600,000 shares and 250,000 shares of Common Stock held by FCP
and, with respect to Mr. Lederman, an
55
<PAGE> 57
option to purchase 10,500 shares of Common Stock held by Mr. Lederman
exercisable within 60 days of June 30, 1997.
(3) The general partners of FCP and FC are corporations owned by Messrs.
Lederman (The Fulcrum Group, Inc.) and Budoff (SAB, Inc.). FC is the sole
limited partner of FCP. Mr. Lederman, Mr. Budoff and their respective
families are the sole limited partners of FC. Mr. Lederman is Managing
Partner of FC and FCP and, pursuant to the terms of the partnership
agreements of FC and FCP, Mr. Lederman, through The Fulcrum Group, Inc.,
maintains the exclusive ability to direct the voting and disposition of the
shares of Common Stock owned by such partnerships.
(4) Includes warrants to purchase 600,000 shares and 250,000 shares of Common
Stock exercisable within 60 days of June 30, 1997.
(5) Includes, with respect to the Whitney Subordinated Debt Fund, L.P. ("WSDF"),
warrants to purchase 405,460 shares and 160,000 shares of Common Stock held
by WSDF and, with respect to Whitney Equity Partners, L.P. ("WEP"), a
warrant to purchase 121,350 shares of Common Stock held by WEP each
exercisable within 60 days of June 30, 1997. WEP and WSDF are limited
partnerships in which Ray E. Newton, III is a general partner. Mr. Newton
disclaims beneficial ownership of the securities held by such partnerships,
except to the extent of his respective ownership interests in such
partnerships.
(6) Includes 239,940 shares held by The Greenberg Family Fund LLC. Mr.
Greenberg, a director of the Company, is President of The Greenberg Family
Fund LLC and maintains the exclusive ability to direct the voting and
disposition of the shares of Common Stock held by The Greenberg Family Fund
LLC. Also includes 36,000 shares held by Mr. Greenberg's wife as to which
Mr. Greenberg disclaims beneficial ownership.
(7) Includes 18,125 shares and a warrant to purchase 2,500 shares of Common
Stock held by Maureen C. Sullivan Revocable Trust -- 1995.
(8) Includes an option to purchase 3,500 shares of Common Stock exercisable
within 60 days of June 30, 1997.
(9) Includes options to purchase an aggregate of 1,605,678 shares of Common
Stock exercisable within 60 days of June 30, 1997.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock having a par value of $0.01 per share and 5,000,000 shares of
Preferred Stock having a par value of $0.01 per share.
The following description of the Company's capital stock and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws is qualified in its entirety by the provisions of the Amended and
Restated Certificate of Incorporation and By-laws (which are included as
exhibits to the Registration Statement of which this Prospectus is a part) and
the General Corporation Law of the State of Delaware.
COMMON STOCK
There will be 11,076,648 shares of Common Stock outstanding upon completion
of the Offering. In addition, an aggregate of 2,341,810 shares of Common Stock
are reserved for issuance under the Company's stock option plan, the FCP Option
Agreement and the Whitney Warrants (as defined below).
All outstanding shares of Common Stock are, and the shares offered hereby
will be, fully paid and nonassessable. The holders of Common Stock are entitled
to one vote for each share held of record on all matters voted upon by
stockholders and may not cumulate votes. Thus, the owners of a majority of the
Common Stock outstanding may elect all of the directors if they choose to do so,
and the owners of the balance of such shares would not be able to elect any
directors. Subject to the rights of holders of any future series of undesignated
Preferred Stock that may be designated, each share of outstanding Common Stock
is entitled to participate equally in any distribution of net assets made to the
stockholders in a liquidation, dissolution or winding up of the Company and is
entitled to participate equally in dividends as and when declared by the Board.
There are no redemption, sinking fund, conversion or preemptive rights with
respect to the shares of Common Stock. All shares of Common Stock have equal
rights and preferences.
PREFERRED STOCK
The Board is authorized, subject to certain limitations prescribed by law,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of Preferred Stock in one or more series with such
designations and such powers, preferences and rights, and such qualifications,
limitations or restrictions (which may differ with respect to each series) as
the Board may fix by resolution.
The Board is empowered to set the terms of such shares (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences). Accordingly, the Board, without
stockholder approval, may issue shares of Preferred Stock with terms (including
terms with respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences) that could adversely
affect the voting power and other rights of holders of Common Stock.
At present, no shares of Preferred Stock are outstanding, and the Company
has no present plans to issue any shares of Preferred Stock.
The undesignated Preferred Stock may have the effect of discouraging an
attempt, through the acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger, sale
or exchange of assets or a similar transaction. For example, the Board could
issue such shares as a dividend to holders of Common Stock or place such shares
privately with purchasers who may side with the Board in opposing a takeover
bid. The anti-takeover effects of the undesignated Preferred Stock may deny
stockholders the receipt of a premium on their Common Stock and may also have a
depressive effect on the market price of the Common Stock.
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<PAGE> 59
WARRANTS
As part of the Whitney Investment the Company issued to (i) WSDF a warrant
(the "WSDF warrant") to purchase 405,460 shares of Common Stock at an exercise
price equal to $0.01 per share for a purchase price of $1,156 and (ii) WEP a
warrant (the "WEP warrant") to purchase 121,350 shares of Common Stock at an
exercise price equal to $8.24 per share for a purchase price of $347
(collectively, the "Whitney Warrants"). The WSDF warrant is exercisable by WSDF
at any time after the earliest to occur of (a) October 21, 1998, (b)
consummation of certain registered public offerings (including the Offering),
(c) a Change of Control (as defined in the WSDF warrant) and (d) receipt by WSDF
of an Outside Sale Notice (as defined in the WSDF warrant). The WEP warrant is
exercisable by WEP at any time. The Whitney Warrants each contain provisions
that may cause an adjustment of the exercise price upon the occurrence of
certain equity issuances specified therein.
As part of the June Whitney Investment the Company issued to WSDF and
affiliates of Messrs. Greenberg and Sullivan warrants (the "June Warrants") to
purchase 200,000 shares of Common Stock at an exercise price equal to $0.01 per
share for an aggregate purchase price of $696,463. In addition, the Company may
be required to issue warrants to purchase up to an additional 200,000 shares of
Common Stock at an exercise price equal to $0.01 per share contingent upon the
payment of the subordinated debt issued in connection with the June Whitney
Investment. The June Warrants are exercisable at any time after the earliest to
occur of (a) June 30, 2001, (b) a Change of Control (as defined in the June
Warrants) and (c) (x) the holder of such June Warrant receiving an Outside Sale
Notice (as defined in the June Warrants) or (y) the holder of such June Warrant
receiving a registration notice pursuant to Section 7 of the Stockholders
Agreement (as defined in the June Warrants). The June Warrants each contain
provisions that may cause an adjustment of the exercise price upon the
occurrence of certain equity issuances specified therein.
Each of WSDC and WEP has executed lock-up agreements as described in Shares
Eligible for Future Sale. See "Shares Eligible for Future Sale."
STOCKHOLDERS AGREEMENT; REGISTRATION RIGHTS
All of the existing holders of the Company's Common Stock and options to
purchase Common Stock are parties to a Stockholders Agreement dated October 21,
1996 (the "Stockholders Agreement") which, except to the extent described in the
next paragraph, will terminate upon the completion of the Offering. The
Stockholders Agreement (i) provides that the stockholders have certain
preemptive rights upon certain equity issuances by the Company, (ii) imposes
certain conditions of the sale, transfer or disposal of shares of Common Stock
and (iii) provides that WEP may designate a person to serve on the Board. The
Stockholders Agreement terminates as to any party thereto upon the earliest to
occur of (i) the transfer of all shares owned by such party, (ii) immediately
prior to the effectiveness of certain registered public offerings (including the
Offering) and (iii) the tenth anniversary of the date of the Stockholders
Agreement; provided however, certain of the provisions will not terminate
including provisions relating to registration rights as discussed below.
The Stockholders Agreement provides that in the event the Company registers
any of its securities for sale to the public, any holder of Restricted Stock (as
defined therein) may request to have such Restricted Stock included in the sale
at the Company's expense, subject to certain limitations. In the event such
offering is an underwritten public offering, the Restricted Stock will be sold
on the same terms and conditions as the shares of Common Stock otherwise being
sold. The number of shares of Restricted Stock which may be included in an
offering may be reduced if and to the extent the managing underwriter determines
that such inclusion of Restricted Stock would adversely affect the marketing of
the securities to be sold by the Company. In addition, each holder of Restricted
Stock agrees to refrain from selling such Restricted Stock during the period of
distribution of an offering and for a period until the 180th day after the
effective date of the registration. As of June 30, 1996, there
58
<PAGE> 60
were 8,076,648 shares subject to registration rights, the holders of which have
been asked to waive their registration rights in connection with the Offering.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of section 203 of the General
Corporation Law of the State of Delaware. Subject to certain exceptions, section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board or unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, assets sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock.
ANTI-TAKEOVER EFFECT OF PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATION OF
INCORPORATION AND BY-LAWS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board and in the policies formulated by the Board and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company, such as an unsolicited acquisition
proposal. Because these provisions could have the effect of discouraging a third
party from acquiring control of the Company, they may inhibit fluctuations in
the market price of shares of Common Stock that could otherwise result from
actual or rumored takeover attempts and, therefore could deprive stockholders of
an opportunity to realize a takeover premium. These provisions also may have the
effect of limiting the price that certain investors might be willing to pay in
the future for shares of the Company's Common Stock and of preventing changes in
the management of the Company.
Election and Removal of Directors. The Company's Board is divided into
three classes of directors serving staggered terms. One class of directors will
be elected at each annual meeting of stockholders for a three-year term. At
least two annual meetings of stockholders, instead of one, generally will be
required to change the majority of the Company's Board. Any director may be
removed for cause at any time by the affirmative vote of the holders of at least
66 2/3% of the shares entitled to vote at a special meeting of stockholders
called for that purpose. The vacancies thus created may be filled at that same
meeting by the affirmative vote of the holders of at least 66 2/3% of the shares
entitled to vote at such meeting. Ordinary vacancies in the Board may be filled
by the affirmative vote of the Board members then in office.
Vote Required to Amend or Repeal Certain Provisions of the Amended and
Restated Certificate of Incorporation and By-laws. The General Corporation Law
of the State of Delaware provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's Amended and Restated Certificate of Incorporation or By-laws,
unless a corporation's Amended and Restated Certificate of Incorporation or
By-laws, as the case may be, requires a greater percentage. The Company's
Amended and Restated Certificate of Incorporation requires the affirmative vote
of the holders of at least 66 2/3% of the shares entitled to vote in the
election of directors to amend or repeal any of its provisions. A vote of not
fewer than 66 2/3% of the holders of shares entitled to vote in the election of
directors is required to amend or repeal the Company's By-laws. The By-laws may
also be amended or repealed by a vote of not fewer than a majority of the entire
Board, provided that the Board may not amend or repeal any By-law adopted by the
stockholders of the Company. Any such vote would be in addition to any separate
class vote that might in the future be required pursuant to the terms of any
Preferred Stock that might be outstanding at the time any such amendments are
submitted to stockholders.
59
<PAGE> 61
Stockholder Consent. The Amended and Restated Certificate of Incorporation
provides that stockholder action can be taken only at an annual or special
meeting of stockholders and cannot be taken by written consent in lieu of a
meeting. In addition, the Amended and Restated Certificate of Incorporation
provides that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board or by the Chairman of the Board. Stockholders will not be permitted
to call a special meeting or to require the Board to call a special meeting.
Advance Notice. The Amended and Restated Certificate of Incorporation
establishes an advance notice procedure for stockholder proposals to be brought
before an annual meeting of the stockholders of the Company, including proposed
nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the Amended and Restated Certificate of Incorporation does not
give the Board the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at a special or
annual meeting, the Amended and Restated Certificate of Incorporation may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be determined
prior to the completion of the Offering.
60
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Offering because of certain contractual and legal restrictions
on resale described below, sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 11,076,648 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
based upon the number of shares outstanding as of June 30, 1997. Of these
shares, all of the 3,000,000 shares sold in the Offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act ("Affiliates"). The remaining
8,076,648 shares of Common Stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below.
The Company, and the executive officers, directors and stockholders who own
in the aggregate 8,076,648 shares of Common Stock have agreed that, other than
by bona fide gift or transfer by reason of death or intestacy, they will not,
without the prior written consent of Hambrecht & Quist LLC, (which consent may
be provided or withheld in its sole discretion) directly or indirectly, sell,
offer, contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire shares of Common Stock owned by them during the
180-day period commencing on the date of this Prospectus. The Company may,
however, issue shares of Common Stock upon the exercise of stock options that
are currently outstanding, and may grant additional options under the Option
Plan, provided that, without the prior written consent of Hambrecht & Quist LLC,
such additional options shall not be exercisable during such period.
Upon expiration of the lock-up period, 13,225 shares of Common Stock held
by existing stockholders will be eligible for sale without restriction under
Rule 144(k) or Rule 701, while 6,403,728 shares held by existing stockholders
will be eligible for sale subject to the volume and other restrictions of Rule
144. The remaining 1,665,763 shares held by existing stockholders will become
eligible for sale pursuant to Rule 144 upon expiration of applicable holding
periods. In addition, as of June 30, 1997, 2,341,810 shares were subject to
outstanding options and warrants. All of those shares are subject to lock-up
agreements. Upon expiration of lock-up agreements, 450,000 shares subject to
such options and warrants will be vested, and could be exercised and sold.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an Affiliate of the Company, or person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the SEC. Sales pursuant to Rule 144 are subject to certain requirements relating
to manner of sale, notice and availability of current public information about
the Company. A person (or person whose shares are aggregated) who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above.
61
<PAGE> 63
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to the Offering.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Option Plan.
Based on the number of options outstanding and shares reserved for issuance
under the Option Plan at June 30, 1997, such registration statement would cover
approximately 765,000 shares. Such registration statement is expected to be
filed and to become effective as soon as practicable after the date of this
Prospectus. Shares registered under such registration statement will, subject to
Rule 144 volume limitations applicable to Affiliates, be available for sale in
the open market, unless such shares are subject to vesting restrictions with the
Company or the lock-up agreements described above. See "Management."
In addition, pursuant to the Stockholders Agreement, certain stockholders
holding 8,076,648 shares of Common Stock after the Offering have certain rights
to have such shares registered for resale under the Securities Act. The number
of shares sold in the public market could increase if registration rights are
exercised. See "Description of Capital Stock -- Stockholders Agreement."
62
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC
and Robertson, Stephens & Company LLC (collectively, the "Representatives"),
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------ ---------
<S> <C>
Hambrecht & Quist LLC.............................................
Robertson, Stephens & Company LLC.................................
---------
Total................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives. The Representatives
have informed the Company that the Underwriters do not intend to confirm sales
of Common Stock offered hereby to any accounts over which they have
discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
In connection with the Storybook Acquisition and related financing
Hambrecht & Quist LLC will receive a fee of $100,000 for certain financial
advisory services.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
All current stockholders of the Company, including the executive officers
and directors, who will own in the aggregate 8,076,648 shares of Common Stock
upon completion of the Offering based on shares outstanding as of June 30, 1997,
have agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or
63
<PAGE> 65
warrants to acquire shares of Common Stock or securities exercisable for or
convertible into shares of Common Stock owned by them during the 180-day period
following the effective date of this Prospectus. The Company has agreed that it
will not, without prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 180-day period following the effective date of this
Prospectus, except that the Company may grant options under its stock plans and
issue securities under, or pursuant to the exercise of options granted under,
its stock plans. Hambrecht & Quist LLC in its sole discretion may release any of
the shares subject to the lock-up at any time without notice. See "Shares
Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Company
Stock. The initial public offering price of the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, sales and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of market
conditions and other factors.
Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis, New York, New York. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Cooley Godward LLP, Palo
Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 30,
1995 and December 28, 1996 and for each of the three years in the period ended
December 28, 1996 included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The financial statements of Storybook Heirlooms, Inc., as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
64
<PAGE> 66
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to such Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement, including exhibits and
schedules thereto may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at 7 World Trade Center, Suite 1300, New York, New York
10048, and the Chicago Regional Office located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and copies of all or any part thereof may be
obtained at prescribed rates from the Commission's Public Reference Section at
its principal office. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's World Wide Web site is http://www.sec.gov.
65
<PAGE> 67
FULCRUM DIRECT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets at December 30, 1995, December 28, 1996 and June 30,
1997 (unaudited).................................................................. F-3
Consolidated Statements of Operations for the fiscal periods 1994, 1995 and 1996 and
the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)...... F-4
Consolidated Statements of Stockholders' Equity for the fiscal periods 1994, 1995
and 1996 and the six months ended June 30, 1997 (unaudited)....................... F-5
Consolidated Statements of Cash Flows for the fiscal periods 1994, 1995 and 1996 and
the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)...... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
STORYBOOK HEIRLOOMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report........................................................ F-23
Balance Sheets at December 31, 1995 and 1996........................................ F-24
Statements of Operations for the fiscal years ended December 31, 1994, 1995 and
1996.............................................................................. F-25
Statements of Shareholders' Equity for the fiscal years ended December 31, 1994,
1995 and 1996..................................................................... F-26
Statements of Cash Flows for the fiscal years ended December 31, 1994, 1995 and
1996.............................................................................. F-27
Notes to Financial Statements....................................................... F-28
Statements of Operations for the six months ended June 30, 1996 (unaudited) and June
27, 1997 (unaudited).............................................................. F-32
Statement of Shareholders' Equity for the six months ended June 27, 1997
(unaudited)....................................................................... F-33
Statements of Cash Flows for the six months ended June 30, 1996 (unaudited) and June
27, 1997 (unaudited).............................................................. F-34
Notes to Financial Statements....................................................... F-35
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Fulcrum Direct, Inc.:
We have audited the accompanying consolidated balance sheets of FULCRUM
DIRECT, INC., (a Delaware corporation) AND SUBSIDIARY (collectively, the
"Company") as of December 30, 1995 and December 28, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from March 16, 1994 (inception) through December 31, 1994 and for
each of the two years in the period ended December 28, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
30, 1995 and December 28, 1996, and the results of their consolidated operations
and their cash flows for the period from March 16, 1994 (inception) through
December 31, 1994 and for each of the two years in the period ended December 28,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
February 28, 1997
F-2
<PAGE> 69
FULCRUM DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 196 $ 140 $ 4,727
Marketable securities................................................. 1,543 -- --
Receivables........................................................... 1,677 1,507 1,467
Inventories........................................................... 7,037 12,532 20,974
Deferred income taxes................................................. 202 29 --
Deferred catalog costs................................................ 621 1,315 2,324
Other current assets.................................................. 258 299 1,489
------- ------- -------
Total current assets........................................... 11,534 15,822 30,981
FURNITURE, FIXTURES AND EQUIPMENT, net.................................. 1,249 3,355 7,582
INTELLECTUAL AND PROPRIETARY PROPERTY, net.............................. 1,872 4,072 1,846
TRADEMARK............................................................... -- 349 6,776
LONG-TERM RECEIVABLES................................................... -- 1,110 2,184
DEFERRED FINANCING COSTS................................................ -- 663 1,047
EXCESS OF COSTS OVER FAIR MARKET VALUE OF ASSETS ACQUIRED............... 205 194 9,458
------- ------- -------
TOTAL ASSETS................................................... $ 14,860 $ 25,565 $59,874
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit....................................................... $ 4,820 $ -- $ --
Cash overdrafts....................................................... 839 1,200 3,995
Accounts payable...................................................... 1,880 3,107 6,854
Short-term debt....................................................... -- -- 2,000
Current portion of long-term debt..................................... 129 426 399
Reserve for returns................................................... 158 514 398
Other accrued liabilities............................................. 481 641 2,123
------- ------- -------
Total current liabilities...................................... 8,307 5,888 15,769
LONG-TERM DEBT, net of current portion.................................. 702 11,754 30,915
DEFERRED INCOME TAXES................................................... 34 -- --
------- ------- -------
Total liabilities.............................................. 9,043 17,642 46,684
------- ------- -------
COMMITMENTS AND CONTINGENCIES...........................................
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares authorized, 30,000
shares Series A Preferred Stock designated, issued and outstanding
as of December 30, 1995; 200,000 shares authorized, 52,000 shares of
Series A Preferred Stock designated, none issued or outstanding, and
35,000 shares of Series B Preferred Stock designated, none issued or
outstanding as of December 28, 1996; and 5,000,000 shares
authorized, none issued or outstanding as of June 30, 1997.......... -- -- --
Common stock, $0.01 par value; 3,600,000 shares authorized, issued and
outstanding as of December 30, 1995; 10,000,000 shares authorized,
6,410,885 issued and outstanding as of December 28, 1996; 25,000,000
shares authorized, 8,076,648 issued and outstanding as of June 30,
1997................................................................ 36 64 81
Additional paid-in capital............................................ 5,384 7,859 20,035
Unrealized gain on marketable securities, net of deferred tax......... 137 -- --
Retained earnings (deficit)........................................... 260 -- (6,926)
------- ------- -------
Total stockholders' equity..................................... 5,817 7,923 13,190
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 14,860 $ 25,565 $59,874
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 70
FULCRUM DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES............................. $ 11,997 $ 28,581 $ 36,457 $ 16,815 $ 23,111
COST OF GOODS SOLD....................... 5,087 13,211 15,566 7,525 9,450
--------- --------- --------- --------- ---------
GROSS PROFIT............................. 6,910 15,370 20,891 9,290 13,661
ADVERTISING AND CATALOG COSTS............ 4,638 5,142 7,089 3,550 7,303
GENERAL AND ADMINISTRATIVE EXPENSES...... 1,979 9,171 12,621 6,142 9,157
NONRECURRING PLAYCLOTHES START UP
COSTS.................................. -- -- 338 -- 2,116
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS............ 293 1,057 843 (402) (4,915)
OTHER INCOME............................. 52 177 869 629 371
INTEREST EXPENSE......................... (63) (762) (820) (412) (1,022)
OTHER EXPENSE............................ (112) (1) (256) (253) --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................... 170 471 636 (438) (5,566)
INCOME TAX EXPENSE (BENEFIT)............. 79 151 230 (158) (442)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE......... 91 320 406 (280) (5,124)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFIT.......... -- -- -- -- (1,802)
--------- --------- --------- --------- ---------
NET INCOME (LOSS)........................ $ 91 $ 320 $ 406 $ (280) $ (6,926)
========= ========= ========= ========= =========
PRO FORMA NET LOSS(1).................... $ (41) $ (189) $ (755) $ (590) $ (6,926)
========= ========= ========= ========= =========
NET INCOME (LOSS)........................ $ 91 $ 320 $ 406 $ (280) $ (6,926)
PREFERRED STOCK DIVIDENDS................ -- 60 583 291 --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS........................... $ 91 $ 260 $ (177) $ (571) $ (6,926)
========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING... 5,476,335 5,780,976 8,265,620 7,708,335 8,294,019
========= ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.............................. $ 0.02 $ 0.04 $ (0.02) $ (0.07) $ (0.62)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.............................. -- -- -- -- (0.22)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE....................... $ 0.02 $ 0.04 $ (0.02) $ (0.07) $ (0.84)
========= ========= ========= ========= =========
PRO FORMA NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE(1).................... $ (0.01) $ (0.03) $ (0.16) $ (0.11) $ (0.84)
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) The pro forma net loss and net loss per common and common equivalent share
represent those amounts as if the change in accounting policy had been applied
in all the periods presented.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 71
FULCRUM DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK,
$0.01 PAR VALUE
---------------------------------
COMMON STOCK,
SERIES A SERIES B $0.01 PAR VALUE ADDITIONAL TOTAL
--------------- --------------- --------------- PAID-IN UNREALIZED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL GAIN EARNINGS EQUITY
------ ------ ------ ------ ------ ------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' INVESTMENT
AT MARCH 16, 1994
(inception)........... -- $-- -- $-- -- $ -- $ -- $ -- $ -- $ --
Capital investment at
March 31, 1994........ -- -- -- -- 3,600 36 2,705 -- -- 2,741
Distribution of
capital............... -- -- -- -- -- -- (551) -- (91) (642)
Net income.............. -- -- -- -- -- -- -- -- 91 91
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, DECEMBER 31,
1994.................. -- -- -- -- 3,600 36 2,154 -- -- 2,190
Net income.............. -- -- -- -- -- -- -- -- 320 320
Issuance of Series A
Preferred Stock....... 30 -- -- -- -- -- 3,000 -- -- 3,000
Additional capital
contributions......... -- -- -- -- -- -- 1,773 -- -- 1,773
Distribution of
capital............... -- -- -- -- -- -- (1,543) -- -- (1,543)
Unrealized gain on
marketable securities,
net of deferred tax... -- -- -- -- -- -- -- 137 -- 137
Preferred stock
dividends (12% per
annum)................ -- -- -- -- -- -- -- -- (60) (60)
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, DECEMBER 30,
1995.................. 30 -- -- -- 3,600 36 5,384 137 260 5,817
Net income.............. -- -- -- -- -- -- -- -- 406 406
Net change of unrealized
gain on marketable
securities, net of
tax................... -- -- -- -- -- -- -- (137) -- (137)
Issuance of Series A
Preferred Stock....... 21 -- -- -- -- -- 2,123 -- -- 2,123
Issuance of Series B
Preferred Stock....... -- -- 31 -- -- -- 3,173 -- -- 3,173
Distribution of
capital............... -- -- -- -- -- -- (2,191) -- (83) (2,274)
Conversion of Series A
Preferred Stock....... (47) -- -- -- 2,417 24 (24) -- -- --
Call Series A Preferred
Stock................. (4) -- -- -- -- -- (400) -- -- (400)
Call Series B Preferred
Stock................. -- -- (31) -- -- -- (3,208) -- -- (3,208)
Sale of common stock and
warrants.............. -- -- -- -- 394 4 1,846 -- -- 1,850
Issuance of warrants.... -- -- -- -- -- -- 1,156 -- -- 1,156
Preferred stock
dividends (12% per
annum)................ -- -- -- -- -- -- -- -- (583) (583)
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, DECEMBER 28,
1996.................. -- -- -- -- 6,411 64 7,859 -- -- 7,923
Net loss (unaudited).... -- -- -- -- -- -- -- -- (6,926) (6,926)
Issuance of warrants
(unaudited)........... -- -- -- -- -- -- 696 -- -- 696
Sale of common stock and
warrants
(unaudited)........... -- -- -- -- 1,450 15 9,985 -- -- 10,000
Issuance of common stock
(unaudited)........... -- -- -- -- 216 2 1,495 -- -- 1,497
---- ---- ---- ---- ----- ---- ------- ---- ------- -------
BALANCE, JUNE 30, 1997
(unaudited)........... -- $-- -- $-- 8,077 $ 81 $ 20,035 $ -- $ (6,926) $ 13,190
==== ==== ==== ==== ===== ==== ======= ==== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 72
FULCRUM DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16, 1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
-------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 91 $ 320 $ 406 $ (280) $ (6,926)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Cumulative effect of change in accounting
principle....................................... -- -- -- -- 3,033
Depreciation and amortization..................... 176 469 1,050 510 666
Net changes in current assets and liabilities:
Receivables..................................... (485) (1,038) 170 215 (887)
Inventories..................................... 41 (5,143) (5,425) (2,398) (4,889)
Customer lists.................................... (368) (1,733) (2,725) (27) (226)
Deferred catalog costs.......................... (203) (154) (694) (153) (549)
Other current assets............................ 498 24 (41) (1,480) (870)
Accounts payable................................ (173) 1,670 1,588 2,452 4,984
Reserve for returns............................. 67 66 6 84 (380)
Other accrued liabilities....................... 105 (121) 160 103 (522)
Deferred income taxes............................. 79 (8) 229 (152) (1,674)
Other long-term liabilities....................... (618) (50) -- -- --
------- -------
Net cash used by operating activities........... (790) (5,698) (5,276) (1,126) (8,240)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of assets................................. (245) (250) (626) (16) (2,449)
Net cash paid in the purchase of Storybook.......... -- -- -- -- (14,498)
Net cash paid in the purchase of Playclothes
assets............................................ -- -- (1,271) -- --
Net cash paid in the purchase of NewStork........... (2,341) -- -- -- --
Sale (purchase) of marketable securities............ -- (1,316) 1,316 1,316 --
------- -------
Net cash used by investing activities........... (2,586) (1,566) (581) 1,300 (16,947)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit....................... 917 3,434 10,193 4,014 14,315
Payments of line of credit.......................... -- (3,985) (8,899) (1,330) (6,412)
Payments of debt obligations........................ (322) (160) (5,419) (5456) (180)
Proceeds from debt obligations...................... 152 4,889 11,228 -- 11,305
Deferred financing costs............................ -- -- (663) -- --
Preferred stock dividends paid...................... -- (60) (222) (38) --
Proceeds from issuance of common stock and
warrants.......................................... -- -- 2,000 -- 10,746
Proceeds from issuance of preferred stock........... -- 3,000 3,465 3,515 --
Redemption of preferred stock....................... -- -- (3,608) -- --
Investment (distribution) of capital................ 2,741 230 (2,274) (774) --
------- -------
Net cash provided by financing activities....... 3,488 7,348 5,801 (69) 29,774
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 112 84 (56) 105 4,587
CASH AND CASH EQUIVALENTS, beginning of period........ -- 112 196 196 140
------- -------
CASH AND CASH EQUIVALENTS, end of period.............. $ 112 $ 196 $ 140 $ 301 $ 4,727
======= =======
CASH PAID FOR INTEREST................................ $ 94 $ 757 $ 1,198 $ 297 $ 1,022
======= =======
SUMMARY OF NON-CASH TRANSACTIONS:
Assignment of intangible assets to stockholder...... $ 642 $ -- $ -- $ -- $ --
======= =======
Related party long-term receivable.................. $ -- $ -- $ -- $ -- $ (1,074)
======= =======
Unrealized gain (loss) on marketable securities, net
of deferred tax................................... $ -- $ 137 $ (137) $ (137) $ --
======= =======
Effect of reduction in deferred tax asset valuation
allowance on purchase accounting.................. $ 329 $ 160 $ (11) $ -- $ --
======= =======
Series A and B Preferred Stock issued for debt...... $ -- $ -- $ 1,320 $ -- $ --
======= =======
Series B Preferred Stock issued for dividends....... $ -- $ -- $ 361 $ 253 $ --
======= =======
Conversion of Preferred Stock to Common Stock....... $ -- $ -- $ 24 $ -- $ --
======= =======
Stock issued for deferred financing costs........... $ -- $ -- $ -- $ -- $ 405
======= =======
Stock issued in the purchase of Storybook........... $ -- $ -- $ -- $ -- $ 1,042
======= =======
Equipment purchased on capital leases............... $ -- $ 593 $ 1,902 $ 1,383 $ 1,797
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 73
FULCRUM DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 16, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994,
THE FISCAL YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996
(INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS
UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(1) DESCRIPTION AND HISTORY OF COMPANY:
Fulcrum Direct, Inc., a Delaware corporation ("Fulcrum" or the "Company"),
is a leading catalog retailer of apparel, accessories and shoes for children,
teens and young women up to 24 years. The Company's portfolio of brands includes
After the Stork, Playclothes, Storybook Heirlooms, zoe, Little Feet, SunSkins
and Discount Direct. The Company's 160,000 square foot headquarters, call center
and distribution center is located in Rio Rancho, New Mexico.
In February 1993, NewStork, Inc. a New Mexico corporation ("NewStork")
purchased the business and assets, and assumed certain liabilities, of After the
Stork, Inc., a New Mexico corporation and a manufacturer and catalog retailer of
natural fiber children's clothing which was founded in 1980. On March 31, 1994,
all of the outstanding stock of NewStork was acquired by FCP Direct, Inc., a
Delaware corporation ("FCP Direct") and a wholly owned subsidiary of Fulcrum
Capital Partners L.P., a Delaware limited partnership ("FCPLP"), for cash
consideration. In March 1995, FCPLP contributed to Fulcrum all common shares of
FCP Direct. On December 30, 1995, to simplify Fulcrum's capital structure,
NewStork was merged into FCP Direct, and FCP Direct was merged into Fulcrum.
During 1995, Fulcrum developed its SunSkins brand, introduced the After the
Stork brand in Japan and developed other revenue enhancing programs. In Spring
1996, Fulcrum introduced Discount Direct and purchased a catalog customer list
from OshKosh B'Gosh. In Fall 1996, Fulcrum introduced its Little Feet brand in
the U.S. and Japan. Net revenues in Japan were $2,887, $9,005 and $2,516 in
fiscal years 1995 and 1996 and for the six month period ended June 30, 1997
(unaudited), respectively.
On December 31, 1996, the Company acquired, for cash consideration of
approximately $1,200 and assumption of $350 of customer returns liabilities,
certain assets relating to the Playclothes brand, previously part of a portfolio
of several brands marketed by a subsidiary of The Walt Disney Company ("The Walt
Disney Company"). Net revenues of the Playclothes catalog were $28,900 in 1996
(unaudited). Assets acquired included (i) all proprietary rights in the
Playclothes brand name, (ii) the Playclothes customer list, (iii) a Canadian
wholesale and license agreement, (iv) the right to mail Fulcrum's catalogs in
1997 to customers of The Disney Catalog and (v) certain immaterial inventory and
fixed assets. Under the Canadian wholesale and license agreement, the Company is
entitled to receive guaranteed payments through December 2000 with an aggregate
present value totaling $1,110. The Company allocated the approximately $1,500
purchase price in the accompanying fiscal year 1996 consolidated balance sheet
as follows: (i) $1,110 to long-term receivables, (ii) $349 to tradenames and
(iii) $60 to customer list.
On June 27, 1997 (unaudited), the Company acquired all of the outstanding
common stock of Storybook Heirlooms, Inc., ("Storybook") a specialty retailer of
children's clothing, for approximately $15,000, which includes 151,000 shares of
the Company's common stock valued at the date of acquisition to be $1,042. This
acquisition has been accounted for under the purchase method. The purchase price
was allocated based on estimated fair values at the date of acquisition. The
Company recorded $2,056 of deferred tax liability for the excess of the
resulting amounts recorded for financial reporting purposes over the tax basis
of certain assets and liabilities acquired. This resulted in an excess of cost
over fair value of net assets acquired of $9,264. The Company is continuing to
evaluate the assets and liabilities of Storybook and there may be adjustment to
the recording of the acquisition. The excess of cost over fair value of net
assets acquired are being amortized on a straight-line basis over 20 years.
F-7
<PAGE> 74
The Company plans to integrate Storybook by: (i) eliminating redundant
corporate staff including select executives and accounting, human resources, and
marketing and manufacturing staffs, (ii) consolidating duplicate distribution
center and call center facilities primarily into Fulcrum's Rio Rancho, New
Mexico facility by closing the Foster City, California facility; and (iii)
consolidating printing, freight, toll-free phone service and credit card
processing contracts, manufacturing and merchandising. The success of the
Storybook Acquisition will depend primarily on the Company's ability to
successfully integrate and consolidate Storybook, which will require substantial
management, financial and other resources and may pose risks with respect to
sales, customer service and market share.
The following unaudited pro forma information reflects the debt used to
finance the acquisition and presents a summary of consolidated results of
operations of the Company and Storybook as if the acquisition had occurred on
January 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 28, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Net revenues............................... $67,405 $ 38,074
Net income (loss).......................... $ 310 $ (7,688)
Net income (loss) per common and common
equivalent share......................... $ (0.03) $ (0.77)
</TABLE>
In management's opinion, the unaudited pro forma consolidated results of
operations are not indicative of the actual results that would have occurred had
the combination been consummated at the beginning of 1996 or of future
operations of the consolidated entities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Storybook, a California
corporation, which the Company intends to eliminate through merger in the second
half of 1997, and Equipment Bond Purchaser, Inc., (a New Mexico corporation,
formed solely to administer the Company's Industrial Revenue Bonds). All
material intercompany transactions and balances have been eliminated.
b. Presentation of Fiscal Periods
The Company uses a 52 to 53 week fiscal year ending the Saturday nearest to
December 31. The 1994 financial statements represent the period from March 16,
1994 (inception) to December 31, 1994. The fiscal years ending December 30, 1995
and December 28, 1996 both included 52 weeks.
c. Fair Value of Financial Instruments
The carrying amounts of all financial instruments, excluding marketable
securities, are believed to approximate fair market value based upon the
following methods and assumptions:
Cash and Cash Equivalents -- The carrying value of cash and cash
equivalents is assumed to approximate fair value due to the short-term maturity
of these instruments.
Marketable Securities -- The fair value of marketable securities
available-for-sale is based upon fair market value. See Note 2e. -- Summary of
Significant Accounting Policies -- Marketable Securities.
Lines of Credit -- The carrying values of the lines of credit are assumed
to approximate fair value due to the secured nature of these instruments, their
floating interest rates and their short-term nature.
F-8
<PAGE> 75
Long-term Debt -- The carrying value of the Company's long-term debt
approximates fair value after allocation of the estimated fair value of the debt
to the warrants issued in connection with subordinated debt.
Letters of Credit -- The Company utilizes stand-by and commercial letters
of credit for certain domestic and imported purchases. The contract amounts of
the letters of credit approximate their fair value because of the short-term
nature.
d. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks and
investments with original maturities of three months or less. The Company's cash
management system provides for the daily replenishment of major bank accounts by
the Company's line of credit for check clearing requirements.
e. Marketable Securities
Marketable securities include marketable equity securities carried as
available-for-sale and are stated at fair market value and unrealized gains or
losses on such securities are reflected, net of tax, in stockholders' equity, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
f. Inventories
Inventories are stated at the lower of fair market value or purchase cost
principally determined by the first-in, first-out ("FIFO") method. The elements
of finished goods include purchased goods and raw materials, inbound freight,
labor and overhead.
g. Deferred Catalog Costs
The Company accounts for catalog costs in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 93-7, Reporting on Advertising Costs. SOP 93-7 requires that the
amortization of capitalized advertising costs be the amount computed using the
ratio that current period revenues for the catalog cost pool bear to the total
of current and estimated future period revenues for that catalog cost pool.
Catalog production and distribution costs are capitalized and amortized over the
periods in which the related revenues are generated, which is approximately
three months from the date catalogs are mailed.
h. Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment, net are stated at cost. The Company
provides for depreciation using the straightline method in amounts that allocate
the cost of furniture, fixtures and equipment over their estimated useful lives
ranging from three to ten years. Costs of routine repair and maintenance are
expensed as incurred. During 1996, the Company capitalized $124 in
implementation and program instruction costs as part of the implementation of
$1,200 of fully integrated operations systems. Assets under capital leases were
$453, $1,190, and $3,039 as of December 30, 1995, December 28, 1996 and June 30,
1997 (unaudited), respectively.
i. Intellectual and Proprietary Property, Net
Intellectual and proprietary property costs consist principally of costs
associated with customer list acquisition. Such costs include the purchase of
customer lists and the rental of customer lists. The Company evaluates the
recoverability of such costs based upon the revenue and related margin
contribution derived from these activities.
As of December 29, 1996, the Company changed its policy of capitalizing
list rental costs. This change was made in connection with the acquisition of
Storybook which has historically followed a
F-9
<PAGE> 76
policy of expensing such costs as incurred and while practices vary, the Company
has decided to conform to Storybook's practices and expense such costs as
incurred. The cumulative effect of the change was recorded as of December 29,
1996 and was $(1,802) or $(0.22) per share, net of tax benefit of $1,231.
Intellectual and proprietary property, is amortized using the straight-line
method over the estimated useful lives of the assets. Customer lists are
amortized over 5 years. Effective January 1, 1996, the Company, based on
independent study, revised its estimate of the useful life of customer lists
from four years to five years, which more appropriately reflects the useful life
over which the economic benefits are expected to be received from these assets.
The effect of this change to the fiscal year 1996 consolidated statement of
operations was $89 after taxes.
Other intellectual and proprietary property included purchased artwork,
patterns and a covenant not to compete and its costs are being amortized over
three years.
j. Asset Impairment
The carrying value of tangible and intangible assets is periodically
reviewed by the Company and impairments would be recognized if the undiscounted
value of projected future cash flows less interest is less than their carrying
value, in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
k. Trademarks
Trademarks associated with the acquisitions of Playclothes and Storybook
are amortized using the straight-line method over fifteen years.
l. Excess of Cost Over Fair Value of Net Assets Acquired
The excess of the cost over the fair value of the net assets acquired is
being amortized using the straight-line method over twenty years.
m. Revenue Recognition
The Company recognizes sales and the related costs of goods sold at the
time merchandise is shipped to customers. Shipping and handling fees charged to
customers and list rental income are reflected as components of net revenues,
respectively, in the accompanying consolidated statements of operations.
n. Reserve for Returns
At the time of sale, the Company provides a reserve equal to the gross
profit on projected merchandise returns, based on its historical returns
experience.
o. Income Tax Expense
Income tax expense includes Federal and state income taxes currently
payable and those deferred or prepaid because of temporary differences between
financial statement and tax bases of assets and liabilities. Deferred income
taxes represent temporary differences relating to current and non-current assets
and liabilities. The Company currently expects that, as a result of the
seasonality of the Company's business, this year's income tax benefit will be
offset by non-cash income tax expense in the remaining interim periods.
p. Nonrecurring Playclothes Start Up Costs
The Company has recorded nonrecurring expenses of $338 and $2,116 before
taxes for the year ended December 28, 1996 and the six months ended June 30,
1997 (unaudited), respectively. This is presented separately as a component of
income (loss) from operations in the Consolidated Statements of Operations. The
Walt Disney Company ceased operations relating to the Playclothes brand prior to
the acquisition of the Playclothes assets, and, as a result, significant costs
were incurred to restaff,
F-10
<PAGE> 77
improve the assets and start up the Playclothes business. Of these amounts, $338
in 1996 and $184 in the first six months of 1997 (unaudited) represent the costs
of recruiting, training and moving employees and other costs associated with the
start up of the Playclothes operation. Also included are expenses for the six
months ended June 30, 1997 (unaudited) amounting to $1,932 which represent list
testing costs. Specifically, a significant portion of the 1997 expenses relate
to the mailing of approximately 3.9 million catalogs mailed to test the
Playclothes housefile.
q. Net Income (Loss) per Common and Common Equivalent Share
Primary earnings per common and common equivalent share are computed by
dividing net income (loss), after deducting preferred stock dividends, by the
weighted average number of common shares outstanding during each period, plus,
for periods presented where the effect is not anti-dilutive, the incremental
shares that would have been outstanding upon the assumed exercise of dilutive
stock options and warrants issued during fiscal year 1996 and the six month
period ended June 30, 1997 (unaudited), using the treasury stock method as
follows:
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH ---------------------------- --------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding...... 3,600,000 3,904,641 6,389,285 5,832,000 6,426,286
Common equivalent shares
calculated using treasury
stock method.................. 1,876,335 1,876,335 1,876,335 1,876,335 1,867,733
--------- --------- --------- --------- ---------
Total shares for income per
share calculation............. 5,476,335 5,780,976 8,265,620 7,708,335 8,294,019
========= ========= ========= ========= =========
</TABLE>
Net income (loss) per common and common equivalent share on a fully diluted
basis is only applicable in fiscal year 1996, and such calculation does not
change net income on a primary basis.
r. Financial Statement Preparation and Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For
additional information, reference is made to "Risk Factors" included elsewhere
in this Prospectus and incorporated by reference herein.
Certain amounts in the prior periods have been reclassified to conform to
the current year consolidated financial statement presentation.
s. Accounting for Stock-Based Compensation
The Company applies Accounting Principle Board Opinion No. 25 and related
interpretations in accounting for its Management Team Equity Plan ("the Option
Plan"). SFAS No. 123 was issued by the Financial Accounting Standards Board
("FASB") in 1995 and, if fully adopted, changes the methods for recognition of
cost on plans similar to those of the Company. The Company has adopted the
disclosure -- only provisions of SFAS No. 123. See Note 5 -- Employee Benefits.
Stock options granted
F-11
<PAGE> 78
under the Option Plan have been issued at or above fair market value of the
Company's common stock at the date of grant. Accordingly, no compensation
expense has been recognized with respect to the Option Plan.
t. Seasonal and Quarterly Fluctuations
The Company's business is subject to seasonal fluctuations. Given the
Company's historical results, management anticipates that the majority of the
Company's net revenues will be derived from the Spring, Fall and Holiday
seasons. As a result, the Company expects its sales and results of operations to
be generally lower in the second and third quarters than in the first and fourth
quarters of each fiscal year, which includes Easter, Back-to-School and Holiday
purchases, respectively. Accordingly, results of operations in any quarter will
not necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarters.
u. Accounting Pronouncements Not Yet Adopted
The FASB issued SFAS No. 128, Earnings Per Share which is effective for
calendar years beginning after December 15, 1997 at which time it will require
restatement of prior year earnings per share calculations. Management has not
yet determined the effect, if any, of SFAS No. 128 on the consolidated financial
statements.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued and
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement. In 1995,
the Company recorded to stockholders' equity a $137 unrealized gain on the sale
of marketable securities, net of deferred tax. In 1996, the Company reversed
this amount upon the sale of such securities. The Company held no marketable
securities in fiscal year 1997. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.
Also in June 1997, SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, was issued. This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to stockholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.
v. Unaudited Interim Financial Statements
In the opinion of management, the unaudited financial statements for the
six months ended June 30, 1996 and June 30, 1997 are presented on a basis
consistent with the audited financial statements and reflect all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results thereof. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
F-12
<PAGE> 79
(3) SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated debt, net of discount, effective
interest at 11.7%, due October 2003. $7,000
principal repayment due upon completion of
an initial public offering................. $ -- $ -- $ 9,304
Subordinated debt, net of discount, effective
interest at 12.5%, due October 2003, $3,000
principal repayment due upon completion of
an initial public offering................. -- 8,868 8,919
Line of credit, variable interest, due May
1999, secured by assets of the Company..... 366 1,661 9,564
Capitalized lease obligations with interest
at 6.9% to 11.7%, due 1999 to 2001 secured
by certain assets and in certain instances,
guaranteed by related parties and officers
of the Company............................. 465 1,416 3,314
8.25% leasehold improvement note, due August
2001, secured by assets of the Company and
guaranteed by a related party.............. -- 235 213
----- ------- -------
831 12,180 31,314
Less: Current portion of long-term debt...... (129) (426) (399)
----- ------- -------
Total long-term debt......................... $ 702 $ 11,754 $30,915
===== ======= =======
</TABLE>
At December 30, 1995, December 28, 1996 and June 30, 1997 (unaudited),
there were $4,820, $0 and $2,000 of short-term borrowings outstanding,
respectively, comprised of a note payable to a bank and lines of credit payable
to related parties and a bank. The weighted average interest rate in 1995 and
1996 was 13.4% and 8.5% for the six month period ended June 30, 1997
(unaudited).
On October 21, 1996, the Company entered into a subordinated debt agreement
with Whitney Subordinated Debt Fund, L.P. ("WSDF") for $10,000 in outstanding
principal, a stated interest rate of 10.101%, due October 21, 2003 (the "1996
WSDF Notes"). A $3,000 principal repayment must be made within five days of
completion of an initial public offering by the Company. A warrant valued at
$1,156 was issued in connection with the subordinated debt as well as an option
to purchase a 10.5% interest in Fulcrum Retail, Inc., a related party, which was
valued at $150 (see Note 9), resulting in an effective interest rate on the
subordinated debt of 12.5%. Deferred financing costs of $663 were incurred in
connection with this transaction.
On June 30, 1997 (unaudited), the Company entered into a subordinated debt
agreement with WSDF and two members of its board of directors for $10,000 in
outstanding principal, a stated interest rate of 10.101%, due October 21, 2003
(the "1997 WSDF Notes"). A $7,000 principal repayment must be made within five
days of completion of an initial public offering by the Company. A warrant
valued at $696 was issued in connection with the subordinated debt, resulting in
an effective interest rate on the subordinated debt of 11.7%. Deferred financing
costs of approximately $450 were incurred in connection with this transaction.
On December 28, 1996, the Company entered into an agreement with a bank to
expand its line of credit (the "Credit Facility"), effective January 1, 1997.
The $10,000 Credit Facility, which was increased to $15,000 and extended to May
1999, provides for a secured line of credit which can be used to borrow against
or for the purpose of issuing standby and commercial letters of credit and is
secured by all the assets of the Company. The Credit Facility bears interest
rates of 0.5% over the bank's corporate base rates or 3.1% above LIBOR. As of
June 30, 1997 (unaudited), outstanding borrowings on
F-13
<PAGE> 80
the Credit Facility were $9,564 and outstanding letters of credit totaled
$1,078. The maximum amount of this facility that may be used for letters of
credit is $2,000.
The Credit Facility and subordinated debt agreements contain restrictions
which, among other things, require maintenance of certain financial ratios
(which are effective for fiscal year 1997 and change quarterly), restrict
encumbrance of assets and creation of other indebtedness.
Scheduled maturities of long-term debt and capitalized lease obligations as
of June 30, 1997 (unaudited) are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------------
<S> <C>
1997 (remaining six months)................................ $ 399
1998....................................................... 890
1999....................................................... 10,445
2000....................................................... 684
2001....................................................... 673
After 2001................................................. 20,000
-------
33,091
Less: Unamortized original issue discount on subordinated
debt..................................................... (1,777)
Less: Current portion of long-term debt.................... (399)
-------
$30,915
=======
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its headquarters, call center and distribution center
under an operating lease expiring December 31, 2006 with a related party. The
Company intends to use net proceeds from the proposed initial public offering to
purchase its headquarters, call center and distribution center. See Note
12 -- Subsequent Events (unaudited). Future minimum rental payments under
operating and capital leases at June 30, 1997 (unaudited) were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS OPERATING LEASES CAPITAL LEASES
--------------------------------------- ---------------- --------------
<S> <C> <C>
1997 (remaining six months)............ $ 750 $ 462
1998................................... 1,676 965
1999................................... 1,684 728
2000................................... 1,166 651
2001................................... 973 472
After 2001............................. 2,382 462
------
Total minimum lease payments........... $8,631 3,740
======
Less amounts representing interest..... (426)
Present value of net minimum lease
payments............................. 3,314
Less current maturities................ (367)
Long-term lease obligation............. $2,947
</TABLE>
Rental expense for the period from March 16, 1994 (inception) through
December 31, 1994 and for the fiscal years ended December 30, 1995, December 28,
1996 and for the six month periods ended June 30, 1996 (unaudited) and June 30,
1997 (unaudited) was $124, $189, $520, $270 and $504, respectively.
F-14
<PAGE> 81
The Company has an agreement commencing September 1996 with AT&T to
purchase certain communication services through September 1999, which agreement
may be renegotiated or terminated by the Company upon a third-party offer to
provide such services at a lower cost.
(5) EMPLOYEE BENEFITS:
a. Management Incentive Agreement
The Board has agreed to provide for a management incentive bonus to be paid
to Messrs. Lederman and Budoff and certain other executive officers in
connection with the successful completion of certain acquisitions, pursuant to a
Management Incentive Agreement between the Company and FCP. Messrs. Lederman and
Budoff have elected to receive such compensation through FCP, a partnership
formed by executive officers of the Company in light of certain tax and
structural advantages. Pursuant to the Management Incentive Agreement, a fee is
paid to FCP for the benefit of the Company's senior management team equal to the
greater of $50 or 2% of the aggregate consideration payable by the Company, or
to the Company or the Company's stockholders in connection with the applicable
transaction up to a fee of $400, with an incremental fee equal to 1% of the
incremental aggregate consideration thereafter. To date, FCP has received an
aggregate of $355 in payments under this agreement, all paid in the form of
Common Stock totaling 50,271 shares. The Management Incentive Agreement expires
in 2005 or upon a Change of Control (as defined therein).
b. Management Team Equity Plan
The Board and the Company's stockholders approved the Management Team
Equity Plan (the "Option Plan") on October 18, 1996. The Option Plan provides
for the granting to executives and other key employees of the Company non
qualified stock options. A total of 765,000 shares of common stock are reserved
for issuance upon exercise of options granted under the Option Plan. As of June
30, 1997 (unaudited), options to purchase 404,350 shares of Common Stock were
outstanding under the Option Plan at a weighted average exercise price of $5.50
per share. The exercise price of all stock options granted through December 28,
1996 was $5.00 per share and was $8.24 for all stock options granted subsequent
to December 28, 1996. Such options expire in ten years from date of grant and
vest over a five-year period. Of these options, 34,195 were vested at June 30,
1997 (unaudited). The effect on income of these options calculated in accordance
with SFAS No. 123 was immaterial for the six month period ended June 30, 1997
(unaudited).
c. 401(k) Plan
The Company has a 401(k) plan for eligible employees. This plan allows
eligible employees to defer portions of their current compensation up to 10% of
their pay, subject to statutory limitations. The Company may, at its discretion,
make matching contributions up to 6% of the employee's deferred compensation.
Employee contributions are always fully vested. Employer contributions vest on a
graduated basis, with full vesting achieved at the end of five years. The
Company's contributions for the period from March 16, 1994 (inception) through
December 31, 1994, for the years ended December 30, 1995 and December 28, 1996
and for the six month period ended June 30, 1997 (unaudited) were not
significant.
F-15
<PAGE> 82
(6) SUPPLEMENTARY CONSOLIDATED BALANCE SHEET DATA:
a. Receivables
Receivables consist of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Credit card......................... $ 194 $ 328 $ 287
Integrated programs................. -- 250 141
Customer list rental................ 148 138 204
Related companies, net (See Note
10 -- Related Party
Transactions)..................... 1,225 635 261
Other............................... 110 156 574
------ ------- -------
$1,677 $ 1,507 $ 1,467
====== ======= =======
</TABLE>
b. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------ JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods....................... $4,296 $ 10,037 $17,286
Work in process...................... 564 594 1,771
Raw materials........................ 2,177 1,901 1,917
------ ------- -------
$7,037 $ 12,532 $20,974
====== ======= =======
</TABLE>
c. Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment, net consist of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................. $ 762 $1,579 $ 3,446
Computer software................... 219 958 1,447
Furniture and equipment............. 273 790 2,659
Leasehold improvements.............. 9 300 151
------ ------ -------
1,263 3,627 7,703
Less: Accumulated depreciation and
amortization ..................... (304) (759) (1,212)
Add: Assets not yet in service...... 290 487 1,091
------ ------ -------
$1,249 $3,355 $ 7,582
====== ====== =======
</TABLE>
F-16
<PAGE> 83
d. Intellectual and Proprietary Property, Net
Intellectual and proprietary property, net consists of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer lists....................... $2,190 $4,914 $ 2,077
Other................................ 29 89 270
------ ------ -------
2,219 5,003 2,347
Less: Accumulated amortization....... (347) (931) (501)
------ ------ -------
$1,872 $4,072 $ 1,846
====== ====== =======
</TABLE>
(7) SUPPLEMENTARY STATEMENTS OF OPERATIONS DATA:
a. Other Income
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
State job training
program
incentives...... $ -- $ 90 $500 $ 267 $ 362
Gain on sale of
marketable
securities...... -- 9 347 347 --
Dividend income... -- 60 15 15 --
Miscellaneous
income.......... 52 18 7 -- 9
--- ---- ---- ---- ----
$ 52 $177 $869 $ 629 $ 371
=== ==== ==== ==== ====
</TABLE>
The State of New Mexico granted to the Company more than $2,000 for
training of new employees through December 1997. The Company utilized $90, $500,
$267 and $362 in fiscal years 1995 and 1996 and for the six month periods ended
June 30, 1996 and June 30, 1997 (unaudited), respectively. The Company has $633
of the grant available for use in fiscal year 1997 and has submitted an
application for up to an additional $2,000 of benefit in fiscal year 1998.
In May 1996, the Company sold marketable securities for $1,650, resulting
in a realized gain of $347.
b. Other Expenses
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Relocation of
operations...... $ -- $ -- $ (246) $(243) $--
Miscellaneous
expense......... (112) (1) (10) (10) $--
--- ---- ---- ---- ----
$ (112) $ (1) $ (256) $(253) $--
=== ==== ==== ==== ====
</TABLE>
F-17
<PAGE> 84
8) INCOME TAXES:
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $ -- $ -- $ -- $ -- $ --
State.................... -- -- -- -- --
Total current............ -- -- -- -- --
Deferred:
Federal.................. 67 129 196 (135) (372)
State.................... 12 22 34 (23) (70)
--- ---- ---- ---- ----
Total deferred........... 79 151 230 (158) (442)
--- ---- ---- ---- ----
Total income tax expense
(benefit)................ $ 79 $151 $230 $(158) $ (442)
=== ==== ==== ==== ====
</TABLE>
The tax benefit of the cumulative effect of change in accounting principle
is $1,231, all of which relates to deferred income tax. Actual tax expense
differs from the "expected" tax expense on income computed by applying the
Federal corporate income tax rate of 34%, to pretax net income of the Company as
follows:
<TABLE>
<CAPTION>
PERIOD OF
MARCH 16,
1994
(INCEPTION) FISCAL YEAR ENDED SIX MONTHS ENDED
THROUGH --------------------------- -------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit)........ $ 58 $160 $216 $(143) $(1,892)
Adjustments in income taxes
resulting from:
Increase in valuation
allowance............. -- -- -- -- 1,607
Amortization of
goodwill.............. 7 4 3 2 2
State income taxes....... 12 22 34 (23) (187)
Adjustment of deferred
income taxes.......... -- (35) -- -- --
Other................. 2 -- (23) 6 28
--- ---- ---- ----- -------
Income tax expense
(benefit) before
cumulative effect of
change in accounting
principle................ 79 151 230 (158) (442)
Benefit of cumulative
effect of change in
accounting principle..... -- -- -- -- (1,231)
--- ---- ---- ----- -------
Income tax expense
(benefit)................ $ 79 $151 $230 $(158) $(1,673)
=== ==== ==== ===== =======
</TABLE>
F-18
<PAGE> 85
Deferred tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 30,
1995 1996 1997
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Reserve for returns................. $136 $ 211 $ --
Inventory reserves.................. 158 375 688
Allowance for doubtful accounts..... 271
Net operating loss.................. 730 1,118 3,836
Other............................... 71 4 50
Other accrued liabilities........... -- -- 273
---- ---- ----
Total gross deferred tax assets..... 1,095 1,708 5,118
---- ---- ----
Less valuation allowance:
Federal............................. -- -- (1,436)
State............................... (29) (18) (188)
---- ---- ----
Total valuation allowance........... (29) (18) (1,624)
---- ---- ----
Deferred tax assets, net.............. 1,066 1,690 3,494
---- ---- ----
Deferred tax liabilities:
Basis differences in furniture,
fixtures and equipment and
intellectual and proprietary
property......................... (769) (1,633) (3,103)
Other............................... -- -- (167)
Prepaid expenses.................... (199)
Unrealized gain on
available-for-sale marketable
securities under SFAS No. 115.... (90) -- --
Other............................... (39) (28) (25)
---- ---- ----
Total gross deferred tax
liabilities...................... (898) (1,661) (3,494)
---- ---- ----
Deferred tax assets (liability),
net................................. $168 $ 29 $ --
==== ==== ====
</TABLE>
In addition to the $2,056 of deferred tax liability recorded in connection
with the Storybook acquisition, Storybook also has a $353 deferred tax asset
associated with miscellaneous book tax reserves differences.
The Company had net tax basis operating loss carryforwards ("NOLs") of
$2,837, at December 28, 1996. Of this amount $778 relates to the periods prior
to the acquisition of New Stork, by FCP Direct, Inc., the successor to the
Company by merger. These NOLs expire as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
------------------------------------------------------------
<S> <C>
2006........................................................ $ 243
2007........................................................ 160
2008........................................................ 375
2009........................................................ 53
2010........................................................ 782
2011........................................................ 1,224
------
$2,837
======
</TABLE>
The Company is currently appealing an IRS ruling that, if the appeal is
unsuccessful, would reduce the Company's preacquisition NOLs by no more than
approximately $500.
In 1996, the Company entered into an arrangement with the City of Rio
Rancho, New Mexico whereby the Company is permitted to make certain reduced
payments in lieu of property and sales
F-19
<PAGE> 86
taxes otherwise due. In order to effect such arrangements, the Industrial
Development Board of Rio Rancho, New Mexico issued industrial development
revenue bonds due 2021 to Equipment Bond Purchaser, Inc., a New Mexico
corporation, which is a wholly owned subsidiary of the Company.
(9) STOCKHOLDERS' EQUITY:
As of December 30, 1995, the Company had 1,000 shares common stock, $0.01
par value per share, authorized, issued and outstanding. On October 17, 1996,
the Company amended its Certificates of Incorporation to increase the number of
authorized shares of common stock from 1,000 shares to 10,000,000 shares. On
October 18, 1996, the Company's common stock was split at a ratio of 3,600:1.
This stock split has been reflected in the accompanying consolidated financial
statements on a retroactive basis for all periods presented.
As of December 30, 1995, the Company had 100,000 shares of preferred stock,
$0.01 par value per share, authorized, of which 30,000 shares had been
designated Series A Preferred Stock ("Series A Preferred Stock") and were issued
and outstanding. The Series A Preferred Stock, with a fixed dividend of 12.0%
per annum, was converted into common stock at negotiated conversion rates and
was, subject to certain restrictions, callable by the Company and puttable by
the holders. On December 31, 1995, the Board of Directors designated an
additional 22,000 shares of the Series A Preferred Stock, bringing total
authorized Series A Preferred Stock to 52,000 shares, and designated 35,000
shares of Series B Preferred Stock ("Series B Preferred Stock"). The Series B
Preferred Stock, with a fixed dividend of 12.0% per annum, was also callable by
the Company.
In 1995, the Company sold 30,000 shares of Series A Preferred Stock to a
related party for $100 per share. In 1996, the Company converted the entire
amount of the debt related to the 12.0% line of credit due to a related party to
8,196 shares, and sold an additional 10,986 shares, of Series B Preferred Stock
for $100 per share. In May 1996, the Company also converted $500 of debt related
to the 18% line of credit due to a related party to 5,000 shares of Series A
Preferred Stock for $100 per share. See Note 3 -- Short-Term Borrowings and
Long-Term Debt. In 1996, the Company also sold an additional 16,125 shares of
Series A Preferred Stock at $100 and $105 per share, as the case may be, to
certain related parties and other individuals and sold 12,285 shares of the
Series B Preferred Stock for $105 per share. Of the shares of preferred stock,
4,000 shares of Series A Preferred Stock and all shares of the Series B
Preferred Stock were called on October 21, 1996. The remaining 17,125 shares of
Series A Preferred Stock were converted into common stock on October 21, 1996 at
conversion rates of 60:1 or 36:1, as the case may be. Quarterly dividends were
declared and paid through October 21, 1996 for both the Series A Preferred Stock
and the Series B Preferred Stock. Total dividends paid in fiscal year 1995 and
1996 were $60 and $583, respectively.
On January 1, 1996, the Company granted a warrant to purchase 600,000
shares of the Company's common stock to FCPLP. Senior management of the Company
own, or have options to purchase, the partnership interests of FCPLP. On October
21, 1996, this warrant agreement was amended and restated, to give effect to the
stock split, with the principal terms unchanged. This warrant expires on January
1, 2006 and may be exercised at $1.00 per share at the earlier of (i) October
21, 1998 or (ii) completion of an initial public offering.
Effective October 21, 1996, WEP purchased from the Company 394,385 shares
of common stock and a warrant to purchase 121,350 shares of the Company's common
stock. This warrant is exercisable immediately at $8.24 per share, expires
October 21, 2006 and was valued at $347 (the "WEP Warrant"). WEP also received
an option to purchase a 10.5% interest in Fulcrum Retail, Inc., a related party,
which was valued at $150. Additionally, on October 21, 1996, the Company granted
to WSDF, in connection with the subordinated debt, a warrant expiring October
21, 2006, to purchase 405,460 shares of the Company's common stock (the "WSDF
Warrant"). The WSDF Warrant may be exercised at $0.01 per share at the earlier
of (i) October 21, 1998 or (ii) completion of an initial public offering. This
warrant was estimated to have a fair value at date of issuance of $1,156 which
was recorded to additional paid-in capital and as original issue discount on the
related subordinated debt.
F-20
<PAGE> 87
Effective June 30, 1997 (unaudited), WEP and two members of the Company's
board of directors purchased from the Company 1,450,000 shares of common stock.
Additionally, on June 30, 1997 (unaudited), the Company granted to WSDF and two
members of the Company's board of directors, in connection with the subordinated
debt, a warrant expiring October 21, 2003, to purchase 200,000 shares in the
aggregate of the Company's common stock. This warrant may be exercised at $.01
per share. The Company is obligated to issue warrants for additional shares up
to 200,000 in the aggregate, based on any amount remaining outstanding on the
1997 WSDF Notes as of December 31, 1997, June 30, 1998 or December 31, 1998, as
defined. These warrants were estimated to have a fair value at date of issuance
of $696 which was recorded to additional paid-in capital and as original issue
discount on the related subordinated debt.
A capital distribution of $2,274 to FCPLP was recorded by the Company in
fiscal 1996 to reflect the reduction in related party receivables described in
Note 10(a).
In connection with the Storybook Acquisition, the Company issued 151,000
shares of Common Stock valued as of the date of the acquisition to two senior
executives of Storybook.
The Company's existing loan agreements with its lenders generally restrict
the Company's ability to pay dividends or make other distributions on its Common
Stock without the prior approval of its lenders.
(10) RELATED PARTY TRANSACTIONS:
a. Receivables
As of December 30, 1995, December 28, 1996 and June 30, 1997 (unaudited),
the Company had net receivables from related parties of $1,225, $635 and $261,
respectively, resulting primarily from the sale by Fulcrum of certain
discontinued inventory or damaged inventory for retail sale or liquidation as
well as advertising expenses and miscellaneous operating charges paid by Fulcrum
and billed to the appropriate related entity. Such receivables have been
guaranteed by FCPLP. The Company's policy is to sell such inventory at a price
that the Company believes is fair market value, which generally ranges from 50%
to 100% of cost, and is to be paid within standard industry terms. Sales of such
inventory totaled $484, $547 and $489, during fiscal years 1995 and 1996 and for
the six month period ending June 28, 1997 (unaudited), respectively. There were
no sales to the related retail company in 1994.
On June 30, 1997, the Company entered into an agreement with a related
party to convert a current receivable of $1,074 into a long-term receivable,
bearing interest at 0.5% over the same corporate base rate as the Credit
Facility. This long-term receivable is due June 30, 2002 and is guaranteed by
FCPLP.
b. Tradenames
Immediately after the purchase of NewStork in March 1994, ownership of the
After the Stork brand name and various other trademarks were assigned to FCPLP
at book value as a distribution of capital and contributed to Fulcrum Brands
L.P., a Delaware limited partnership and a related party ("Brands"). The Company
has agreed to pay Brands an annual fee equal to .05% of the Company's net
revenues, as defined, as a license fee for use of the trademarks owned by
Brands. Payments made to Brands relating to the trademark fees in fiscal periods
1994, 1995 and 1996 were not significant. All of the Company's trademarks and
trademark applications are held by Brands, except for those related to
Playclothes and Storybook. Upon completion of the proposed initial public
offering, the Company expects to exercise an option to purchase from Brands all
of the trademarks and trademark applications used by Fulcrum for $1,750, less
royalties paid under the trademark agreement. See Note 12 -- Subsequent Events
(unaudited). Of the $1,750 purchase price, Brands will receive a distribution of
$1,100.
F-21
<PAGE> 88
c. Facility
The Company leases its 160,000 square foot headquarters, call center and
distribution center from Fulcrum Properties L.P., a Delaware limited partnership
and a related party ("Properties"). This operating lease was effective January
1, 1996 and expires December 31, 2006. Rent expense for the six months ended
June 30, 1996 (unaudited) and for fiscal year 1996 was $227 and $455,
respectively, which related to the lease of the 80,000 square feet then in
existence. Rent expense for the six months ended June 30, 1997 (unaudited) was
$374, which relates to the lease of 160,000 square feet. The Company expects to
enter into a purchase agreement with Properties pursuant to which, upon
completion of the proposed initial public offering, the Company will purchase
all of Properties' rights in the facility for anticipated aggregate
consideration of $2,500 plus assumption of $5,600 of mortgage financing and
related interest rate swap agreements. See Note 12 -- Subsequent Events
(Unaudited). Of the $8,100 purchase price, Fulcrum Properties, L.P. will receive
a distribution of $1,200.
(11) LITIGATION:
The Company is a party to litigation in the normal course of business.
Management, on the advice of counsel, believes that a material adverse outcome
of any pending litigation is remote.
(12) SUBSEQUENT EVENTS (UNAUDITED):
The Company is contemplating filing a registration statement in
anticipation of an initial public offering. As of August 8, 1997, proceeds from
the proposed offering are unknown.
The Company intends to use the net proceeds from any such offering to (i)
repay $10,000 principal amount of subordinated debt, (ii) purchase certain
intellectual property owned by Brands for approximately $1,750, (iii) purchase
certain real estate owned by Properties for approximately $2,500 in cash, plus
assumed liabilities, (iv) fund potential acquisitions and (v) provide working
capital and for general corporate purposes.
F-22
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
Storybook Heirlooms, Inc.:
We have audited the accompanying balance sheets of Storybook Heirlooms,
Inc. (the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Storybook Heirlooms, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 28, 1997
F-23
<PAGE> 90
STORYBOOK HEIRLOOMS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............................................ $ 707,798 $ 538,396
Accounts receivable............................................. 80,552 286,699
Receivable from shareholder..................................... -- 507,686
Merchandise inventories......................................... 3,073,610 3,682,279
Deferred catalog costs.......................................... 529,516 1,294,143
Prepaid expenses and other assets............................... 120,127 365,906
Deferred taxes.................................................. -- 145,652
---------- -----------
Total current assets.................................... 4,511,603 6,820,761
PROPERTY AND EQUIPMENT -- Net..................................... 832,488 1,030,849
---------- -----------
TOTAL ASSETS...................................................... $ 5,344,091 $ 7,851,610
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables.................................................. $ 2,129,442 $ 3,135,869
Accrued compensation............................................ 207,858 245,727
Other accrued liabilities....................................... 211,855 253,458
Reserve for sales returns....................................... 426,641 512,976
Income taxes payable............................................ -- 49,160
Current deferred taxes.......................................... -- 88,417
Current portion of long-term obligations........................ 72,549 181,041
---------- -----------
Total current liabilities............................... 3,048,345 4,466,648
---------- -----------
LONG-TERM OBLIGATIONS............................................. 115,022 206,718
DEFERRED TAXES.................................................... -- 9,633
COMMITMENTS AND CONTINGENCIES..................................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock -- no par value; 5,000,000 shares authorized;
none outstanding............................................. -- --
Common stock -- no par value; 30,000,000 shares authorized;
shares issued and outstanding: 11,446,787 and 11,438,797..... 3,429,701 3,434,301
Accumulated deficit............................................. (1,248,977) (265,690)
---------- -----------
Total shareholders' equity.............................. 2,180,724 3,168,611
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 5,344,091 $ 7,851,610
========== ===========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 91
STORYBOOK HEIRLOOMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES........................................ $ 26,990,000 $ 28,243,321 $ 30,948,100
COST OF SALES.................................... (13,682,137) (14,361,187) (15,108,621)
------------ ------------ ------------
GROSS MARGIN..................................... 13,307,863 13,882,134 15,839,479
SELLING, GENERAL AND ADMINISTRATIVE.............. (12,662,172) (12,583,741) (13,793,454)
------------ ------------ ------------
OPERATING INCOME................................. 645,691 1,298,393 2,046,025
INTEREST EXPENSE................................. (93,484) (126,953) (153,125)
OTHER INCOME (EXPENSE) -- NET.................... 25,232 (42,868) 277,785
------------ ------------ ------------
INCOME BEFORE INCOME TAXES....................... 577,439 1,128,572 2,170,685
INCOME TAX PROVISION............................. -- -- (766,029)
------------ ------------ ------------
NET INCOME....................................... $ 577,439 $ 1,128,572 $ 1,404,656
============ ============ ============
</TABLE>
See notes to financial statements.
F-25
<PAGE> 92
STORYBOOK HEIRLOOMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1993............. 11,404,787 $3,426,401 $(2,942,091) $ 484,310
EXERCISE OF STOCK OPTIONS............... 4,000 400 -- 400
DISTRIBUTION TO SHAREHOLDERS............ -- -- (12,897) (12,897)
NET INCOME.............................. -- -- 577,439 577,439
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1994............. 11,408,787 3,426,801 (2,377,549) 1,049,252
EXERCISE OF STOCK OPTIONS............... 14,000 2,900 -- 2,900
NET INCOME.............................. -- -- 1,128,572 1,128,572
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1995............. 11,422,787 3,429,701 (1,248,977) 2,180,724
EXERCISE OF STOCK OPTIONS............... 24,000 4,600 -- 4,600
DISTRIBUTIONS TO SHAREHOLDERS........... -- -- (421,369) (421,369)
NET INCOME.............................. -- -- 1,404,656 1,404,656
---------- ---------- --------- ----------
BALANCES, DECEMBER 31, 1996............. 11,446,787 $3,434,301 $ (265,690) $3,168,611
========== ========== ========= ==========
</TABLE>
See notes to financial statements.
F-26
<PAGE> 93
STORYBOOK HEIRLOOMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
(52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................. $ 577,439 $ 1,128,572 $ 1,404,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 211,771 252,787 249,416
Deferred taxes................................. -- -- 67,558
Deferred rent.................................. 33,991 (9,380) 17,411
Loss on disposal of equipment.................. 6,976 -- 240,713
Changes in assets and liabilities:
Receivables.................................. (93,813) 82,074 (206,147)
Merchandise inventories...................... (1,460,147) (160,546) (608,669)
Deferred catalog costs....................... 155,677 (156,871) (764,627)
Prepaid expenses and other assets............ (199,345) 140,575 (245,779)
Trade payables............................... 882,680 (39,700) 1,006,427
Accrued compensation and other accrued
liabilities............................... 91,396 59,660 79,472
Allowance for sales returns.................. (95,897) (50,806) 86,335
----------- ----------- -----------
Net cash provided by operating
activities.............................. 110,728 1,246,365 1,326,766
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment................ (409,327) (98,435) (461,388)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings:
Bank shareholders.............................. 495,170 -- --
Bank line of credit............................ 750,000 1,754,000 2,270,000
Repayments:
Bank line of credit............................ (724,318) (2,164,000) (2,270,000)
Shareholders................................... (466,491) (207,662) --
Capital lease obligations...................... (112,058) (125,428) (110,325)
Advances to shareholder........................... -- -- (2,142,445)
Repayments from shareholder....................... -- -- 1,634,759
Exercise of stock options......................... 400 2,900 4,600
Distribution to shareholders...................... (12,897) -- (421,369)
----------- ----------- -----------
Net cash used in financing activities..... (70,194) (740,190) (1,034,780)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS..... (368,793) 407,740 (169,402)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD........... 668,851 300,058 707,798
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD................. $ 300,058 $ 707,798 $ 538,396
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 83,028 $ 143,490 $ 153,126
=========== =========== ===========
Cash paid for income taxes........................ $ 800 $ 800 $ 638,001
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchased under capital leases.......... $ 146,870 $ 36,571 $ 327,932
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-27
<PAGE> 94
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION -- Storybook Heirlooms, Inc. (the "Company"), incorporated on
August 30, 1989, is a specialty retailer of children's clothing, which it
markets through mail order catalogs dispersed through the United States and
Japan and two outlet stores.
BASIS OF PRESENTATION -- The Company operates and reports on a 52/53-week
fiscal year ending on the Friday nearest December 31 of each year. Fiscal 1996
included 53 weeks and ended on January 3, 1997. Fiscal 1995 and 1994 included 52
weeks and ended on December 29, 1995 and December 30, 1994, respectively. For
purposes of presentation, the Company presents its fiscal year as ending
December 31.
CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with an initial maturity of 90 days or less to be cash
equivalents.
MERCHANDISE INVENTORIES are stated at lower of cost (first-in, first-out
method) or market.
DEFERRED CATALOG COSTS consist of direct costs to produce and distribute
catalogs. Such costs are capitalized and amortized over the expected sales life
of each catalog, which is generally three months.
PROPERTY AND EQUIPMENT are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Amortization of leasehold improvements is computed using the straight-line
method based on the estimated useful lives of the assets or the term of the
lease, if shorter.
REVENUE RECOGNITION -- Catalog sales are recorded when merchandise is
shipped. Reserves for estimated sales returns are recorded at the time the
revenue is recognized.
RENT EXPENSE is recognized on a straight-line basis over the life of the
lease.
INCOME TAXES -- Through December 31, 1995, the Company was an S Corporation
for both federal and California income tax purposes and, accordingly, the profit
and losses of the corporation were included in the individual tax returns of the
shareholders. For state purposes the Company was required to pay a California S
Corporation income tax of 1.5%. Effective January 1, 1996, the Company elected
to change its tax status to a C Corporation. In connection with the change to a
C Corporation, the Company recorded a deferred tax liability of $114,860, which
is included in other income for 1996. The Company uses the asset and liability
method to account for income taxes, which requires the Company to compute
deferred income taxes based on the difference between financial statement and
tax basis of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based awards
using the intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-28
<PAGE> 95
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and equipment.............................. $1,016,428 $1,393,452
Machinery and equipment..................................... 121,798 266,330
Leasehold improvements...................................... 306,341 187,484
---------- ----------
Total............................................. 1,444,567 1,847,266
Accumulated depreciation and amortization................... (612,079) (816,417)
---------- ----------
Property and equipment -- net............................... $ 832,488 $1,030,849
========== ==========
</TABLE>
Property and equipment at December 31, 1995 and 1996 includes $439,960 and
$525,168, respectively, of equipment purchased under capital lease agreements.
The related accumulated amortization at December 31, 1995 and 1996 is $235,417
and $167,478, respectively.
3. LEASES
The Company leases its office and distribution center, certain equipment,
and two retail store facilities under leases that expire through 2001. The terms
of the store facility leases require minimum rental payments, contingent rental
payments based upon a percentage of store revenues, and provide for renewal
options from four to seven years. The Company's distribution facility lease
expires in July 1997 and management expects that the lease will be renewed in
the ordinary course of business. Total rent expense for the years ended 1994,
1995 and 1996 was $328,887, $495,984 and $631,869, respectively.
These facility leases contain provisions for an abatement of rent during
the first year and escalating payments over the remainder of the lease term.
Rent expense recognized in excess of cash rent paid is reflected as deferred
rent on the accompanying balance sheet and amounted to $46,171 and $28,760 at
December 31, 1995 and 1996, respectively.
At December 31, 1996, the present value of future minimum capital lease
payments, inclusive of bargain purchase options, and the future minimum cash
payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Year ending December 31:
1997.............................................................. $ 201,086 $ 444,537
1998.............................................................. 149,829 394,804
1999.............................................................. 47,452 409,961
2000.............................................................. -- 371,860
2001.............................................................. -- 179,434
Thereafter........................................................ -- --
--------- ----------
Total minimum lease payments.............................. 398,367 $1,800,596
==========
Less amount representing interest................................. (39,369)
---------
Present value of future minimum lease payments.................... 358,998
Less current portion.............................................. (171,125)
---------
Long-term capital lease obligations............................... $ 187,873
=========
</TABLE>
F-29
<PAGE> 96
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. BANK LINE OF CREDIT
In December 1996, the Company established a line of credit with a bank
which provides for borrowings up to $1,750,000. Borrowings bear interest at the
bank's base rate plus .75% and are collateralized by a security interest in
accounts receivable, inventory and equipment. The agreement contains restrictive
covenants as to debt ratios, liquidity and pretax profits. Outstanding
borrowings are payable to the bank on demand. There was no outstanding
borrowings at December 31, 1996.
5. INCOME TAXES
The provision for income taxes at December 31, 1996 consists of the
following:
<TABLE>
<S> <C>
Current:
Federal......................................................... $533,977
State........................................................... 164,794
--------
Total current........................................... 698,771
--------
Deferred:
Federal......................................................... 39,445
State........................................................... 27,813
--------
Total deferred.......................................... 67,258
--------
Total provision................................................... $766,029
========
</TABLE>
Deferred tax assets and (liabilities) consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1996 1996
---------- ------------
<S> <C> <C>
Deferred tax assets:
Sales returns reserve......................................... $ 170,656 $ 205,190
Inventory reserve and basis difference........................ 247,883 275,997
State taxes................................................... -- 56,029
Other temporary differences................................... 25,897 37,816
--------- ---------
Gross deferred assets.................................... 444,436 575,032
Deferred tax liabilities:
Prepaid expenses.............................................. (280,671) (498,931)
Other temporary differences................................... (48,905) (28,499)
--------- ---------
Net deferred tax asset............................................. $ 114,860 $ 47,602
========= =========
</TABLE>
The net deferred tax asset represents temporary differences for future tax
deductions which management believes the realization of such asset is more
likely than not.
The 1996 provision for income taxes as reported in the financial statements
differs from the amount that would result from applying the regular federal
statutory rate to income before income taxes primarily due to state income taxes
and tax benefit from the Company's foreign sales corporation.
6. STOCK OPTIONS
STOCK OPTION PLAN -- Under the 1989 and 1991 Stock Option Plans, incentive
or nonqualified stock options to purchase up to 2,659,651 shares of common stock
may be granted. Options must be granted at not less than 85% of fair market
value at the date of grant as determined by the Board of Directors. Options vest
over a period of five years and expire seven years after the date of grant. At
December 31,
F-30
<PAGE> 97
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996, options for 1,450,567 (1995 -- 1,827,796) shares were available for future
grant. In July 1995, the Board of Directors reduced the exercise price for
358,500 options granted in 1994 from $0.85 to $0.65.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PRICE
EXERCISE PER
SHARES PRICE SHARE
--------- -------- -------------
<S> <C> <C> <C>
Balance, December 31, 1993............................... 398,201 $.10 to $.60
Options granted........................................ 358,500 $.65
Options exercised...................................... (4,000) $.10
Options canceled....................................... (163,930) $.10 to $.55
---------
Balance, December 31, 1994............................... 588,771 $.49
Options granted........................................ 262,084 $.65
Options exercised...................................... (14,000) $.18
Options canceled....................................... (66,000) $.59
---------
Balance, December 31, 1995 (217,463 exercisable at a
weighted average price of $.37)........................ 770,855 $.54
Options granted........................................ 635,000 $.65
Options exercised...................................... (24,000) $.19
Options canceled....................................... (257,771) $.60
---------
Balance, December 31, 1996 (311,217 exercisable at a
weighted average price of $.48)........................ 1,124,084 $.60
=========
</TABLE>
Exercise prices of options outstanding at December 31, 1996, ranged from
$.10 to $.65. The weighted average remaining contractual life of options
outstanding at December 31, 1996 was approximately 5.5 years.
Had compensation cost for the Company's stock-based plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, the Company's pro forma net income for 1996 and 1995 would not have been
materially different than actual net income.
WARRANTS -- In 1994, the Company issued warrants to purchase 10,000 shares
of common stock at an exercise price of $1 per share. These warrants expire in
February 1999.
7. RELATED PARTY TRANSACTIONS
During 1996, the Company made loans totalling $2,142,445 to the Company's
Chairman and majority shareholder, of which $507,686 was outstanding at December
31, 1996. The outstanding balance bears interest at 10.75% and is due December
31, 1997. During 1996, the total interest received on the loan was $99,477. At
December 31, 1996 there was no outstanding interest due.
F-31
<PAGE> 98
STORYBOOK HEIRLOOMS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 27, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 27,
1996 1997
----------- -----------
<S> <C> <C>
NET SALES......................................................... $16,048,057 $14,963,088
COST OF SALES..................................................... (7,887,166) (6,993,666)
----------- -----------
GROSS MARGIN...................................................... 8,160,891 7,969,422
ADVERTISING AND CATALOG COSTS..................................... (3,418,627) (3,700,367)
GENERAL AND ADMINISTRATIVE........................................ (3,938,700) (4,038,575)
----------- -----------
OPERATING INCOME.................................................. 803,564 230,480
INTEREST EXPENSE.................................................. (27,133) (70,104)
OTHER EXPENSE -- NET.............................................. (58,955) (179,802)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................................. 717,476 (19,426)
INCOME (BENEFIT) TAX PROVISION.................................... (296,013) 3,293
----------- -----------
NET INCOME (LOSS)................................................. $ 421,463 $ (16,133)
=========== ===========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 99
STORYBOOK HEIRLOOMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 27, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996.............. 11,446,787 $3,434,301 $(265,690) $3,168,611
NET LOSS (unaudited)..................... -- -- (16,133) (16,133)
---------- ---------- --------- ----------
BALANCES, JUNE 27, 1997 (unaudited)...... 11,446,787 $3,434,301 $(281,823) $3,152,478
========== ========== ========= ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE> 100
STORYBOOK HEIRLOOMS, INC.
STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 27, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 27,
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 421,463 $ (16,133)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 113,420 161,368
Deferred taxes............................................................ -- (305,853)
Changes in assets and liabilities:
Receivables............................................................. (764,368) (656,202)
Merchandise inventories................................................. (730,432) (833,561)
Deferred catalog costs.................................................. (197,137) 834,632
Prepaid expenses and other assets....................................... (914,922) 25,443
Trade payables.......................................................... (1,307,901) (1,578,031)
Accrued compensation and other accrued liabilities...................... 1,291,574 563,978
Allowance for sales returns............................................. 113,333 (249,224)
Income taxes payable.................................................... 296,013 (49,160)
----------- -----------
Net cash used in operating activities................................ (1,678,957) (2,102,743)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (143,104) (111,826)
Other....................................................................... (109,839) --
----------- -----------
Net cash used in investing activities................................ (252,943) (111,826)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on line of credit................................................ 1,727,143 --
Payments of capital lease obligations....................................... (81,578) (78,827)
Distribution to shareholders................................................ (421,463) --
Advances from parent........................................................ -- 1,755,000
----------- -----------
Net cash provided by financing activities............................ 1,224,102 1,676,173
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS.......................................... (707,798) (538,396)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD..................................... 707,798 538,396
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD........................................... $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 27,133 $ 12,863
=========== ===========
Cash paid for income taxes.................................................. $ 487,000 $ 577,547
----------- -----------
</TABLE>
See notes to financial statements.
F-34
<PAGE> 101
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION -- Storybook Heirlooms, Inc. (the "Company"), incorporated on
August 30, 1989, is a specialty retailer of children's clothing, which it
markets through mail order catalogs dispersed through the United States and
Japan and two outlet stores in the United States.
BASIS OF PRESENTATION -- Prior to the purchase of the Company by Fulcrum
Direct, Inc., ("Fulcrum") as described below, the Company operated and reported
on a 52/53-week fiscal year ending on the Friday nearest December 31 of each
year. Subsequent to the purchase, the Company will operate and report on a
52/53-week fiscal year ending on the Saturday nearest December 31 of each year.
The six month periods ending June 30, 1997 and June 27, 1996 included 25 and 26
weeks, respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with an initial maturity of 90 days or less to be cash
equivalents.
MERCHANDISE INVENTORIES are stated at lower of cost (first-in, first-out
method) or market.
DEFERRED CATALOG COSTS consist of direct costs to produce and distribute
catalogs. Such costs are capitalized and amortized over the expected sales life
of each catalog, which is generally three months.
PROPERTY AND EQUIPMENT are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Amortization of leasehold improvements is computed using the straight-line
method based on the estimated useful lives of the assets or the term of the
lease, if shorter.
REVENUE RECOGNITION -- Catalog sales are recorded when merchandise is
shipped. Reserves for estimated sales returns are recorded at the time the
revenue is recognized.
RENT EXPENSE is recognized on a straight-line basis over the life of the
lease.
INCOME TAXES -- Through December 31, 1995, the Company was an S Corporation
for both federal and California income tax purposes and, accordingly, the profit
and losses of the corporation were included in the individual tax returns of the
shareholders. For state purposes the Company was required to pay a California S
Corporation income tax of 1.5%. Effective January 1, 1996, the Company elected
to change its tax status to a C Corporation. In connection with the change to a
C Corporation, the Company recorded a deferred tax liability of $114,860, which
is included in other income for 1996. The Company uses the asset and liability
method to account for income taxes, which requires the Company to compute
deferred income taxes based on the difference between financial statement and
tax basis of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based awards
using the intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SEASONAL AND QUARTERLY FLUCTUATIONS -- The Company's business is subject to
seasonal fluctuations. Given the Company's historical results, management
anticipates that the majority of the Company's net revenues will be derived from
the Spring, Fall and Holiday seasons. As a result, the
F-35
<PAGE> 102
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Company expects its sales and results of operations to be generally lower in the
second and third quarters than in the first and fourth quarters of each fiscal
year, which includes Easter, Back-to-School and Holiday purchases, respectively.
Accordingly, results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarters.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED -- In June 1997, SFAS No. 130,
Comprehensive Income, was issued and becomes effective in 1998 and requires
reclassification of earlier financial statements for comparative purposes. SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency translation adjustments and gains and losses on certain securities be
shown in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- In the opinion of management, the
unaudited financial statements for the six months ended June 30, 1996 and June
27, 1997 are presented on a basis consistent with the audited financial
statements and reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the result thereof. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year.
2. ACQUISITION
On June 27, 1997 Fulcrum acquired all of the outstanding common stock of
the Company for $15,000,000, which includes 151,000 shares of Fulcrum's common
stock valued at the date of acquisition to be $1,042,000 ("the Acquisition").
This acquisition has been accounted for under the purchase method. The purchase
price was allocated based on estimated fair values at the date of acquisition.
Fulcrum recorded $1,654,000 of deferred tax liability for the excess of the
resulting amounts recorded for financial reporting purposes over the tax basis
of certain assets and liabilities acquired. This resulted in an excess of cost
over fair value of net assets acquired of $9,264,000.
3. LEASES
The Company leases its office and distribution center, certain equipment,
and two retail store facilities under leases that expire through 2001. The terms
of the store facility leases require minimum rental payments, contingent rental
payments based upon a percentage of store revenues, and provide for renewal
options from four to seven years. The Company's distribution facility lease
expires in July 1997 and management expects that the lease will be renewed in
the ordinary course of business. Total rent expense for the six months ended
June 30, 1996 and June 27, 1997 was $328,887 and $495,984, respectively.
These facility leases contain provisions for an abatement of rent during
the first year and escalating payments over the remainder of the lease term.
Rent expense recognized in excess of cash rent amounted to $29,433 at June 27,
1997.
F-36
<PAGE> 103
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
At June 27, 1997, the present value of future minimum capital lease
payments, inclusive of bargain purchase options, and the future minimum cash
payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
Fiscal Years:
1997 (remaining six months)....................................... $ 135,448 $ 222,269
1998.............................................................. 153,703 394,804
1999.............................................................. 49,390 409,961
2000.............................................................. -- 371,860
2001.............................................................. -- 179,434
Thereafter........................................................ -- --
--------- ----------
Total minimum lease payments.............................. 338,541 $1,578,328
==========
Less amount representing interest................................. (29,609)
---------
Present value of future minimum lease payments.................... 308,932
Less current portion.............................................. (181,322)
---------
Long-term capital lease obligations............................... $ 127,610
=========
</TABLE>
4. BANK LINE OF CREDIT
In December 1996, the Company established a line of credit with a bank
which provides for borrowings up to $1,750,000. Borrowings bear interest at the
bank's base rate plus .75% and are collateralized by a security interest in
accounts receivable, inventory and equipment. The agreement contains restrictive
covenants as to debt ratios, liquidity and pretax profits. Outstanding
borrowings are payable to the bank on demand. Effective with the Acquisition,
the line of credit was terminated.
5. INCOME TAXES
The provision for income taxes for the six months ended June 27, 1997
consists of the following:
<TABLE>
<S> <C>
Current:
Federal........................................................ $ 236,433
State.......................................................... 66,127
--------
Total current.......................................... 302,560
--------
Deferred:
Federal........................................................ (240,207)
State.......................................................... (65,646)
--------
Total deferred......................................... (305,853)
--------
Total provision.................................................. $ (3,293)
========
</TABLE>
The June 27, 1997 provision for income taxes as reported in the financial
statements differs from the amount that would result from applying the regular
federal statutory rate to income before income taxes primarily due to state
income taxes.
F-37
<PAGE> 104
STORYBOOK HEIRLOOMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. STOCK OPTIONS
STOCK OPTION PLAN -- Under the 1989 and 1991 Stock Option Plans, incentive
or nonqualified stock options to purchase up to 2,659,651 shares of common stock
may be granted. Options must be granted at not less than 85% of fair market
value at the date of grant as determined by the Board of Directors. Options vest
over a period of five years and expire seven years after the date of grant. At
June 27, 1997, options for 1,450,567 shares were available for future grant. In
July 1995, the Board of Directors reduced the exercise price for 358,500 options
granted in 1994 from $0.85 to $0.65.
Option activity is summarized as follows (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1996 (311,217 exercisable at a weighted average
price of $.48)...................................................... 1,124,084 $.60
Options canceled.................................................... (1,124,084) $.60
Balance, June 27, 1997................................................ --
=========
</TABLE>
Had compensation cost for the Company's stock-based plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, the Company's pro forma net income for the six months ended June 27, 1997
and for fiscal years 1996 and 1995 would not have been materially different than
actual net income.
Pursuant to the Acquisition, all stock options were canceled.
WARRANTS -- In 1994, the Company issued warrants to purchase 10,000 shares
of common stock at an exercise price of $1 per share. These warrants expire in
February 1999.
F-38
<PAGE> 105
============================================================
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Recent Developments........................ 6
Risk Factors............................... 8
The Company................................ 16
Use of Proceeds............................ 17
Dividend Policy............................ 17
Capitalization............................. 18
Dilution................................... 19
Selected Consolidated Financial Data....... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Business................................... 33
Management................................. 45
Certain Relationships and Related
Transactions............................. 51
Principal Stockholders..................... 55
Description of Capital Stock............... 57
Shares Eligible for Future Sale............ 61
Underwriting............................... 63
Legal Matters.............................. 64
Experts.................................... 64
Additional Information..................... 65
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================
============================================================
3,000,000 SHARES
[FULCRUM DIRECT LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HAMBRECHT & QUIST
ROBERTSON, STEPHENS & COMPANY
, 1997
============================================================
<PAGE> 106
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 10,455
NASD filing fee................................................... 4,900
Nasdaq National Market original listing fee....................... 17,500
Blue sky fees and expenses (including attorneys' fees and
expenses)....................................................... 10,000
Printing and engraving expenses................................... 150,000
Transfer agent's fees and expenses................................ 15,000
Accounting fees and expenses...................................... 275,000
Legal fees and expenses........................................... 350,000
Miscellaneous expenses............................................ 67,145
--------
Total................................................... $900,000
========
</TABLE>
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is, or
is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors and officers of the Company to the fullest
extent permitted by Section 145.
In that regard, the Amended and Restated Certificate of Incorporation
provides that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of such corporation, or is or was
serving at the request of such corporation as a director, officer or member of
another corporation, partnership, joint venture, trust or other enter-
II-1
<PAGE> 107
prise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in consideration of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Over the past three years, the Company has sold shares of its capital stock
as follows in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended.
SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE
Shares of Series A Preferred Stock were sold to the following persons on
the following dates:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
DATE NAME SHARES PURCHASE PRICE
- ------------------------- ----------------------------------------- --------- --------------
<S> <C> <C> <C>
October 1, 1995.......... Fulcrum Capital Partners, L.P. 20,000(1) $2,000,000
November 1, 1995......... Fulcrum Capital Partners, L.P. 10,000(1) 1,000,000
January 1, 1996.......... Pete Lederman 3,000(2) 300,000
January 1, 1996.......... Lori Feldman 1,500(2) 150,000
May 1, 1996.............. The Greenberg Family Fund LLC 5,000(2) 500,000
May 1, 1996.............. Bella Ejnes 600(2) 60,000
June 1, 1996............. Patrick K. Sullivan 1,000(2) 100,000
June 1, 1996............. The Greenberg Family Fund LLC 1,665(2) 174,825
June 1, 1996............. Murray Alter 335(2) 35,175
June 1, 1996............. Roberta Greenberg 1,000(2) 100,000
July 1, 1996............. Patrick K. Sullivan 4,000(2) 400,000
July 1, 1996............. Howard Unger 1,500(2) 150,000
July 1, 1996............. Bella Ejnes 400(2) 40,000
July 1, 1996............. Dan and Corrine Blum 500(2) 50,000
July 1, 1996............. Kim Fields 250(2) 25,000
July 1, 1996............. Gary Budoff 125(2) 12,500
July 1, 1996............. Mark Ejnes 125(2) 12,500
July 1, 1996............. Ted Ejnes 125(2) 12,500
</TABLE>
- ---------------
(1) Converted into shares of Common Stock on October 21, 1996 at a ratio of 60
shares of Common Stock to one share of Series A Preferred Stock.
(2) Converted into shares of Common Stock on October 21, 1996 at a ratio of 36
shares of Common Stock to one share of Series A Preferred Stock.
II-2
<PAGE> 108
SERIES B PREFERRED STOCK, PAR VALUE $0.01 PER SHARE
Shares of Series B Preferred Stock were sold to the following persons on
the following dates:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
DATE NAME SHARES PURCHASE PRICE
- ------------------------- ---------------------- --------- --------------
<S> <C> <C> <C>
January 1, 1996.......... The Fulcrum Group, 8,196 $ 819,618.59
Inc.
March 1, 1996............ The Fulcrum Group, 5,029 502,948.39
Inc.
June 1, 1996............. The Greenberg Family 12,285 1,289,925.00
Fund
September 1, 1996........ The Fulcrum Group, 5,957 595,739.77
Inc.
</TABLE>
All shares of Series B Preferred Stock were redeemed by the Company on
October 21, 1996.
COMMON STOCK
On October 21, 1996, the Company issued to Fulcrum Capital Partners, L.P.
("FCP") a warrant to purchase 600,000 shares of Common Stock at an exercise
price equal to $1.00 per share at any time until January 1, 2006. In addition on
December 31, 1996, the Company issued 6,068 shares of its Common Stock to FCP as
payment for a $50,000 fee owed to FCP in connection with certain advisory
services.
On October 21, 1996, the Company sold to Whitney Equity Partners, L.P.
394,385 shares of Common Stock and a warrant to purchase 121,350 shares of
Common Stock for an aggregate price of $2,000,000.
On June 28, 1997, in connection with the Storybook Acquisition, the Company
issued shares of Common Stock to trusts established for the benefit of Estelle
M. DeMuesy and Jonathan W. Bruml in the amounts of 86,000 and 65,000,
respectively.
On June 30, 1997, the Company sold to the following persons Common Stock in
the following amounts at a price of $6.90 per share:
<TABLE>
<CAPTION>
NUMBERS
NAME OF SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Whitney Equity Partners, L.P...................................................... 1,160,000
The Greenberg Family Fund LLC..................................................... 271,875
Maureen C. Sullivan, Revocable Trust-1995......................................... 18,125
</TABLE>
On July 30, 1997, the Company issued 2,416,500 shares of Common Stock in
exchange for an equal number of shares of its Common Stock in order to correct a
defect in the original issuance of such shares.
SUBORDINATED DEBT
On October 21, 1996, the Company sold to Whitney Subordinated Debt Fund,
L.P. a senior subordinated promissory note due 2003 in the principal amount of
$10,000,000 for a price of $9,500,000 and a warrant to purchase 405,460 shares
of Common Stock for a price of $500,000.
On June 30, 1997, the Company sold to the following persons Senior
Subordinated Promissory Notes due 2003 in the following principal amounts for
the following prices and warrants to purchase Common Stock for the following
prices:
<TABLE>
<CAPTION>
NAME NOTES/PRICE WARRANTS/PRICE
- -------------------------------------------------- --------------------- ----------------
<S> <C> <C>
Whitney Subordinated Debt Fund, L.P............... $8,000,000/$7,442,829 160,000/$557,170
The Greenberg Family Fund LLC..................... 1,875,000/1,744,413 37,500/130,586
Maureen C. Sullivan, Revocable Trust-1995......... 125,000/116,294 2,500/8,706
</TABLE>
II-3
<PAGE> 109
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Securities Purchase Agreement, dated as of June 27, 1997, by and among
Storybook Heirlooms, Inc., certain stockholders of Storybook Heirlooms, Inc.
and Fulcrum Direct, Inc.
3.1 Restated Certificate of Incorporation of Fulcrum Direct, Inc.
3.2 By-Laws of Fulcrum Direct, Inc.
4.1 Form of certificate representing the shares of Common Stock*
5.1 Opinion of Kirkland & Ellis*
10.1 Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Michael G. Lederman**
10.2 Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Scott A. Budoff**
10.3 Revolving Credit Facility Agreement, dated as of January 1, 1997, among
Fulcrum Direct, Inc. and Sunwest Bank**
10.4 Securities Purchase Agreement, dated as of October 21, 1996, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity
Partners, L.P.**
10.4.1 Amendment No. 1 dated as of February 24, 1997 among Fulcrum Direct, Inc.,
Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P.
10.4.2 Amendment No. 3 to Securities Purchase Agreement dated as of May 7, 1997 among
Fulcrum Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity
Partners, L.P.
10.4.3 Amendment No. 4 to Securities Purchase Agreement dated as of June 30, 1997
among Fulcrum Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney
Equity Partners, L.P.
10.5 Side Letter Agreement, dated October 21, 1996, between Fulcrum Direct, Inc.
and Whitney Subordinated Debt Fund, L.P.**
10.6 Senior Subordinated Promissory Note, dated as of October 21, 1996, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.**
10.7 Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.**
10.8 Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Equity Partners, L.P.**
10.9 Common Stock Purchase Warrant, dated as of January 1, 1996, between Fulcrum
Direct, Inc. and Fulcrum Capital Partners, L.P.**
10.10 Management Team Equity Plan, adopted as of October 21, 1996, by Fulcrum
Direct, Inc., including related form of option agreement.*
10.11 Stockholders' Agreement, dated as of October 21, 1996, by and among Fulcrum
Direct, Inc. and certain of its Stockholders**
10.12 Amended and Restated Management Incentive Agreement by and between Fulcrum
Direct, Inc. and Fulcrum Capital Partners L.P.**
</TABLE>
II-4
<PAGE> 110
<TABLE>
<C> <S>
10.15 Greenberg Loan Agreement, dated as of June 31, 1995, by and among Arnold
Greenberg, and Herbert Greenberg (as trustees for Michael Greenberg, Susan
Greenberg and Robin Greenberg) as lenders and NewStork, Inc. as borrower**
10.16 Bond Purchase Agreement, dated as of December 27, 1995, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties, L.P.
10.17 Bond Purchase Agreement, dated as of December 23, 1996, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties, L.P.
10.18 Indenture, dated as of December 1, 1995, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.
10.18.1 Indenture, dated as of December 1, 1996, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.
10.19 Lease and Option Agreement, dated as of August 11, 1995, by and between
Fulcrum Direct, Inc. and Fulcrum Properties L.P.
10.19.1 Lease Amendment, dated as of December 29, 1995, by and between Fulcrum Direct,
Inc. and Fulcrum Properties, L.P.
10.19.2 Lease Amendment, dated as of September 24, 1996, by and between Fulcrum
Direct, Inc. and Fulcrum Properties, L.P.
10.20 Fulcrum Direct, Inc. Employees Savings Trust 401(K) profit sharing plan.*
10.21 Playclothes Acquisition Agreement, dated as of June 30, 1996, by and between
Fulcrum Direct, Inc., and Childcraft, Inc.**
10.22 Catalog Agreement, dated April 25, 1995, by and between Regal Greetings &
Gifts Inc. and Childcraft, Inc.**
10.23 Securities Purchase Agreement, dated as of June 30, 1997, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P., The Greenberg Family Fund
LLC and Maureen C. Sullivan, Revocable Trust -- 1995.
10.24 Senior Subordinated Promissory Note, dated as of June 30, 1997, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.
10.25 Common Stock Purchase Warrant, dated as of June 30, 1997, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.
10.26 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Estelle M. DeMuesy.
10.27 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Jonathan W. Bruml.
10.28 Severance, Confidentiality and Non-Competition Agreement, dated as of June 27,
1997, by and between Jerry H. Machado and Fulcrum Direct, Inc.
11.1 Schedule of Computation of Primary Net Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Kirkland & Ellis (to be included in the opinion to be filed as
Exhibit 5.1)*
24.1 Powers of Attorney (included on the signature page of this Part II)**
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
II-5
<PAGE> 111
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offerings of such securities at
that time shall be deemed to be the initial bona fide offerings thereof.
II-6
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rio Rancho, State of New
Mexico on August 8, 1997.
FULCRUM DIRECT, INC.
By: /s/ MICHAEL G. LEDERMAN
------------------------------------
Name: Michael G. Lederman
Title: Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed on August 8, 1997,
by the following persons in the capacities indicated with respect to Fulcrum
Direct, Inc.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------------------------- ---------------------------------------------
<C> <S>
/s/ MICHAEL G. LEDERMAN Chairman, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Michael G. Lederman
/s/ SCOTT A. BUDOFF President, Chief Operating Officer, Secretary
- --------------------------------------------- and Director
Scott A. Budoff
/s/ CARRIE K. COLE Chief Financial Officer and Vice President
- --------------------------------------------- (Principal Financial and Accounting Officer)
Carrie K. Cole
* Director
- ---------------------------------------------
Arnold Greenberg
* Director
- ---------------------------------------------
Ray E. Newton, III
* Director
- ---------------------------------------------
Patrick K. Sullivan, M.D.
* Director
- ---------------------------------------------
Howard Unger
*By: /s/ SCOTT A. BUDOFF
- ---------------------------------------------
Scott A. Budoff, attorney in fact
</TABLE>
II-7
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Securities Purchase Agreement, dated as of June 27, 1997, by and among
Storybook Heirlooms, Inc., certain stockholders of Storybook Heirlooms, Inc.
and Fulcrum Direct, Inc.
3.1 Restated Certificate of Incorporation of Fulcrum Direct, Inc.
3.2 By-Laws of Fulcrum Direct, Inc.
4.1 Form of certificate representing the shares of Common Stock*
5.1 Opinion of Kirkland & Ellis*
10.1 Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Michael G. Lederman**
10.2 Employment Agreement, dated October 21, 1996, between Fulcrum Direct, Inc. and
Scott A. Budoff**
10.3 Revolving Credit Facility Agreement, dated as of January 1, 1997, among
Fulcrum Direct, Inc. and Sunwest Bank**
10.4 Securities Purchase Agreement, dated as of October 21, 1996, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity
Partners, L.P.**
10.4.1 Amendment No. 1 dated as of February 24, 1997 among Fulcrum Direct, Inc.,
Whitney Subordinated Debt Fund, L.P. and Whitney Equity Partners, L.P.
10.4.2 Amendment No. 3 to Securities Purchase Agreement dated as of May 7, 1997 among
Fulcrum Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney Equity
Partners, L.P.
10.4.3 Amendment No. 4 to Securities Purchase Agreement dated as of June 30, 1997
among Fulcrum Direct, Inc., Whitney Subordinated Debt Fund, L.P. and Whitney
Equity Partners, L.P.
10.5 Side Letter Agreement, dated October 21, 1996, between Fulcrum Direct, Inc.
and Whitney Subordinated Debt Fund, L.P.**
10.6 Senior Subordinated Promissory Note, dated as of October 21, 1996, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.**
10.7 Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.**
10.8 Common Stock Purchase Warrant, dated as of October 21, 1996, between Fulcrum
Direct, Inc. and Whitney Equity Partners, L.P.**
10.9 Common Stock Purchase Warrant, dated as of January 1, 1996, between Fulcrum
Direct, Inc. and Fulcrum Capital Partners, L.P.**
10.10 Management Team Equity Plan, adopted as of October 21, 1996, by Fulcrum
Direct, Inc., including related form of option agreement.*
10.11 Stockholders' Agreement, dated as of October 21, 1996, by and among Fulcrum
Direct, Inc. and certain of its Stockholders**
10.12 Amended and Restated Management Incentive Agreement by and between Fulcrum
Direct, Inc. and Fulcrum Capital Partners L.P.**
10.15 Greenberg Loan Agreement, dated as of June 31, 1995, by and among Arnold
Greenberg, and Herbert Greenberg (as trustees for Michael Greenberg, Susan
Greenberg and Robin Greenberg) as lenders and NewStork, Inc. as borrower**
</TABLE>
<PAGE> 114
<TABLE>
<C> <S>
10.16 Bond Purchase Agreement, dated as of December 27, 1995, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties, L.P.
10.17 Bond Purchase Agreement, dated as of December 23, 1996, among the city of Rio
Rancho, New Mexico, Property Bond Purchaser, Inc. and Fulcrum Properties, L.P.
10.18 Indenture, dated as of December 1, 1995, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.
10.18.1 Indenture, dated as of December 1, 1996, among the city of Rio Rancho, New
Mexico, Property Bond Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A.
10.19 Lease and Option Agreement, dated as of August 11, 1995, by and between
Fulcrum Direct, Inc. and Fulcrum Properties L.P.
10.19.1 Lease Amendment, dated as of December 29, 1995, by and between Fulcrum Direct,
Inc. and Fulcrum Properties, L.P.
10.19.2 Lease Amendment, dated as of September 24, 1996, by and between Fulcrum
Direct, Inc. and Fulcrum Properties, L.P.
10.20 Fulcrum Direct, Inc. Employees Savings Trust 401(K) profit sharing plan.*
10.21 Playclothes Acquisition Agreement, dated as of June 30, 1996, by and between
Fulcrum Direct, Inc., and Childcraft, Inc.**
10.22 Catalog Agreement, dated April 25, 1995, by and between Regal Greetings &
Gifts Inc. and Childcraft, Inc.**
10.23 Securities Purchase Agreement, dated as of June 30, 1997, among Fulcrum
Direct, Inc., Whitney Subordinated Debt Fund, L.P., The Greenberg Family Fund
LLC and Maureen C. Sullivan, Revocable Trust -- 1995.
10.24 Senior Subordinated Promissory Note, dated as of June 30, 1997, between
Fulcrum Direct, Inc. as borrower and Whitney Subordinated Debt Fund, L.P.
10.25 Common Stock Purchase Warrant, dated as of June 30, 1997, between Fulcrum
Direct, Inc. and Whitney Subordinated Debt Fund, L.P.
10.26 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Estelle M. DeMuesy.
10.27 Employment Agreement, dated as of June 27, 1997, between Fulcrum Direct, Inc.
and Jonathan W. Bruml.
10.28 Severance, Confidentiality and Non-Competition Agreement, dated as of June 27,
1997, by and between Jerry H. Machado and Fulcrum Direct, Inc.
11.1 Schedule of Computations of Primary Net Earnings per Share.
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Kirkland & Ellis (to be included in the opinion to be filed as
Exhibit 5.1)*
24.1 Powers of Attorney (included on the signature page of this Part II)**
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 2.1
SECURITIES PURCHASE AGREEMENT
by and among
STORYBOOK HEIRLOOMS, INC.,
THE SHAREHOLDERS OF STORYBOOK HEIRLOOMS, INC.
WHO ARE SIGNATORY HERETO
and
FULCRUM DIRECT, INC.,
Dated as of June 27, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECURITIES PURCHASE AGREEMENT..................................................................................1
ARTICLE I PURCHASE AND SALE OF SHARES..........................................................................1
SECTION 1.1 Purchase and Sale of Shares..............................................................1
SECTION 1.2 Options..................................................................................1
SECTION 1.3 Escrow....................................................................................1
SECTION 1.4 Letter of Intent..........................................................................2
SECTION 1.5 Reduction of Purchase Price for Storybook Common Shares not Sold Hereunder................2
ARTICLE II CLOSING.............................................................................................2
SECTION 2.1 Closing..................................................................................2
ARTICLE III REPRESENTATIONS AND WARRANTIES OF STORYBOOK AND MACHADO............................................2
SECTION 3.1 Corporate Organization...................................................................3
SECTION 3.2 Capitalization...........................................................................3
SECTION 3.3 Authority Relative to this Agreement.....................................................4
SECTION 3.4 Consents and Approvals; No Violations....................................................4
SECTION 3.5 Financial Statements.....................................................................4
SECTION 3.6 Receivables..............................................................................5
SECTION 3.7 Inventories..............................................................................6
SECTION 3.8 Customers and Suppliers..................................................................7
SECTION 3.9 No Undisclosed Liabilities...............................................................7
SECTION 3.10 Absence of Certain Changes..............................................................8
SECTION 3.11 No Default..............................................................................9
SECTION 3.12 Litigation..............................................................................9
SECTION 3.13 Compliance with Applicable Law..........................................................9
SECTION 3.14 Taxes...................................................................................9
SECTION 3.15 ERISA..................................................................................10
SECTION 3.16 Change in Control......................................................................11
SECTION 3.17 Intellectual Property..................................................................11
SECTION 3.18 Contracts and Commitments..............................................................11
SECTION 3.19 Labor Relations........................................................................13
SECTION 3.20 Employee Benefit Plans.................................................................13
SECTION 3.21 Personnel..............................................................................13
SECTION 3.22 Environmental Matters..................................................................13
SECTION 3.23 Insurance..............................................................................15
SECTION 3.24 Related Party Contracts................................................................16
SECTION 3.25 Real Property; Leased Premises.........................................................16
SECTION 3.26 Absence of Certain Payments............................................................17
SECTION 3.27 Disclosure.............................................................................17
SECTION 3.28 Books and Records......................................................................17
SECTION 3.29 Accounts; Lockboxes; Safe Deposit Boxes................................................17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.................................................17
SECTION 4.1 Ownership...............................................................................18
SECTION 4.2 Authorization...........................................................................18
SECTION 4.3 Conflicts...............................................................................18
ARTICLE V REPRESENTATIONS AND WARRANTIES OF FULCRUM...........................................................18
SECTION 5.1 Corporate Organization..................................................................18
SECTION 5.2 Authority Relative to this Agreement....................................................18
SECTION 5.3 Consents and Approvals; No Violations...................................................19
SECTION 5.4 Disclosure..............................................................................19
ARTICLE VI COVENANTS OF STORYBOOK AND SHAREHOLDERS............................................................19
SECTION 6.1 Repayment of Debt.......................................................................19
SECTION 6.2 Further Assurances......................................................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII MUTUAL COVENANTS..................................................................................20
SECTION 7.1 Best Efforts............................................................................20
SECTION 7.2 Brokers or Finders......................................................................20
SECTION 7.3 Fees and Expenses.......................................................................21
ARTICLE VIII INDEMNIFICATION, ETC.............................................................................21
SECTION 8.1 Survival of Representations and Covenants...............................................21
SECTION 8.2 Indemnification.........................................................................22
SECTION 8.3 Dispute Resolution......................................................................22
ARTICLE IX CONDITIONS TO CLOSING..............................................................................23
SECTION 9.1 Conditions of the Obligations of the Shareholders.......................................23
SECTION 9.2 Conditions of Obligations of Fulcrum....................................................24
ARTICLE X AMENDMENT...........................................................................................25
SECTION 10.1 Amendment; Extension; Waiver...........................................................25
ARTICLE XI MISCELLANEOUS......................................................................................25
SECTION 11.1 Notices................................................................................25
SECTION 11.2 Descriptive Headings...................................................................26
SECTION 11.3 Counterparts...........................................................................26
SECTION 11.4 Entire Agreement; Assignment...........................................................27
SECTION 11.5 Governing Law..........................................................................27
SECTION 11.6 Specific Performance...................................................................27
SECTION 11.7 Publicity..............................................................................27
SECTION 11.8 Parties in Interest....................................................................27
SECTION 11.9 Knowledge...............................................................................27
SECTION 11.10 Waiver of Rights of First Refusal......................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT 1.3 - Form of Escrow Agreement
EXHIBIT 3.5 - Storybook Financial Statements
EXHIBIT 3.6(a) - Receivables
EXHIBIT 3.8 - Storybook House File Count Sheet
EXHIBIT 3.17 - Intellectual Property Applications and Registrations
EXHIBIT 7.3 - Fees and Expenses
EXHIBIT 9.1(a) - Wire Transfer Instructions
EXHIBIT 9.1(c) - Form of Secretary's Certificate of Fulcrum Direct, Inc.
EXHIBIT 9.2(d) - Form of Officer's Certificate of Storybook Heirlooms, Inc.
EXHIBIT 9.2(e) - Form of Fenwick & West, LLP Opinion
EXHIBIT 9.2(f) - Form of Severance, Confidentiality and Non-Competition Agreement
EXHIBIT 9.2(g) - Form of Employment Agreement
EXHIBIT 9.2(i) - Form of Deloitte & Touche LLP Letter Agreement
EXHIBIT 9.2(j) - Form of Secretary's Certificate of Storybook Heirlooms, Inc.
SCHEDULE III - Storybook Disclosure Schedule
</TABLE>
iii
<PAGE> 5
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (together with the exhibits and
attachments hereto, the "Agreement"), dated as of June 27, 1997 by and among
Storybook Heirlooms, Inc., a California corporation ("Storybook"), the
shareholders of Storybook signatory hereto (the "Shareholders") and Fulcrum
Direct, Inc., a Delaware corporation ("Fulcrum").
W I T N E S S E T H:
WHEREAS, the Shareholders beneficially own, directly and
indirectly, all of the issued and outstanding shares of common stock, no par
value per share, of Storybook, as set forth on Exhibit 3.2(a)(ii) (the
"Storybook Common Shares");
WHEREAS, Storybook, Fulcrum and Jerry H. Machado ("Machado")
entered into a letter of intent dated May 2, 1997 (the "Letter of Intent"),
respecting the transactions contemplated herein; and
WHEREAS, the Shareholders desire to sell the Storybook Common
Shares to Fulcrum, and Fulcrum desires to purchase the Storybook Common Shares
from the Shareholders, on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements hereinafter set forth, the parties hereto do
hereby covenant and agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
SECTION 1.1 Purchase and Sale of Shares. At the Closing (as defined
below), the Shareholders shall sell, transfer, convey, assign and deliver to
Fulcrum and Fulcrum shall purchase from the Shareholders at the Closing, each
Storybook Common Share, for a price per share (the "Purchase Price") equal to
$13,000,000 (less the amounts as set forth in and subject to Sections 1.3, 6.1,
7.2 and 7.3 below) divided by the total number of Storybook Common Shares issued
and outstanding on the Closing Date.
SECTION 1.2 Options. Prior to or simultaneously with the Closing, each
outstanding option, warrant or other right to purchase Storybook Common Shares
(collectively, "Options") to the extent not therefore exercised, shall be
cancelled.
SECTION 1.3 Escrow. At the Closing, Fulcrum shall deposit, out of the
amount payable to Machado pursuant to Section 1.1 above, $500,000 (the "Escrowed
Amount") of the Purchase Price in escrow pursuant to an escrow agreement (the
"Escrow Agreement") substantially in the form of Exhibit 1.3 hereto. The Escrow
Agreement shall provide for the release of the Escrowed Amount to Machado 60
days following the date of the first audit of Storybook
<PAGE> 6
(or its Successor) following the Closing, except to the extent any claim for
indemnification has been made by Fulcrum, and not resolved then the estimated
amount of any such claims, pursuant to Article VIII hereof shall be retained in
escrow until resolution thereof. Fulcrum will use its commercially reasonable
efforts to have such audit completed as soon as possible, consistent with
generally accepted accounting practices, after the Closing Date.
SECTION 1.4 Letter of Intent. Fulcrum, Storybook and Machado hereby
agree that the terms and provisions of the Letter of Intent have been
incorporated herein and are therefore superseded by the terms and conditions of
this Agreement.
SECTION 1.5 Reduction of Purchase Price for Storybook Common Shares not
Sold Hereunder. If less than all outstanding Storybook Common Shares are sold to
Fulcrum hereunder, then the aggregate Purchase Price set forth in Section 1.1
hereof shall be reduced by an amount equal to the product of $13,000,000 times a
fraction, the numerator of which is the number of Storybook Common Shares
outstanding and not being sold to Fulcrum hereunder and the denominator of which
is the total number of outstanding Storybook Common Shares.
ARTICLE II
CLOSING
SECTION 2.1 Closing. Subject to the terms and conditions contained in
this Agreement, the purchase and sale of the Storybook Common Shares hereunder
(the "Closing") shall take place at the offices of Fenwick & West LLP, Two Palo
Alto Square, Palo Alto, California 94306, effective as of 5:00 p.m. on June 27,
1997 (the "Closing Date"), or at such other place or on such other date as is
mutually agreeable to Fulcrum and the Shareholders. At the Closing, each
Shareholder shall have complied with Section 9.2 hereof and Fulcrum shall have
complied with Section 9.1 hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF STORYBOOK AND MACHADO
Subject to the exceptions set forth in the disclosure schedule by
specific section reference, delivered by Storybook and Machado to Fulcrum (the
"Storybook Disclosure Schedule"), attached hereto as Schedule III, which
document is hereby incorporated herein by reference, Storybook and Machado
hereby jointly and severally represent and warrant to Fulcrum as follows:
SECTION 3.1 Corporate Organization. Storybook is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
2
<PAGE> 7
Storybook has no subsidiaries. Section 3.1(i) of the Storybook Disclosure
Schedule sets forth the name of each jurisdiction in which Storybook is
qualified or licensed to do business. Storybook is duly qualified or licensed to
do business and is in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except in such jurisdictions
where, the failure to be so duly qualified or licensed and in good standing
would not, individually or in the aggregate, be reasonably likely to have a
Material Adverse Effect on Storybook. "Material Adverse Effect" means as to
Storybook as used herein or as to Fulcrum in Section 5.3 hereof, (a) a material
change in the business, assets, liabilities, customer or supplier relations,
operations, results of operations or condition (financial or otherwise) of
Storybook or Fulcrum, respectively, or (b) any condition which would prevent or
materially delay consummation of the transactions contemplated by this
Agreement. The copies of Storybook's Articles of Incorporation and Bylaws
delivered at Closing, are true, complete and correct copies of such instruments,
as in effect as of the date of this Agreement, and Storybook is not in violation
thereof.
SECTION 3.2 Capitalization.
(a) The authorized capital stock of Storybook consists of 30,000,000
shares of Common Stock, no par value, of which 11,446,787 shares were
authorized, issued and outstanding as of the date of this Agreement. All of the
issued and outstanding Storybook Common Shares are duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights. As of the
date of this Agreement, before giving effect to the Closing, 2,059,631 shares of
Common Stock of Storybook are reserved for issuance upon exercise of Options.
Except as set forth above or as contemplated by this Agreement, there are not as
of the date of this Agreement, and at the Closing there will not be, any shares
of capital stock (or securities substantially equivalent to capital stock
including, without limitation, stock appreciation rights, phantom stock, profit
participation or similar rights) of Storybook issued or outstanding or any
subscriptions, options, warrants, calls, rights, convertible securities or other
agreements or commitments of any character obligating Storybook to issue,
transfer or sell any of its securities. Section 3.2(a)(ii) of the Storybook
Disclosure Schedule sets forth as of the date of this Agreement (i) the name of
the holder and beneficial owner of each outstanding Storybook Common Share and,
(ii) the number of Storybook Common Shares held by such holder. As of the
Closing Date, all Options have been cancelled by Storybook, and no Options are
currently issued or outstanding.
(b) Storybook does not own, directly or indirectly, any capital stock
or other equity securities of any corporation or have any direct or indirect
equity or ownership interest (financial or otherwise) in any business. Except as
contemplated by this Agreement, there are not as of the date of this Agreement,
and at the Closing there will not be, any voting trusts or other
3
<PAGE> 8
agreements or understandings to which Storybook is a party or is bound with
respect to voting of the capital stock of Storybook. There are no persons or
entities in which Storybook has any voting rights or equity interests.
SECTION 3.3 Authority Relative to this Agreement. Storybook has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized and approved by (i) the Board of Directors of
Storybook by Unanimous Written Consent, dated June 25, 1997 and (ii) no other
proceedings on the part of Storybook or Machado are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by Storybook and Machado and
constitutes a valid and binding agreement of Storybook and Machado, enforceable
against each of them in accordance with its terms, except as enforcement may be
limited by bankruptcy, moratorium and other creditors' rights laws and by any
limitations as to enforceability of equitable remedies as may be observed by the
relevant judicial body.
SECTION 3.4 Consents and Approvals; No Violations. Except for
applicable requirements of state Blue Sky laws, no filing with or notification
to, and no permit, authorization, consent, waiver or approval of, any
government, executive official thereof, governmental or regulatory authority,
agency or commission, including courts of competent jurisdiction, domestic or
foreign (a "Governmental Entity"), is necessary for the consummation by
Storybook or Machado, of the transactions contemplated by this Agreement except
for such filing, notification, permit, authorization, consent, waiver or
approval for which the failure to obtain would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect. Neither the
execution and delivery of this Agreement by Storybook nor the consummation by
Storybook of the transactions contemplated hereby nor compliance by Storybook
with any of the provisions hereof will (i) conflict with or result in any breach
of any provision of the Articles of Incorporation or Bylaws of Storybook, (ii)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or result in the creation of any mortgage, pledge,
charge, security interest, claim or encumbrance of any kind (collectively, a
"Lien")) under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, contract, agreement or other instrument or
obligation to which Storybook or Machado is a party or by which any of them or
any of their respective properties or assets may be bound or (iii) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Storybook or Machado or any of their respective properties or assets.
SECTION 3.5 Financial Statements. (a) Attached hereto as Exhibit 3.5
are the following financial statements (collectively,
4
<PAGE> 9
the "Financial Statements"):
(i) the audited balance sheets of Storybook as of December 31, 1994,
December 30, 1995 and December 28, 1996, and the related statements of income
and cash flows (or the equivalent) for the respective twelve-month periods then
ended; and
(ii) the unaudited balance sheet of Storybook as of May 30, 1997, and
the related statements of income for the five-month period then ended (the
"Interim Financial Statements").
Each of the foregoing Financial Statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, was prepared
from the books and records of Storybook (which, in turn, are accurate and
complete in all material respects) and fairly presents, in all material
respects, the financial position of Storybook as of the dates specified therein
and its results of operations and cash flows for the periods specified, all in
conformity with generally accepted accounting principles, consistently applied.
(b) Storybook has made available to Fulcrum all accounting books and
records maintained by Storybook, which are complete and correct in all material
respects, showing tax and book basis, historical cost, method of depreciation
and tax depreciation by individual account.
(c) The current forecast for "Gross Profit" (being defined as the sum
of "Total Net Revenues" plus "Total Other Income" less "Total Cost of Goods
Sold" (as such terms have been used by Storybook in the Financial Statements))
for fiscal year 1997 is $17,525,000. To the best knowledge of Storybook and
Machado, this forecast accurately reflects the forecasted Gross Profit of
Storybook for such fiscal period, taking into account all information available
to Storybook and Machado as of the Closing Date, provided that no guarantee is
made that any of such forecast will be achieved, or to what extent it will be
achieved.
SECTION 3.6 Receivables. (a) Exhibit 3.6(a) attached hereto is an aged
list of Storybook's accounts receivables, notes receivables or other receivables
(including list exchange balances; "Receivables") as of May 30, 1997. Except to
the extent, if any, reserved for on the Interim Financial Statements, all
Receivables reflected on the Interim Financial Statements and the Receivables
existing on the Closing Date will have arisen from the sale of inventory or
services, or list rental and like arrangements, to persons not affiliated with
Storybook and in the ordinary course of Storybook's business consistent with
past practice and, except as reserved against on the Interim Financial
Statements or set forth on Exhibit 3.6(a), to the best knowledge of Storybook
and Machado, will constitute valid, undisputed claims of Storybook not subject
to valid claims of set-off or other defenses or counterclaims other than in the
ordinary course of Storybook's business consistent with past practice.
5
<PAGE> 10
(b) To the best knowledge of Storybook and Machado, all Receivables
reflected on the Interim Financial Statements (subject to the reserve for bad
debts, if any, reflected on the Interim Financial Statements) will be good and
will be collectible, without resort to litigation or extraordinary collection
activity, within 90 days after the Closing Date (other than receivables related
to the rental or exchange of Storybook's customer list, which shall be
collectible in the normal course consistent with past collection practices),
assuming at least the level of collection efforts used by Storybook prior to
Closing, and subject to returns, allowances and adjustments in the ordinary
course of business.
(c) Section 3.6(c) of the Storybook Disclosure Schedule lists all
material contracts and agreements relating to Receivables.
SECTION 3.7 Inventories. (a) The perpetual inventory report dated June
24, 1997 (the "Inventory Report", and the inventory listed therein, including,
without limitation, raw materials and finished goods, being collectively, the
"Inventory") has been delivered to Fulcrum and Fulcrum acknowledges receipt
thereof.
(b) To the best knowledge of Storybook and Machado, the quantity of
Inventory reflected in the Inventory Report is accurate to within plus or minus
3%.
(c) To the best knowledge of Storybook and Machado, the value per item
of the Inventory is at least equal to the aggregate value of the Inventory
stated on the Inventory Report, which is the value reflected on the Interim
Financial Statements. The values at which the Inventory is carried on the
Inventory Report reflects actual cost of goods, calculated in accordance with
generally accepted accounting principles, consistently applied. The reserve for
obsolescence on the books of Storybook as of May 30, 1997 was equal to $300,000
(the "Inventory Reserve"). The value of the Inventory Reserve is calculated in
accordance with generally accepted accounting principles, consistently applied,
consistent with past practice of Storybook and assumes that obsolete inventory
will be disposed of in current and anticipated catalogs and at Storybook's
outlet stores, except for defective inventory with no saleable value which
Inventory is intended to be donated to charitable organizations.
(d)(i) Storybook has good and marketable title to the Inventory free
and clear of all encumbrances; (ii) the Inventory does not consist of any items
held on consignment; (iii) Storybook is not under any obligation or liability
with respect to accepting returns of items of inventory or merchandise in the
possession of its customers other than in the ordinary course of its business
consistent with past practice; (iv) Storybook has not acquired or manufactured a
material amount of inventory for sale which is not of a quantity and quality
projected to be usable in the ordinary course of its business consistent with
past practice and within a reasonable period of time (except for Inventory
reserved against in the Inventory Reserve) nor has Storybook changed the cost of
any Inventory held for sale in the ordinary course (other than
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Inventory reserved against in the Inventory Reserve), except for (x) reductions
to reflect any reduction in the cost thereof to Storybook, (y) reductions and
increases responsive to normal competitive conditions, and (z) increases to
reflect any increase in the cost thereof to Storybook in the ordinary course of
business.
(e) Except for Inventory reserved against in the Inventory Reserve, the
Inventory is in good and merchantable condition in all material respects, and is
suitable and usable in all material respects for the purposes for which it is
intended and is in a condition such that it can be sold in the ordinary course
of Storybook's business.
(f) Section 3.7(f) of the Storybook Disclosure Schedule lists all
material contracts and agreements relating to Inventory.
SECTION 3.8 Customers and Suppliers.
(a) Customers. Attached hereto as Exhibit 3.8 is a Catalog House File
Count Sheet containing, among other things, the number of customers that have
purchased merchandise from Storybook ("Buyers"). As of the Closing Date,
Storybook's Buyer File contained at least 500,000 Buyers, of which at least
175,000 Buyers have purchased from Storybook during the twelve-month period
prior to the Closing Date. As of the Closing Date, all information relating to
Buyers and prospective Buyers, maintained by Storybook (including, the
historical purchases by such Buyers, all list and other test results, all house
file models, zip models, regression models, and any other models developed by or
for the benefit of Storybook), have been provided to the Fulcrum. To the best
knowledge of Storybook and Machado, Storybook's housefile database (the
"Housefile") contains all historical data regarding mailings to Buyers, catalog
requesters and prospective Buyers, and accurately reflects, in all material
respects, all mailing details and results therefrom and order detail since
December 31, 1994, and such data has been maintained in accordance with industry
practices since that date such that such data is suitable for future statistical
modeling and the creation of catalog mail plans.
(b) Suppliers. Section 3.8(b) of the Storybook Disclosure Schedule
contains a list of all suppliers (and each material purchase order or contract
in its possession relating thereto) from which Storybook was invoiced for or
legally obligated to purchase raw materials, contract labor, merchandise and
other goods or services for its business with a dollar value in excess of
$10,000, individually or in the aggregate, since January 1, 1997 through the
Closing Date, and the approximate amount for which each such supplier invoiced
during such period. Storybook has not received any notice (written or oral) that
any of such suppliers will not sell raw materials, contract labor, merchandise
and other goods or services to Storybook at any time after the Effective Date on
terms and conditions similar to those imposed on current sales to Storybook,
subject to general and customary price increases.
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SECTION 3.9 No Undisclosed Liabilities. Except as and to the extent
provided in the Interim Financial Statements, Storybook did not have at May 30,
1997, any liabilities (whether contingent or absolute, direct or indirect,
asserted or unasserted, accrued or unaccrued, liquidated or unliquidated due or
to become due, known or unknown to Storybook or Machado or matured or unmatured)
not fully reflected and fully reserved against in the Interim Financial
Statements in accordance with generally accepted accounting principles,
consistently applied. Except as provided in Section 3.9(ii) of the Storybook
Disclosure Schedule, as of the Closing Date, there were no loss contingencies
(as such term is used in the Statement of Financial Accounting Standards No. 5)
which were not adequately provided for in the Interim Financial Statements or
disclosed in the notes thereto. Since May 30, 1997, except as set forth in
Section 3.9(iii) of the Storybook Disclosure Schedule, Storybook has not
incurred any liability greater than $10,000 except in the ordinary course of
business consistent with past practice.
SECTION 3.10 Absence of Certain Changes. Except as and to the extent
set forth in Section 3.10 of the Storybook Disclosure Schedule, since May 30,
1997, neither Storybook nor any of its subsidiaries has:
(a) paid, discharged or otherwise satisfied any material claim,
liabilities or obligations (absolute, accrued, contingent or otherwise) other
than payments, made in the ordinary course of business and consistent with past
practice, of liabilities and obligations reflected or reserved against in the
Interim Financial Statements or incurred in the ordinary course of business and
consistent with past practice greater than $10,000 in the aggregate;
(b) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any Liens, except
for (i) Liens for current taxes or other governmental charges not yet due and
payable, or the amount or validity of which is being contested by the
appropriate proceedings and for which an appropriate reserve has been
established, (ii) Liens of carriers, warehouseman, mechanics and materialmen and
similar Liens incurred in the ordinary course of business, and (iii) zoning,
entitlement and other land use and environmental regulations (collectively,
"Permitted Liens");
(c) sold, transferred, or otherwise disposed of any of its properties
or assets (real, personal or mixed, tangible or intangible) greater than $10,000
in the aggregate, except in the ordinary course of business and consistent with
past practice;
(d) granted any increase in the compensation or benefits of any officer
or key employee (including any such increase pursuant to any bonus, pension,
profit sharing or other plan or commitment) or any increase in the compensation
or benefits payable or to become payable to any officer or employee, and no such
increase is customary on a periodic basis or required by agreement or
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understanding;
(e) made any change in severance policy or practices;
(f) made any expenditure capitalized in accordance with Storybook's
current accounting policies or acquired any property or assets (other than new
materials and supplies) for a cost in excess of $10,000, in the aggregate;
(g) declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or otherwise
acquired, directly or indirectly, any shares of capital stock or other
securities of Storybook;
(h) made any change in any method of tax or financial accounting or
accounting practice or made or changed any election for Federal income tax
purposes;
(i) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers, directors or stockholders or any affiliate or associate of any of its
officers, directors or stockholders except for directors' fees, and compensation
to officers at rates not exceeding the rates of compensation paid during
Storybook's fiscal year ended December 28, 1996; or
(j) agreed, whether in writing or otherwise, to take any action
described in this Section 3.10.
SECTION 3.11 No Default. Storybook is not in default or violation (and
no event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (i)
its Articles of Incorporation or its Bylaws, (ii) any note, bond, mortgage,
indenture, license, contract, agreement or other instrument or obligation to
which Storybook is a party or by which it or any of its properties or assets may
be bound or (iii) any order, writ, injunction, decree, statute, rule or
regulation applicable to Storybook.
SECTION 3.12 Litigation. There is no action, suit, proceeding,
arbitration, investigation pending, or to the best knowledge of Storybook or
Machado, threatened, by or before any Governmental Entity involving Storybook.
Storybook is not a party or subject to the provisions of any order or decree of
any Governmental Entity which would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect. There is no action, suit,
proceeding, arbitration or investigation initiated by Storybook currently
pending or which Storybook presently intends to initiate.
SECTION 3.13 Compliance with Applicable Law. The business of Storybook
has not been conducted in violation of any applicable law, ordinance, rule,
regulation, decree or order of any Governmental Entity. Storybook holds all
permits, licenses,
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variances, exemptions, orders and approvals of all Governmental Entities
necessary for the lawful conduct of its businesses (the "Storybook Permits")
except for such Storybook Permits for which the failure to so hold would not,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect. Storybook is in compliance with the terms of the Storybook
Permits. Storybook has not received any notification of any asserted present or
past failure by Storybook to comply with such laws, rules or regulations or such
Storybook Permits which have not been previously cured, and to the best
knowledge of Storybook's President or Machado, there is no pending audit,
investigation or other review by any Governmental Entity to determine the
existence of any violation of such laws, rules or regulations or such Storybook
Permits.
SECTION 3.14 Taxes.
(a) Storybook has filed all Tax Returns which it is required to file
under applicable laws and regulations; all such Tax Returns are complete and
correct in all material respects and have been prepared in compliance with all
applicable laws and regulations in all material respects; Storybook in all
material respects has paid all Taxes due and owing by it through the Closing
Date (whether or not such Taxes are required to be shown on a Tax Return) which
it is not contesting in good faith (such contested Taxes are listed in section
3.14(a) of the Storybook Disclosure Schedule) and has withheld and paid over to
the appropriate taxing authority all Taxes which it is required to withhold
through the Closing Date from amounts paid or owing to any employee,
stockholder, creditor or other third party; Storybook has not waived any statute
of limitations with respect to any material Taxes or agreed to any extension of
time with respect to any material Tax assessment or deficiency; the accrual for
Taxes on the Interim Financial Statements would be adequate to pay all Tax
liabilities of Storybook if its current tax year were treated as ending on the
date of the Interim Financial Statements (excluding any amount recorded which is
attributable solely to timing differences between book and Tax income); since
the date of the Interim Financial Statements, Storybook has not incurred any
material liability for Taxes other than in the ordinary course of business; the
assessment of any additional Taxes for periods for which Tax Returns have been
filed by Storybook does not exceed the recorded liability therefor on the
Interim Financial Statements (excluding any amount recorded which is
attributable solely to timing differences between book and Tax income); the
federal income Tax Returns of Storybook have been audited and closed for all tax
years through 1996; no foreign, federal, state or local tax audits or
administrative or judicial proceedings are pending or being conducted with
respect to Storybook; no information related to Tax matters has been requested
by any foreign, federal, state or local taxing authority and no written notice
indicating an intent to open an audit or other review has been received by
Storybook from any foreign, federal, state or local taxing authority.
(b) Storybook has properly and correctly completed and filed
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all necessary applications for qualification as an "S corporation" under Section
1361 of the Internal Revenue Code of 1986, as amended, and as of the end of
Storybook's 1995 fiscal year has filed all necessary applications for conversion
to a "C corporation" and is currently taxed as a "C corporation." Storybook and
Machado are not aware that any tax liabilities prior to conversion to a "C
corporation" were not properly paid by the relevant Shareholders.
(c) "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.
SECTION 3.15 ERISA. (a) Storybook does not have any obligation to
contribute to (or any other liability, including current or potential withdrawal
liability, with respect to) any "multiemployer plan" (as defined in Section
3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")).
(b) Storybook does not maintain or have any obligation to contribute to
(or any other liability with respect to) any plan or arrangement whether or not
terminated, which provides medical, health, life insurance or other welfare-type
benefits for current or future retired or terminated employees (except for
limited continued medical benefit coverage required to be provided under Section
4980B of the IRC or as required under applicable state law).
(c) Storybook does not maintain, contribute to or have any liability
under (or with respect to) any employee plan which is a tax-qualified "defined
benefit plan" (as defined in Section 3(35) of ERISA), whether or not terminated.
(d) Storybook does not maintain, contribute to or have any liability
under (or with respect to) any employee plan which is a tax-qualified "defined
contribution plan" (as defined in Section 3(34) of ERISA), whether or not
terminated.
(e) Storybook does not maintain, contribute to or have any liability
under (or with respect to) any plan or arrangement providing benefits to current
or former employees, including any bonus plan, plan for deferred compensation,
employee health or other welfare benefit plan or other arrangement, whether or
not terminated.
SECTION 3.16 Change in Control. Except for this Agreement, Storybook is
not a party to any material contract, agreement or
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understanding which contains a "change in control," "potential change in
control," or similar provision. Except as otherwise contemplated by this
Agreement, the consummation of the transactions contemplated by this Agreement
will not (either alone or upon the occurrence of any additional acts or events)
result in any payment (whether of severance pay or otherwise) becoming due from
Storybook to any person.
SECTION 3.17 Intellectual Property.
(a) Storybook owns, or is licensed or otherwise has the full right to
use, all copyrights, trademarks and service marks (including all applications
and registrations therefor), trade names, patents (including, applications
therefor), and all other intellectual property, which are necessary for the
conduct of its business as heretofore conducted (collectively, the "Intellectual
Property"). Attached as Exhibit 3.17 hereto are copies of all such applications
and registrations for such Intellectual Property.
(b) There are no outstanding claims, judgments, settlements or
proceedings against Storybook asserting the invalidity, abuse, misuse or
unenforceability of any of the Intellectual Property, there are no threatened
claims or proceedings relating to the validity of or enforceability of the
Intellectual Property. To the best knowledge of Storybook and Machado, there are
no pending or threatened opposition or other administrative proceedings with
respect to any Intellectual Property which is the subject of a pending
application that could reasonably be expected to prevent the registration in due
course of such Intellectual Property.
SECTION 3.18 Contracts and Commitments. (a) Except as set forth in
Section 3.18(a) of the Storybook Disclosure Schedule and attached thereto:
(i) Storybook does not have any agreements, contracts, commitments, or
restrictions that are material to its business, prospects, financial condition,
working capital, assets, liabilities (absolute, accrued, contingent or
otherwise) or operations;
(ii) There are no purchase contracts or commitments under which
Storybook is required to pay in excess of $25,000, which continue for a period
of more than twelve (12) months;
(iii) There are no outstanding sales contracts or commitments of
Storybook that call for the payment to, or receipt by, Storybook of more than
$25,000, which continue for a period of more than twelve (12) months;
(iv) Storybook does not have any contracts, agreements, arrangements,
or understandings with any officers, directors or employees that are not
cancelable by Storybook on notice of not longer than thirty (30) days and
without liability, penalty, or premium;
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(v) Storybook is not in default, nor is Storybook or Machado aware of
any facts or circumstances which could serve as the basis for any valid claim of
material default by Storybook, under any contract made or obligation owed by it;
(vi) Storybook is not restricted by agreement from carrying on its
business anywhere in the world;
(vii) Storybook does not have any debt obligation for borrowed money,
including guarantees of or agreements to acquire any such debt obligation of
others, not reflected in the Financial Statements;
(viii) Storybook does not have any outstanding loan to any person other
than to Machado;
(ix) Storybook does not have any power of attorney outstanding or any
material obligations or liabilities (whether absolute, accrued, contingent, or
otherwise), as guarantor, surety, co-signer, endorser, co-maker or indemnitor
for the material obligation of any person, corporation, partnership, joint
venture, association, organization, or other entity; and
(x) None of the officers, directors or stockholders of Storybook has
any ownership or other property interest in any property, real or personal,
tangible or intangible, including without limitation Intellectual Property, that
is used in the business of Storybook.
(b) Each contract specified in Section 3.18(a) of the Storybook
Disclosure Schedule: (i) to the best knowledge of Storybook and Machado, is
valid and binding on the respective parties thereto and is in full force and
effect, (ii) is not subject to restrictions regarding a change in ownership or
control and (iii) upon consummation of the transactions contemplated by this
Agreement, shall continue in full force and effect without penalty or other
adverse consequence and shall be unaffected by the transactions contemplated
herein. Storybook is not in breach or default in any material respect under the
terms of any such contract, the result of which could result in a Material
Adverse Effect.
(c) To the best knowledge of Storybook and Machado, no other party to
any such contract is, in any material respect, in breach or default thereunder.
SECTION 3.19 Labor Relations. As of the date hereof, there is no strike
or other labor dispute pending against Storybook. Storybook is not bound by or
subject to (and none of its properties or assets is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the best knowledge of
Storybook and Machado has sought to represent any of the employees,
representatives or agents of Storybook, nor is Storybook aware of any labor
organization activity involving its employees.
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Except as previously disclosed to Fulcrum, no officer or key employee of
Storybook has any plans to terminate his employment with Storybook.
SECTION 3.20 Employee Benefit Plans. Storybook has previously given to
Fulcrum true and correct copies of Storybook's material work rule manuals,
employee salary and bonus rules, retirement and severance pay rules, director
compensation rules, director retirement allowance regulations and other
compensation and benefit regulations and arrangements and each employment or
consulting contract to the extent they exist. Except as previously disclosed to
Fulcrum in writing by Storybook, there are no other significant employee benefit
plans, programs or arrangements, maintained or contributed to by Storybook.
SECTION 3.21 Personnel. Schedule 3.21(i) of the Storybook Disclosure
Schedule sets forth a list of the names and current salaries of each officer and
employee of Storybook as of the date of this Agreement. Section 3.21(ii) of the
Storybook Disclosure Schedule sets forth a complete and correct list of all
written employment, compensation, severance, consulting or indemnification
contracts between Storybook and its present or former employees, officers,
directors and consultants to the extent Storybook has any continuing obligations
thereunder. Storybook has made available to Fulcrum true and correct copies of
all such agreements.
SECTION 3.22 Environmental Matters. (a) For purposes of this Agreement,
the term "Environmental and Safety Requirements" means all federal, state, local
and foreign statutes, regulations, ordinances and other provisions having the
force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law, in each case
concerning public health and safety, worker health and safety and pollution or
protection of the environment (including, without limitation, all those relating
to the presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
Release, threatened Release, control or cleanup of any hazardous or otherwise
regulated materials, substances or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum products or
byproducts, asbestos, polychlorinated biphenyls, noise or radiation); "Release"
shall have the meaning set forth in CERCLA (as defined below); and
"Environmental Lien" shall mean any Lien, whether recorded or unrecorded, in
favor of any governmental entity, relating to any liability of Storybook arising
under any Environmental and Safety Requirements.
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(b) Except as has not had or would not reasonably be expected to have a
Material Adverse Effect:
(1) Storybook has complied with and is currently in
compliance with all Environmental and Safety Requirements, and has not
received any oral or written notice, report or information regarding
any liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise) or any corrective, investigatory or remedial obligations
arising under Environmental and Safety Requirements which relate to
Storybook or any of its properties or facilities, except for any such
noncompliance, liability or obligation which has not had or would not
reasonably be expected to have a Material Adverse Effect.
(2) Without limiting the generality of the foregoing,
Storybook has obtained and complied with, and is currently in
compliance with, all permits, licenses and other authorizations that
may be required pursuant to any Environmental and Safety Requirements
for the occupancy of its properties or facilities or the operation of
its businesses. A list of all such permits, licenses and other
authorizations is set forth in Section 3.22(b)(2) of the Storybook
Disclosure Schedule.
(3) Neither this Agreement nor the consummation of
the transactions contemplated by this Agreement will impose any
obligations on Storybook or otherwise for site investigation or
cleanup, or notification to or consent of any government agencies or
third parties under any Environmental and Safety Requirements
(including, without limitation, any so called "transaction-triggered"
or "responsible property transfer" laws and regulations).
(4) To the best knowledge of Storybook and Machado,
none of the following exists at any property or facility occupied or
operated by Storybook:
(i) underground storage tanks or surface
impoundments;
(ii) asbestos-containing materials in any form
or condition; or
(iii) materials or equipment containing
polychlorinated biphenyls.
(5) Storybook has not treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled or
Released any substance (including, without limitation, any hazardous
substance) or occupied or operated any facility or property, so as to
give rise to liabilities of Storybook for response costs, natural
resource damages or attorneys fees pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"),
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as amended, or any other Environmental and Safety Requirements.
(6) Without limiting the generality of the foregoing,
no facts, events or conditions relating, to the best knowledge of
Storybook and Machado, to the past or present properties, or to the
facilities or operations of Storybook will prevent, hinder or limit
continued compliance with Environmental and Safety Requirements, give
rise to any corrective, investigatory or remedial obligations pursuant
to Environmental and Safety Requirements or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise) pursuant to Environmental and Safety Requirements
(including, without limitation, those liabilities relating to onsite or
offsite Releases or threatened Releases of hazardous materials,
substances or wastes, personal injury, property damage or natural
resources damage, except for any such noncompliance, obligation or
liability which has not had or would not reasonably be expected to have
a Material Adverse Effect
(7) Storybook has not, either expressly or by
operation of law, assumed or undertaken any material liability or
corrective, investigatory or remedial obligation of any other person
relating to any Environmental and Safety Requirements.
(8) No Environmental Lien has attached to any
property owned, leased or operated by Storybook during such ownership,
lease or operation by Storybook.
SECTION 3.23 Insurance. Section 3.23(a) of the Storybook Disclosure
Schedule contains an accurate and complete description of all material policies
of fire, liability, workmen's compensation and other forms of insurance owned or
held by Storybook. Such policies are in amounts customarily used and cover risks
customarily insured against, by businesses of the type and size operated by
Storybook. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the Closing will have
been paid, and no notice of cancellation or termination has been received with
respect to any such policy. Such policies will remain in full force and effect
through the respective dates set forth in Section 3.23(a) of the Storybook
Disclosure Schedule without the payment of additional premiums; and will not be
materially affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement. All of such policies have been issued by
insurance companies with ratings of BBB+ or higher from a nationally recognized
rating agency. All known claims, if any, made against Storybook that are covered
by insurance have been disclosed to, and to the best knowledge of Storybook and
Machado, have been accepted by the appropriate insurance companies and, to the
best knowledge of Storybook and Machado, are being defended by such appropriate
insurance companies and are described in Section 3.23(b) of the Storybook
Disclosure Schedule and no claims by Storybook have been
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denied coverage during the last three years.
SECTION 3.24 Related Party Contracts. Each of the related-party
agreements described in Sections 3.18(a)(4) and 3.18(a)(10) of the Storybook
Disclosure Schedule were entered into between Storybook and the other party or
parties thereto on an arm's length basis on terms no less favorable to Storybook
than it could obtain from an unrelated third party.
SECTION 3.25 Real Property; Leased Premises.
(a) Storybook owns no real property or land.
(b) Section 3.25(b) of the Storybook Disclosure Schedule sets forth a
true and complete list of each lease of premises executed by or binding upon
Storybook as lessee, sublessee, tenant or assignee (the "Leased Premises"). Each
such lease is in full force and effect without any default or breach thereof by
Storybook or, to the best knowledge of Storybook and Machado, any other party
thereto. True and complete copies of all leases listed on Schedule 3.25(b) of
the Storybook Disclosure Schedule (including all amendments, addenda, waivers
and all other binding documents relating thereto) have been made available to
Fulcrum.
(c) Except as set forth in Section 3.25(c) of the Storybook Disclosure
Schedule, Storybook has not, to the best knowledge of Storybook and Machado,
received any notice of or writing referring to any requirements by any insurance
company that has issued a policy covering any part of any Leased Premises or by
any board of fire underwriters or other body exercising similar functions,
requiring any repairs or work to be done on any part of any Leased Premises. All
public utilities used in the operation of each Leased Premises in the manner
currently operated are installed and operating, and all installation and
connection charges with respect to Leased Premises have been paid in full or
provided for. The plumbing, electrical, heating, air conditioning, ventilating
and all other structural or material mechanical systems in the buildings upon
the Leased Premises are, to the best knowledge of Storybook and Machado, in good
working order and working condition, so as to be adequate for the operation of
the business of Storybook as heretofore conducted. To the best knowledge of
Storybook and Machado, the roof, basement and foundation walls of all buildings
on the Leased Premises are free of leaks and other material defects.
SECTION 3.26 Absence of Certain Payments. Neither Storybook nor any of
its affiliates or any of their respective officers, directors, employees or
agents or other people acting on behalf of any of them have (i) engaged in any
activity prohibited by the United States Foreign Corrupt Practices Act of 1977
or any other similar law, regulation, decree, directive or order of any other
country and (ii) without limiting the generality of the preceding clause (i),
used any corporate or other funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to political activity
to government
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officials or others. None of Storybook or any of its affiliates or to the best
knowledge of Storybook and Machado, any of their respective directors, officers,
employees or agents of other persons acting on behalf of any of them, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
SECTION 3.27 Disclosure. (a) Since the date of the latest audited
Financial Statements, Storybook has not suffered any event which may be
reasonably expected to have a Material Adverse Effect.
(b) No representation or warranty by Storybook or Machado,
respectively, in this Agreement and no statement contained in any document,
schedule or certificate furnished or to be furnished by or on behalf of
Storybook or Machado, respectively, to Fulcrum or any of its representatives
pursuant to the provisions hereof or in connection with transactions
contemplated hereby, contains as of the date hereof or will contain as of the
Closing any untrue statement of material fact or omits or will omit to state any
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
SECTION 3.28 Books and Records. The books of account, minute books,
stock certificate books and stock transfer ledgers of Storybook are complete and
correct in all material respects, and there have been no material transactions
involving the business of Storybook which properly should have been set forth
therein and which have not been so set forth.
SECTION 3.29 Accounts; Lockboxes; Safe Deposit Boxes. Section 3.29 of
the Storybook Disclosure Schedule lists (a) the name of each bank, savings and
loan association, or other financial institution in which Storybook has an
account and (b) the location of all lockboxes and safe deposit boxes of
Storybook.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each of the Shareholders (including Machado) represents and warrants to
Fulcrum, severally, as to such respective Shareholder, as follows:
SECTION 4.1 Ownership. All of the Storybook Common Shares set forth
opposite such Shareholder's name in Section 4.1 of the Storybook Disclosure
Schedule are owned of record and beneficially by such Shareholder, and such
Shareholder has good and marketable title to such Storybook Common Shares, free
and clear of all security interests, claims, liens, pledges, options,
encumbrances, charges, agreements, voting trusts, proxies and other arrangements
or restrictions whatsoever ("Encumbrances"). Except for such Storybook Common
Shares, such Shareholder owns no other shares of the capital stock of the
Storybook or rights to acquire any such shares. At the Closing, such Shareholder
shall transfer to Fulcrum
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good and marketable title to such Storybook Common Shares, free and clear of all
Encumbrances.
SECTION 4.2 Authorization. This Agreement has been duly authorized,
executed and delivered by such Shareholder and constitutes a valid and legally
binding obligation of such Shareholder, enforceable in accordance with its
terms, except as enforcement may be limited by bankruptcy, moratorium and other
creditors' rights laws and by any limitations as to enforceability of equitable
remedies as may be observed by the relevant judicial body.
SECTION 4.3 Conflicts. The execution, delivery and performance of this
Agreement by such Shareholder does not conflict with, violate or result in the
breach of, require the execution or delivery of any consents or other
instruments, or create any lien or encumbrance on, such Shareholder's Storybook
Common Shares pursuant to, any agreement, instrument, order, judgment, decree,
law or governmental regulation to which such Shareholder is a party or is
subject or by which such Shareholder's Storybook Common Shares are bound.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FULCRUM
Fulcrum represents and warrants to Storybook and to each Shareholder,
severally, as follows:
SECTION 5.1 Corporate Organization. Fulcrum is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
SECTION 5.2 Authority Relative to this Agreement. Fulcrum has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized and approved by the Board of Directors of
Fulcrum at a meeting held June 10, 1997. This Agreement has been duly and
validly executed and delivered by Fulcrum and constitutes a valid and binding
agreement of Fulcrum, enforceable against Fulcrum in accordance with its terms,
except as enforcement may be limited by bankruptcy, moratorium and other
creditors' rights laws and by any limitations as to enforceability of equitable
remedies as may be observed by the relevant judicial body.
SECTION 5.3 Consents and Approvals; No Violations. No filing with or
notification to, and no permit, authorization, consent, waiver or approval of,
any Governmental Entity, is necessary for the consummation by Fulcrum of the
transactions contemplated by this Agreement except for such filing,
notification, permit,
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<PAGE> 24
authorization, consent, waiver or approval for which the failure to obtain would
not, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect. Neither the execution and delivery of this Agreement by Fulcrum
nor the consummation by Fulcrum of the transactions contemplated hereby nor
compliance by Fulcrum with any of the provisions hereof will (i) conflict with
or result in any breach of any provision of the Certificate of Incorporation or
By-Laws of Fulcrum or any of its subsidiaries, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration
or result in the creation of any Lien) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract, agreement
or other instrument or obligation to which Fulcrum or any of its subsidiaries is
a party or by which any of them or any of their respective properties or assets
may be bound or (iii) violate any order, writ, injunction, decree, statute,
treaty, rule or regulation applicable to Fulcrum, any of its subsidiaries or any
of their properties or assets, except in the case of (ii) or (iii) for
violations, breaches or defaults that would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect.
SECTION 5.4 Disclosure. No representation or warranty by Fulcrum in
this Agreement and no statement contained in any document, schedule or
certificate furnished or to be furnished by Fulcrum to Storybook or any of its
representatives pursuant to the provisions hereof or in connection with the
transactions contemplated hereby, contains as of the date hereof or will contain
as of the Closing any untrue statement of material fact or omits or will omit to
state any material fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE VI
COVENANTS OF STORYBOOK AND SHAREHOLDERS
Storybook and the Shareholders covenant and agree as follows:
SECTION 6.1 Repayment of Debt. (a) At the Closing, Fulcrum shall pay to
Storybook, on behalf of, and at the direction of, Machado, $1,100,638.19 as
payment in full of the obligation owed by Machado to Storybook under a revolving
line of credit, which amount shall be deducted from the portion of the Purchase
Price otherwise payable to Machado pursuant to Section 1.1(a) hereof, and such
revolving credit line shall be terminated as of the Closing Date.
(b) At the Closing, Fulcrum shall pay to CoAmerica Bank ("CoAmerica")
on behalf of, and at the direction of, Machado, $1,814,500.00 as payment in full
of the obligations owed by Machado to CoAmerica and Machado and Storybook shall
take all actions necessary at or prior to the Closing to have all liens and
security
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<PAGE> 25
interests held by CoAmerica in the Storybook Common Shares owned by Machado, and
sold to Fulcrum pursuant to the Agreement, terminated as of the Closing.
SECTION 6.2 Further Assurances. Each of Storybook and the Shareholders
shall execute such documents and perform such further acts (including, without
limitation, obtaining any consents, exemptions, authorizations, or other actions
by, or giving any notices to, or making any filings with, any governmental
agency or any other person) as may be reasonably requested by Fulcrum, prior to,
or after, the Closing, to carry out or to perform the provisions of this
Agreement.
ARTICLE VII
MUTUAL COVENANTS
SECTION 7.1 Best Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate the transactions contemplated
herein. Each party shall promptly consult with the other with respect to,
provide any necessary information with respect to and provide the other (or its
counsel) copies of, all filings made by such party with any Governmental Entity
in connection with this Agreement and the transactions contemplated hereby.
SECTION 7.2 Brokers or Finders. Each of Storybook and Fulcrum
represents, as to itself, its subsidiaries and its affiliates, that no agent,
broker, investment banker, financial advisor or other firm or person is or will
be entitled to any brokers' or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated by this Agreement,
except Tucker Capital, whose fees and expenses will be paid out of the Purchase
Price (and deducted therefrom) in accordance with Storybook's agreement with
such firm (a copy of which has been delivered by Storybook to Fulcrum prior to
the date of this Agreement), and Hambrecht & Quist LLC and Fulcrum Capital
Partners, L.P., whose fees and expenses will be paid by Fulcrum in accordance
with Fulcrum's agreement with such firms. Each of Storybook and Machado, and
Fulcrum agrees to indemnify and hold the other harmless from and against any and
all claims, liabilities or obligations with respect to any other fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by or on behalf of such party. Each of the
Shareholders agrees to indemnify Fulcrum and hold it harmless from and against
any and all claims liabilities or obligations with respect to any other fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by or on behalf of such party.
SECTION 7.3 Fees and Expenses. All costs and expenses incurred in
connection with this Agreement and the transactions
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contemplated hereby shall be paid by the Shareholders pro rata from the Purchase
Price as a reduction on the one hand as specified in Exhibit 7.3 and Fulcrum on
the other.
ARTICLE VIII
INDEMNIFICATION, ETC.
SECTION 8.1 Survival of Representations and Covenants.
(a) The representations, warranties, covenants and obligations in this
Agreement shall survive the Closing and the sale of the Storybook Common Shares
to Fulcrum and shall expire on the second anniversary of the Closing Date.
(b) Notwithstanding the foregoing, if a Claim Notice (as defined below)
relating to any representation, warranty, covenant or obligation is given to
Machado or a Shareholder on or prior to the second anniversary of the Closing
Date then, notwithstanding anything to the contrary contained in Section 8.1(a),
such representation or warranty shall not so expire solely with respect to such
claim, but rather shall remain in full force and effect until such time as each
and every claim specifically set forth in such Claim Notice has been fully and
finally resolved, either by means of a written settlement agreement executed on
behalf of Fulcrum and Machado or a Shareholder, as the case may be, or by means
of a final, non-appealable judgment issued by a court of competent jurisdiction.
(c) For purposes of this Agreement, a "Claim Notice" relating to a
particular representation or warranty shall be deemed to have been given if any
Indemnitee (as defined below) acting in good faith, delivers to Machado or a
Shareholder, as the case may be, a written notice stating that such Indemnitee
believes that there is or has been a possible breach of a representation or
warranty and containing (i) a brief description, providing reasonable detail, of
the circumstances supporting such Indemnitee's belief that there is or has been
such a possible breach, and (ii) a non-binding, preliminary estimate of the
aggregate dollar amount of the actual and potential damages that have arisen and
may arise as a direct or indirect result of such possible breach.
(d) For purposes of this Agreement, each statement or other item of
information set forth in the Storybook Disclosure Schedule shall be deemed to be
a representation, warranty, covenant or obligation of Machado in this Agreement.
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SECTION 8.2 Indemnification.
(a) Machado or a Shareholder, as the case may be, shall hold harmless
and indemnify each of Fulcrum, its affiliates, officers, agents, employees and
directors (the "Indemnitees") from and against, and shall compensate and
reimburse each of the Indemnitees for, any and all liabilities, losses, costs,
payments, damages, claims, obligations and expenses (including reasonable
attorney's fees and out-of-pocket costs) (collectively, the "Damages") that are
suffered or incurred by any of the Indemnitees or to which any of the
Indemnitees may otherwise become subject at any time (regardless of whether or
not such Damages relate to any third-party claim) and that arise from or as a
result of, or are connected with:
(1) Any breach of any of the representations, warranties, covenants or
obligations made by Machado or a Shareholder, as the case may be, in this
Agreement, it being understood that a Shareholder will only be liable for any
breach of such Shareholder's respective representation, warrant, covenant or
obligation under Article IV and Sections 9.2(a), (b), (c) and (k); or
(2) Any breach of any representation, warranty, statement, information
or provision contained in the Storybook Disclosure Schedule or in any other
document delivered or otherwise made available to Fulcrum or any of its
representatives by or on behalf of Machado or any representative of Machado.
(b) Machado or a Shareholder, as the case may be, shall not be required
to make any indemnification payment pursuant to Section 8.2(a) for any breach of
their respective representations and warranties until such time as, and only to
the extent that, the total amount of all Damages (including the Damages arising
from such breach and all other Damages arising from any other breaches of
Machado's, or such shareholder's, respective representations and warranties)
that have been directly or indirectly suffered or incurred by Indemnitees, or to
which Indemnitees have otherwise become subject, equals or exceeds the amount of
$10,000 in the aggregate. The aggregate indemnification payments that any
Shareholder is required to make pursuant to Section 7.2(a) shall in no event
exceed the Purchase Price received by such Shareholder pursuant hereto.
(c) The parties hereto acknowledge that notwithstanding the fact that
an Indemnitee is not a party to this Agreement, such Indemnitee is entitled to
the benefits of and to enforce all provisions hereof as an intended third party
hereof.
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<PAGE> 28
SECTION 8.3 Dispute Resolution.
(a) Within the period of thirty (30) business days following their
receipt of any Claim Notice applicable to them, Machado or a Shareholder, as the
case may be, shall have the right to deliver a notice (a "Dispute Notice")
stating that Machado or such Shareholder, as the case may be, disputes the
validity or the amount specified in such Claim Notice or any portion thereof as
applicable to such Shareholder (a "Disputed Amount") and providing in reasonable
detail the reasons therefor. In case Machado or such Shareholder, as the case
may be, delivers a Dispute Notice with regard to any claim or claims by an
Indemnitee made in any Claim Notice, the Indemnitee(s) will have thirty (30)
business days to respond in a written statement to the objection of Machado or
such Shareholder, as the case may be. If after such thirty (30) business day
period there remains a dispute as to any claims, Machado or such Shareholder, as
the case may be, and the Indemnitee(s) will attempt in good faith for thirty
(30) days to agree upon the rights of the respective parties with respect to
each of such claims. Thereafter, if Machado or such Shareholder, as the case may
be, and the Indemnitee(s) should so agree, a memorandum setting forth such
agreement will be prepared and signed by both parties and any agreed upon
indemnification shall be paid promptly by Machado or a Shareholder, as the case
may be. If no Agreement is reached, then the parties may submit such matter to a
court of competent jurisdiction.
(b) If agreement is reached pursuant to such Section 8.3(a) above or if
a court of competent jurisdiction so orders, with respect to any claim for
indemnification hereunder, then Machado or a Shareholder, as the case may be,
shall promptly pay the total amount of Damages arising out of such claim to the
Indemnitee(s), subject to the limitations of Section 8.2(b) hereof. If Machado
is required to make an indemnification payment hereunder, then the obligation to
make such payment may be satisfied by, and to the extent of, the release of all
or a part of the Escrowed Amount pursuant to the terms of the Escrow Agreement,
provided, that the release of all or any portion of the Escrowed Amount to
Machado, pursuant to the terms of the Escrow Agreement shall in no way limit the
rights of the Indemnitee(s) or the obligations of Machado hereunder.
ARTICLE IX
CONDITIONS TO CLOSING
SECTION 9.1 Conditions of the Obligations of the Shareholders. The
obligations of the Shareholders hereunder are further subject to the
satisfaction at or prior to the Closing of the following conditions:
(a) Fulcrum shall have delivered the Purchase Price to each Shareholder
in the manner provided in the letter attached hereto as Exhibit 9.1(a).
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<PAGE> 29
(b) Fulcrum shall have performed and complied, in all material
respects, with all obligations and covenants required to be performed or
complied with by it under this Agreement at or prior to the Closing.
(c) Fulcrum shall have delivered to the Shareholders a Secretary's
Certificate, substantially in the form of Exhibit 9.1(c) attached hereto.
(d) Fulcrum shall have delivered to the Shareholders a cross-receipt
acknowledging receipt of the Storybook Common Shares.
(e) Storybook and the Shareholders shall have received from Fulcrum all
other documents reasonably requested by Storybook or the Shareholders which are
required to be delivered (and have not been previously delivered) by Fulcrum
under the provisions of this Agreement.
SECTION 9.2 Conditions of Obligations of Fulcrum. The obligations of
Fulcrum hereunder are further subject to the satisfaction at or prior to the
Closing of the following conditions:
(a) Each Shareholder individually, and all Shareholders in the
aggregate, shall have delivered to Fulcrum, stock certificate(s) representing
all Storybook Common Shares beneficially owned by such Shareholder and all
Shareholders, respectively, accompanied by duly executed stock powers executed
in blank, in form and substance reasonably satisfactory to Fulcrum, or a Lost
Certificate Indemnity Agreement and document of share ownership assignment to
Fulcrum in such form as Fulcrum approves in writing.
(b) Storybook and the Shareholders shall have performed and complied
with, in all material respects, with all obligations and covenants required to
be performed or complied with by them under this Agreement at or prior to the
Closing.
(c) Storybook and the Shareholders shall have obtained all consents,
approvals, authorizations and permits required from third parties and any
Governmental Entity necessary for the consummation of the transactions by
Storybook and the Shareholders of the transactions contemplated by this
Agreement.
(d) Fulcrum shall have received from Storybook an officer's certificate
substantially in the form of Exhibit 9.2(d) attached hereto.
(e) Fulcrum shall have received from Fenwick & West, LLP, counsel to
Storybook and Machado, an opinion substantially in the form of Exhibit 9.2(e)
attached hereto.
(f) Fulcrum shall have received from Machado, a fully executed
Severance, Confidentiality and Non-competition Agreement, substantially in the
form of Exhibit 9.2(f) attached hereto.
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(g) Fulcrum shall have received from each of Estelle DeMuesy and Jon
Bruml fully executed Employment Agreements substantially in the form of Exhibit
9.2(g) attached hereto.
(h) Fulcrum shall have received resignation letters and general
releases signed by each member of Storybook's Board of Directors (except for
Estelle DeMuesy as President of Storybook) with respect to any and all positions
and/or offices each may hold with Storybook and any payments for compensation,
benefits or severance for any period prior to or following June 27, 1997.
(i) Fulcrum shall have received from Deloitte & Touche LLP a fully
executed letter agreement between Deloitte & Touche LLP and Fulcrum
substantially in the form attached hereto as Exhibit 9.2(i).
(j) Fulcrum shall have received from Storybook a Secretary's
Certificate, substantially in the form of Exhibit 9.2(j) attached hereto.
(k) Fulcrum shall have received from Storybook and each of the
Shareholders all other documents reasonably requested by Fulcrum which are
required to be delivered (and have not been previously delivered) to Fulcrum
under the provisions of this Agreement.
(l) Fulcrum shall have received from Machado an agreement signed by
Machado, Storybook and each holder of Options outstanding as of immediately
prior to Closing, transferring such Options to Machado and subsequently
cancelling such Options on or before the Closing.
ARTICLE X
AMENDMENT
SECTION 10.1 Amendment; Extension; Waiver. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. At any time following the Closing, the parties hereto may, in a
written instrument signed on behalf of the parties hereto by Fulcrum, Storybook
and Machado, (i) extend the time for the performance of any of the obligations
or other acts of the other parties thereto, (ii) waive any inaccuracies in the
representations and warranties of the other parties hereto contained or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein by the other parties hereto.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Notices. All notices and other communications
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<PAGE> 31
hereunder, following the Closing Date, shall be in writing, and shall be deemed
given upon receipt if delivered personally (including delivery by courier), sent
by facsimile transmission (receipt of which is confirmed) or by certified or
registered mail, return receipt requested, or by a nationally recognized private
overnight courier to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to the Shareholders, to:
c/o Jerry H. Machado
1142 Moore Road
Woodside, California 94062-1112
Facsimile: (415) 529-1209
with copies to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Bruce W. Jenett
Facsimile No.: (415) 494-1417
and
(b) if to Storybook or Fulcrum, to:
Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
Facsimile No.: (505) 867-7100
with a copy to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Frederick Tanne
Facsimile No.: (212) 446-4900
SECTION 11.2 Descriptive Headings. The descriptive headings herein are
inserted for convenience only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
SECTION 11.3 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more
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<PAGE> 32
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
SECTION 11.4 Entire Agreement; Assignment. This Agreement (with all
attachments and Exhibits hereto), the Severance, Confidentiality and
Non-Competition Agreement and the Employment Agreements (a) constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (b) shall not be assigned by operation of law or otherwise.
SECTION 11.5 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware without regard to
any applicable principles of conflicts of law.
SECTION 11.6 Specific Performance. The parties hereto agree that if any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur,
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
SECTION 11.7 Publicity. Except as reasonably determined to be required
by law, neither Storybook nor the Shareholders shall issue or cause the
publication of any press release or other public announcement with respect to
the transactions contemplated by this Agreement without prior approval of
Fulcrum.
SECTION 11.8 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and for the purpose of
Article VIII, the Indemnitees and nothing in this Agreement, express or implied,
is intended to or shall confer upon any other person or persons any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 11.9 Knowledge. As used in this Agreement, the terms
"knowledge" or "aware" as they relate to each of Storybook and Machado,
respectively, shall mean and include the best knowledge or awareness of Estelle
DeMuesy and Jon Bruml, on the one hand, and Machado, on the other, in each case
after diligent inquiry of the matters in question, provided that no search of
records outside of those kept by Storybook or Machado within their own premises
is implied therein not need be undertaken.
SECTION 11.10 Waiver of Rights of First Refusal. Storybook and each
Shareholder hereby waives any and all preemptive rights, rights of first
refusal, rights of first offer of any other rights it may have with respect to
the sale of the Storybook Common Shares to Fulcrum hereunder.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by a duly authorized person as of the date first written above.
STORYBOOK HEIRLOOMS, INC. FULCRUM DIRECT, INC.
By: By:
Name: Name:
Title: Title:
Date signed: June 27, 1997 Date signed: June 27, 1997
JERRY H. MACHADO, AS TO ARTICLE III SHAREHOLDERS
INDIVIDUAL SHAREHOLDER:
Jerry H. Machado
Date signed: June 27, 1997 Printed name:
Date signed: June 27, 1997
ENTITY SHAREHOLDER:
Printed Name of Entity:
By:
Printed name:
Title:
Date signed: June 27, 1997
SIGNATURE PAGE TO
SECURITIES PURCHASE AGREEMENT DATED AS OF JUNE 27, 1997
STOCK POWER AND ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, and pursuant to that certain Securities
Purchase Agreement (the "Agreement") dated June 1997 among
Storybook Heirlooms, Inc., a California corporation (the
"Company"), Fulcrum Direct, Inc., a Delaware corporation, and
<PAGE> 34
certain shareholders of the Company, the undersigned hereby
sells, assigns and transfers unto:
______________________________________________________________
_______________ shares of the Common Stock of the Company, represented by
Certificate(s) No. _______________ delivered herewith, and
does hereby irrevocably constitute and appoint the Secretary of the
Company as the undersigned's attorney-in-fact, with full power of
substitution, to transfer said stock on the books of the Company.
Dated as of June __________, 1997
(Signature)
(Please Print Name)
(Spouse's Signature, if any)
(Please Print Spouse's Name)
INSTRUCTION: Please sign at the signature line and fill in all the blanks
EXCEPT for (1) the line reserved for the transferee information and
(2) the date. This information will be filled in by Fenwick & West upon
closing of the contemplated transaction with Fulcrum Direct, Inc. The purpose
of this Stock Power and Assignment is to enable the Company and/or its
assignee(s) to acquire the shares on the terms set forth in the Agreement
without requiring additional signatures on the part of the Shareholder.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FULCRUM DIRECT, INC.
ARTICLE I
NAME
The name of the corporation is Fulcrum Direct, Inc. (the "Corporation").
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent of the
corporation at such address is The Corporation Trust Company.
ARTICLE III
CORPORATE PURPOSE
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "General Corporation Law").
ARTICLE IV
CAPITAL STOCK
The Corporation is hereby authorized to issue two classes of
shares designated respectively "common shares" and "preferred shares." The total
number of common shares that the corporation shall have the authority to issue
is 25,000,000, all of which shares shall be $.01 par value. The total number of
preferred shares shall have the authority to issue is 5,000,000, all of which
shares shall be $.01 par value. Preferred shares shall be issued in series, and
the Board of Directors of the Corporation (the "Board") is hereby authorized by
resolution (a "Preferred Stock Designation"), subject to any limitation
prescribed by law, to fix the number of shares of each such series, and to
determine the voting power, designations, preferences, rights and
qualifications, limitations and restrictions granted to or imposed on any wholly
unissued series of such class of preferred shares. As to any such series, the
Board may increase or decrease (but not below the
<PAGE> 2
number of such shares then outstanding) the number of shares of any such series
subsequent to the issue of such shares of that series.
ARTICLE V
DIRECTORS
(1) Elections of directors of the Corporation need not be by
written ballot, except and to the extent provided in the By-laws of the
Corporation. The number of directors who shall serve on the Board shall be fixed
from time to time exclusively by the Board pursuant to a resolution adopted by a
majority of the Board, provided that in no event will the number of directors be
fewer than three or greater than seven. The Board shall be divided into three
classes as nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one class
expiring each year. The Board shall, by resolution adopted by a majority of the
Board, designate which class a particular director shall be a member of. The
term of office of the first class shall expire at the 1998 annual meeting of
stockholders, the term of office of the second class shall expire at the 1999
annual meeting of stockholders and the term of office of the third class shall
expire at the 2000 annual meeting of stockholders. At each annual meeting of
stockholders, commencing with the 1998 annual meeting of stockholders, directors
elected to succeed those directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified or until his/her
earlier death, resignation or removal.
(2) Only persons who are nominated in accordance with the
procedures set forth in this paragraph shall be eligible to serve as directors.
Nominations of persons for election to the Board may be made at an annual
meeting of stockholders (a) by or at the direction of the Board or (b) by or on
behalf of a stockholder of the Corporation, or a duly authorized proxy for such
stockholder, who is a stockholder of record at the time of giving notice
provided for in this paragraph and who shall be entitled to vote for the
election of directors at the meeting. Any nominations not made by or at the
direction of the Board must be made pursuant to a notice in writing to the
Secretary of the Corporation delivered or mailed to, and received at, the
principal executive offices of the Corporation not fewer than 120 days or more
than 150 days prior to the anniversary date of the immediately preceding annual
meeting; provided, however, that in the event the annual meeting with respect to
which such notice is to be tendered is not held within 30 days before or after
such anniversary date such notice by the stockholder must be received at the
principal executive offices of the Corporation prior to the close of business on
the tenth day following the date on which notice of the meeting was first given
or made to the stockholders generally; and further provided, however, that,
notwithstanding the foregoing, with respect to the 1998 annual meeting of
stockholders, such notice by the stockholder must be received at the principal
executive offices of the Corporation prior to the close of business on the tenth
day following the date on which notice of the meeting was first given or made to
stockholders generally. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director, all
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<PAGE> 3
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934
(including such person's written consent to being named as a nominee and to
serving as a director, if elected); and (b) as to the stockholder giving such
notice (i) the name and address, as they appear on the Corporation's books, of
such stockholder, (ii) the class and number of shares of stock of the
Corporation beneficially owned by such stockholder and represented by proxy and
(iii) a description of all arrangements and understandings between such
stockholder and any other person or persons (including their names) in
connection with such nomination and any material interest of such stockholder in
such nomination. At the request of the Board, any person nominated by the Board
for election as a director shall furnish to the secretary of the Corporation
that information required to be set forth in a stockholder's notice of
nomination that pertains to the nominee. If the Board shall determine, based on
the facts, that a nomination was not made in accordance with the above
procedures, the Chairman of the Board shall so declare to the meeting and the
defective nomination shall be disregarded.
(3) Unless the Board otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies of the Board resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled only by a
majority vote of the directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the annual meeting
of a stockholders at which the term of office of the class to which they have
been elected expires and until such director's successor shall have been duly
elected and qualified. No decrease in the number of authorized directors
constituting the entire Board shall shorten the term of any incumbent director.
(4) Any director may be removed for "Cause" at any time by the
affirmative vote of the holders of at least 66-2/3% of the shares entitled to
vote at a special meeting of stockholders called for that purpose and the
vacancies thus created may be filled at that same meeting by the affirmative
vote of the holders of at least 66-2/3% of the shares entitled to vote at such
meeting pursuant to the provisions of Section 2 of this Article V. For purposes
of this Certificate of Incorporation "Cause" shall mean the conviction of a
felony involving the affairs of the Corporation. No Director may be removed
without cause, except by vote of a majority of the Board.
(5) To the fullest extent permitted by the General Corporation
Law as it now exists and as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
(6) Notwithstanding any other provisions of this Certificate
of Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, the affirmative vote of the holders of at least 66-2/3% of the
shares entitled to vote in the election of directors, following adoption of any
such amendment, and submission for a vote, by a majority of the Board, shall be
required to amend or repeal, or adopt any provisions inconsistent with, this
Article V.
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ARTICLE VI
SHAREHOLDER ACTIONS
Any action required or permitted to be taken by the
stockholders of the corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders and special meetings of stockholders of the
Corporation may be called only by the Chairman of the Board or by the Board
pursuant to a resolution adopted by a majority of the Board. At an annual
meeting of stockholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been brought before the annual
meeting (a) by or at the direction of the Board or (b) by any stockholder of the
Corporation who complies with the requirements of this Article VI and as shall
otherwise be proper subjects for stockholder action and shall be properly
introduced at the meeting. For a proposal to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely advance
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Corporation not less than 120 days prior to
the scheduled meeting date, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, if less than
120 days' notice or prior public disclosure of the scheduled meeting date is
given or made, notice by the stockholder, to be timely, must be so delivered or
received not later than the close of business on the tenth day following the
earlier of the day on which the notice of such meeting was mailed to
stockholders or the day on which such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a description of the
proposal desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business and any other stockholders known by such stockholder to be supporting
such proposal, (iii) the class and number of shares of the Corporation's stock
which are beneficially owned by the stockholder on the date of such notice and
(iv) any financial interest of the stockholder in such proposal. The presiding
officer of the annual meeting shall determine whether the requirements of this
Article VI have been met with respect to any stockholder proposal. If the
presiding officer determines that a stockholder proposal was not made in
accordance with the terms of this Article VI, he or she shall so declare at the
meeting and any such proposal shall not be acted upon at the meeting.
Notwithstanding any other provisions of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, the
affirmative vote of the holders of at least 66-2/3 percent of the shares
entitled to vote in the election of directors, following adoption of any such
amendment, and submission for a vote, by a majority of the Board, shall be
required to amend or repeal, or adopt any provisions inconsistent with this
Article VI.
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ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
(1) To the fullest extent permitted by the General Corporation
Law, the Corporation shall indemnify any person who was or is a party or is
threatened (or anticipated) to be made a party to any anticipated, threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he/she is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him/her in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his/her conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
seeking indemnification did not act in good faith and in a manner which he/she
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his/her conduct was unlawful.
(2) To the fullest extent permitted by the General Corporation
Law, the Corporation shall indemnify any person who was or is a party or is
threatened (or anticipated) to be made a party to any anticipated, threatened,
pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he/she is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him/her in connection with the defense or settlement of such action or suit if
he/she acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such persons shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(3) To the extent that a director, officer, employee or agent
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Sections (1) and (2) of this
Article VII, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him/her in connection therewith.
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(4) Any indemnification under Sections (1) and (2) of this
Article VII (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because
he/she has met the applicable standard conduct set forth in such Sections (1)
and (2). Such determination shall be made by the Board, in good faith.
(5) Expenses incurred by an officer or director in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officers to repay such
amount if it shall ultimately be determined that he/she is not entitled to be
indemnified by the Corporation authorized in this Article VII. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate.
(6) The indemnification and advancement of expenses provided
by or granted pursuant to, the other sections of this Article VII shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(7) The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him/her in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of Section 174 of the General
Corporation Law.
(8) For purposes of this Article VII, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provision of this Article VII with respect to the
resulting or surviving corporation as he/she would have with respect to such
constituent corporation if its separate existence had continued.
(9) For purposes of this Article VII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes
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<PAGE> 7
duties on, or involves service by such director, officer, employee or agent with
respect to any employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he/she reasonably believed to be
in the interest of the participants and beneficiaries of any employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VII.
(10) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article VIII shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
ARTICLE VIII
BY-LAWS
The holders of shares entitled at the time to vote for the
election of directors shall have power to adopt, amend or repeal the By-laws of
the Corporation by a vote of not fewer than 66-2/3% of such shares, and, except
as otherwise provided by law, the Board shall have the power to adopt, amend or
repeal the By-laws by a vote of not fewer than a majority of the entire Board.
However, any By-law adopted by the stockholders may not be amended or repealed
by a vote of the Board.
ARTICLE IX
REORGANIZATION
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders of any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors of class of creditors, and/or of
the stockholders of class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors of class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
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ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter, restate,
change or repeal any provision of this Certificate of Incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred on
stockholders in this Certificate of Incorporation are subject to this
reservation.
* * * * *
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
FULCRUM DIRECT, INC.
EFFECTIVE AS OF JUNE 25, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
ARTICLE I
OFFICES..................................................................................................1
SECTION 1.01. Registered Office.............................................................1
SECTION 1.02. Other Offices.................................................................1
ARTICLE II
MEETINGS OF STOCKHOLDERS.................................................................................1
SECTION 2.01. Annual Meetings...............................................................1
SECTION 2.02. Special Meetings..............................................................1
SECTION 2.03. Notice of Meetings............................................................1
SECTION 2.04. Waiver of Notice..............................................................2
SECTION 2.05. Adjournments..................................................................2
SECTION 2.06. Quorum........................................................................2
SECTION 2.07. Voting........................................................................3
SECTION 2.08. Proxies.......................................................................3
ARTICLE III
BOARD OF DIRECTORS.......................................................................................3
SECTION 3.01. General Powers................................................................3
SECTION 3.02. Number and Term of Office.....................................................3
SECTION 3.03. Resignation...................................................................3
SECTION 3.04. Removal.......................................................................3
SECTION 3.05. Vacancies.....................................................................3
SECTION 3.06. Meetings......................................................................3
SECTION 3.07. Committees of the Board.......................................................5
SECTION 3.08. Directors' Consent in Lieu of Meeting.........................................5
SECTION 3.09. Action by Means of Telephone or Similar Communications
Equipment.....................................................................5
SECTION 3.10. Compensation..................................................................5
------------
ARTICLE IV
OFFICERS ................................................................................................6
SECTION 4.01. Officers......................................................................6
</TABLE>
i
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<TABLE>
<S> <C>
SECTION 4.02. Authority and Duties..........................................................6
SECTION 4.03. Term of Office, Resignation and Removal.......................................6
SECTION 4.04. Vacancies.....................................................................6
SECTION 4.05. The Chairman..................................................................6
SECTION 4.06. The Chief Executive Officer...................................................6
SECTION 4.07. The President.................................................................7
SECTION 4.08. Vice Presidents and Executive Directors.......................................7
SECTION 4.09. The Secretary.................................................................7
SECTION 4.10. The Treasurer.................................................................7
SECTION 4.11. Assistant Secretaries.........................................................8
SECTION 4.12. Assistant Treasurers..........................................................8
ARTICLE V
CHECKS, DRAFTS, NOTES, CONTRACTS AND PROXIES.............................................................8
SECTION 5.01. Checks, Drafts, Notes, Contracts and Other Obligations........................8
SECTION 5.02. Execution of Proxies..........................................................8
ARTICLE VI
SHARES AND TRANSFERS OF SHARES...........................................................................8
SECTION 6.01. Certificates Evidencing Shares................................................8
SECTION 6.02. Stock Ledger..................................................................9
SECTION 6.03. Transfers of Shares...........................................................9
SECTION 6.04. Addresses of Stockholders.....................................................9
SECTION 6.05. Lost, Destroyed and Mutilated Certificates....................................9
SECTION 6.06. Regulations..................................................................10
SECTION 6.07. Fixing Date for Determination of Stockholders of Record......................10
ARTICLE VII
SEAL....................................................................................................10
SECTION 7.01. Seal.........................................................................10
ARTICLE VIII
FISCAL YEAR.............................................................................................10
SECTION 8.01. Fiscal Year..................................................................10
ARTICLE IX
INDEMNIFICATION.........................................................................................10
</TABLE>
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<TABLE>
<S> <C>
SECTION 9.01. Insurance for Indemnification................................................10
ARTICLE X
AMENDMENTS..............................................................................................11
SECTION 10.01. Amendments...................................................................11
ARTICLE XI
MISCELLANEOUS...........................................................................................11
SECTION 11.01. Integration..................................................................11
</TABLE>
iii
<PAGE> 5
AMENDED AND RESTATED
BY-LAWS
OF
FULCRUM DIRECT, INC.
ARTICLE I
OFFICES
SECTION 1.01. Registered Office. The registered office of FULCRUM
DIRECT, INC. (the "Corporation") in the State of Delaware shall be at the
principal office of The Corporation Trust Company in the City of Wilmington,
County of New Castle, and the registered agent in charge thereof shall be The
Corporation Trust Company.
SECTION 1.02. Other Offices. The Corporation may also have an office or
offices at any other place or places within or without the State of Delaware as
the Board of Directors of the Corporation (the "Board") may from time to time
determine or the business of the Corporation may from time to time require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Annual Meetings. The annual meeting of Stockholders
("Stockholders") of the Corporation for the election of directors of the
Corporation ("Directors"), and for the transaction of such other business as may
properly come before such meeting, shall be held at such place, date and time as
shall be fixed by the Board and designated in the notice provided to
Stockholders pursuant to Section 2.03 hereof.
SECTION 2.02. Special Meetings. Special meetings of Stockholders for
any purpose or purposes may be called by the Chairman of the Board (the
"Chairman") or by the Board pursuant to a resolution adopted by a majority of
the Board.
SECTION 2.03. Notice of Meetings.
(a) Except as otherwise provided by law, written notice of
each annual or special meeting of stockholders stating the place, date and time
of such meeting and, in the case
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of a special meeting, the purpose or purposes for which such meeting is to be
held, shall be given personally or by first-class mail (airmail in the case of
international communications) to each stockholder entitled to vote at the
meeting, not less than 10 nor more than 60 days before the date of such meeting.
If mailed, such notice shall be deemed to be given when deposited in the United
States mail, postage prepaid, directed to the Stockholder at such Stockholder's
address as it appears on the records of the Corporation. If, prior to the time
of mailing, the Secretary of the Corporation (the "Secretary") shall have
received from any Stockholder a written request that notices intended for such
Stockholder are to be mailed to some address other than the address that appears
on the records of the Corporation, notices intended for such Stockholder shall
be mailed to the address designated in such request.
(b) Notice of a special meeting of Stockholders may be given
by the person or persons calling the meeting, or upon the written request of
such person or persons, such notice shall be given by the Secretary on behalf of
such person or persons. If the person or persons calling a special meeting of
Stockholders give notice thereof, such person or persons shall deliver a copy of
such notice to the Secretary. Each request to the Secretary for the giving of
notice of a special meeting of Stockholders shall state the purpose or purposes
of such meeting.
SECTION 2.04. Waiver of Notice. Notice of any annual or special meeting
of Stockholders need not be given to any Stockholder who files a written waiver
of notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of Stockholders need be specified in any written waiver
of notice thereof. Attendance of a Stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was inadequate or improperly given.
SECTION 2.05. Adjournments. Whenever a meeting of Stockholders, annual
or special, is adjourned to another date, time or place, notice need not be
given of the adjourned meeting if the date, time and place thereof are announced
at the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder entitled to vote thereat. At the adjourned meeting, any business may
be transacted which might have been transacted at the original meeting.
SECTION 2.06. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), the recordholders of a majority of the shares entitled to vote
thereat, present in person or by proxy, shall constitute a quorum for the
transaction of business at all meetings of Stockholders, whether annual or
special. If, however, such quorum shall not be present in person or by proxy at
any meeting of Stockholders, the Stockholders entitled to vote thereat may
adjourn the meeting from time to time in accordance with Section 2.05 hereof
until a quorum shall be present in person or by proxy.
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SECTION 2.07. Voting. Each Stockholder shall be entitled to one vote
for each share of Common Stock held of record by such Stockholder. Except as
otherwise provided by law or the Certificate of Incorporation, when a quorum is
present at any meeting of Stockholders, the vote of the recordholders of a
majority of the Shares constituting such quorum shall decide any question
brought before such meeting.
SECTION 2.08. Proxies. Each Stockholder entitled to vote at a meeting
of Stockholders may authorize another person or persons to act for such
Stockholder by proxy. Such proxy shall be filed with the Secretary before such
meeting of Stockholders, at such time as the Board may require. No proxy shall
be voted or acted upon more than three years from its date, unless the proxy
provides for a longer period.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Certificate of Incorporation or these By-laws directed or required to be
exercised or done by Stockholders.
SECTION 3.02. Number and Term of Office. The number of Directors, term
of office, nomination procedure and classification of the Board, shall be as
provided in Article V of the Certificate of Incorporation. Directors shall be
elected at each annual meeting of Stockholders by a plurality of votes cast
thereat, as provided in Article V of the Certificate of Incorporation.
SECTION 3.03. Resignation. Any Director may resign at any time by
giving written notice to the Board, the Chairman or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified, upon receipt thereof by the Board, the Chairman or the
Secretary, as the case may be. Unless otherwise specified therein, acceptance of
such resignation shall not be necessary to make it effective.
SECTION 3.04. Removal. Any or all of the Directors may be removed only
as provided in Article V of the Certificate of Incorporation.
SECTION 3.05. Vacancies. Vacancies shall be treated in accordance with
Article V of the Certificate of Incorporation.
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SECTION 3.06. Meetings.
(a) Annual Meetings. As soon as practicable after each annual
election of Directors by the Stockholders, the Board shall meet for the purpose
of organization and the transaction of other business, unless it shall have
transacted all such business by written consent pursuant to Section 3.08 hereof.
(b) Other Meetings. Other meetings of the Board shall be held
at such times as the Chairman, the President of the Corporation (the
"President"), the Secretary or a majority of the Board shall from time to time
determine.
(c) Notice of Meetings. The Secretary shall give written
notice to each Director of each meeting of the Board, which notice shall state
the place, date, time and purpose of such meeting. Notice of each such meeting
shall be given to each Director, if by mail, addressed to him/her at his/her
residence or usual place of business, at least two days before the day on which
such meeting is to be held, or shall be sent to him/her at such place by
telefax, telecopy, telegraph, cable, or other form of recorded communication, or
be delivered personally or by telephone not later than the day before the day on
which such meeting is to be held. A written waiver of notice, signed by the
Director entitled to notice, whether before or after the time of the meeting
referred to in such waiver, shall be deemed equivalent to notice. Neither the
business to be transacted at, nor the purpose any meeting of the Board need be
specified in any written waiver of notice thereof. Attendance of a Director at a
meeting of the Board shall constitute a waiver of notice of such meeting, except
as provided by law.
(d) Place of Meetings. The Board may hold its meetings at such
place or places within or without the State of Delaware as the Board or the
Chairman may from time to time determine, or as shall be designated in the
respective notices or waivers of notice of such meetings.
(e) Quorum and Manner of Acting. A majority of the total
number of Directors then in office shall constitute a quorum for the transaction
of business at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and the vote of a majority of those
Directors present at any such meeting at which a quorum is present shall be
necessary for the passage of any resolution or act of the Board, except as
otherwise expressly required by law, the Certificate of Incorporation or these
By-laws. In the absence of a quorum for any such meeting, a majority of the
Directors present thereat may adjourn such meeting from time to time until a
quorum shall be present.
(f) Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside, in the following
order of precedence;:
(i) the Chairman;
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(ii) the CEO;
(iii) the President; or
(iv) any Director chosen by a majority of the
Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
SECTION 3.07. Committees of the Board. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more Directors. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he/she
or they constitute a quorum, may unanimously appoint another Director to act at
the meeting in the place of any such absent or disqualified member. Any
committee of the Board, to the extent provided in the resolution of the Board
designating such committee, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that no such committee shall be
vested with authority to take actions prohibited by law or the Certificate of
Incorporation. Each committee of the Board shall keep regular minutes of its
proceedings and report the same to the Board when so requested by the Board.
SECTION 3.08. Directors' Consent in Lieu of Meeting. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all the members of the Board or such committee and such
consent is filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.09. Action by Means of Telephone or Similar Communications
Equipment. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
SECTION 3.10. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board may determine the compensation of
Directors. In addition, as determined by the Board, Directors may be reimbursed
by the Corporation for their expenses, if any, in the
5
<PAGE> 10
performance of their duties as Directors. No such compensation or reimbursement
shall preclude any Director from serving the Corporation in any other capacity
and receiving compensation therefor.
ARTICLE IV
OFFICERS
SECTION 4.01. Officers. The officers of the Corporation shall be the
Chairman, the Chief Executive Officer (the "CEO"), the President, the Secretary
and the Treasurer and may include one or more Vice Presidents, one or more
Executive Directors and one or more Assistant Secretaries and one or more
Assistant Treasurers and such other officers as the Board shall deem
appropriate. Any two or more offices may be held by the same person.
SECTION 4.02. Authority and Duties. All officers shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-laws or, to the extent not so provided, by resolution of
the Board or as determined by the Chairman, the CEO or the President.
SECTION 4.03. Term of Office, Resignation and Removal.
(a) Each officer shall be nominated by the Chairman, the CEO
or the President and approved by a majority of the Board and shall hold office
for one year or such other term as may be determined by the Board. Each officer
shall hold office until his successor has been appointed and qualified or his
earlier death, resignation or removal in the manner herein provided.
(b) Any officer may resign at any time by giving written
notice to the Board, the Chairman, the CEO, the President or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified upon receipt thereof by the Board, the Chairman, the
President or the Secretary, as the case may be. Unless otherwise specified
therein, acceptance of such resignation shall not be necessary to make it
effective.
(c) All officers and agents appointed by the Board shall be
subject to removal, with or without cause, at any time, upon motion of any of
the Chairman, the CEO, or the President, and the vote of a majority of the
Board.
SECTION 4.04. Vacancies. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled in accordance with Section 4.03(a).
Unless earlier removed pursuant to Section 4.03(c) hereof, any officer approved
by the Board to fill any such vacancy shall serve only until such time as the
unexpired term of his predecessor expires unless reappointed by the Board.
6
<PAGE> 11
SECTION 4.05. The Chairman. The Chairman shall have the power to call
special meetings of Stockholders, to call special meetings of the Board and, if
present, to preside at all meetings of Stockholders and all meetings of the
Board. The Chairman shall perform all duties incident to the office of Chairman
of the Board and all such other duties as may from time to time be assigned to
him/her by the Board, consistent with duties assigned to the position of
"Chairman."
SECTION 4.06. The Chief Executive Officer. The Chairman shall nominate,
subject to approval by the Board, the CEO with responsibility for general and
active supervision and direction over the business and affairs of the
Corporation and over its several officers, agents and employees, subject,
however, to the direction of the Board. The CEO shall also have such other
powers and duties incident to the designated position of CEO as the Board may
from time to time by resolution determine. The CEO may from time to time
designate officers to serve as Chief Operating Officer, Chief Financial Officer,
Chief Accounting Officer, Chief Marketing Officer, and Chief Information Officer
and other such designated positions to fulfill the responsibilities of such
designated positions. Such designated officers shall also have such other powers
and duties incident to their designated position as the Board may from time to
time by resolution determine.
SECTION 4.07. The President. The President shall perform all duties
incident to the office of President and all such other duties as may from time
to time be assigned to him by the Chairman, the CEO, or the Board.
SECTION 4.08. Vice Presidents and Executive Directors. Vice Presidents
and Executive Directors, if any, in order of their seniority or in any other
order determined by the CEO, shall generally assist the CEO and President, and
perform such other duties as the CEO or the President shall prescribe.
SECTION 4.09. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He/She shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman, the CEO or
the President and shall act under the supervision of the Chairman, the CEO and
the President. He shall keep in safe custody the seal of the Corporation and
affix the same to any instrument requiring it and duly authorized for signature
in the name of the corporation and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer of the Corporation (the
"Treasurer") or an Assistant Secretary or Assistant Treasurer of the
Corporation. He/She shall keep in safe custody the certificate books and
Stockholder records and such other books and records of the Corporation as the
Board, the Chairman or the President may direct and shall perform all other
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him/her by the Board, the Chairman, the CEO or the
President.
7
<PAGE> 12
SECTION 4.10. The Treasurer. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, the Chairman or the President, or any
officer or officers, or any officer and agent jointly, duly authorized by the
Board, the Chairman, the CEO or the President, shall, from time to time, direct
or approve. He/She shall disburse the funds of the Corporation under the
direction of the Board, the Chairman, the CEO or the President. He/She shall
keep a full and accurate account of all moneys received and paid on account of
the Corporation and shall render a statement of his/her accounts whenever the
Board, the Chairman, the CEO or the President shall so request. He shall perform
all other necessary actions and duties in connection with the administration of
the financial affairs of the Corporation and shall generally perform all the
duties usually appertaining to the office of treasurer of a corporation.
SECTION 4.11. Assistant Secretaries. Assistant Secretaries of the
Corporation ("Assistant Secretaries"), if any, in order of their seniority or in
any other order determined by the Board, the Chairman, the CEO or the President
shall generally assist the Secretary and perform such other duties as the Board,
the Chairman, the CEO, the President, or the Secretary shall prescribe, and, in
the absence or disability of the Secretary, shall perform the duties and
exercise the powers of the Secretary.
SECTION 4.12. Assistant Treasurers. Assistant Treasurers of the
Corporation ("Assistant Treasurers"), if any, in order of their seniority or in
any other order determined by the Board, the Chairman, the CEO or the President,
shall generally assist the Treasurer and perform such other duties as the Board,
the Chairman, the CEO, the President, or the Treasurer shall prescribe, and, in
the absence or disability of the Treasurer, shall perform the duties and
exercise the powers of the Treasurer.
ARTICLE V
CHECKS, DRAFTS, NOTES, CONTRACTS AND PROXIES
SECTION 5.01. Checks, Drafts, Notes, Contracts and Other Obligations.
All checks, drafts and other orders for the payment of money, notes and other
evidences of indebtedness, and contractual obligations or other obligations
issued in the name of the Corporation, shall be signed by such officer or
officers of the Corporation and in such manner as shall be determined, from time
to time, by resolution of the Board.
SECTION 5.02. Execution of Proxies. The Chairman, the CEO or the
President, or, in the absence or disability of any of them, any Vice President,
may authorize, from time to time, the execution and issuance of proxies to vote
shares of stock or other securities of other corporations held of record by the
Corporation and the execution of consents to action taken or to be taken by any
such corporation. All such proxies and consents, unless otherwise authorized by
the Board, shall be signed in the name of the Corporation by the Chairman, the
CEO or the President.
8
<PAGE> 13
ARTICLE VI
SHARES AND TRANSFERS OF SHARES
SECTION 6.01. Certificates Evidencing Shares. The Corporation's shares
shall be evidenced by certificates in such form or forms as shall be approved by
the Board. Certificates shall be issued in consecutive order and shall be
numbered in the order of their issue, and shall be signed by (i) the Chairman,
the CEO or the President and (ii) by the Secretary, any Assistant Secretary, the
Treasurer or any Assistant Treasurer, and shall be sealed with the Corporation's
seal or a facsimile thereof. Any or all of the signatures on the certificate may
be a facsimile. In the event any such officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office or to be employed by the Corporation before such certificate is issued,
such certificate may be issued by the Corporation with the same effect as if
such officer had held such office on the date of issue.
SECTION 6.02. Stock Ledger. A stock ledger in one or more counterparts
shall be kept by the Secretary or a designated agent of the Corporation, in
which shall be recorded the name and address of each person, firm or corporation
owning the shares evidenced by each certificate evidencing shares issued by the
Corporation, the number of shares evidenced by each such certificate, the date
of issuance thereof and, in the case of cancellation, the date of cancellation.
Except as otherwise expressly required by law, the person in whose name shares
stand on the stock ledger of the Corporation shall be deemed the owner and
recordholder thereof for all purposes.
SECTION 6.03. Transfers of Shares. Registration of transfers of shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such Shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
SECTION 6.04. Addresses of Stockholders. Each Stockholder shall
designate to the Secretary or a designated agent of the Corporation an address
at which notices of meetings and all other corporate notices may be served or
mailed to such Stockholder, and, if any Stockholder shall fail to so designate
such an address, corporate notices may be served upon such Stockholder by mail
directed to the mailing address, if any, as the same appears in the stock ledger
of the corporation or at the last known mailing address of such Stockholder.
SECTION 6.05. Lost, Destroyed and Mutilated Certificates. Each
recordholder of Shares shall promptly notify the Corporation of any loss,
destruction or mutilation of any certificate or certificates evidencing any
Share or Shares of which he/she is the recordholder. The Board may, in its
discretion, cause the Corporation to issue a new certificate in place of any
certificate theretofore
9
<PAGE> 14
issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon
the surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction, and the Board may, in its discretion, require the recordholder of
the Shares evidenced by the lost, stolen or destroyed certificate or his/her
legal representative to give the Corporation a bond sufficient to indemnify the
Corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
SECTION 6.06. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
SECTION 6.07. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of Stockholders or any adjournment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other such action. A determination of the Stockholders
entitled to notice of or to vote at a meeting of Stockholders shall apply to any
adjournment of such meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
ARTICLE VII
SEAL
SECTION 7.01. Seal. The Board may approve and adopt a corporate seal,
which shall be in the form of a circle and shall bear the full name of the
Corporation, the year of its incorporation and the words "Corporate Seal
Delaware".
ARTICLE VIII
FISCAL YEAR
SECTION 8.01. Fiscal Year. The fiscal year of the Corporation shall be
a 52/53 week fiscal year ending on the Saturday closest to the end of the
calendar year, unless changed by resolution of the Board.
10
<PAGE> 15
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. Insurance for Indemnification. The Corporation shall
provide indemnification as set forth in Article VII of the Certificate of
Incorporation.
ARTICLE X
AMENDMENTS
SECTION 10.01. Amendments. These By-laws may only be amended pursuant
to Article VIII of the Certificate of Incorporation.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Integration. The provisions of Articles V, VI, VII and
VIII of the Certificate of Incorporation are incorporated herein by reference.
Adopted this 25th Day of June 1997 by the Board of
Directors of the Corporation
By:
-----------------------------------
Name: Scott A. Budoff
Title: President, COO and Secretary
11
<PAGE> 1
EXHIBIT 10.4.1
AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT
This Amendment Number 1 ("Amendment No. 1") to the Securities
Purchase Agreement (the "SPA"), dated as of October 21, 1996, among FULCRUM
DIRECT, INC. (the "Company"), a Delaware corporation, WHITNEY SUBORDINATED DEBT
FUND, L.P. ("WSDF"), a Delaware limited partnership, and WHITNEY EQUITY
PARTNERS, L.P., a Delaware limited partnership ("WEP" and together with WSDF,
the "Purchasers") is entered into as of February 24, 1997. Capitalized terms
used herein and not otherwise defined have the meanings ascribed to such terms
in the SPA.
W I T N E S S E T H:
WHEREAS, the Company and WSDF wish to modify certain of the
financial covenants contained in Section 9.8 of the SPA.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
1. Section 9.8 of the SPA is amended and restated to read in
its entirety as follows:
"9.8 Financial Covenants.
(a) EBITDA. As of the end of each fiscal quarter
specified below, the Company shall not permit EBITDA (for such fiscal
quarter and the three immediately preceding fiscal quarters treated as
a single accounting period) to be less than the corresponding amount
set forth below:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Fiscal Year 1997
- ----------------
First Quarter $3,000,000
Second Quarter $3,500,000
Third Quarter $5,500,000
Fourth Quarter $8,000,000
<CAPTION>
Fiscal Year 1998
- -----------------
<S> <C>
First Quarter $8,500,000
Second Quarter $9,000,000
Third Quarter $9,000,000
Fourth Quarter $10,000,000
Each Fiscal Quarter Thereafter $10,000,000
- ------------------------------
</TABLE>
<PAGE> 2
(b) Cash Flow Coverage Ratio. As of the end of each
fiscal quarter specified below, the Company shall not permit the Cash
Flow Coverage Ratio to be less than the corresponding ratio set forth
below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
Fiscal Year 1997
- ----------------
<S> <C>
Fourth Quarter 2.0 to 1.0
<CAPTION>
Fiscal Year 1998
<S> <C>
First Quarter 2.25 to 1.0
Second Quarter 2.75 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 3.5 to 1.0
Each Fiscal Quarter Thereafter 3.5 to 1.0
</TABLE>
In addition, within forty-five (45) days after the
end of the First, Second and Third Quarters of Fiscal Year 1997, the
Company shall deliver to WSDF a calculation setting forth the actual
Cash Flow Coverage Ratio as of the end of each such quarters.
(c) Leverage Ratio. As of the end of each fiscal
quarter specified below, the Company shall not permit the Leverage
Ratio to be more than the corresponding ratio set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
Fiscal Year 1997
- ----------------
<S> <C>
First Quarter 6.5 to 1.0
Second Quarter 6.5 to 1.0
Third Quarter 4.5 to 1.0
Fourth Quarter 2.5 to 1.0
<CAPTION>
Fiscal Year 1998
<S> <C>
First Quarter 2.25 to 1.0
Second Quarter 2.0 to 1.0
Third Quarter 2.0 to 1.0
Fourth Quarter 2.0 to 1.0
Each Fiscal Quarter Thereafter 2.0 to 1.0"
</TABLE>
2. Counterparts. This Amendment No. 1 may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall
2
<PAGE> 3
be deemed to be an original and all of which taken together shall constitute one
and the same agreement.
3. Entire Agreement. This Amendment No. 1, together with the
SPA and the exhibits and schedules thereto and the other Transaction Documents,
is intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein and
therein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein or therein. This Amendment No. 1,
together with the SPA and the exhibits and schedules thereto, and the other
Transaction Documents supersede all prior agreements and understandings between
the parties with respect to such subject matter. Except to the extent
specifically set forth herein, the SPA shall remain in full force and effect and
shall not be deemed amended or superseded in any respect.
4. Incorporation by Reference. Article 11 of the SPA (other
than Sections 11.5 and 11.12) is incorporated herein by reference as if included
herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be executed and delivered by their respective officers
hereunto duly authorized as of the date first above written.
FULCRUM DIRECT, INC.
By: ____________________________________
Name:
Title:
WHITNEY SUBORDINATED DEBT FUND, L.P.
By: ____________________________________
Name:
Title:
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its general Partner
By: ____________________________________
Name:
Title:
3
<PAGE> 1
EXHIBIT 10.4.2
AMENDMENT NO. 3 TO SECURITIES PURCHASE AGREEMENT
This Amendment Number 3 ("Amendment No. 3") to the Securities
Purchase Agreement (the "SPA"), dated as of October 21, 1996, among FULCRUM
DIRECT, INC. (the "Company"), a Delaware corporation, WHITNEY SUBORDINATED DEBT
FUND, L.P. ("WSDF"), a Delaware limited partnership, and WHITNEY EQUITY
PARTNERS, L.P., a Delaware limited partnership ("WEP" and together with WSDF,
the "Purchasers") is entered into as of May 7, 1997. Capitalized terms used
herein and not otherwise defined have the meanings ascribed to such terms in the
SPA.
W I T N E S S E T H:
WHEREAS, the Company and WSDF wish to amend the definition of
"Senior Indebtedness" in Section 1.1 and modify the financial covenants
contained in Section 9.4 of the SPA.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
1. The definition of "Senior Indebtedness" in Section 1.1 of
the SPA is amended and restated to read in its entirety as follows:
"Senior Indebtedness" means all Indebtedness senior
to the Indebtedness represented by the Note of the Company currently outstanding
or incurred in the future pursuant to any borrowing by the Company from any bank
or institutional lender not affiliated with Lederman, Budoff or the Company and
any renewals, extensions, refinancings or refundings thereof; provided, that it
shall not include any capital lease obligations and Indebtedness represented by
the Note).
2. Section 9.4 of the Loan Agreement is amended and restated
to read in its entirety as follows:
"9.4 Limitations on Indebtedness. The Company shall
not, and shall not cause, suffer or permit any of its Subsidiaries to,
directly or indirectly, collectively and in the aggregate, issue,
assume or otherwise incur any Indebtedness, other than: (a)
Indebtedness under the Transaction Documents; (b) Senior Indebtedness,
up to an aggregate principal amount of $25,000,000 and any other
Indebtedness, up to an aggregate principal amount of $5,000,000;
provided, however, that Senior Indebtedness may exceed an aggregate
principal amount of $25,000,000 if the ratio of total Indebtedness to
total share capital (including retained earnings) of the Company as
reflected on the Company's most recent quarterly balance sheet, is less
than 2.5 to 1.0; and provided, further, that under no circumstances
shall Senior Indebtedness exceed $30,000,000; (c) Indebtedness listed
on Schedule 5.27; (d) non-current liabilities for post-employment
healthcare and other insurance benefits; (e) trade payables and accrued
expenses, in each case arising in the ordinary course of business; (f)
Indebtedness secured by a Lien permitted under Section 9.5; (g)
refinancings, refundings or extensions of the foregoing; provided, that
any such
<PAGE> 2
refinancings, refundings or extensions shall not (i) exceed the
principal amount refinanced, refunded or extended, (ii) shorten the
maturity (or weighted average life to maturity) of such Indebtedness,
(iii) increase the interest rate applicable to such Indebtedness, (iv)
facilitate the exercise or enforcement of any remedies of any obligee
of such Indebtedness in respect of any default or event default
thereunder, or (v) result in any amendments or modifications of any of
the subordination provisions applicable to such Indebtedness; and (h)
Indebtedness existing at the time of acquisition on assets or a company
acquired by the Company.
3. Counterparts. This Amendment No. 2 may be executed in any
number of counterparts and by the 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 one and the same agreement.
4. Entire Agreement. This Amendment No. 2, together with the
SPA and the exhibits and schedules thereto and the other Transaction Documents,
is intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein and
therein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein or therein. This Amendment No. 2,
together with the SPA and the exhibits and schedules thereto, and the other
Transaction Documents supersede all prior agreements and understandings between
the parties with respect to such subject matter. Except to the extent
specifically set forth herein, the SPA shall remain in full force and effect and
shall not be deemed amended or superseded in any respect.
5. Incorporation by Reference. Article 11 of the SPA (other
than Sections 11.5 and 11.12) is incorporated herein by reference as if included
herein.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be executed and delivered by their respective officers
hereunto duly authorized as of the date first above written.
FULCRUM DIRECT, INC.
By:____________________________________
Name:
Title:
WHITNEY SUBORDINATED DEBT FUND, L.P.
By:____________________________________
Name:
Title:
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its general Partner
By:____________________________________
Name:
Title:
3
<PAGE> 1
EXHIBIT 10.4.3
AMENDMENT NO. 4 TO SECURITIES PURCHASE
AGREEMENT (AND RELATED DOCUMENTS)
This Amendment Number 4 ("Amendment No. 4") to the Securities
Purchase Agreement (the "SPA") (and related documents), dated as of October 21,
1996, among FULCRUM DIRECT, INC. (the "Company"), a Delaware corporation,
WHITNEY SUBORDINATED DEBT FUND, L.P. ("WSDF"), a Delaware limited partnership,
and WHITNEY EQUITY PARTNERS, L.P., a Delaware limited partnership ("WEP" and
together with WSDF, the "Purchasers") is entered into as of June 30, 1997.
Capitalized terms used herein and not otherwise defined have the meanings
ascribed to such terms in the SPA.
W I T N E S S E T H:
WHEREAS, the Company and WSDF wish to (i) add Section 6(a)(xi)
of the Note, (ii) amend the definition of "Senior Indebtedness" in Section 7(a)
of the Note and (iii) modify certain of the financial covenants contained in
Section 9.8 of the SPA.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
1. Section 6(a)(xi) of the Note amended and restated to read
in its entirety as follows:
"(xi) Failure to purchase the Warrant dated as of
June 30, 1997 held by the Holder pursuant to Section 2(a) of the Warrant as of
June 30, 1997."
2. The definition of "Senior Indebtedness" in Section 7(a) of
the Note is amended and restated to read in its entirety as follows:
""Senior Indebtedness" shall have the meaning
assigned to it in the Purchase Agreement."
3. Section 9.8 of the SPA is amended and restated to read in
its entirety as follows:
"(1) EBITDA. As of the end of each fiscal quarter specified below,
the Company shall not permit EBITDA (for such fiscal quarter
and the three immediately preceding fiscal quarters treated as
a single accounting period) to be less than the corresponding
amount set forth below:
Period Amount
------ ------
<PAGE> 2
<TABLE>
<S> <C>
Fiscal Year 1997
Third Quarter $ 2,500,000
Fourth Quarter $ 8,000,000
Fiscal Year 1998
First Quarter $ 8,500,000
Second Quarter $ 9,000,000
Third Quarter $ 9,000,000
Fourth Quarter $10,000,000
Each Fiscal Quarter Thereafter $10,000,000
</TABLE>
(2) Cash Flow Coverage Ratio. As of the end of each fiscal quarter
specified below, the Company shall not permit the Cash Flow Coverage
Ratio to be less than the corresponding ratio set forth below:
Period Ratio
------ -----
Fiscal Year 1998
Second Quarter 2.75 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 3.5 to 1.0
Each Fiscal Quarter Thereafter 3.5 to 1.0
------------------------------
(3) Leverage Ratio. As of the end of each fiscal quarter
specified below, the Company shall not permit the Leverage
Ratio to be more than the corresponding ratio set forth below:
2
<PAGE> 3
Period Ratio
------ -----
Fiscal Year 1997
Third Quarter 6.5 to 1.0
Fourth Quarter 3.0 to 1.0
Fiscal Year 1998
First Quarter 2.25 to 1.0
Second Quarter 2.0 to 1.0
Third Quarter 2.0 to 1.0
Fourth Quarter 2.0 to 1.0
Each Fiscal Quarter Thereafter 2.0 to 1.0"
------------------------------
4. Counterparts. This Amendment No. 4 may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE> 4
be deemed to be an original and all of which taken together shall constitute one
and the same agreement.
5. Entire Agreement. This Amendment No. 4, together with the
SPA and the exhibits and schedules thereto and the other Transaction Documents,
is intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein and
therein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein or therein. This Amendment No. 4,
together with the SPA and the exhibits and schedules thereto, and the other
Transaction Documents supersede all prior agreements and understandings between
the parties with respect to such subject matter. Except to the extent
specifically set forth herein, the SPA shall remain in full force and effect and
shall not be deemed amended or superseded in any respect.
6. Incorporation by Reference. Article 11 of the SPA (other
than Sections 11.5 and 11.12) is incorporated herein by reference as if included
herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 4 to be executed and delivered by their respective officers
hereunto duly authorized as of the date first above written.
FULCRUM DIRECT, INC.
By:____________________________________
Name:
Title:
WHITNEY SUBORDINATED DEBT FUND, L.P.
By:____________________________________
Name:
Title:
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its general Partner
By:____________________________________
Name:
Title:
4
<PAGE> 1
EXHIBIT 10.16
PROPERTY BOND PURCHASER, INC.
CITY OF RIO RANCHO, NEW MEXICO
AND
FULCRUM PROPERTIES, L.P.
---------------------------------------------------
BOND PURCHASE AGREEMENT
---------------------------------------------------
DATED: DECEMBER 27, 1995
$3,950,000
CITY OF RIO RANCHO, NEW MEXICO
TAXABLE INDUSTRIAL DEVELOPMENT REVENUE BOND
(FULCRUM PROPERTIES, L.P. PROJECT)
SERIES 1995
<PAGE> 2
BOND PURCHASE AGREEMENT
PROPERTY BOND PURCHASER, INC. (together with its successors, assigns and
transferees, the "Purchaser"), CITY OF RIO RANCHO, NEW MEXICO (the "Issuer") and
FULCRUM PROPERTIES, L.P. (the "Company") agree:
Section 1. Recitals. The City, the Purchaser and Sunwest Bank of
Albuquerque, N.A., as Depositary (the "Depositary"), have entered into an
Indenture dated as of December 1, 1995 (the "Indenture"). Pursuant to the
Indenture, the Issuer will issue its Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project) Series 1995 in the maximum principal amount
of $3,950,000 (the "Bond") Proceeds of the Bond will be used to acquire,
construct, equip and improve a project consisting of land, buildings,
improvements and equipment to be used as an administrative office and warehouse
facility (the "Project").
Section 2. Purchase and Delivery. On the basis of the representations and
covenants contained in this Bond Purchase Agreement (this "Agreement") and
subject to the terms and conditions contained in this Agreement, the Purchaser
agrees to purchase the Bond from the Issuer and the Issuer agrees to sell the
Bond to the Purchaser. As consideration for the sale of the Bond, the Purchaser
agrees to make advances on the Bond at the times and under the conditions
specified in Section 404 of the Indenture. The Issuer will deliver the Bond to
the Purchaser, at or prior to 10:00 a.m., Mountain Time, on December 27, 1995,
or at such other time not later than five business days thereafter as the
Purchaser may determine and advise the Issuer (the "Closing Date").
Section 3. Issuer Representations. The Issuer represents that, as of the
date of this Agreement:
(a) Each of the representations of the Issuer in the Lease and Purchase
Agreement dated as of December 1, 1995 (the "Lease" and, together with the
Indenture and this Bond Purchase Agreement, the "Bond Documents") and the
Indenture is true and correct as if made on and as of the date of this
Agreement.
(b) Pursuant to an ordinance duly adopted by the City Council of the Issuer
on November 8, 1995 (the "Bond Ordinance"), the Issuer duly authorized and
approved (i) the execution and delivery by the Issuer of the Bond Documents and
the performance by the Issuer of its obligations under the Bond Documents, and
(ii) the issuance, execution and delivery of the Bond. The Bond Ordinance has
not been amended, modified or repealed.
(c) The Bond Documents and the Bond Ordinance constitute, and the Bond,
when executed by the Issuer and delivered to the Purchaser will constitute,
legal, valid and binding obligations of the Issuer, enforceable against the
Issuer in accordance with their respective terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and general principles of equity.
(d) The statements contained in any certificate provided under this
Agreement and signed and delivered to the Purchaser by any authorized official
of the Issuer will be deemed a
<PAGE> 3
representation and warranty by the Issuer to the Purchaser.
Section 4. Company Representations. The Company represents that, as of the
date of this Agreement:
(a) The Company is a limited partnership duly organized and validly
existing and in good standing under the laws of the State of Delaware and has or
will obtain at the necessary time, all necessary licenses and permits to lease
and operate the Project and other property financed with the proceeds of the
Bond. The Company has not received any notice of an alleged violation and is not
in violation of any zoning, land use, environmental or other similar law or
regulation applicable to the property subject to the Lease. The Company has full
right, power and authority to approve the Bond Documents and to perform the
other acts and things as provided for in this Agreement. The Company has full
right, power and authority to approve, enter into, deliver and/or perform its
obligations under the Bond Documents.
(b) The approval by the Company of the Bond Documents and the execution,
delivery and performance of its obligations under the Bond Documents, compliance
by the Company with the provisions hereof and of any and all of the foregoing
documents, the application by the Company of the proceeds of the sale of the
Bond for the purposes described in the Indenture, and the consummation of the
transactions contemplated herein do not and will not conflict with or result in
the breach of any of the terms, conditions or provisions of, or constitute a
default under, the limited partnership agreement, as amended, of the Company or
any agreement, indenture, mortgage, lease or instrument to which the Company is
a party or by which the Company or any of its property is or may be bound or any
existing law or court or administrative regulation, decree or order which is
applicable to the Company or any of its property, and do not and will not result
in the creation or imposition of any lien of any nature upon any of the property
of the Company, except for Permitted Liens (as defined in the Lease).
(c) No "Default," "Event of Default" or event which, with notice or lapse
of time or both, would constitute a "Default" or an "Event of Default" under the
Bond Documents has occurred and is continuing.
(d) The Company has duly-authorized all necessary action to be taken by it
for (i) the issuance and delivery of the Bond by the Issuer upon the terms and
conditions and for the uses set forth or described herein and in the Indenture;
(ii) the approval of the Bond and the Indenture; and (iii) the execution,
delivery or receipt of and the performance as applicable, of its obligations
under the Bond Documents and any and all such other agreements and documents as
may be required to be executed, delivered or received by the Company in order to
carry out, effectuate and consummate the transactions contemplated herein and
therein.
(e) The Company will not take or omit to take any action which will in any
way cause or result in the proceeds of the sale of the Bond being applied in a
manner other than as provided in the Indenture and the Lease.
(f) To the best knowledge of the Company, there is no action, suit,
proceeding, inquiry or investigation at law or in equity before or by any public
board or body pending or, to the
2
<PAGE> 4
knowledge of the Company, threatened against or affecting the Company or its
property wherein an unfavorable decision, ruling or finding would have a
material adverse effect on (i) the transactions contemplated in this Agreement
or (ii) the validity or enforceability in accordance with their respective terms
of the Bond Documents.
(g) On or before the date of the sale of the Bond, the Company will approve
or execute and deliver, as applicable, the Bond Documents. This Agreement is,
and when executed and delivered, as applicable, the Bond Documents will be the
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and general principles of equity.
(h) To the best knowledge of the Company, all approvals, consents,
authorizations, certifications, and other orders of any government authority,
board, agency or commission having jurisdiction, and all filings with such
entities, failure to obtain or make which would materially adversely affect the
performance by the Company of its obligations hereunder or under the Bond
Documents, have been duly obtained. All permits and approvals required to date
for the construction and operation of the Project have been obtained or will be
obtained in due course.
(I) Any certificate signed by an authorized officer of the Company
delivered to the Issuer or to the Purchaser in connection with the issuance of
the Bond will be deemed a representation and warranty by the Company to the
Issuer and the Purchaser as to the statements made therein.
Section 5. Purchaser Representations. The Purchaser represents and
acknowledges that, as of the date of this Agreement:
(a) The Purchaser is purchasing the Bond for its own account for investment
and with no present intention of distributing or reselling the Bond or any
interest in the Bond but without prejudice, however, to its right at all times
to sell or otherwise dispose of all or any part of the Bond in compliance with
the Securities Act of 1933, as amended, the regulations promulgated thereunder
and applicable state securities laws and regulations.
(b) The Purchaser understands that the Bond is a special, limited, and not
general, obligation of the Issuer, is payable solely from the revenues received
by the Purchaser on behalf of the Issuer under the Lease and from the security
therefor as described in the Indenture but from no other sources. It understands
that the Bond is not secured by any obligation or pledge of any monies received
or to be received from taxation or from the State of New Mexico (the "State") or
any political subdivision or taxing district thereof (including, without implied
limitation, the Issuer), and that the Bond will never represent or constitute a
general obligation, debt or bonded indebtedness of the Issuer, the State, or any
political subdivision thereof, and that no right will exist to have taxes levied
by the Issuer, the State, or any political subdivision thereof, for the payment
of principal of, premium, if any, and interest on the Bond. The Purchaser
understands that the payment of the Bond depends upon the general credit of the
Company, and upon the security granted in the Indenture for the Company's
obligations under the Lease.
(c) The Purchaser has received copies of financial statements of the
Company, has been afforded the opportunity to discuss the business, assets and
financial position of the Company with
3
<PAGE> 5
the officers, employees and auditors of the Company, and has received such
information concerning the Company and its business, assets and financial
position, and the Project (as defined in the Indenture) as it deems necessary in
making its decision to purchase the Bond.
(d) The Purchaser is duly and legally authorized to purchase the Bond, has
knowledge and experience in financial and business matters, is capable of
evaluating the merits and risks of its purchase of the Bond, is aware of the
intended use of proceeds of the Bond, and understands that interest on the Bond
is not excludable from gross income for federal income tax purposes.
(e) The Purchaser understands that the Issuer has not undertaken to furnish
any information with respect to the Company or to ascertain the accuracy of any
information furnished to the Purchaser with respect to the Company and the
Purchaser has not requested or received any representations from the Issuer with
respect to any such information, its accuracy or completeness. The Purchaser,
for itself and for any subsequent holder of the Bond, waives any requirement of
due diligence in investigation or inquiry on the part of the Issuer, its
officials, counsel, agents and consultants and all claims, actions or causes of
action which the Purchaser may have from and after the date hereof against the
Issuer, its officials, counsel, agents and consultants growing out of any such
action which any of the foregoing took, or could have taken, in connection with
the authorization, execution, delivery, sale or resale of the Bond to or by the
Purchaser or in connection with any statement or representation which induced
the Purchaser to purchase the Bond.
(f) The Purchaser has received and reviewed copies in draft and final form
of the Bond Documents and the Bond Ordinance.
(g) This Agreement constitutes the legal, valid and binding obligation of
the Purchaser, enforceable against the Purchaser in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general principles of equity.
(h) The Purchaser has been informed by the Company and agrees that the
Indenture has not been qualified under the Trust Indenture Act of 1939, and that
the Bond (i) is not being registered or otherwise qualified for sale under (a)
the Securities Act of 1933, as amended, or (b) the "Blue Sky" laws and
regulations of any state, (ii) will not be listed on any stock or other
securities exchange, (iii) will not carry a rating from any rating service and
(iv) will not be readily marketable. The Purchaser has been informed by the
Company and agrees that a legend will be placed on the Bond certificate or any
other documents evidencing ownership of the Bond to the effect that it has not
been registered under the Securities Act of 1933, as amended, or the applicable
state "Blue Sky" laws and that it may only be transferred in compliance with the
Indenture.
(i) The Purchaser acknowledges that its purchase of the Bond constitutes a
transaction in a bond secured by the Indenture which is, among other things, a
personal property security agreement, pursuant to which the Bond is offered and
sold as a unit.
(j) The execution, delivery and performance of this Agreement by the
Purchaser will not constitute a default under any other agreement by which the
Purchaser is bound.
4
<PAGE> 6
Section 6. Indemnification.
(a) The Company agrees to indemnify, defend and hold harmless all
officials, directors, councilors, officers and employees of the Issuer and each
person, if any, who has the power to direct or cause the direction of the
management and policies of the Issuer (the "Indemnified Parties") against any
and all losses, claims, damages, liabilities, joint or several, or any expenses
related thereto whatsoever arising out of or in connection with or caused by any
pledge, offering, sale or resale of the Bond or any underlying security in
violation of any federal or state securities laws or by an untrue statement or
misleading statement or alleged untrue statement or alleged misleading statement
of a material fact made to any person or caused by an omission or alleged
omission of any material fact in connection with the Bond or the pledge, sale,
resale or delivery thereof.
In case a claim shall be made or any action shall be brought against one or
more of the Indemnified Parties based upon the matters described in the
preceding paragraph and in respect of which indemnity is sought against the
Company pursuant to the preceding paragraph, the Indemnified Party or Parties
seeking indemnity shall promptly notify the Company, in writing, and the Company
shall promptly assume or cause the assumption of the defense thereof, including
the employment of counsel chosen by the Company and approved in writing by the
Issuer (provided that such approval by the Issuer shall not be unreasonably
withheld), the payment of all expenses and the right to participate in
negotiations and to consent to settlement. If any Indemnified Party is advised
in a written opinion of counsel that there may be legal defenses available to
such Indemnified Party which are adverse to or in conflict with those available
to the Company, or that the defenses of such Indemnified Party should be handled
by separate counsel, the Company shall not have the right to assume or cause the
assumption of the defense of such Indemnified Party, however, the Company shall
be responsible for the fees and expenses of counsel retained by such Indemnified
Party in assuming its own defense. If the Company shall have failed to assume or
cause the assumption of the defense of such action or to retain counsel
reasonably satisfactory to the Issuer or in the event it is determined the
defense of such Indemnified Party should be handled by separate counsel within a
reasonable time after notice of the commencement of such action, the fees and
expenses of counsel retained by the Indemnified Party shall be paid by the
Company. Notwithstanding, and in addition to, any of the foregoing, any one or
more of the Indemnified Parties shall have the right to employ separate counsel
with respect to any such claim or in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be paid by such
Indemnified Party or Parties unless the employment of such counsel has been
specifically authorized in writing by the Company. The Company shall not be
liable for any settlement of any such action effected without the written
consent of the Company, but if settled with the written consent of the Company
or if there is a final judgment for the plaintiff in any such action with or
without consent, the Company agrees to indemnify and hold harmless the
Indemnified Parties from and against any loss or liability by reason of such
settlement or judgment. The covenants and agreements of the Company herein
contained shall survive the delivery of the Bond.
(b) In order to provide for just and equitable contribution in
circumstances in which the indemnity provided for in this Section is for any
reason held to be unavailable to the Indemnified Parties other than in
accordance with its terms, the Company shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement incurred by the Issuer in such proportions as determined by
a court having jurisdiction of the matter; provided, however, that no person
guilty of fraudulent misrepresentation shall be entitled to
5
<PAGE> 7
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls an Indemnified Party shall have the same rights to contribution as such
Indemnified Party.
Section 7. Conditions. The obligation of the Purchaser to purchase the Bond
and the obligation of the Issuer to sell the Bond are subject to satisfaction of
the following conditions precedent:
(a) The representations of the Issuer and the Company in this Agreement
will be true and correct on and as of the Closing Date as if made on and as of
the Closing Date.
(b) As of the Closing Date, no Default (as defined in the Indenture) or
Event of Default (as defined in the Lease) will have occurred and be continuing,
and no event will have occurred and be continuing which, with the lapse of time
or the giving of notice or both, would constitute a Default or Event of Default.
(c) On or before the Closing Date, all actions required to be taken as of
the Closing Date in connection with the Bond, the Bond Ordinance and the Bond
Documents by the Issuer and the Company will have been taken, and the Issuer and
the Company will each have performed and complied with all agreements, covenants
and conditions required to be performed or complied with by the Bond Ordinance
and the Bond Documents.
(d) The Indenture will have been duly executed and delivered by the Issuer,
the Purchaser and the Depositary. The Lease will have been duly executed by the
Issuer and the Company. Each of the Bond Documents, the Bond Ordinance and all
other official action of the Issuer relating to the Bond, the Project and the
Bond Documents will be in full force and effect on the Closing Date and will not
have been amended, modified or supplemented on or before the Closing Date.
(e) The Issuer, the Company and the Purchaser will have received the
following, each dated the Closing Date:
(i) the approving opinion of Sutin, Thayer & Browne A Professional
Corporation, Bond Counsel, substantially in the form of Exhibit A;
(ii) the opinion of counsel to the Company (which opinion, as to
matters of New Mexico law may be given by Sutin, Thayer -- Browne A Professional
Corporation as New Mexico counsel to the Company), substantially in the form of
Exhibit B;
(iii) the opinion of counsel to the Issuer, substantially in the form
set forth in Exhibit C;
(iv) an opinion of counsel to the Purchaser, substantially in the form
set forth in Exhibit D;
(v) a certificate of and with reference to the Issuer signed by a duly
authorized officer of the Issuer to the effect set forth in subsections (a), (b)
and (c) of this Section 7;
6
<PAGE> 8
(vi) a certificate of and with reference to the Company signed by a
duly authorized officer of the Company to the effect set forth in subsections
(a), (b) and (c) of this Section 7; and
(vii) a certificate of the Depositary signed by a duly authorized
officer of the Depositary, to the effect that (A) he or she is an authorized
officer of the Depositary; (B) the Indenture has been duly executed and
delivered by the Depositary; (C) the Depositary has all necessary corporate
powers required to execute and deliver, and to perform its obligations under,
the Indenture; and (D) to the best of his or her knowledge, the execution and
delivery by the Depositary of the Indenture and the performance by the
Depositary of its obligations under the Indenture will not conflict with or
constitute a breach of or default under any law, administrative regulation,
consent decree or any agreement or other instrument to which the Depositary is
subject or by which the Depositary is bound.
If any conditions to the obligations of the Purchaser or the Issuer under this
Agreement are not satisfied and if the satisfaction of such conditions is not
waived by the Purchaser and the Issuer, then, at the option of the Purchaser and
the Issuer, (x) the Closing Date will be postponed for such period, not to
exceed seven days, as may be necessary for such conditions to be satisfied or
(y) the obligations of the Purchaser and the Issuer under this Agreement will
terminate, and neither the Purchaser nor the Issuer will have any further
obligations or liabilities under this Agreement, however, the Company will
continue to be obligated to reimburse the Issuer for the expenses of the Issuer.
Section 8. Survival. All agreements, covenants and representations and all
other statements of the Issuer, the Company and the Purchaser and their
respective officers set forth in or made pursuant to this Agreement will survive
the Closing Date and the delivery of and payment for the Bond.
Section 9. Incorporation of Indenture Provisions. Each of the provisions of
Sections 203 and 701 and Article XI of the Indenture and Section 10.3 of the
Lease is incorporated in this Agreement.
Section 10. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New Mexico applicable to agreements
made and to be performed in the State of New Mexico, without regard or effect
given to conflict of laws or rules which would require the application of any
other jurisdiction.
Section 11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed and delivered will constitute an
original and all together will constitute but one and the same instrument.
Section 12. Severability. If any section, paragraph, clause or provision of
this Agreement shall for any reason be held to be invalid or unenforceable, the
invalidity or unenforceability of such section, paragraph, clause or provision
shall not affect any of the remaining provisions of this Agreement.
DATED: December 27, 1995.
7
<PAGE> 9
CITY OF RIO RANCHO, NEW MEXICO
By ________________________________
Thomas E. Swisstack, Mayor
PROPERTY BOND PURCHASER, INC.
By_________________________________
Scott A. Budoff, President
8
<PAGE> 10
FULCRUM PROPERTIES, L.P.
By FULCRUM CAPITAL L.P., its
general partner
By____________________________
Scott A. Budoff, Principal
1250727
9
<PAGE> 11
[Letterhead of Bond Counsel]
December 27, 1995
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
$3,950,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1995
Ladies and Gentlemen: -
We have acted as Bond Counsel in connection with the issuance and sale by the
City of Rio Rancho, New Mexico (the "Issuer") of its Taxable Industrial
Development Revenue Bond (Fulcrum Properties, L.P. Project) Series 1995 in the
maximum principal amount of $3,950,000 (the "Bond").
The Bond will bear interest on its unpaid principal amount at 8% per annum and
mature on December 1, 2020. Interest on the Bond is payable each June 1 and
December 1, beginning June 1, 1996.
The Bond is subject to redemption prior to maturity as described in the
Indenture dated as of December 1, 1995 (the "Indenture") among the Issuer,
Property Bond Purchaser, Inc. (the "Purchaser") and Sunwest Bank of Albuquerque,
N.A., as Depositary the "Depositary"). The principal of, interest on and
redemption price of the Bond are not general obligations of the Issuer but
special obligations payable solely from the revenues pledged under the
Indenture.
EXHIBIT A
10
<PAGE> 12
City of Rio Rancho, et al.
December 27, 1995
Page 2
Neither the faith and credit nor the taxing power of the State of New Mexico or
of any of its political subdivisions, including the Issuer, is pledged to the
payment of the principal of, interest on or redemption price of the Bond. The
principal of, interest on and redemption price of the Bond will never constitute
a debt or indebtedness of the Issuer within the meaning of any provision or
limitation of the constitution or laws of the State of New Mexico or the home
rule charter of the Issuer. The Bond will never constitute nor give rise to a
pecuniary liability of the State of New Mexico, any of its political
subdivisions or of the Issuer or a charge against their general credit or taxing
powers.
In connection with the issuance of the Bond we have examined (a) a certified
copy of an Ordinance passed by the City Council of the Issuer on November 8,
1995, authorizing the issuance of the Bond, pursuant to and under the provisions
of Sections 3-32-1 through 3-32-16, New Mexico Statutes Annotated, 1978
Compilation, as amended (the "Act"); (b) the executed Bond; (c) executed
counterparts of the Indenture, the Lease and Purchase Agreement dated as of
December 1, 1995 (the "agreement 't) between the Issuer and Fulcrum Properties,
L.P. (the "Company") and the Bond Purchase Agreement dated December 27, 1995
(the "Bond Purchase Agreement" and, together with the Indenture and the
Agreement, the "Bond Documents") among the Purchaser, the Issuer and the
Company; and (d) such other opinions, documents, certificates and letters as we
deem relevant in rendering this opinion.
Based on such examination, in our opinion:
1. The Issuer is a municipal corporation and political subdivision of the
State of New Mexico and has the power and authority, under the constitution
and laws of the State of New Mexico, including the Act, and its home rule
charter to execute and deliver the Bond Documents, and to authorize,
execute, issue and deliver the Bond.
2. The terms and provisions of the Bond and the Bond Documents comply in all
respects with the requirements of the Act.
3. The Bond has been validly authorized, executed and issued in accordance
with the law of New Mexico and represents the valid and binding special
obligation of the Issuer.
4. The Bond Documents have been duly authorized, executed and delivered by the
Issuer and, assuming due authorization, execution and delivery by the other
parties to the Bond
11
<PAGE> 13
City of Rio Rancho, et al.
December 27, 1995
Page 3
Documents constitute legal, valid and binding obligations of the Issuer
enforceable against the Issuer in accordance with their respective terms, except
as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general principles of equity.
Very truly yours,
12
<PAGE> 14
[Letterhead of Sutin, Thayer & Browne]
December 27, 1995
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
$3,950,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1995
Ladies and Gentlemen:
We have acted as New Mexico counsel to Fulcrum Properties, L.P. (the "Company")
and Property Bond Purchaser, Inc. (the "Purchaser"). We have been asked to
render this opinion in connection with the issuance by the City of Rio Rancho,
New Mexico, of its Taxable Industrial Revenue Bond (Fulcrum Properties, L.P.
Project) Series 1995 in the amount of $3,950,000.
In that regard we have reviewed executed copies of:
1. the Lease and Purchase Agreement dated as of December 1, 1995 (the
"Agreement') between the City of Rio Rancho, New Mexico (the "Issuer") and
the Company;
2. the Bond Purchase Agreement dated December 27, 1995 among the Purchaser,
the Issuer and the Company (the "Bond Purchase Agreement") pursuant to
which the Purchaser has agreed to purchase the Bond to be issued under the
Indenture dated as of December 1, 1995 among the Issuer, the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary (the "Indenture"). The
Agreement, the Bond Purchase Agreement and the Indenture are collectively
referred to herein as the "Documents";
3. certificates of officers and/or general partners of the Company and the
Purchaser, certificates of public officials and such other documents as we
have deemed necessary.
EXHIBIT B
13
<PAGE> 15
City of Rio Rancho, et al.
December 27, 1995
Page 2
We have also made such other investigations of law and fact as we have deemed
necessary. For purposes of this opinion we have assumed:
1. the authenticity and genuineness of all signatures other than the Company
and the Purchaser on original and certified Documents; the authenticity and
genuineness of all signatures other than the Company and the Purchaser on
all copies, conformed copies and facsimiles of Documents; and the
conformity of copies, conformed copies and facsimiles to original and
certified Documents; and
2. the due authorization, execution and delivery of the Documents by all
parties other than the Issuer, the Company and the Purchaser.
Despite any other express or implied statement in this letter, each of the
opinions expressed in this letter is subject to the following further
qualifications, whether or not such opinions refer to such qualifications:
1. Where the phrase "to our knowledge" appears, we have examined the files of
the Company and the Purchaser in our office but have not inquired of the
Company or the Purchaser or made any independent investigation.
2. We express no opinion and we do not purport to opine as to the accuracy of
the representations and warranties made by the Company or the Purchaser or
any of their general partners or officers in any of the Documents.
3. Enforceability of the Documents may be limited by bankruptcy, insolvency,
reorganization, or similar federal or state laws of general application
relating to the rights of creditors, including without limitation such
similar laws granting rights and powers which have substantially the same
effect as rights which the Company or any actual creditor of the Company
was entitled to assert absent such laws; by general principles of equity,
including the defenses of unconscionability, ambiguity, and economic
duress, whether asserted in equitable or in legal proceedings; by rules of
commercial reasonableness; by the provisions of law concerning transfers in
contemplation of insolvency to preferred creditors; by provisions of law
governing appointment of receivers, injunctive relief and other equitable
remedies; and by certain other limitations which may be imposed upon the
availability of certain equitable remedies or the
14
<PAGE> 16
City of Rio Rancho, et al.
December 27, 1995
Page 3
exercise of certain equitable rights, including without limitation, specific
performance or enforcement, waivers or eliminations of rights such as statutory
rights of redemption, of jury trial and service of process, separation or
aggregation of property at foreclosure or enforced sale.
4. As to the due authorization by the Company and its partners of the
execution, delivery and performance by the Company of its obligations under
the Agreement and the Bond Purchase Agreement, we have relied exclusively
on the opinion of Scott A. Budoff, Esq., general counsel to the Company
addressed to you and attached hereto.
This opinion is limited to matters which may be governed by federal law and the
laws of New Mexico. We express no opinion with respect to any matter which may
be governed by the laws of any other state or jurisdiction. To the extent the
laws of any other state or jurisdiction are relevant to our opinion, we assume
that such laws are identical to the laws of New Mexico in all respects.
Based upon and subject to the foregoing, in our opinion:
1. Based solely on certificates of the Delaware Secretary of State, the
Company is a limited partnership duly organized and validly existing under
the laws of Delaware and is in good standing under the laws of Delaware.
2. The Company has duly authorized the execution, delivery and performance of
the Agreement and the Bond Purchase Agreement.
3. The Company is authorized to do business as a foreign limited partnership
in the State of New Mexico, and is in good standing under the laws of New
Mexico.
4. The execution, delivery and performance by the Company of the Agreement and
the Bond Purchase Agreement will not conflict with, contravene or violate
any applicable law, rule, regulation or ordinance.
5. All necessary authorizations, approvals, consents and other orders of any
governmental authority or agency for the execution and delivery by the
Company of the Agreement and
15
<PAGE> 17
City of Rio Rancho, et al.
December 27, 1995
Page 4
the Bond Purchase Agreement have been obtained and are in full force and
effect.
6. To our knowledge there is no action, suit, proceeding, inquiry or
investigation by or before any court, public board or body pending or
threatened against the Company or the Purchaser which (i) seeks to or does
restrain or enjoin the issuance or delivery of the Bond or the execution
and delivery of the Agreement, the Bond Purchase Agreement or (ii) in any
manner questions the validity or enforceability of the Bond, the Agreement,
the Bond Purchase Agreement or the Indenture.
7. The Agreement and the Bond Purchase Agreement constitute legal, valid and
binding obligations of the Company, enforceable against it in accordance
with their respective terms.
8. Neither the Bond nor the Agreement is required to be registered under any
New Mexico or federal securities law. The Indenture is not required to be
qualified under the Trust Indenture Act of 1939.
Very truly yours,
SUTIN, THAYER & BROWNE
A Professional Corporation
16
<PAGE> 18
SCOTT A. BUDOFF
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
December 27, 1995
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Sutin, Thayer & Browne
A Professional Corporation
P.O. Box 1945
Albuquerque, New Mexico 87103
$3,950,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1995
Ladies and Gentlemen:
I am the general counsel of Fulcrum Properties, L.P. (the "Company") and have
represented the Company in connection with the issuance by the City of Rio
Rancho, New Mexico, of its Taxable Industrial Revenue Bond (Fulcrum Properties,
L.P. Project) Series 1995 in the amount of $3,950,000.
In that regard I have reviewed executed copies of:
1. the Lease and Purchase Agreement dated as of December 1, 1995 (the
"Agreement") between the City of Rio Rancho, New Mexico (the "Issuer") and
the Company;
2. the Bond Purchase Agreement dated December 27, 1995 among the Purchaser,
the Issuer and the Company (the "Bond Purchase Agreement") pursuant to
which the Purchaser has agreed to purchase the Bond to be issued under the
Indenture dated as of December 1, 1995 among the Issuer, the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary; and
17
<PAGE> 19
City of Rio Rancho, et al.
December 27, 1995
Page 2
3. certificates of officers and/or general partners of the Company,
certificates of public officials and such other documents as I have deemed
necessary.
I have also made such other investigations of law and fact as I have deemed
necessary.
I am licensed to practice law only in the State of New York and not in the State
of Delaware. However, I am familiar with and have practiced under the corporate
law and limited partnership law of the State of Delaware.
Based upon the foregoing, in my opinion, the Company and its partners have duly
authorized the execution, delivery and performance by the Company of the
Agreement and the Bond Purchase Agreement.
Very truly yours,
Scott A. Budoff
1360031
18
<PAGE> 20
[Letterhead of Counsel to Issuer]
December 27, 1995
Fulcrum Properties, L. P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Sutin, Thayer & Browne
A Professional Corporation
P. O. Box 1945
Albuquerque, New Mexico 87103
Ladies and Gentlemen:
I am City Attorney to the City of Rio Rancho, New Mexico (the "Issuer"). This
opinion is being rendered to you in connection with the issuance by the Issuer
of its Taxable Industrial Development Revenue Bond (Fulcrum Properties, L.P.
Project) Series 1995 in the maximum principal amount of $3,950,000 (the "Bond").
In my opinion:
1. The City is a duly organized and validly existing municipal corporation and
political subdivision of the State of New Mexico (the "State") under the
Constitution and laws of the State.
2. Ordinance No. 42, Enactment No. 95-037 (the "Ordinance") was duly adopted
by the City Council of the Issuer on November 8, 1995, in accordance with
all applicable laws and has not been repealed or rescinded.
3. To my knowledge, no litigation is now pending or threatened against the
Issuer which seeks to or does restrain or enjoin the issuance or delivery
of the Bond, or in any manner questions the authority or proceedings for
the issuance of the Bond.
Very truly yours,
EXHIBIT C
19
<PAGE> 21
[Letterhead of Counsel to the Purchaser]
December 27, 1995
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Ladies and Gentlemen:
We have acted as counsel to Property Bond Purchaser, Inc. (the "Purchaser") in
connection with the Indenture dated as of December 1, 1995 (the "Indenture")
among the City of Rio Rancho, New Mexico (the "Issuer"), the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary, and the Bond Purchase
Agreement dated December 27, 1995 (the "Bond Purchase Agreement") among the
Purchaser, the Issuer and Fulcrum Properties, L.P. (the "Company"), pursuant to
which the Purchaser has agreed to purchase the Issuer's Taxable Industrial
Development Revenue Bond (Fulcrum Properties, L.P. Project) Series 1995 in the
maximum principal amount of $3,950,000 to be issued under the Indenture. Terms
are used in this letter as defined in the Indenture and the Agreement (as
defined in the Indenture). In that connection we have reviewed executed copies
of the Bond Documents, certificates of officers of the Purchaser and
certificates of public officials and have made such other investigations of law
and fact as we have deemed necessary.
For purposes of this opinion we have assumed:
1. the authenticity and genuineness of all signatures other than the Company
and the Purchaser on original and certified Documents; the authenticity and
genuineness of all signatures other than the Company and the Purchaser on
all copies, conformed copies and facsimiles of Documents; and the
conformity of copies, conformed copies and facsimiles to original and
certified Documents; and
2. the due authorization, execution and delivery of the Documents by all
parties other than the Issuer, the Company and the Purchaser.
Despite any other express or implied statement in this letter, each of the
opinions expressed in this letter is subject to the following further
qualifications, whether or not such opinions refer to such qualifications:
1. Where the phrase "to our knowledge" appears, we have examined the files of
the Company and the Purchaser in our office but have not inquired of the
Company or the Purchaser or made any independent investigation.
EXHIBIT D
20
<PAGE> 22
City of Rio Rancho, New Mexico
December 27, 1995
Page 2
2. We express no opinion and we do not purport to opine as to the accuracy of
the representations and warranties made by the Company or the Purchaser or
any of their general partners or officers in any of the Documents.
3. Enforceability of the Documents may be limited by bankruptcy, insolvency,
reorganization, or similar federal or state laws of general application
relating to the rights of creditors, including without limitation such
similar laws granting rights and powers which have substantially the same
effect as rights which the Company or any actual creditor of the Company
was entitled to assert absent such laws; by general principles of equity,
including the defenses of unconscionability, ambiguity, and economic
duress, whether asserted in equitable or in legal proceedings; by rules of
commercial reasonableness; by the provisions of law concerning transfers in
contemplation of insolvency to preferred creditors; by provisions of law
governing appointment of receivers, injunctive relief and other equitable
remedies; and by certain other limitations which may be imposed upon the
availability of certain equitable remedies or the exercise of certain
equitable rights, including without limitation, specific performance or
enforcement, waivers or eliminations of rights such as statutory rights of
redemption, of jury trial and service of process, separation or aggregation
of property at foreclosure or enforced sale.
This opinion is limited to matters which may be governed by federal law and the
laws of New Mexico. We express no opinion with respect to any matter which may
be governed by the laws of any other state or jurisdiction.
Based upon the foregoing, in our opinion:
1. The Purchaser is a corporation duly organized and validly existing under
the laws of New Mexico, and is in good standing under the laws of New
Mexico.
2. The Indenture and the Bond Purchase Agreement constitute legal, valid and
binding obligations of the Purchaser, enforceable against the Purchaser in
accordance with their respective terms.
3. The execution, delivery and performance by the Purchaser of the Indenture
and the Bond Purchase Agreement will not conflict with, contravene, violate
or constitute a breach
21
<PAGE> 23
City of Rio Rancho, New Mexico
December 27, 1995
Page 3
of or default under the certificate of incorporation or the bylaws of the
Purchaser or any law, rule, regulation, ordinance, order, consent, decree,
agreement or instrument to which the Purchaser is a party or by which it or
its properties is bound.
4. All necessary authorizations, approvals, consents and other orders of any
governmental authority or agency for the execution and delivery by the
Purchaser of the Indenture and the Bond Purchase Agreement have been
obtained and are in full force and effect.
5. To the best of our knowledge, there is no action, suit, proceeding, inquiry
or investigation by or before any court, public board or body pending or
threatened against the Purchaser, which (i) seeks to or does restrain or
enjoin the issuance or delivery of the Bond or the execution and delivery
of any of the Bond Documents, or (ii) in any manner questions the validity
or enforceability of the Bond or any of the Bond Documents.
Very truly yours,
1250727
22
<PAGE> 1
EXHIBIT 10.17
PROPERTY BOND PURCHASER, INC.
CITY OF RIO RANCHO, NEW MEXICO
AND
FULCRUM PROPERTIES, L.P.
---------------------------------------------------
BOND PURCHASE AGREEMENT
---------------------------------------------------
DATED: DECEMBER 23, 1996
$2,100,000
CITY OF RIO RANCHO, NEW MEXICO
TAXABLE INDUSTRIAL DEVELOPMENT REVENUE BOND
(FULCRUM PROPERTIES, L.P. PROJECT)
SERIES 1996
<PAGE> 2
BOND PURCHASE AGREEMENT
PROPERTY BOND PURCHASER, INC. (together with its successors, assigns and
transferees, the "Purchaser"), CITY OF RIO RANCHO, NEW MEXICO the "Issuer") and
FULCRUM PROPERTIES, L.P. (the "Company") agree:
Section 1. Recitals. The City, the Purchaser and Sunwest Bank of
Albuquerque, N.A., as Depositary (the "Depositary"), have entered into an
Indenture dated as of December 1, 1996 (the "Indenture"). Pursuant to the
Indenture, the Issuer will issue its Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project) Series 1996 in the maximum principal amount
of $2,100,000 (the "Bond"). Proceeds of the Bond will be used to acquire,
construct, equip and improve a project consisting of land, buildings,
improvements and equipment to be used as an administrative office and warehouse
facility (the "Project").
Section 2. Purchase and Delivery. On the basis of the representations and
covenants contained in this Bond Purchase Agreement (this "Agreement") and
subject to the terms and conditions contained in this Agreement, the Purchaser
agrees to purchase the Bond from the Issuer and the Issuer agrees to sell the
Bond to the Purchaser. As consideration for the sale of the Bond, the Purchaser
agrees to make advances on the Bond at the times and under the conditions
specified in Section 404 of the Indenture. The Issuer will deliver the Bond to
the Purchaser, at or prior to 10:00 a.m., Mountain Time, on December 23, 1996,
or at such other time not later than five business days thereafter as the
Purchaser may determine and advise the Issuer (the "Closing Date").
Section 3. Issuer Representations. The Issuer represents that, as of the
date of this Agreement:
(a) Each of the representations of the Issuer in the Lease and
Purchase Agreement dated as of December 1, 1996 (the "Lease" and, together with
the Indenture and this Bond Purchase Agreement, the "Bond Documents") and the
Indenture is true and correct as if made on and as of the date of this
Agreement.
(b) Pursuant to an ordinance duly adopted by the City Council of the
Issuer on November 13, 1996 (the "Bond Ordinance"), the Issuer duly authorized
and approved (i) the execution and delivery by the Issuer of the Bond Documents
and the performance by the Issuer of its obligations under the Bond Documents,
and (ii) the issuance, execution and delivery of the Bond. The Bond Ordinance
has not been amended, modified or repealed.
(c) The Bond Documents and the Bond Ordinance constitute, and the
Bond, when executed by the Issuer and delivered to the Purchaser will
constitute, legal, valid and binding obligations off the Issuer, enforceable
against the Issuer in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally and general
principles of equity.
<PAGE> 3
(d) The statements contained in any certificate provided under this
Agreement and signed and delivered to the Purchaser by any authorized official
of the Issuer will be deemed a representation and warranty by the Issuer to the
Purchaser.
Section 4. Company Representations. The Company represents that, as of the
date of this Agreement:
(a) The Company is a limited partnership duly organized and validly
existing and in good standing under the laws of the State of Delaware and has or
will obtain at the necessary time, all necessary licenses and permits to lease
and operate the Project and other property financed with the proceeds of the
Bond. The Company has not received any notice of an alleged violation and is not
in violation of any zoning, land use, environmental or other similar law or
regulation applicable to the property subject to the Lease. The Company has full
right, power and authority to approve the Bond Documents and to perform the
other acts and things as provided for in this Agreement. The Company has full
right, power and authority to approve, enter into, deliver and/or perform its
obligations under the Bond Documents.
(b) The approval by the Company of the Bond Documents and the
execution, delivery and performance of its obligations under the Bond Documents,
compliance by the Company with the provisions hereof and of any and all of the
foregoing documents, the application by the Company of the proceeds of the sale
of the Bond for the purposes described in the Indenture, and the consummation of
the transactions contemplated herein do not and will not conflict with or result
in the breach of any of the terms, conditions or provisions of, or constitute a
default under, the limited partnership agreement, as amended, of the Company or
any agreement, indenture, mortgage, lease or instrument to which the Company is
a party or by which the Company or any of its property is or may be bound or any
existing law or court or administrative regulation, decree or order which is
applicable to the Company or any of its property, and do not and will not result
in the creation or imposition of any lien of any nature upon any of the property
of the Company, except for Permitted Liens (as defined in the Lease).
(c) No "Default," "Event of Default" or event which, with notice or
lapse of time or both, would constitute a "Default" or an "Event of Default"
under the Bond Documents has occurred and is continuing.
(d) The Company has duly authorized all necessary action to be taken
by it for (i) the issuance and delivery of the Bond by the Issuer upon the terms
and conditions and for the uses set forth or described herein and in the
Indenture; (ii) the approval of the Bond and the Indenture; and (iii) the
execution, delivery or receipt of and the performance as applicable, of its
obligations under the Bond Documents and any and all such other agreements and
documents as may be required to be executed, delivered or received by the
Company in order to carry out, effectuate and consummate the transactions
contemplated herein and therein.
2
<PAGE> 4
(e) The Company will not take or omit to take any action which will in
any way cause or result in the proceeds of the sale of the Bond being applied in
a manner other than as provided in the Indenture and the Lease.
(f) To the best knowledge of the Company, there is no action, suit,
proceeding, inquiry or investigation at law or in equity before or by any public
board or body pending or, to the knowledge of the Company, threatened against or
affecting the Company or its property wherein an unfavorable decision, ruling or
finding would have a material adverse effect on (i) the transactions
contemplated in this Agreement or (ii) the validity or enforceability in
accordance with their respective terms of the Bond Documents.
(g) On or before the date of the sale of the Bond, the Company will
approve or execute and deliver, as applicable, the Bond Documents. This
Agreement is, and when executed and delivered, as applicable, the Bond Documents
will be the legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally and general
principles of equity.
(h) To the best knowledge of the Company, all approvals, consents,
authorizations, certifications, and other orders of any government authority,
board, agency or commission having jurisdiction, and all filings with such
entities, failure to obtain or make which would materially adversely affect the
performance by the Company of its obligations hereunder or under the Bond
Documents, have been duly obtained. All permits and approvals required to date
for the construction and operation of the Project have been obtained or will be
obtained in due course.
(i) Any certificate signed by an authorized officer of the Company
delivered to the Issuer or to the Purchaser in connection with the issuance of
the Bond will be deemed a representation and warranty by the Company to the
Issuer and the Purchaser as to the statements made therein.
Section 5. Purchaser Representations. The Purchaser represents and
acknowledges that, as of the date of this Agreement:
(a) The Purchaser is purchasing the Bond for its own account for
investment and with no present intention of distributing or reselling the Bond
or any interest in the Bond but without prejudice, however, to its right at all
times to sell or otherwise dispose of all or any part of the Bond in compliance
with the Securities Act of 1933, as amended, the regulations promulgated
thereunder and applicable state securities laws and regulations.
(b) The Purchaser understands that the Bond is a special, limited, and
not general, obligation of the Issuer, is payable solely from the revenues
received by the Purchaser on behalf of the Issuer under the Lease and from the
security therefor as described in the Indenture but from no other sources. It
understands that the Bond is not secured by any obligation or pledge of any
monies
3
<PAGE> 5
received or to be received from taxation or from the State of New Mexico (the
"State") or any political subdivision or taxing district thereof (including,
without implied limitation, the Issuer), and that the Bond will never represent
or constitute a general obligation, debt or bonded indebtedness of the Issuer,
the State, or any political subdivision thereof, and that no right will exist to
have taxes levied by the Issuer, the State, or any political subdivision
thereof, for the payment of principal of, premium, if any, and interest on the
Bond. The Purchaser understands that the payment of the Bond depends upon the
general credit of the Company, and upon the security granted in the Indenture
for the Company's obligations under the Lease.
(c) The Purchaser has received copies of financial statements of the
Company, has been afforded the opportunity to discuss the business, assets and
financial position of the Company with the officers, employees and auditors of
the Company, and has received such information concerning the Company and its
business, assets and financial position, and the Project (as defined in the
Indenture) as it deems necessary in making its decision to purchase the Bond.
(d) The Purchaser is duly and legally authorized to purchase the Bond,
has knowledge and experience in financial and business matters, is capable of
evaluating the merits and risks of its purchase of the Bond, is aware of the
intended use of proceeds of the Bond, and understands that interest on the Bond
is not excludable from gross income for federal income tax purposes.
(e) The Purchaser understands that the Issuer has not undertaken to
furnish any information with respect to the Company or to ascertain the accuracy
of any information furnished to the Purchaser with respect to the Company and
the Purchaser has not requested or received any representations from the Issuer
with respect to any such information, its accuracy or completeness. The
Purchaser, for itself and for any subsequent holder of the Bond, waives any
requirement of due diligence in investigation or inquiry on the part of the
Issuer, its officials, counsel, agents and consultants and all claims, actions
or causes of action which the Purchaser may have from and after the date hereof
against the Issuer, its officials, counsel, agents and consultants growing out
of any such action which any of the foregoing took, or could have taken, in
connection with the authorization, execution, delivery, sale or resale of the
Bond to or by the Purchaser or in connection with any statement or
representation which induced the Purchaser to purchase the Bond.
(f) The Purchaser has received and reviewed copies in draft and final
form of the Bond Documents and the Bond Ordinance.
(g) This Agreement constitutes the legal, valid and binding obligation
of the Purchaser, enforceable against the Purchaser in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and general principles of equity.
(h) The Purchaser has been informed by the Company and agrees that the
Indenture has not been qualified under the Trust Indenture Act of 1939, and that
the Bond (i) is not
4
<PAGE> 6
being registered or otherwise qualified for sale under (1) the Securities Act of
1933, as amended, or (2) the "Blue Sky" laws and regulations of any state, (ii)
will not be listed on any stock or other securities exchange, (iii) will not
carry a rating from any rating service and (iv) will not be readily marketable.
The Purchaser has been informed by the Company and agrees that a legend will be
placed on the Bond certificate or any other documents evidencing ownership of
the Bond to the effect that it has not been registered under the Securities Act
of 1933, as amended, or the applicable state "Blue Sky" laws and that it may
only be transferred in compliance with the Indenture.
(i) The Purchaser acknowledges that its purchase of the Bond
constitutes a transaction in a bond secured by the Indenture which is, among
other things, a personal property security agreement, pursuant to which the Bond
is offered and sold as a unit.
(j) The execution, delivery and performance of this Agreement by the
Purchaser will not constitute a default under any other agreement by which the
Purchaser is bound.
Section 6. Indemnification.
(a) The Company agrees to indemnify, defend and hold harmless all
officials, directors, councilors, officers and employees of the Issuer and each
person, if any, who has the power to direct or cause the direction of the
management and policies of the Issuer (the "Indemnified Parties") against any
and all losses, claims, damages, liabilities, joint or several, or any expenses
related thereto whatsoever arising out of or in connection with or caused by any
pledge, offering, sale or resale of the Bond or any underlying security in
violation of any federal or state securities laws or by an untrue statement or
misleading statement or alleged untrue statement or alleged misleading statement
of a material fact made to any person or caused by an omission or alleged
omission of any material fact in connection with the Bond or the pledge, sale,
resale or delivery thereof.
In case a claim shall be made or any action shall be brought against
one or more of the Indemnified Parties based upon the matters described in the
preceding paragraph and in respect of which indemnity is sought against the
Company pursuant to the preceding paragraph, the Indemnified Party or Parties
seeking indemnity shall promptly notify the Company, in writing, and the Company
shall promptly assume or cause the assumption of the defense thereof, including
the employment of counsel chosen by the Company and approved in writing by the
Issuer (provided that such approval by the Issuer shall not be unreasonably
withheld), the payment of all expenses and the right to participate in
negotiations and to consent to settlement. If any Indemnified Party is advised
in a written opinion of counsel that there may be legal defenses available to
such Indemnified Party which are adverse to or in conflict with those available
to the Company, or that the defenses of such Indemnified Party should be handled
by separate counsel, the Company shall not have the right to assume or cause the
assumption of the defense of such Indemnified Party, however, the Company shall
be responsible for the fees and expenses of counsel retained by such Indemnified
Party in assuming its own defense. If the Company shall have failed to assume or
cause the assumption of the defense of such action or to retain counsel
reasonably satisfactory to the Issuer
5
<PAGE> 7
or in the event it is determined the defense of such Indemnified Party should be
handled by separate counsel within a reasonable time after notice of the
commencement of such action, the fees and expenses of counsel retained by the
Indemnified Party shall be paid by the Company. Notwithstanding, and in addition
to, any of the foregoing, any one or more of the Indemnified Parties shall have
the right to employ separate counsel with respect to any such claim or in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be paid by such Indemnified Party or Parties unless the
employment of such counsel has been specifically authorized in writing by the
Company. The Company shall not be liable for any settlement of any such action
effected without the written consent of the Company, but if settled with the
written consent of the Company or if there is a final judgment for the plaintiff
in any such action with or without consent, the Company agrees to indemnify and
hold harmless the Indemnified Parties from and against any loss or liability by
reason of such settlement or judgment. The covenants and agreements of the
Company herein contained shall survive the delivery of the Bond.
(b) In order to provide for just and equitable contribution in
circumstances in which the indemnity provided for in this Section is for any
reason held to be unavailable to the Indemnified Parties other than in
accordance with its terms, the Company shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement incurred by the Issuer in such proportions as determined by
a court having jurisdiction of the matter; provided, however, that no person
guilty of fraudulent misrepresentation shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section, each person, if any, who controls an Indemnified Party shall
have the same rights to contribution as such Indemnified Party.
Section 7. Conditions. The obligation of the Purchaser to purchase the Bond
and the obligation of the Issuer to sell the Bond are subject to satisfaction of
the following conditions precedent:
(a) The representations of the Issuer and the Company in this
Agreement will be true and correct on and as of the Closing Date as if made on
and as of the Closing Date.
(b) As of the Closing Date, no Default (as defined in the Indenture)
or Event of Default (as defined in the Lease) will have occurred and be
continuing, and no event will have occurred and be continuing which, with the
lapse of time or the giving of notice or both, would constitute a Default or
Event of Default.
(c) On or before the Closing Date, all actions required to be taken as
of the Closing Date in connection with the Bond, the Bond Ordinance and the Bond
Documents by the Issuer and the Company will have been taken, and the Issuer and
the Company will each have performed and complied with all agreements, covenants
and conditions required to be performed or complied with by the Bond Ordinance
and the Bond Documents.
6
<PAGE> 8
(d) The Indenture will have been duly executed and delivered by the
Issuer, the Purchaser and the Depositary. The Lease will have been duly executed
by the Issuer and the Company. Each of the Bond Documents, the Bond Ordinance
and all other official action of the Issuer relating to the Bond, the Project
and the Bond Documents will be in full force and effect on the Closing Date and
will not have been amended, modified or supplemented on or before the Closing
Date.
(e) The Issuer, the Company and the Purchaser will have received the
following, each dated the Closing Date:
(i) the approving opinion of Sutin, Thayer & Browne A
Professional Corporation, Bond Counsel, substantially in the form of
Exhibit A;
(ii) the opinion of counsel to the Company (which opinion, as to
matters of New Mexico law may be given by Sutin, Thayer & Browne A
Professional Corporation as New Mexico counsel to the Company),
substantially in the form of Exhibit B;
(iii) the opinion of counsel to the Issuer, substantially in the
form set forth in Exhibit C;
(iv) an opinion of counsel to the Purchaser, substantially in the
form set forth in Exhibit D;
(v) a certificate of and with reference to the Issuer signed by a
duly authorized officer of the Issuer to the effect set forth in
subsections (a), (b) and (c) of this Section 7;
(vi) a certificate of and with reference to the Company signed by
a duly authorized officer of the Company to the effect set forth in
subsections (a), (b) and (c) of this Section 7; and
(vii) a certificate of the Depositary signed by a duly authorized
officer of the Depositary, to the effect that (A) he or she is an
authorized officer of the Depositary; (B) the Indenture has been duly
executed and delivered by the Depositary; (C) the Depositary has all
necessary corporate powers required to execute and deliver, and to perform
its obligations under, the Indenture; and (D) to the best of his or her
knowledge, the execution and delivery by the Depositary of the Indenture
and the performance by the Depositary of its obligations under the
Indenture will not conflict with or constitute a breach of or default under
any law, administrative regulation, consent decree or any agreement or
other instrument to which the Depositary is subject or by which the
Depositary is bound.
If any conditions to the obligations of the Purchaser or the Issuer under this
Agreement are not satisfied and if the satisfaction of such conditions is not
waived by the Purchaser and the Issuer,
7
<PAGE> 9
then, at the option of the Purchaser and the Issuer, (x) the Closing Date will
be postponed for such period, not to exceed seven days, as may be necessary for
such conditions to be satisfied or (y) the obligations of the Purchaser and the
Issuer under this Agreement will terminate, and neither the Purchaser nor the
Issuer will have any further obligations or liabilities under this Agreement,
however, the Company will continue to be obligated to reimburse the Issuer for
the expenses of the Issuer.
Section 8. Survival. All agreements, covenants and representations and all
other statements of the Issuer, the Company and the Purchaser and their
respective officers set forth in or made pursuant to this Agreement will survive
the Closing Date and the delivery of and payment for the Bond.
Section 9. Incorporation of Indenture Provisions. Each of the provisions of
Sections 203 and 701 and Article XI of the Indenture and Section 10.3 of the
Lease is incorporated in this Agreement.
Section 10. Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New Mexico applicable to agreements
made and to be performed in the State of New Mexico, without regard or effect
given to conflict of laws or rules which would require the application of any
other jurisdiction.
Section 11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed and delivered will constitute an
original and all together will constitute but one and the same instrument.
Section 12. Severability. If any section, paragraph, clause or provision of
this Agreement shall for any reason be held to be invalid or unenforceable, the
invalidity or unenforceability of such section, paragraph, clause or provision
shall not affect any of the remaining provisions of this Agreement.
DATED: December 23, 1996.
CITY OF RIO RANCHO, NEW MEXICO
By ___________________________________
Thomas E. Swisstack, Mayor
PROPERTY BOND PURCHASER, INC.
By ___________________________________
Scott A. Budoff, President
8
<PAGE> 10
FULCRUM PROPERTIES, L.P.
By FULCRUM CAPITAL L.P., its general partner
By _______________________________
Scott A. Budoff, Principal
9
<PAGE> 11
[Letterhead of Bond Counsel]
December 23, 1996
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
$2,100,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1996
Ladies and Gentlemen:
We have acted as Bond Counsel in connection with the issuance and sale by the
City of Rio Rancho, New Mexico (the "Issuer") of its Taxable Industrial
Development Revenue Bond (Fulcrum Properties, L.P. Project) Series 1996 in the
maximum principal amount of $2,100,000 (the "Bond").
The Bond will bear interest on its unpaid principal amount at 8% per annum and
mature on December 1, 2020. Interest on the Bond is payable each June 1 and
December 1, beginning June 1, 1997.
The Bond is subject to redemption prior to maturity as described in the
Indenture dated as of December 1, 1996 (the "Indenture") among the Issuer,
Property Bond Purchaser, Inc. (the "Purchaser") and Sunwest Bank of Albuquerque,
N.A., as Depositary (the "Depositary").
The principal of, interest on and redemption price of the Bond are not general
obligations of the Issuer but special obligations payable solely from the
revenues pledged under the Indenture.
EXHIBIT A
<PAGE> 12
City of Rio Rancho, et al.
December 23, 1996
Page 2
Neither the faith and credit nor the taxing power of the State of New Mexico or
of any of its political subdivisions, including the Issuer, is pledged to the
payment of the principal of, interest on or redemption price of the Bond. The
principal of, interest on and redemption price of the Bond will never constitute
a debt or indebtedness of the Issuer within the meaning of any provision or
limitation of the constitution or laws of the State of New Mexico or the home
rule charter of the Issuer. The Bond will never constitute nor give rise to a
pecuniary liability of the State of New Mexico, any of its political
subdivisions or of the Issuer or a charge against their general credit or taxing
powers.
In connection with the issuance of the Bond we have examined (a) a certified
copy of an Ordinance passed by the City Council of the Issuer on November 13,
1996, authorizing the issuance of the Bond, pursuant to and under the provisions
of Sections 3-32-1 through 3-32-16, New Mexico Statutes Annotated, 1978
Compilation, as amended (the "Act"); (b) the executed Bond; (c) executed
counterparts of the Indenture, the Lease and Purchase Agreement dated as of
December 1, 1996 (the "Agreement") between the Issuer and Fulcrum Properties,
L.P. (the "Company") and the Bond Purchase Agreement dated December 23, 1996
(the "Bond Purchase Agreement" and, together with the Indenture and the
Agreement, the "Bond Documents") among the Purchaser, the Issuer and the
Company; and (d) such other opinions, documents, certificates and letters as we
deem relevant in rendering this opinion.
Based on such examination, in our opinion:
1. The Issuer is a municipal corporation and political subdivision of the
State of New Mexico and has the power and authority, under the constitution
and laws of the State of New Mexico, including the Act, and its home rule
charter to execute and deliver the Bond Documents, and to authorize,
execute, issue and deliver the Bond.
2. The terms and provisions of the Bond and the Bond Documents comply in all
respects with the requirements of the Act.
3. The Bond has been validly authorized, executed and issued in accordance
with the law of New Mexico and represents the valid and binding special
obligation of the Issuer.
4. The Bond Documents have been duly authorized, executed and delivered by the
Issuer and, assuming due authorization, execution and delivery by the other
parties to the Bond Documents constitute legal, valid and binding
obligations of the Issuer enforceable against the Issuer in accordance with
their respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity.
EXHIBIT A
<PAGE> 13
City of Rio Rancho, et al.
December 23, 1996
Page 3
Very truly yours,
EXHIBIT A
<PAGE> 14
[Letterhead of Sutin, Thayer & Browne]
December 23, 1996
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
$2,100,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1996
Ladies and Gentlemen:
We have acted as New Mexico counsel to Fulcrum Properties, L.P. (the "Company")
and Property Bond Purchaser, Inc. (the "Purchaser"). We have been asked to
render this opinion in connection with the issuance by the City of Rio Rancho,
New Mexico, of its Taxable Industrial Revenue Bond (Fulcrum Properties, L.P.
Project) Series 1996 in the amount of $2,100,000.
In that regard we have reviewed executed copies of:
1. the Lease and Purchase Agreement dated as of December 1, 1996 (the
"Agreement") between the City of Rio Rancho, New Mexico (the "Issuer") and
the Company;
2. the Bond Purchase Agreement dated December 23, 1996 among the Purchaser,
the Issuer and the Company (the "Bond Purchase Agreement") pursuant to
which the Purchaser has agreed to purchase the Bond to be issued under the
Indenture dated as of December 1, 1996 among the Issuer, the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary (the "Indenture"). The
Agreement, the Bond Purchase Agreement and the Indenture are collectively
referred to herein as the "Documents";
EXHIBIT B
<PAGE> 15
City of Rio Rancho, et al.
December 23, 1996
Page 2
3. certificates of officers and/or general partners of the Company and the
Purchaser, certificates of public officials and such other documents as we
have deemed necessary.
We have also made such other investigations of law and fact as we have deemed
necessary.
For purposes of this opinion we have assumed:
1. the authenticity and genuineness of all signatures other than the Company
and the Purchaser on original and certified Documents; the authenticity and
genuineness of all signatures other than the Company and the Purchaser on
all copies, conformed copies and facsimiles of Documents; and the
conformity of copies, conformed copies and facsimiles to original and
certified Documents; and
2. the due authorization, execution and delivery of the Documents by all
parties other than the Issuer, the Company and the Purchaser.
Despite any other express or implied statement in this letter, each of the
opinions expressed in this letter is subject to the following further
qualifications, whether or not such opinions refer to such qualifications:
1. Where the phrase "to our knowledge" appears, we have examined the files of
the Company and the Purchaser in our office but have not inquired of the
Company or the Purchaser or made any independent investigation.
2. We express no opinion and we do not purport to opine as to the accuracy of
the representations and warranties made by the Company or the Purchaser or
any of their general partners or officers in any of the Documents.
3. Enforceability of the Documents may be limited by bankruptcy, insolvency,
reorganization, or similar federal or state laws of general application
relating to the rights of creditors, including without limitation such
similar laws granting rights and powers which have substantially the same
effect as rights which the Company or any actual creditor of the Company
was entitled to assert absent such laws; by general principles of equity,
including the defenses of unconscionability, ambiguity, and economic
duress, whether asserted in equitable or in legal proceedings; by rules of
commercial reasonableness; by the provisions of law concerning transfers in
contemplation of insolvency to preferred creditors; by provisions of law
governing appointment of receivers, injunctive relief and other equitable
remedies; and by certain other limitations which may be imposed upon the
availability of certain equitable remedies or the exercise of certain
equitable rights, including without
EXHIBIT B
<PAGE> 16
City of Rio Rancho, et al.
December 23, 1996
Page 3
limitation, specific performance or enforcement, waivers or eliminations of
rights such as statutory rights of redemption, of jury trial and service of
process, separation or aggregation of property at foreclosure or enforced
sale.
4. As to the due authorization by the Company and its partners of the
execution, delivery and performance by the Company of its obligations under
the Agreement and the Bond Purchase Agreement, we have relied exclusively
on the opinion of Scott A. Budoff, Esq., general counsel to the Company
addressed to you and attached hereto.
This opinion is limited to matters which may be governed by federal law and the
laws of New Mexico. We express no opinion with respect to any matter which may
be governed by the laws of any other state or jurisdiction. To the extent the
laws of any other state or jurisdiction are relevant to our opinion, we assume
that such laws are identical to the laws of New Mexico in all respects.
Based upon and subject to the foregoing, in our opinion:
1. Based solely on certificates of the Delaware Secretary of State, the
Company is a limited partnership duly organized and validly existing under
the laws of Delaware and is in good standing under the laws of Delaware.
2. The Company has duly authorized the execution, delivery and performance of
the Agreement and the Bond Purchase Agreement.
3. The Company is authorized to do business as a foreign limited partnership
in the State of New Mexico, and is in good standing under the laws of New
Mexico.
4. The execution, delivery and performance by the Company of the Agreement and
the Bond Purchase Agreement will not conflict with, contravene or violate
any applicable law, rule, regulation or ordinance.
5. All necessary authorizations, approvals, consents and other orders of any
governmental authority or agency for the execution and delivery by the
Company of the Agreement and the Bond Purchase Agreement have been obtained
and are in full force and effect.
6. To our knowledge there is no action, suit, proceeding, inquiry or
investigation by or before any court, public board or body pending or
threatened against the Company or the Purchaser which (I) seeks to or does
restrain or enjoin the issuance or delivery of the Bond or the execution
and delivery of the Agreement, the Bond Purchase Agreement or (ii) in any
EXHIBIT B
<PAGE> 17
City of Rio Rancho, et al.
December 23, 1996
Page 4
manner questions the validity or enforceability of the Bond, the Agreement,
the Bond Purchase Agreement or the Indenture.
7. The Agreement and the Bond Purchase Agreement constitute legal, valid and
binding obligations of the Company, enforceable against it in accordance
with their respective terms.
8. Neither the Bond nor the Agreement is required to be registered under any
New Mexico or federal securities law. The Indenture is not required to be
qualified under the Trust Indenture Act of 1939.
Very truly yours,
SUTIN, THAYER & BROWNE A Professional
Corporation
EXHIBIT B
<PAGE> 18
[Letterhead of Counsel to Issuer]
December 23, 1996
Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Sutin, Thayer & Browne A Professional
Corporation
P. O. Box 1945
Albuquerque, New Mexico 87103
Ladies and Gentlemen:
I am City Attorney to the City of Rio Rancho, New Mexico (the "Issuer"). This
opinion is being rendered to you in connection with the issuance by the Issuer
of its Taxable Industrial Development Revenue Bond (Fulcrum Properties, L.P.
Project) Series 1996 in the maximum principal amount of $2,100,000 (the "Bond").
In my opinion:
1. The City is a duly organized and validly existing municipal corporation and
political subdivision of the State of New Mexico (the "State") under the
Constitution and laws of the State.
2. Ordinance No. 0-29, Enactment No. 96-029 (the "Ordinance") was duly adopted
by the City Council of the Issuer on November 13, 1996, in accordance with
all applicable laws and has not been repealed or rescinded.
3. To my knowledge, no litigation is now pending or threatened against the
Issuer which seeks to or does restrain or enjoin the issuance or delivery
of the Bond, or in any manner questions the authority or proceedings for
the issuance of the Bond.
Very truly yours,
EXHIBIT C
<PAGE> 19
[Letterhead of Counsel to the Purchaser]
December 23, 1996
City of Rio Rancho, New Mexico
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Ladies and Gentlemen:
We have acted as counsel to Property Bond Purchaser, Inc. (the "Purchaser") in
connection with the Indenture dated as of December 1, 1996 (the "Indenture")
among the City of Rio Rancho, New Mexico (the "Issuer"), the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary, and the Bond Purchase
Agreement dated December 23, 1996 (the "Bond Purchase Agreement") among the
Purchaser, the Issuer and Fulcrum Properties, L.P. (the "Company"), pursuant to
which the Purchaser has agreed to purchase the Issuer's Taxable Industrial
Development Revenue Bond (Fulcrum Properties, L.P. Project) Series 1996 in the
maximum principal amount of $2,100,000 to be issued under the Indenture. Terms
are used in this letter as defined in the Indenture and the Agreement (as
defined in the Indenture). In that connection we have reviewed executed copies
of the Bond Documents, certificates of officers of the Purchaser and
certificates of public officials and have made such other investigations of law
and fact as we have deemed necessary.
For purposes of this opinion we have assumed:
1. the authenticity and genuineness of all signatures other than the Company
and the Purchaser on original and certified Documents; the authenticity and
genuineness of all signatures other than the Company and the Purchaser on
all copies, conformed copies and facsimiles of Documents; and the
conformity of copies, conformed copies and facsimiles to original and
certified Documents; and
2. the due authorization, execution and delivery of the Documents by all
parties other than the Issuer, the Company and the Purchaser.
Despite any other express or implied statement in this letter, each of the
opinions expressed in this letter is subject to the following further
qualifications, whether or not such opinions refer to such qualifications:
1. Where the phrase "to our knowledge" appears, we have examined the files of
the Company and the Purchaser in our office but have not inquired of the
Company or the Purchaser or made any independent investigation.
EXHIBIT D
<PAGE> 20
City of Rio Rancho, et al.
December 23, 1996
Page 2
2. We express no opinion and we do not purport to opine as to the accuracy of
the representations and warranties made by the Company or the Purchaser or
any of their general partners or officers in any of the Documents.
3. Enforceability of the Documents may be limited by bankruptcy, insolvency,
reorganization, or similar federal or state laws of general application
relating to the rights of creditors, including without limitation such
similar laws granting rights and powers which have substantially the same
effect as rights which the Company or any actual creditor of the Company
was entitled to assert absent such laws; by general principles of equity,
including the defenses of unconscionability, ambiguity, and economic
duress, whether asserted in equitable or in legal proceedings; by rules of
commercial reasonableness; by the provisions of law concerning transfers in
contemplation of insolvency to preferred creditors; by provisions of law
governing appointment of receivers, injunctive relief and other equitable
remedies; and by certain other limitations which may be imposed upon the
availability of certain equitable remedies or the exercise of certain
equitable rights, including without limitation, specific performance or
enforcement, waivers or eliminations of rights such as statutory rights of
redemption, of jury trial and service of process, separation or aggregation
of property at foreclosure or enforced sale.
This opinion is limited to matters which may be governed by federal law and the
laws of New Mexico. We express no opinion with respect to any matter which may
be governed by the laws of any other state or jurisdiction.
Based upon the foregoing, in our opinion:
1. The Purchaser is a corporation duly organized and validly existing under
the laws of New Mexico, and is in good standing under the laws of New
Mexico.
2. The Indenture and the Bond Purchase Agreement constitute legal, valid and
binding obligations of the Purchaser, enforceable against the Purchaser in
accordance with their respective terms.
3. The execution, delivery and performance by the Purchaser of the Indenture
and the Bond Purchase Agreement will not conflict with, contravene, violate
or constitute a breach of or default under the certificate of incorporation
or the bylaws of the Purchaser or any law, rule, regulation, ordinance,
order, consent, decree, agreement or instrument to which the Purchaser is a
party or by which it or its properties is bound.
EXHIBIT D
<PAGE> 21
City of Rio Rancho, et al.
December 23, 1996
Page 3
4. All necessary authorizations, approvals, consents and other orders of any
governmental authority or agency for the execution and delivery by the
Purchaser of the Indenture and the Bond Purchase Agreement have been
obtained and are in full force and effect.
5. To the best of our knowledge, there is no action, suit, proceeding, inquiry
or investigation by or before any court, public board or body pending or
threatened against the Purchaser, which (i) seeks to or does restrain or
enjoin the issuance or delivery of the Bond or the execution and delivery
of any of the Bond Documents, or (ii) in any manner questions the validity
or enforceability of the Bond or any of the Bond Documents.
Very truly yours,
EXHIBIT D
<PAGE> 1
EXHIBIT 10.18
CITY OF RIO RANCHO, NEW MEXICO
PROPERTY BOND PURCHASER, INC.
and
SUNWEST BANK OF ALBUQUERQUE, N.A., as Depositary
----------------
INDENTURE
----------------
Dated as of December 1, 1995
Securing
$3,950,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1995
This instrument constitutes a security agreement with respect to certain
personal property, under the laws of the State of New Mexico.
<PAGE> 2
Table of Contents
ARTICLE I - RECITALS...........................................................1
Section 101. The Act.............................................1
Section 102. Government Proceedings..............................1
Section 103. The Agreement.......................................1
Section 104. The Indenture: Collateral Pledge....................1
Section 105. Conditions Precedent Performed......................1
ARTICLE II - DEFINITIONS AND RULES OF CONSTRUCTION.............................2
Section 201. Meanings of Words and Terms.........................2
Section 202. Rules of Construction...............................3
Section 203. Bond Not General Obligation of Issuer...............3
ARTICLE III - GRANT............................................................4
Section 301. Pledge..............................................4
Section 302. Release.............................................4
Section 303. Survival of Certain Provisions......................4
ARTICLE IV - AUTHORIZATION, FORM, EXECUTION AND DELIVERY OF BOND...............4
Section 401. Authorization; Authorized Amount of Bond. ..........4
Section 402. Form of Bond........................................5
Section 403. Execution and Delivery..............................5
Section 404. Advances............................................5
Section 405. Application of Payments.............................5
Section 406. Bond Registration...................................5
ARTICLE V - REDEMPTION.........................................................6
Section 501. Redemption..........................................6
ARTICLE VI - THE ACQUISITION ACCOUNT...........................................6
Section 602. Disbursements.......................................6
Section 603. Depositary May Rely on Requisitions.................7
Section 604. Status Reports......................................7
Section 605. Completion Date.....................................7
Section 606.. Payment on Acceleration.............................7
Section 607. Investments.........................................7
ARTICLE VII - PARTICULAR COVENANTS AND PROVISIONS..............................8
Section 701.. Payment of Bond; Bond a Limited Obligation..........8
Section 702. Obligations Under the Agreement.....................8
i
<PAGE> 3
ARTICLE VIII - DEFAULT AND REMEDIES............................................8
Section 801. Defaults............................................8
Section 802. Acceleration........................................8
Section 803. Issuer and Depositary Not Responsible...............9
Section 804. Certification of No Default.........................9
ARTICLE IX - THE DEPOSITARY....................................................9
Section 901. Acceptance of Duties................................9
Section 902. Compensation.......................................10
Section 903. Qualification......................................10
Section 904. Resignation and Removal............................10
Section 905.. Successor Depositary...............................10
ARTICLE X - SUPPLEMENTS AND AMENDMENTS TO INDENTURE...........................11
ARTICLE XI - MISCELLANEOUS PROVISIONS.........................................11
Section 1101. Notices............................................11
Section 1102. Remedies...........................................12
Section 1103. Beneficiaries......................................12
Section 1104. Severability.......................................12
Section 1105. Obligations of Issuer Not Obligations of
Officials Individually.............................13
Section 1106. Payments Due on Days That Are Not Business Days....13
Section 1107. Execution in Counterparts..........................13
Section 1108. Applicable Law.....................................13
Section 1109. Survival...........................................13
Exhibit A - Form of Bond
Exhibit B - Form of Requisition and Certificate
Exhibit C - Form of Completion Certificate
ii
<PAGE> 4
CITY OF RIO RANCHO, NEW MEXICO, a municipal corporation existing under the
laws of the State of New Mexico (together with its successors and assigns, the
"Issuer"), PROPERTY BOND PURCHASER, INC., a New Mexico corporation (together
with its successors and assigns, and transferees of the Bond (defined below),
the "Purchaser"), and SUNWEST BANK OF ALBUQUERQUE, N.A., a national banking
association (together with its successors and assigns, the "Depositary"), agree:
ARTICLE I - RECITALS
Section 101. The Act. Pursuant to Sections 3-32-1 through 3-32-16, New
Mexico Statutes Annotated, 1978 Compilation, as amended (the "Act"), the Issuer
is authorized to acquire, construct and equip certain industrial or commercial
projects and to issue its industrial revenue bonds to finance such projects and
certain related costs. Such bonds are payable solely out of revenue of the
leasing of such projects. Such bonds may be further secured by an assignment of
the Issuer's interest in the lease agreements respecting the project to be
acquired, constructed and equipped. Under the Act, a project may include land,
buildings, machinery, equipment and other property deemed necessary in
connection with such project.
Section 102. Government Proceedings. Fulcrum Properties, L.P., a Delaware
limited partnership (together with its successors and assigns, the "Company"),
presented to the Issuer a proposal relating to the issuance of industrial
revenue bonds and the development of an administrative office and warehouse
facility. The Issuer, by City Council ("Council") Ordinance adopted on November
8, 1995 (the "Ordinance"), authorized, among other matters, (i) the issuance of
its City of Rio Rancho, New Mexico Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project) Series 1995 (the "Bond") in the principal
amount not to exceed $3,950,000, and (ii) the execution and delivery of this
Indenture.
Section 103. The Agreement. The Issuer has entered into a Lease and
Purchase Agreement dated as of the date of this Indenture (together with any and
all amendments and supplements, the "Agreement") with the Company, under which
the Issuer has leased the Project Property (as defined in the Agreement) to the
Company and the Company has agreed to make rental payments in amounts sufficient
to pay the principal of, interest on and redemption price of the Bond when due.
For the purpose of providing security for the payment of the principal of,
interest on and redemption price of the Bond, the Issuer wishes to assign to the
Purchaser certain of its interests in the Agreement.
Section 104. The Indenture: Collateral Pledge. The Bond is to be issued
under this Indenture which constitutes a collateral pledge of the Agreement to
the Purchaser.
Section 105. Conditions Precedent Performed. All acts, conditions and
things required on the part of the Issuer by the Constitution and laws of the
State of New Mexico to happen, exist and be performed precedent to and in the
execution and delivery of this Indenture and the Agreement and the issuance of
the Bond have happened, exist and have been performed as so required in order to
make this Indenture, the Agreement and the Bond valid and binding
<PAGE> 5
agreements of the Issuer, enforceable against the Issuer in accordance with
their respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity.
ARTICLE II - DEFINITIONS AND RULES OF CONSTRUCTION
Section 201. Meanings of Words and Terms. All words and terms defined in
the Agreement have the same meanings when used in this Indenture. In addition:
"Acquisition Account" has the meaning assigned in Section 601.
"Act" has the meaning assigned in Section 101.
"Agreement" has the meaning assigned in Section 103.
"Authorized Company Representative" means any one of the persons at the
time designated to act on behalf of the Company in a certificate furnished to
the Issuer and the Depositary containing the specimen signatures of such persons
and signed on behalf of the Company by an officer of the Company.
"Bond" has the meaning assigned in Section 102.
"Bond Documents" means this Indenture, the Agreement and the Bond Purchase
Agreement.
"Bond Purchase Agreement" means the Bond Purchase Agreement dated the date
of the execution and delivery of this Indenture among the Purchaser, the Issuer
and the Company.
"Business Day" means any day that is not a Saturday or Sunday or a day on
which banking institutions in the State or in the city of payment are authorized
or required to close.
"Company" has the meaning assigned in Section 102.
"Default" has the meaning assigned in Section 801.
"Depositary" has the meaning assigned in the first paragraph of this
Indenture.
"Indenture" means this Indenture, together with any amendments and
supplements.
"Interest Payment Date" means each June 1 and December 1, beginning June 1,
1996.
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"Issuer" has the meaning assigned in the first paragraph of this Indenture.
"Ordinance" has the meaning assigned in Section 102.
"Parties" means the Issuer, the Company, the Purchaser and the Depositary.
"Party" means any one of the Parties.
"Payment of the Bond" means payment in full of the principal of and
interest on the Bond in accordance with its terms and the provisions of this
Indenture and payment of all fees and expenses of the Issuer and the Depositary
payable by the Company under this Indenture, the Agreement or the Bond Purchase
Agreement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision.
"State" means the State of New Mexico.
"Related Costs" means expenditures incurred or to be incurred with respect
to the Project, including, without limitation, the acquisition of the Project
Site and the Project Property and the payment of principal of and interest on
any loan the proceeds of which are used to acquire the Project Site and/or the
Project Property.
"Revenues" means all payments to be made by the Company pursuant to the
Agreement and all other amounts to be received by the Issuer or the Depositary
in respect of the administrative office and warehouse facility project,
including all amounts and investments in the funds and accounts created
hereunder and all income and profits thereon.
Section 202. Rules of Construction.
(a) The captions and headings in this Indenture are for convenience only
and in no way define, limit or describe the scope or intent of any provisions or
sections of this Indenture.
(b) All references in this Indenture to particular articles, sections or
exhibits are references to articles or sections of or exhibits to this Indenture
unless some other reference is established.
(c) Any inconsistency between the provisions of the Agreement and the
provisions of this Indenture will be resolved in favor of the provisions of this
Indenture.
Section 203. Bond Not General Obligation of Issuer. Neither the faith and credit
nor the taxing power of the State or of any of its political subdivisions,
including the Issuer, is pledged to the
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payment of the principal of, interest on or redemption price of the Bond. The
Bond will be payable solely out of the Revenues, proceeds and receipts and other
security pledged hereby. The principal of, interest on and redemption price of
the Bond will never constitute a debt or indebtedness or general obligation of
the Issuer within the meaning of any State constitutional provision or statutory
limitation. The Bond will never constitute or give rise to a pecuniary liability
of the Issuer or be a charge against its general credit or a charge against the
general credit or the taxing powers of the State or any political subdivision
thereof.
ARTICLE III - GRANT
Section 301. Pledge. In consideration of the purchase of the Bond by the
Purchaser, and in order to secure the payment of the principal of, interest on
and redemption price of the Bond, and in order to secure the performance by the
Issuer of its obligations under this Indenture and the Bond, the Issuer pledges
and assigns to the Purchaser and grants a security interest to the Purchaser in
(i) all the Issuer's right, title and interest in and to the Agreement,
including its rights to the Revenues, but reserving its rights under Sections
4.6, 4.14, 4.15, 5.7, 5.8, 5.9 and 5.11 of the Agreement including but not
limited to the right to reimbursement for certain costs and expenses, to receive
or designate the recipient of any payment in lieu of taxes pursuant to Section
5.11 of the Agreement, to receive notices, to give consents and to be
indemnified; and (ii) the moneys and investments in the Acquisition Account.
Section 302. Release. If the principal of and interest on the Bond is paid
in full to the Purchaser, all obligations of the Issuer under this Indenture
will terminate, and the Purchaser will discharge this Indenture and execute and
deliver to the Issuer and the Company such instruments in writing as may be
required to evidence such discharge. The Clerk of the Issuer is authorized to
accept the certificate of the Purchaser that all principal and interest due on
the Bond has been paid as evidence of the satisfaction of this Indenture.
Section 303. Survival of Certain Provisions. Notwithstanding the foregoing,
any provisions of this Indenture and any related legislation which relate to the
maturity of the Bond, interest payments and dates thereof, exchange, transfer
and registration of the Bond, replacement of the mutilated, destroyed, lost or
stolen Bond, nonpresentment of the Bond, the holding of moneys in trust, and
repayments to the Company from the various funds established pursuant to this
Indenture and the duties of the Depositary in connection with all of the
foregoing, will remain in effect and be binding upon the Depositary and the
Purchaser notwithstanding the release and discharge of this Indenture. The
provisions of this Section will survive the release, discharge and subordination
of this Indenture.
ARTICLE IV - AUTHORIZATION, FORM, EXECUTION AND DELIVERY OF BOND
Section 401. Authorization; Authorized Amount of Bond. The Bond is hereby
authorized to be issued under this Indenture and secured by this Indenture. The
Bond will be issued as a single fully registered bond without coupons, in the
denomination of $3,950,000. The Bond will be numbered R-1. No bonds may be
issued under this Indenture except in accordance
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with this Article. The total principal amount of the Bond that may be issued
under this Indenture is expressly limited to $3,950,000. No additional bonds may
be issued. The Bond may be transferred in accordance with its terms.
Section 402. Form of Bond. The Bond will be in substantially the form of
Exhibit A. The Bond will be dated the date of the execution and delivery of this
Indenture and will bear interest on advances made pursuant to Section 404 from
the respective dates of such advances at 8% per annum on the aggregate unpaid
principal amount of such advances. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months. Accrued interest will be paid
on each Interest Payment Date. The Bond will mature on December 1, 2020.
Section 403. Execution and Delivery. The Bond will be signed by the Mayor,
City Administrator or City Treasurer/ Director of Finance of the Issuer and
delivered to the Purchaser on the date of the execution and delivery of this
Indenture.
Section 404. Advances. Subject to the terms and conditions of the Bond
Purchase Agreement, the Purchaser will purchase the Bond upon the execution and
delivery of the Indenture and will pay the purchase price of the Bond as set
forth in Section 2 of the Bond Purchase Agreement through the advances described
in this Section 404. The Company will request advances by notice to the
Purchaser and the Depositary. Promptly upon receipt of notice from the Company
requesting an advance, the Purchaser will, so long as no Default has occurred
and is continuing, pay the amount of the advance requested in such notice to the
Depositary for deposit in the Acquisition Account; provided that the aggregate
amount of such advances will not exceed $3,950,000. The records of the
Depositary will be conclusive as to the aggregate amount of advances requested
and made, absent manifest error. The Purchaser is authorized to endorse on the
schedule attached to the Bond the date and amount of each such advance and each
principal payment on and redemption in part of the Bond and the resulting
principal amount. Failure to make any such endorsement or any error in such
endorsement will not affect the rights or obligations of any of the Parties on
or with respect to the Bond.
Section 405. Application of Payments. Payments received by the Purchaser
with respect to the redemption of all or any portion of the Bond will be applied
first to the principal amount to be redeemed and then to accrued interest on
such principal amount. All other payments received by the Purchaser with respect
to the Bond will be applied first to accrued interest on and then to the unpaid
principal of the Bond. If such payments exceed accrued interest on and the
unpaid principal of the Bond, the Purchaser will pay such excess to the Company.
Section 406. Bond Registration. The Company will maintain a registration
book showing the name and address of the holder of the Bond. Upon the Company's
receipt of notice of the transfer of the Bond in accordance with its terms, the
Company will cause the registration book to reflect the name and address of the
transferee, unless a trustee for bondholders is appointed as provided in this
Indenture, in which event such trustee shall maintain such registration book.
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ARTICLE V - REDEMPTION
Section 501. Redemption. If the Company gives notice to the Issuer, the
Depositary and the Purchaser pursuant to Article VIII of the Agreement that the
Company has elected to cause redemption of the Bond in full or in part, all or
such portion of the Bond will be deemed redeemed by the Issuer on the date
indicated in such notice at a redemption price equal to the principal amount to
be redeemed plus accrued interest on such principal amount to the redemption
date.
ARTICLE VI - THE ACQUISITION ACCOUNT
Section 601. Creation; Deposits. A special account is hereby created with
the Depositary and designated "Fulcrum Properties, L.P. Project Acquisition
Account" (the "Acquisition Account"). Any moneys received by the Issuer or the
Depositary on account of any advances under Section 404 will be deposited in the
Acquisition Account. The moneys in the Acquisition Account will be held by the
Depositary and will, subject to the provisions of Sections 605 and 606, be
applied to the payment of Related Costs and, pending such application, will be
subject to a lien in favor of the Purchaser.
Section 602. Disbursements. The Depositary will make payments of Related
Costs from the Acquisition Account, but only upon receipt of a requisition and
certificate in the form of Exhibit B, signed by an Authorized Company
Representative, stating to whom the payment is to be made, the general purpose
for which the obligation to be paid was incurred, and that:
(1) obligations in the stated amounts were incurred for Related Costs
and are due and payable (or, if the Company is indicated as the payee, were duly
paid by the Company) and that each item is a proper charge against the
Acquisition Account and has not been the subject of a previous withdrawal from
the Acquisition Account;
(2) to the best knowledge of such Authorized Company Representative
there has not been filed with or served upon the Issuer or the Company notice of
any lien, right or attachment upon, or claim affecting the right of any such
Persons to receive payment of, the respective amounts stated in such requisition
which has not been released or will not be released simultaneously with the
payment of such obligation; and
(3) with respect to any item for payment for labor or to contractors,
builders or materialmen, (i) the obligations stated have been properly incurred,
(ii) to the best knowledge of such Authorized Company Representative, such work
was actually performed or such materials or supplies were actually furnished or
installed in or about the Project, and (iii) to the best knowledge of such
Authorized Company Representative, either such materials or supplies are not
subject to any lien or security interest or any such lien or security interest
will be released or discharged upon payment of the requisition.
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Section 603. Depositary May Rely on Requisitions. All requisitions and
certificates received by the Depositary as conditions of payment from the
Acquisition Account may be conclusively relied upon by the Depositary and will
be retained by the Depositary, subject at all reasonable times to examination by
the Issuer and other Parties and their respective agents and representatives.
Section 604. Status Reports. On a quarterly basis, the Depositary will make
a written report covering all receipts and moneys then on deposit in the
Acquisition Account, any investments of such moneys and all transfers and
disbursements of such moneys as at and for the quarterly periods ending March
31, June 30, September 30 and December 31 of each year. The Depositary will make
such reports monthly, at no additional cost, if the Company requests. The
Depository will provide copies of such quarterly and/or monthly reports to the
Issuer upon the Issuer's written request.
Section 605. Completion Date. Upon receipt of a certificate from the
Company, in the form of Exhibit C signed by an Authorized Company
Representative, establishing the Completion Date, the Depositary will, to the
extent moneys are available therefor, set aside the moneys necessary for the
payment of the Related Costs incurred by the Company but not then due or payable
as set forth in such certificate and then will transfer any moneys remaining in
the Acquisition Account to the Company for use in connection with the Project or
for payment of debt service on the Bond (but the Depositary and the Issuer shall
have no duty to inquire into or otherwise monitor the Company's use of such
moneys).
Section 606. Payment on Acceleration. If the Purchaser declares the unpaid
principal of and accrued interest on the Bond to be immediately due and payable
pursuant to Section 802, the Depositary will promptly pay all moneys then held
for the credit of the Acquisition Account to the Purchaser for application to
the unpaid principal of and accrued interest on the Bond.
Section 607. Investments. Moneys on deposit in the Acquisition Account
will, at the written direction of an Authorized Company Representative, be
invested and reinvested by the Depositary in short-term interest-bearing
securities or funds. Such investments will be deemed at all times to be a part
of the Acquisition Account. Any interest accruing on any such investment and any
profit realized from such investment will be credited to the Acquisition
Account. Any loss resulting from any such investment will be charged to the
Acquisition Account. The Depositary will sell at the best price obtainable or
present for redemption any such investment when necessary in order to provide
cash to meet any payment or transfer from the Acquisition Account. Neither the
Depositary nor the Issuer will be liable or responsible for any loss resulting
from any such investment. The Depositary may make any such investment through
its own or its affiliated bond or investment department, unless otherwise
directed in writing by an Authorized Company Representative.
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ARTICLE VII - PARTICULAR COVENANTS AND PROVISIONS
Section 701. Payment of Bond; Bond a Limited Obligation. Pursuant to the
Agreement, the Issuer has caused the Company to pay the principal of, interest
on and redemption price of the Bond in the manner provided in this Indenture and
in the Bond. Except as otherwise provided in this Indenture, such principal,
interest and redemption price are payable solely from the Basic Rent, which the
Company will pay as provided in the Lease. NEITHER THE FAITH AND CREDIT -NOR-THE
TAXING POWER OF THE STATE OR OF ANY OF ITS-POLITICAL SUBDIVISIONS, INCLUDING THE
ISSUER, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, INTEREST ON OR REDEMPTION
PRICE OF THE BOND. THE PRINCIPAL OF, INTEREST ON AND REDEMPTION PRICE OF THE
BOND WILL NEVER CONSTITUTE A DEBT OR INDEBTEDNESS OF THE ISSUER WITHIN THE
MEANING OF ANY PROVISION OR LIMITATION OF THE CONSTITUTION OR LAWS OF THE STATE
OR THE HOME RULE CHARTER OF THE ISSUER. THE BOND WILL NEVER CONSTITUTE NOR GIVE
RISE TO A PECUNIARY LIABILITY OF THE STATE, ANY OF ITS POLITICAL SUBDIVISIONS OR
OF THE ISSUER OR A CHARGE AGAINST THEIR GENERAL CREDIT OR TAXING POWERS.
Section 702. Obligations Under the Agreement. The Issuer: (i) will perform
all of its obligations under the Agreement; (ii) will not execute or agree to
any change, amendment or modification of or supplement to the Agreement except
by a supplement or an amendment duly executed by the Issuer and the Company with
the approval of the Purchaser; and (iii) will not agree to any abatement,
reduction or diminution of the Basic Rent without the approval of the Purchaser.
ARTICLE VIII - DEFAULT AND REMEDIES
Section 801. Defaults. Each of the following events is a "Default":
(a) Payment of any installment of principal of, interest on or
redemption price of the Bond is not made within five days of the date when due.
(b) An Event of Default occurs and is continuing.
(c) The Issuer fails to perform any other of its obligations under the
Bond or this Indenture for a period of 30 days after receipt of notice of such
failure from any of the Parties.
Section 802. Acceleration. If a Default has occurred and is continuing,
the Purchaser may by notice to the other Parties declare the then unpaid
principal of and all accrued interest on the Bond to be immediately due and
payable. Upon such declaration the same will be immediately due and payable by
the Company; provided, however, that the Purchaser, by written notice to the
other parties, may annul such declaration and destroy its effects and waive any
such
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default if all reasonable charges and expenses of the Issuer and the Depositary
and their agents and counsel shall have been paid or provided for.
Section 803. Issuer and Depositary Not Responsible. Neither the Issuer nor
the Depositary has any responsibility to act on behalf of the Purchaser with
respect to any Default. All rights and remedies arising from or related to any
Default are the rights and remedies of the Purchaser, provided that, upon
request of the Purchaser, the Issuer, if legally required, will cooperate with
the Purchaser in the lawful enforcement of such rights and remedies upon receipt
of indemnity satisfactory to the Issuer in the Issuer's sole discretion against
any out-of-pocket cost, expense (including any reasonable counsel fees and
expenses) or liability the Issuer may incur or suffer as a result of or in
connection with such cooperation, subject to the provisions concerning the
appointment of a trustee set forth in Article X.
Section 804. Certification of No Default. On or before December 1 of each
year in which the Bond is outstanding, beginning December 1, 1996, the Company
and the Purchaser will deliver a certificate to the Issuer stating that they are
aware of no Default or Event of Default or, if they are so aware, describing the
circumstances of such Default or Event of Default.
ARTICLE IX - THE DEPOSITARY
Section 901. Acceptance of Duties. The Depositary accepts the duties
imposed on it by this Indenture, but only on the following express terms and
conditions:
(a) The Depositary undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied covenants
or obligations will be read into this Indenture against the Depositary.
(b) In the absence of negligence or willful misconduct on its part,
the Depositary may conclusively rely on certificates or notices furnished to the
Depositary and conforming on their faces to the requirements of this Indenture
or the Agreement, as the case may be; but if any such certificates or notices
are specifically required to be furnished to the Depositary under this Indenture
or the Agreement, the Depositary will examine the same to determine whether they
conform on their faces to the requirements of this Indenture or the Agreement,
as the case may be.
(c) No provision of this Indenture will be construed to relieve the
Depositary from liability for its own negligence or willful misconduct.
(d) The Depositary may consult with counsel and other professionals
and the advice of such counsel and other professionals shall be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by the Depositary hereunder in good faith and in reliance thereon.
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(e) The Depositary shall be under no obligation to take any action or
exercise any right or power under this Indenture unless the Purchaser shall
first have provided to the Depositary, its directors, officers, agents and
employees, security or indemnity satisfactory to the Depositary against the
costs (including without limitation reasonable fees of attorneys), expenses and
liabilities that might be incurred by the Depositary in connection therewith.
Section 902. Compensation. The Company will pay to the Depositary its
reasonable fees and charges and all of its reasonable expenses (including
reasonable counsel fees and expenses) as Additional Payments in accordance with
the Agreement.
Section 903. Qualification. The Depositary must be an association or a
corporation organized and doing business under the laws of the United States of
America or of any state, be granted trust powers under such laws and be subject
to supervision or examination by federal or state banking authorities. If at any
time the Depositary ceases to be eligible in accordance with the provisions of
this Section 903, it will resign immediately in the manner and with the effect
specified in Section 904.
Section 904. Resignation and Removal.
(a) No resignation or removal of the Depositary and no appointment of
a successor Depositary will become effective until the acceptance of appointment
by the successor Depositary under Section 905.
(b) The Depositary may resign at any time by notice to the other
Parties. If an instrument of acceptance by a successor Depositary has not been
delivered to the retiring Depositary within 30 days after the giving of such
notice of resignation, the retiring Depositary may petition any court of
competent jurisdiction for the appointment of a successor Depositary.
(c) The Depositary may be removed at any time by the Company by notice
to the other Parties.
(d) The Depositary will be automatically removed on the occurrence of
the Completion Date and the application of all moneys on deposit in the
Acquisition Account as provided in Section 605. No successor Depositary will
thereafter be appointed and each reference to the Depositary in this Indenture
and the Agreement will thereafter be ineffective.
(e) If the Depositary resigns or is removed (except as provided in
subsection (d) of this Section 904), the Company will promptly appoint a
successor Depositary and give written notice of such appointment to the Issuer,
the Purchaser and the retiring or removed Depositary.
Section 905. Successor Depositary.
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(a) Every successor Depositary appointed under this Indenture will
execute, acknowledge and deliver to its predecessor, and the other Parties an
instrument accepting such appointment, and thereupon such successor Depositary,
without any further act, will become fully vested with all the rights, and
subject to all the obligations, of its predecessor; but such predecessor will,
nevertheless, on the request of its successor, the Issuer, the Company or the
Purchaser execute and deliver an instrument transferring to such successor
Depositary all the rights of such predecessor under this Indenture. Every
predecessor will deliver all property and moneys held by it under this Indenture
to its successor. The Issuer and the Purchaser will execute, acknowledge and
deliver any instrument reasonably required by any successor Depositary to more
fully and certainly vest in such Depositary the rights vested in the predecessor
Depositary by this Indenture.
(b) Notwithstanding any of the foregoing provisions of this Article,
any Person qualified to act as Depositary under this Indenture with or into
which the Person acting as Depositary may be merged or consolidated, or to which
the assets and business of such Person may be sold, will automatically become
the successor Depositary.
ARTICLE X - SUPPLEMENTS AND AMENDMENTS TO INDENTURE
This Indenture may be supplemented or amended only by one or more
instruments executed by the Issuer, the Purchaser and the Depositary and
consented to by the Company. The Depositary will execute any such proposed
supplement or amendment on the request of the Purchaser unless the Depositary
determines in good faith that its rights or obligations under this Indenture
would be materially and adversely affected by such supplement or amendment. If
the rights or obligations of the Depositary would be materially and adversely
affected by such supplement or amendment, as determined in good faith by the
Depositary, the Depositary will have no liability for its refusal to enter into
such supplement or amendment. Notwithstanding the generality of the foregoing,
if the Purchaser gives notice to the Issuer, the Depositary and the Company of
the Purchaser's desire to have a trustee appointed for the benefit of the
Purchaser, the Parties will cooperate in amending this Indenture to facilitate
such appointment. Nothing herein is intended to require the Issuer to act in a
fiduciary capacity and if the original Purchaser transfers the Bond and if
circumstances arise which would so require, the Issuer has the right to request
that a trustee be appointed by and at the expense of the Company and the Parties
n amending this Indenture to facilitate the making of such appointment.
ARTICLE XI - MISCELLANEOUS PROVISIONS
Section 1101. Notices. Any notice, demand, direction, request, consent,
report or other instrument authorized or required by any of the Bond Documents
to be executed, given or filed will be in writing and will be deemed to have
been sufficiently given or filed for all purposes of the Bond Documents when
delivered by hand delivery or on the third Business Day following the day on
which the same has been mailed -by registered or certified mail, postage
prepaid, addressed as follows:
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If to the Issuer: City of Rio Rancho
3900 Southern Boulevard
Rio Rancho, New Mexico 87124
Attention: City Administrator
If to the Purchaser: Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
If to the Company: Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
If to the Depositary: Sunwest Bank of Albuquerque, N.A.
Corporate Trust Department
500 4th Street, N.W., 3rd Floor
Albuquerque, New Mexico 87102
Attention: Elizabeth Dean, Vice President -
Trust Officer
Any Party may, by notice to each of the other Parties, designate any further or
different addresses to which subsequent notices, certificates or other
communications are to be sent.
Section 1102. Remedies. No right or remedy conferred on any Party in any of
the Bond Documents is intended to be exclusive of any other right or remedy.
Each such right or remedy is in addition to every other right or remedy provided
in any of the Bond Documents or by law. No delay or omission of any Party to
exercise any such right or remedy will impair any such right or remedy or be
construed to be a waiver. Every such right or remedy may be exercised from time
to time and as often as the relevant Party may deem expedient. No waiver by any
Party of any right or remedy with respect to any Default or Event of Default
will extend to or affect any other existing or subsequent Default or Event of
Default.
Section 1103. Beneficiaries. Nothing in any of the Bond Documents expressed
or implied is intended or is to be construed to confer upon any Person other
than the Parties (and, in the case of Section 5.8 of the Agreement only, the
Indemnities) any right, remedy or claim, legal or equitable.
Section 1104. Severability. In case any one or more of the provisions of
any of the Bond Documents or of the Bond is for any reason held to be illegal or
invalid, such illegality or invalidity will not affect any other provision of
any of the Bond Documents or of the Bond, but the Bond Documents and the Bond
will be construed and enforced as if such illegal or invalid provision had not
been contained therein. In case any covenant, stipulation, obligation or
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agreement of the Issuer contained in any of the Bond Documents or the Bond is
for any reason held to be in violation of law, then such covenant, stipulation,
obligation or agreement will be deemed to be the covenant, stipulation,
obligation or agreement of the Issuer to the full extent permitted by law.
Section 1105. Obligations of Issuer Not Obligations of Officials
Individually. All obligations of the Issuer under the Bond Documents and the
Bond will be deemed to be obligations of the Issuer to the full extent permitted
by the Constitution and laws of the State. No obligation under any of the Bond
Documents or the Bond will be deemed to be an obligation of any present or
future officer (including, without limitation, City Councilors) or employee of
the Issuer in his or her individual capacity, and no officer of the Issuer who
executes the Bond will be personally liable on the Bond or be subject to any
personal liability or accountability by reason of the issuance of the Bond.
Section 1106. Payments Due on Days That Are Not Business Days. If the date
for any payment called for under any of the Bond Documents or the Bond is not a
Business Day, then such payment will be made on the next Business Day and no
interest on such payment will accrue for the period after such date.
Section 1107. Execution in Counterparts. Each of the Bond Documents may be
executed in multiple counterparts, all of which taken together will constitute
one instrument. Any Party may execute any of the Bond Documents by executing any
such counterpart of such Bond Document.
Section 1108. Applicable Law. The validity, construction and effect of each
of the Bond Documents will be governed by the law of the State applicable to
agreements made and to be performed in the State.
Section 1109. Survival. The provisions of Sections 901 and 902 of this
Indenture shall survive payment of the Bond and expiration or earlier
termination of this Indenture.
Section 1110. No Violation of Public Policies Regarding Indemnity. If a
court of competent jurisdiction determines that the provisions of Section 56-7-1
NMSA 1978, as amended, are applicable to this Agreement or any claim arising
under this Agreement, then any agreement to indemnify in connection with this
Agreement will not extend to liability, claims, damages, losses or expenses,
including attorney fees, arising out of:
(a) The preparation or approval of maps, drawings, opinions, reports,
surveys, change orders, designs or specifications by the indemnitee, or the
agents or employees of the indemnitee; or
(b) The giving of or the failure to give directions or instructions by
the indemnitee, or the agents or employees of the indemnitee, where such giving
or failure to give directions or instructions is the primary cause of bodily
injury to persons or damage to property.
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Section 1111. Non-Merger. The provisions of this Indenture shall survive
the conveyance of the Project to the Issuer, the reconveyance of the Project to
the Company, and all other performances hereunder, and shall not be deemed
merged in any deed or other instrument or document delivered hereunder.
Section 1112. Limitation of Liability of Officials of Issuer. No covenant,
agreement or obligation contained herein shall be deemed to be a covenant,
agreement or obligation of any present or future official, officer, employee,
agent or member of the Council of the Issuer in his individual capacity, and
neither the officials of the Issuer nor any officer thereof executing the Bond
shall be liable personally on the Bond or be subject to any personal liability
or accountability by reason of the issuance thereof. No official, officer,
employee, agent or member of the Council of the Issuer shall incur any personal
liability with respect to any other action taken by him pursuant to this
Indenture or the Act.
DATED AS OF December 1, 1995.
CITY OF RIO RANCHO, NEW MEXICO
By: __________________________________
Thomas E. Swisstack, Mayor
PROPERTY BOND PURCHASER, INC.
By: __________________________________
Scott A. Budoff, President
SUNWEST BANK OF ALBUQUERQUE, N.A.
By: __________________________________
Its _____________________________
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STATE OF NEW MEXICO
COUNTY OF SANDOVAL
This instrument was acknowledged before me on December 27, 1995 by
Thomas E. Swisstack as Mayor of the City of Rio Rancho, New Mexico, a New Mexico
municipal corporation.
-----------------------------------
Notary Public
My commission expires:
- --------------------------
STATE OF NEW MEXICO
COUNTY OF BERNALILLO
This instrument was acknowledged before me on December 27, 1995 by
Scott A. Budoff as President of Property Bond Purchaser, Inc., a New Mexico
corporation.
-----------------------------------
Notary Public
My commission expires:
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15
<PAGE> 19
STATE OF NEW MEXICO
COUNTY OF BERNALILLO
This instrument was acknowledged before me on December 28, 1995 by
Elizabeth Dean as Vice President & Trust Officer of Sunwest Bank of Albuquerque,
N.A., a national banking association.
-----------------------------------
Notary Public
My commission expires:
- --------------------------
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<PAGE> 20
EXHIBIT A
THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR BY ANY STATE SECURITIES LAW AND
IS TRANSFERABLE ONLY UPON COMPLIANCE WITH THE RESTRICTIVE TERMS
PROVIDED BELOW AND IN THE INDENTURE REFERRED TO BELOW.
No. R-1 Up to $3,950,000
United States of America
State of New Mexico
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1995
MATURITY DATE INTEREST RATE ISSUE DATE
December 1, 2020 8% per annum December _, 1995
CITY OF RIO RANCHO, NEW MEXICO, a municipal corporation existing under the
Constitution and laws of the State of New Mexico (the "Issuer"), for value
received, promises to pay, solely from the source described below, to Property
Bond Purchaser, Inc. (together with its successors and assigns, and transferees
as permitted below, the "Purchaser"), on the Maturity Date, Three Million Nine
Hundred Fifty Thousand Dollars (subject to prior optional or mandatory
redemption as described below) or so much of such amount as has been advanced by
the Purchaser and is outstanding and to pay, solely from such source, to the
Purchaser under the Indenture at the close of business on the day 15 days before
the relevant payment date, interest on principal amounts advanced with respect
to this Bond from the dates of such advances at the Interest Rate specified
above (computed on the basis of a 360-day year consisting of twelve 30- day
months) until payment of such principal amount. Such interest is payable
semiannually on June 1 and December 1 in each year, beginning June 1, 1996.
This Bond is issued under and pursuant to the Constitution and laws of
the State of New Mexico, particularly Sections 3-32-1 to 3-32-16 NMSA 1978, as
amended, and under the home rule powers of the Issuer and pursuant to an
ordinance duly adopted by the Issuer.
The principal of, interest on and redemption price of this Bond are
payable solely from revenues derived by the Issuer from the Lease and Purchase
Agreement dated as of December 1, 1995 (the "Agreement") between the Issuer and
Fulcrum Properties, L.P. (the "Company"), which Agreement relates to an
administrative office and warehouse facility in Rio Rancho, New Mexico and which
revenues have been pledged and assigned by the Issuer to the Purchaser under the
Indenture dated as of December 1, 1995 (together with any amendments and
<PAGE> 21
supplements, the "Indenture 't) among the Issuer, the Purchaser and Sunwest Bank
of Albuquerque, N.A., as Depositary (the "Depositary").
Reference is made to the Indenture, the Agreement, and the Bond
Purchase Agreement (as defined in the Indenture) for the provisions, among
others, with respect to the custody and application of the proceeds of the sale
of this Bond, the collection and disposition of income and other revenues,
restrictions on transfer of this Bond, a description of the account charged with
and pledged to the payment of the principal of, interest on and redemption price
of this Bond, the nature and extent of the security, the terms and conditions
under which this Bond is issued and amounts are to be advanced with respect to
this Bond by the Purchaser, and the rights, duties and obligations of the
Issuer, the Company, the Purchaser and the Depositary. By accepting this Bond,
the holder accepts and undertakes to perform all of the obligations of the
Purchaser.
NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF NEW
MEXICO OR OF ANY OF ITS POLITICAL SUBDIVISIONS, INCLUDING THE ISSUER, IS PLEDGED
TO THE PAYMENT OF THE PRINCIPAL OF, INTEREST ON OR REDEMPTION PRICE OF THIS
BOND. THE PRINCIPAL OF, INTEREST ON AND REDEMPTION PRICE OF THIS BOND WILL NEVER
CONSTITUTE A DEBT OR INDEBTEDNESS OF THE ISSUER WITHIN THE MEANING OF ANY
PROVISION OR LIMITATION OF THE CONSTITUTION OR LAWS OF THE STATE OF NEW MEXICO
OR THE HOME RULE CHARTER OF THE ISSUER. THIS BOND WILL NEVER CONSTITUTE NOR GIVE
RISE TO A PECUNIARY LIABILITY OF THE STATE OF NEW MEXICO, ANY OF ITS POLITICAL
SUBDIVISIONS OR OF THE ISSUER OR A CHARGE AGAINST THEIR GENERAL CREDIT OR TAXING
POWERS.
This Bond may be called for redemption, as provided in the Indenture,
at the option of the Company as a whole or in part on any date selected by the
Company, at a redemption price equal to the principal amount to be redeemed plus
interest accrued on such principal amount to the redemption date.
If a Default (as defined in the Indenture) occurs, the Purchaser may
cause the then unpaid principal amount of this Bond and all accrued interest to
be immediately due and payable as provided in the Indenture. Neither the Issuer
nor the Depositary has any responsibility to act on behalf of the Purchaser with
respect to any Default.
The Purchaser is authorized to endorse on the schedule attached to this
Bond the date and amount of each advance by the Purchaser pursuant to Section
404 of the Indenture and each principal payment on and redemption in part of
this Bond and the resulting principal amount. Failure-to make any such
endorsement or any error in such endorsement will not affect the rights or
obligations of the Issuer or the Purchaser.
This Bond may be transferred in whole but not in part. Upon any such
transfer, the transferee will give notice of the transfer and of the
transferee's address for notices and for
2
<PAGE> 22
payment of principal of and interest on this Bond to the Issuer, the Company and
the Depositary in the manner provided in the Indenture.
All acts, conditions and things required to happen, exist and be
performed precedent to and in the issuance of this Bond and the execution of the
Indenture have happened, exist and have been performed as so required.
The validity, construction and performance of this Bond are governed by
the law of New Mexico applicable to agreements made and to be performed in New
Mexico.
CITY OF RIO RANCHO, NEW MEXICO
By __________________________________
Its Mayor
3
<PAGE> 23
<TABLE>
<CAPTION>
Amount of
Principal Resulting
Amount of Payment or Principal Notation
Date Advance Redemption Amount Made By
---- ------- ---------- ------ -------
<S> <C> <C> <C> <C>
</TABLE>
4
<PAGE> 24
EXHIBIT B
REQUISITION AND CERTIFICATE
To: Sunwest Bank of Albuquerque, N.A., as Depositary
The undersigned, pursuant to the Indenture dated as of December 1, 1995
(the "Indenture"), among the City of Rio Rancho, New Mexico (the "Issuer"),
Property Bond Purchaser, Inc., and Sunwest Bank of Albuquerque, N.A., as
Depositary, requests on behalf of Fulcrum Properties, L.P. (the "Company") the
disbursement of $______ from the Acquisition Account (as defined by reference in
the Indenture) to pay the following costs and expenses related to the Project
(as defined in the Indenture) or to the issuance of the Bond (as defined in the
Indenture):
<TABLE>
<CAPTION>
General
Classification
Amount of Expenditure Payee
------ -------------- -----
<S> <C> <C> <C>
$
Total: $
</TABLE>
The undersigned certifies that:
(1) obligations in the stated amounts were incurred for Related
Costs (as defined in the Indenture) and are due and payable (or, if the Company
is indicated as the payee, were duly paid by the Company) and that each item is
a proper charge against the Acquisition Account and has not been the subject of
a previous withdrawal from the Acquisition Account;
(2) to the best knowledge of the undersigned there has not been
filed with or served upon the Issuer or the Company notice of any lien, right or
attachment upon, or claim affecting the right of any such payee to receive
payment of, the respective amounts stated in such requisition which has not been
released or will not be released simultaneously with the payment of such
obligation; and
(3) with respect to any item for payment for labor or to
contractors, builders or materialmen, (i) the obligations stated have been
properly incurred, (ii) to the best knowledge of the undersigned, such work was
actually performed or such materials or supplies were actually furnished or
installed in or about the Project, and (iii) to the best knowledge of the
undersigned, either such materials or supplies are not subject to any lien or
security interest or any-such lien or security - interest will be released or
discharged upon payment of this requisition.
DATED: ____________________________________
<PAGE> 25
__________________________________
Authorized Company
Representative
2
<PAGE> 26
EXHIBIT C
COMPLETION CERTIFICATE
The undersigned Authorized Company Representative, pursuant to
Section 605 of the Indenture dated as of December l, 1995 (the "Indenture"),
among the City of Rio Rancho, New Mexico (the "Issuer"), Property Bond
Purchaser, Inc. and Sunwest Bank of Albuquerque, N.A., as Depositary, states
that, except for specified amounts remaining in the Acquisition Account for any
Related Costs shown below incurred by the Company but not now due and payable,
the Project is complete and all costs of labor, services materials and supplies
in connection with the Project have been paid for or provisions have been made
for their payment. After the transfer of remaining moneys in the Acquisition
Account to the Company pursuant to Section 605 of the Indenture, the Company
will have sole responsibility for the payment of any Related Cost in excess of
the amount specified to be retained in the Acquisition Account.
Related Costs Not Yet due and Payable
<TABLE>
<CAPTION>
Amount For
<S> <C>
$__________ ____________________________________
____________________________________
$__________ ____________________________________
____________________________________
$__________ ____________________________________
____________________________________
</TABLE>
DATED: __________________________________
____________________________________
Authorized Company Representative
3
<PAGE> 1
EXHIBIT 10.18.1
CITY OF RIO RANCHO, NEW MEXICO
PROPERTY BOND PURCHASER, INC.
and
SUNWEST BANK OF ALBUQUERQUE, N.A., as Depositary
-----------------
INDENTURE
-----------------
Dated as of December 1, 1996
Securing
$2,100,000
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1996
This instrument constitutes a security agreement with respect to certain
personal property, under the laws of the State of New Mexico.
<PAGE> 2
Table of Consents
ARTICLE I - RECITALS.......................................................... 1
Section 101. The Act..................................................... 1
Section 102. Government Proceedings...................................... 1
Section 103. The Agreement............................................... 1
Section 104. The Indenture; Collateral Pledge............................ 1
Section 105. Conditions Precedent Performed.............................. 2
ARTICLE II - DEFINITIONS AND RULES OF CONSTRUCTION............................ 2
Section 201. Meanings of Words and Terms................................. 2
Section 202. Rules of Construction....................................... 3
Section 203. Bond Not General Obligation of Issuer....................... 4
ARTICLE III - GRANT........................................................... 4
Section 301. Pledge...................................................... 4
Section 302. Release..................................................... 4
Section 303. Survival of Certain Provisions.............................. 5
ARTICLE IV - AUTHORIZATION, FORM, EXECUTION AND DELIVERY OF BOND.............. 5
Section 401. Authorization; Authorized Amount of Bond.................... 5
Section 402. Form of Bond................................................ 5
Section 403. Execution and Delivery...................................... 5
Section 404. Advances.................................................... 5
Section 405. Application of Payments..................................... 6
Section 406. Bond Registration........................................... 6
ARTICLE V - REDEMPTION........................................................ 6
Section 501. Redemption.................................................. 6
ARTICLE VI - THE ACQUISITION ACCOUNT.......................................... 6
Section 601. Creation; Deposits.......................................... 6
Section 602. Disbursements............................................... 6
Section 603. Depositary May Rely on Requisitions......................... 7
Section 604. Status Reports.............................................. 7
Section 605. Completion Date............................................. 7
Section 606. Payment on Acceleration..................................... 7
Section 607. Investments................................................. 7
ARTICLE VII - PARTICULAR COVENANTS AND PROVISIONS............................. 8
Section 701. Payment of Bond: Bond a Limited Obligation.................. 8
Section 702. Obligations Under the Agreement............................. 8
ARTICLE VIII - DEFAULT AND REMEDIES........................................... 8
Section 801. Defaults.................................................... 8
Section 802. Acceleration................................................ 8
i
<PAGE> 3
<TABLE>
<S> <C>
Section 803. Issuer and Depositary Not Responsible................................ 9
Section 804. Certification of No Default.......................................... 9
ARTICLE IX - THE DEPOSITARY............................................................ 9
Section 901. Acceptance of Duties................................................. 9
Section 902. Compensation......................................................... 10
Section 903. Qualification........................................................ 10
Section 904. Resignation and Removal.............................................. 10
Section 905. Successor Depositary................................................. 10
ARTICLE X - SUPPLEMENTS AND AMENDMENTS TO INDENTURE.................................... 11
ARTICLE XI - MISCELLANEOUS PROVISIONS.................................................. 11
Section 1101. Notices............................................................. 11
Section 1102. Remedies............................................................ 12
Section 1103. Beneficiaries....................................................... 12
Section 1104. Severability........................................................ 12
Section 1105. Obligations of Issuer Not Obligations of Officials Individually..... 13
Section 1106. Payments Due on Days That Are Not Business Days..................... 13
Section 1107. Execution in Counterparts........................................... 13
Section 1108. Applicable Law...................................................... 13
Section 1109 Survival............................................................. 13
Section 1110. No Violation of Public Policies Retarding Indemnity................. 13
Section 1111. Non-Merger.......................................................... 13
Section 1112. Limitation of Liability of Officials of Issuer...................... 13
</TABLE>
ii
<PAGE> 4
CITY OF RIO RANCHO, NEW MEXICO, a municipal corporation existing under
the laws of the State of New Mexico (together with its successors and assigns,
the "Issuer"), PROPERTY BOND PURCHASER, INC., a New Mexico corporation (together
with its successors and assigns, and transferees of the Bond (defined below),
the "Purchaser"), and SUNWEST BANK OF ALBUQUERQUE, N.A., a national banking
association (together with its successors and assigns, the "Depositary"), agree:
ARTICLE I - RECITALS
Section 101. The Act. Pursuant to Sections 3-32-1 through 3-32-16, New
Mexico Statutes Annotated, 1978 Compilation, as amended (the "Act"), the Issuer
is authorized to acquire, construct and equip certain industrial or commercial
projects and to issue its industrial revenue bonds to finance such projects and
certain related costs. Such bonds are payable solely out of revenue of the
leasing of such projects. Such bonds may be further secured by an assignment of
the Issuer's interest in the lease agreements respecting the project to be
acquired, constructed and equipped. Under the Act, a project may include land,
buildings, machinery, equipment and other property deemed necessary in
connection with such project.
Section 102. Government Proceedings. Fulcrum Properties, L.P., a
Delaware limited partnership (together with its successors and assigns, the
"Company"), presented to the Issuer a proposal relating to the issuance of
industrial revenue bonds and the development of a warehouse facility. The
Issuer, by City Council ("Council") Ordinance adopted on November 13, 1996 (the
"Ordinance"), authorized, among other matters, (i) the issuance of its City of
Rio Rancho, New Mexico Taxable Industrial Development Revenue Bond (Fulcrum
Properties, L.P. Project) Series 1996 (the "Bond") in the principal amount not
to exceed $2,100,000, and (ii) the execution and delivery of this Indenture.
Section 103. The Agreement. The Issuer has entered into a Lease and
Purchase Agreement dated as of the date of this Indenture (together with any and
all amendments and supplements, the "Agreement") with the Company, under which
the Issuer has leased the Project Property (as defined in the Agreement) to the
Company and the Company has agreed to make rental payments in amounts sufficient
to pay the principal of, interest on and redemption price of the Bond when due.
For the purpose of providing security for the payment of the principal of,
interest on and redemption price of the Bond, the Issuer wishes to assign to the
Purchaser certain of its interests in the Agreement.
Section 104. The Indenture; Collateral Pledge. The Bond is to be issued
under this Indenture which constitutes a collateral pledge of the Agreement to
the Purchaser.
1
<PAGE> 5
Section 105. Conditions Precedent Performed. All acts, conditions and
things required on the part of the Issuer by the Constitution and laws of the
State of New Mexico to happen, exist and be performed precedent to and in the
execution and delivery of this Indenture and the Agreement and the issuance of
the Bond have happened, exist and have been performed as so required in order to
make this Indenture, the Agreement and the Bond valid and binding agreements of
the Issuer, enforceable against the Issuer in accordance with their respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and general principles of equity.
ARTICLE II - DEFINITIONS AND RULES OF CONSTRUCTION
Section 201. Meanings of Words and Terms. All words and terms defined
in the Agreement have the same meanings when used in this Indenture. In
addition:
"Acquisition Account" has the meaning assigned in Section 601.
"Act" has the meaning assigned in Section 101.
"Agreement" has the meaning assigned in Section 103.
"Authorized Company Representative" means any one of the persons at the
time designated to act on behalf of the Company in a certificate furnished to
the Issuer and the Depositary containing the specimen signatures of such persons
and signed on behalf of the Company by an officer of the Company.
"Bond" has the meaning assigned in Section 102.
"Bond Documents" means this Indenture, the Agreement and the Bond
Purchase Agreement.
"Bond Purchase Agreement" means the Bond Purchase Agreement dated the
date of the execution and delivery of this Indenture among the Purchaser, the
Issuer and the Company.
"Business Day" means any day that is not a Saturday or Sunday or a day
on which banking institutions in the State or in the city of payment are
authorized or required to close. "Company" has the meaning assigned in Section
102.
"Default" has the meaning assigned in Section 801.
"Depositary" has the meaning assigned in the first paragraph of this
Indenture.
2
<PAGE> 6
"Indenture" means this Indenture, together with any amendments and
supplements.
"Interest Payment Date" means each June 1 and December 1, beginning
June 1, 1997.
"Issuer" has the meaning assigned in the first paragraph of this
Indenture.
"Ordinance" has the meaning assigned in Section 102.
"Parties" means the Issuer, the Company, the Purchaser and the
Depositary.
"Party" means any one of the Parties.
"Payment of the Bond" means payment in full of the principal of and
interest on the Bond in accordance with its terms and the provisions of this
Indenture and payment of all fees and expenses of the Issuer and the Depositary
payable by the Company under this Indenture, the Agreement or the Bond Purchase
Agreement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision.
"State" means the State of New Mexico.
"Related Costs" means expenditures incurred or to be incurred with
respect to the Project, including, without limitation, the acquisition of the
Project Site and the Project Property and the payment of principal of and
interest on any loan the proceeds of which are used to acquire the Project Site
and/or the Project Property.
"Revenues" means all payments to be made by the Company pursuant to the
Agreement and all other amounts to be received by the Issuer or the Depositary
in respect of the administrative office and warehouse facility project,
including all amounts and investments in the funds and accounts created
hereunder and all income and profits thereon.
Section 202. Rules of Construction.
(a) The captions and headings in this Indenture are for convenience
only and in no way define, limit or describe the scope or intent of any
provisions or sections of this Indenture.
3
<PAGE> 7
(b) All references in this Indenture to particular articles, sections
or exhibits are references to articles or sections of or exhibits to this
Indenture unless some other reference is established.
(c) Any inconsistency between the provisions of the Agreement and the
provisions of this Indenture will be resolved in favor of the provisions of this
Indenture.
Section 203. Bond Not General Obligation of Issuer. Neither the faith
and credit nor the taxing power of the State or of any of its political
subdivisions, including the Issuer, is pledged to the payment of the principal
of, interest on or redemption price of the Bond. The Bond will be payable solely
out of the Revenues, proceeds and receipts and other security pledged hereby.
The principal of, interest on and redemption price of the Bond will never
constitute a debt or indebtedness or general obligation of the Issuer within the
meaning of any State constitutional provision or statutory limitation. The Bond
will never constitute or give rise to a pecuniary liability of the Issuer or be
a charge against its general credit or a charge against the general credit or
the taxing powers of the State or any political subdivision thereof.
ARTICLE III - GRANT
Section 301. Pledge. In consideration of the purchase of the Bond by
the Purchaser, and in order to secure the payment of the principal of, interest
on and redemption price of the Bond, and in order to secure the performance by
the Issuer of its obligations under this Indenture and the Bond, the Issuer
pledges and assigns to the Purchaser and grants a security interest to the
Purchaser in (i) all the Issuer's right, title and interest in and to the
Agreement, including its rights to the Revenues, but reserving its rights under
Sections 4.6, 4.14, 4.15, 5.7, 5.8, 5.9 and 5.11 of the Agreement including but
not limited to the right to reimbursement for certain costs and expenses, to
receive or designate the recipient of any payment in lieu of taxes pursuant to
Section 5.11 of the Agreement, to receive notices, to give consents and to be
indemnified; and (ii) the moneys and investments in the Acquisition Account.
Section 302. Release. If the principal of and interest on the Bond is
paid in full to the Purchaser, all obligations of the Issuer under this
Indenture will terminate, and the Purchaser will discharge this Indenture and
execute and deliver to the Issuer and the Company such instruments in writing as
may be required to evidence such discharge. The Clerk of the Issuer is
authorized to accept the certificate of the Purchaser that all principal and
interest due on the Bond has been paid as evidence of the satisfaction of this
Indenture.
4
<PAGE> 8
Section 303. Survival of Certain Provisions. Notwithstanding the
foregoing, any provisions of this Indenture and any related legislation which
relate to the maturity of the Bond, interest payments and dates thereof,
exchange, transfer and registration of the Bond, replacement of the mutilated,
destroyed, lost or stolen Bond, nonpresentment of the Bond, the holding of
moneys intrust, and repayments to the Company from the various funds established
pursuant to this Indenture and the duties of the Depositary in connection with
all of the foregoing, will remain in effect and be binding upon the Depositary
and the Purchaser notwithstanding the release and discharge of this Indenture.
The provisions of this Section will survive the release, discharge and
subordination of this Indenture.
ARTICLE IV - AUTHORIZATION, FORM, EXECUTION AND DELIVERY OF BOND
Section 401. Authorization; Authorized Amount of Bond. The Bond is
hereby authorized to be issued under this Indenture and secured by this
Indenture. The Bond will be issued as a single fully registered bond without
coupons, in the denomination of $2,100,000. The Bond will be numbered R-1. No
bonds may be issued under this Indenture except in accordance with this Article.
The total principal amount of the Bond that may be issued under this Indenture
is expressly limited to $2,100,000. No additional bonds may be issued. The Bond
may be transferred in accordance with its terms.
Section 402. Form of Bond. The Bond will be in substantially the form
of Exhibit A. The Bond will be dated the date of the execution and delivery of
this Indenture and will bear interest on advances made pursuant to Section 404
from the respective dates of such advances at 8% per annum on the aggregate
unpaid principal amount of such advances. Interest will be computed on the basis
of a 360-day year consisting of twelve 30-day months. Accrued interest will be
paid on each Interest Payment Date. The Bond will mature on December 1, 2021.
Section 403. Execution and Delivery. The Bond will be signed by the
Mayor, City Administrator or City Treasurer/ Director of Finance of the Issuer
and delivered to the Purchaser on the date of the execution and delivery of this
Indenture.
Section 404. Advances. Subject to the terms and conditions of the Bond
Purchase Agreement, the Purchaser will purchase the Bond upon the execution and
delivery of the Indenture and will pay the purchase price of the Bond as set
forth in Section 2 of the Bond Purchase Agreement through the advances described
in this Section 404. The Company will request advances by notice to the
Purchaser and the Depositary. Promptly upon receipt of notice from the Company
requesting an advance, the Purchaser will, so long as no Default has occurred
and is continuing, pay the amount of the advance requested in such notice to the
Depositary for deposit in the Acquisition Account; provided that the aggregate
amount of such advances will not exceed $2,100,000. The records of the
Depositary will be conclusive as to the aggregate amount of advances requested
and made, absent manifest error. The Purchaser is authorized to endorse on the
schedule attached to the Bond the date and amount of each such advance and each
principal payment on and redemption in part of the Bond and the resulting
principal amount. Failure to make any such endorsement or any error in such
endorsement will not affect the rights or obligations of any of the Parties on
or with respect to the Bond.
5
<PAGE> 9
Section 405. Application of Payments. Payments received by the
Purchaser with respect to the redemption of all or any portion of the Bond will
be applied first to the principal amount to be redeemed and then to accrued
interest on such principal amount. All other payments received by the Purchaser
with respect to the Bond will be applied first to accrued interest on and then
to the unpaid principal of the Bond. If such payments exceed accrued interest on
and the unpaid principal of the Bond, the Purchaser will pay such excess to the
Company.
Section 406. Bond Registration. The Company will maintain a
registration book showing the name and address of the holder of the Bond. Upon
the Company's receipt of notice of the transfer of the Bond in accordance with
its terms, the Company will cause the registration book to reflect the name and
address of the transferee, unless a trustee for bondholders is appointed as
provided in this Indenture, in which event such trustee shall maintain such
registration book.
ARTICLE V - REDEMPTION
Section 501. Redemption. If the Company gives notice to the Issuer, the
Depositary and the Purchaser pursuant to Article VIII of the Agreement that the
Company has elected to cause redemption of the Bond in full or in part, all or
such portion of the Bond will be deemed redeemed by the Issuer on the date
indicated in such notice at a redemption price equal to the principal amount to
be redeemed plus accrued interest on such principal amount to the redemption
date.
ARTICLE VI - THE ACQUISITION ACCOUNT
Section 601. Creation; Deposits. A special account is hereby created
with the Depositary and designated "Fulcrum Properties, L.P. Project Acquisition
Account" (the "Acquisition Account"). Any moneys received by the Issuer or the
Depositary on account of any advances under Section 404 will be deposited in the
Acquisition Account. The moneys in the Acquisition Account will be held by the
Depositary and will, subject to the provisions of Sections 605 and 606, be
applied to the payment of Related Costs and, pending such application, will be
subject to a lien in favor of the Purchaser.
Section 602. Disbursements. The Depositary will make payments of
Related Costs from the Acquisition Account, but only upon receipt of a
requisition and certificate in the form of Exhibit B, signed by an Authorized
Company Representative, stating to whom the payment is to be made, the general
purpose for which the obligation to be paid was incurred, and that:
(1) obligations in the stated amounts were incurred for Related Costs
and are due and payable (or, if the Company is indicated as the payee, were duly
paid by the Company) and that each item is a proper charge against the
Acquisition Account and has not been the subject of a previous withdrawal from
the Acquisition Account;
(2) to the best knowledge of such Authorized Company Representative
there has not been filed with or served upon the Issuer or the Company notice of
any lien, right or ~
6
<PAGE> 10
attachment upon, or claim affecting the right of any such Persons to receive
payment of, the respective amounts stated in such requisition which has not been
released or will not be released simultaneously with the payment of such
obligation; and
(3) with respect to any item for payment for labor or to contractors,
builders or materialmen, (i) the obligations stated have been properly incurred,
(ii) to the best knowledge of such Authorized Company Representative, such work
was actually performed or such materials or supplies were actually furnished or
installed in or about the Project, and (iii) to the best knowledge of such
Authorized Company Representative, either such materials or supplies are not
subject to any lien or security interest or any such lien or security interest
will be released or discharged upon payment of the requisition.
Section 603. Depositary May Rely on Requisitions. All requisitions and
certificates received by the Depositary as conditions of payment from the
Acquisition Account may be conclusively relied upon by the Depositary and will
be retained by the Depositary, subject at all reasonable times to examination by
the Issuer and other Parties and their respective agents and representatives.
Section 604. Status Reports. On a quarterly basis, the Depositary will
make a written report covering all receipts and moneys then on deposit in the
Acquisition Account, any investments of such moneys and all transfers and
disbursements of such moneys as at and for the quarterly periods ending March
31, June 30, September 30 and December 31 of each year. The Depositary will make
such reports monthly, at no additional cost, if the Company requests. The
Depository will provide copies of such quarterly and/or monthly reports to the
Issuer upon the Issuer's written request.
Section 605. Completion Date. Upon receipt of a certificate from the
Company, in the form of Exhibit C signed by an Authorized Company
Representative, establishing the Completion Date, the Depositary will, to the
extent moneys are available therefor, set aside the moneys necessary for the
payment of the Related Costs incurred by the Company but not then due or payable
as set forth in such certificate and then will transfer any moneys remaining in
the Acquisition Account to the Company for use in connection with the Project or
for payment of debt service on the Bond (but the Depositary and the Issuer shall
have no duty to inquire into or otherwise monitor the Company's use of such
moneys).
Section 606. Payment on Acceleration. If the Purchaser declares the
unpaid principal of and accrued interest on the Bond to be immediately due and
payable pursuant to Section 802, the Depositary will promptly pay all moneys
then held for the credit of the Acquisition Account to the Purchaser for
application to the unpaid principal of and accrued interest on the Bond.
Section 607. Investments. Moneys on deposit in the Acquisition Account
will, at the written direction of an Authorized Company Representative, be
invested and reinvested by the Depositary in short-term interest-bearing
securities or funds. Such investments will be deemed at all times to be a part
of the Acquisition Account. Any interest accruing on any such investment and any
profit realized from such investment will be credited to the Acquisition
7
<PAGE> 11
Account. Any loss resulting from any such investment will be charged to the
Acquisition Account. The Depositary will sell at the best price obtainable or
present for redemption any such investment when necessary in order to provide
cash to meet any payment or transfer from the Acquisition Account. Neither the
Depositary nor the Issuer will be liable or responsible for any loss resulting
from any such investment. The Depositary may make any such investment through
its own or its affiliated bond or investment department, unless otherwise
directed in writing by an Authorized Company Representative.
ARTICLE VII - PARTICULAR COVENANTS AND PROVISIONS
Section 701. Payment of Bond: Bond a Limited Obligation. Pursuant to
the Agreement, the Issuer has caused the Company to pay the principal of,
interest on and redemption price of the Bond in the manner provided in this
Indenture and in the Bond. Except as otherwise provided in this Indenture, such
principal, interest and redemption price are payable solely from the Basic Rent,
which the Company will pay as provided in the Lease. NEITHER THE FAITH AND
CREDIT NOR THE TAXING POWER OF THE STATE OR OF ANY OF ITS POLITICAL
SUBDIVISIONS, INCLUDING THE ISSUER, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL
OF, INTEREST ON OR REDEMPTION PRICE OF THE BOND. THE PRINCIPAL OF, INTEREST ON
AND REDEMPTION PRICE OF THE BOND WILL NEVER CONSTITUTE A DEBT OR INDEBTEDNESS OF
THE ISSUER WITHIN THE MEANING OF ANY PROVISION OR LIMITATION OF THE CONSTITUTION
OR LAWS OF THE STATE OR THE HOME RULE CHARTER OF THE ISSUER. THE BOND WILL NEVER
CONSTITUTE NOR GIVE RISE TO A PECUNIARY LIABILITY OF THE STATE, ANY OF ITS
POLITICAL SUBDIVISIONS OR OF THE ISSUER OR A CHARGE AGAINST THEIR GENERAL CREDIT
OR TAXING POWERS.
Section 702. Obligations Under the Agreement. The Issuer: (i) will
perform all of its obligations under the Agreement; (ii) will not execute or
agree to any change, amendment or modification of or supplement to the Agreement
except by a supplement or an amendment duly executed by the Issuer and the
Company with the approval of the Purchaser; and (iii) will not agree to any
abatement, reduction or diminution of the Basic Rent without the approval of the
Purchaser.
ARTICLE VIII - DEFAULT AND REMEDIES
Section 801. Defaults. Each of the following events is a "Default":
(a) Payment of any installment of principal of, interest on or
redemption price of the Bond is not made within five days of the date when due.
(b) An Event of Default occurs and is continuing.
(c) The Issuer fails to perform any other of its obligations under the
Bond or this Indenture for a period of 30 days after receipt of notice of such
failure from any of the Parties.
Section 802. Acceleration. If a Default has occurred and is continuing,
the
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<PAGE> 12
Purchaser may by notice to the other Parties declare the then unpaid principal
of and all accrued interest on the Bond to be immediately due and payable. Upon
such declaration the same will be immediately due and payable by the Company;
provided, however, that the Purchaser, by written notice to the other parties,
may annul such declaration and destroy its effects and waive any such default if
all reasonable charges and expenses of the Issuer and the Depositary and their
agents and counsel shall have been paid or provided for.
Section 803. Issuer and Depositary Not Responsible. Neither the Issuer
nor the Depositary has any responsibility to act on behalf of the Purchaser with
respect to any Default. All rights and remedies arising from or related to any
Default are the rights and remedies of the Purchasers provided that, upon
request of the Purchaser, the Issuer, if legally required, will cooperate with
the Purchaser in the lawful enforcement of such rights and remedies upon receipt
of indemnity satisfactory to the Issuer in the Issuer's sole discretion against
any out-of-pocket cost, expense (including any reasonable counsel fees and
expenses) or liability the Issuer may incur or suffer as a result of or in
connection with such cooperation, subject to the provisions concerning the
appointment of a trustee set forth in Article X.
Section 804. Certification of No Default. On or before December 1 of
each year in which the Bond is outstanding, beginning December 1, 1997, the
Company and the Purchaser will deliver a certificate to the Issuer stating that
they are aware of no Default or Event of Default or, if they are so aware,
describing the circumstances of such Default or Event of Default.
ARTICLE IX - THE DEPOSITARY
Section 901. Acceptance of Duties. The Depositary accepts the duties
imposed on it by this Indenture, but only on the following express terms and
conditions:
(a) The Depositary undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied covenants
or obligations will be read into this Indenture against the Depositary.
(b) In the absence of negligence or willful misconduct on its part, the
Depositary may conclusively rely on certificates or notices furnished to the
Depositary and conforming on their faces to the requirements of this Indenture
or the Agreement, as the case may be; but if any such certificates or notices
are specifically required to be furnished to the Depositary under this Indenture
or the Agreement, the Depositary will examine the same to determine whether they
conform on their faces to the requirements of this Indenture or the Agreement,
as the case may be.
(c) No provision of this Indenture will be construed to relieve the
Depositary from liability for its own negligence or willful misconduct.
(d) The Depositary may consult with counsel and other professionals and
the advice of such counsel and other professionals shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by the Depositary hereunder in
9
<PAGE> 13
good faith and in reliance thereon.
(e) The Depositary shall be under no obligation to take any action or
exercise any right or power under this Indenture unless the Purchaser shall
first have provided to the Depositary, its directors, officers, agents and
employees, security or indemnity satisfactory to the Depositary against the
costs (including without limitation reasonable fees of attorneys), expenses and
liabilities that might be incurred by the Depositary in connection therewith.
Section 902. Compensation. The Company will pay to the Depositary its
reasonable fees and charges and all of its reasonable expenses (including
reasonable counsel fees and expenses) as Additional Payments in accordance with
the Agreement.
Section 903. Qualification. The Depositary must be an association or a
corporation organized and doing business under the laws of the United States of
America or of any state, be granted trust powers under such laws and be subject
to supervision or examination by federal or state banking authorities. If at any
time the Depositary ceases to be eligible in accordance with the provisions of
this Section 903, it wily resign immediately in the manner and with the effect
specified in Section 904.
Section 904. Resignation and Removal.
(a) No resignation or removal of the Depositary and no appointment of a
successor Depositary will become effective until the acceptance of appointment
by the successor Depositary under Section 905.
(b) The Depositary may resign at any time by notice to the other
Parties. If an instrument of acceptance by a successor Depositary has not been
delivered to the retiring Depositary within 30 days after the giving of such
notice of resignation, the retiring Depositary may petition any court of
competent jurisdiction for the appointment of a successor Depositary.
(c) The Depositary may be removed at any time by the Company by notice
to the other Parties.
(d) The Depositary will be automatically removed on the occurrence of
the Completion Date and the application of all moneys on deposit in the
Acquisition Account as provided in Section 605. No successor Depositary will
thereafter be appointed and each reference to the Depositary in this Indenture
and the Agreement will thereafter be ineffective.
(e) If the Depositary resigns or is removed (except as provided in
subsection (d) of this Section 904), the Company will promptly appoint a
successor Depositary and give written notice of such appointment to the Issuer,
the Purchaser and the retiring or removed Depositary.
Section 905. Successor Depositary.
(a) Every successor Depositary appointed under this Indenture will
execute,
10
<PAGE> 14
acknowledge and deliver to its predecessor, and the other Parties an instrument
accepting such appointment, and thereupon such successor Depositary, without any
further act, will become fully vested with all the rights, and subject to all
the obligations, of its predecessor; but such predecessor will, nevertheless, on
the request of its successor, the Issuer, the Company or the Purchaser execute
and deliver an instrument transferring to such successor Depositary all the
rights of such predecessor under this Indenture. Every predecessor will deliver
all property and moneys held by it under this Indenture to its successor. The
Issuer and the Purchaser will execute, acknowledge and deliver any instrument
reasonably required by any successor Depositary to more fully and certainly vest
in such Depositary the rights vested in the predecessor Depositary by this
Indenture.
(b) Notwithstanding any of the foregoing provisions of this Article,
any Person qualified to act as Depositary under this Indenture with or into
which the Person acting as Depositary may be merged or consolidated, or to which
the assets and business of such Person may be sold, will automatically become
the successor Depositary.
ARTICLE X - SUPPLEMENTS AND AMENDMENTS TO INDENTURE
This Indenture may be supplemented or amended only by one or more
instruments executed by the Issuer, the Purchaser and the Depositary and
consented to by the Company. The Depositary will execute any such proposed
supplement or amendment on the request of the Purchaser unless the Depositary
determines in good faith that its rights or obligations under this Indenture
would be materially and adversely affected by such supplement or amendment. If
the rights or obligations of the Depositary would be materially and adversely
affected by such supplement or amendment, as determined in good faith by the
Depositary, the Depositary will have no liability for its refusal to enter into
such supplement or amendment. Notwithstanding the generality of the foregoing,
if the Purchaser gives notice to the Issuer, the Depositary and the Company of
the Purchaser's desire to have a trustee appointed for the benefit of the
Purchaser, the Parties will cooperate in amending this Indenture to facilitate
such appointment. Nothing herein is intended to require the Issuer to act in a
fiduciary capacity and if the original Purchaser transfers the Bond and if
circumstances arise which would so require, the Issuer has the right to request
that a trustee be appointed by and at the expense of the Company and the Parties
will cooperate in amending this Indenture to facilitate the making of such
appointment.
ARTICLE XI - MISCELLANEOUS PROVISIONS
Section 1101. Notices. Any notice, demand, direction, request, consent,
report or other instrument authorized or required by any of the Bond Documents
to be executed, given or filed will be in writing and will be deemed to have
been sufficiently given or filed for all purposes of the Bond Documents when
delivered by hand delivery or on the third Business Day following the day on
which the same has been mailed by registered or certified mail, postage prepaid,
addressed as follows:
If to the Issuer: City of Rio Rancho
3900 Southern Boulevard
11
<PAGE> 15
Rio Rancho, New Mexico 87124
Attention: City Administrator
If to the Purchaser: Property Bond Purchaser, Inc.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
If to the Company: Fulcrum Properties, L.P.
4321 Fulcrum Way, N.E.
Rio Rancho, New Mexico 87124
Attention: Scott A. Budoff
If to the Depositary: Sunwest Bank of Albuquerque, N.A.
Corporate Trust Department
500 4th Street, N.W., 3rd Floor
Albuquerque, New Mexico 87102
Attention: Elizabeth Dean,
Vice President - Trust Officer
Any Party may, by notice to each of the other Parties, designate any further or
different addresses to which subsequent notices, certificates or other
communications are to be sent.
Section 1102. Remedies. No right or remedy conferred on any Party in
any of the Bond Documents is intended to be exclusive of any other right or
remedy. Each such right or remedy is in addition to every other right or remedy
provided in any of the Bond Documents or by law. No delay or omission of any
Party to exercise any such right or remedy will impair any such right or remedy
or be construed to be a waiver. Every such right or remedy may be exercised from
time to time and as often as the relevant Party may deem expedient. No waiver by
any Party of any right or remedy with respect to any Default or Event of Default
will extend to or affect any other existing or subsequent Default or Event of
Default.
Section 1103. Beneficiaries. Nothing in any of the Bond Documents
expressed or implied is intended or is to be construed to confer upon any Person
other than the Parties (and, in the case of Section 5.8 of the Agreement only,
the Indemnities) any right, remedy or claim, legal or equitable.
Section 1104. Severability. In case any one or more of the provisions
of any of the Bond Documents or of the Bond is for any reason held to be illegal
or invalid, such illegality or invalidity will not affect any other provision of
any of the Bond Documents or of the Bond, but the Bond Documents and the Bond
will be construed and enforced as if such illegal or invalid provision had not
been contained therein. In case any covenant, stipulation, obligation or
agreement of the Issuer contained in any of the Bond Documents or the Bond is
for any reason held to be in violation of law, then such covenant, stipulation,
obligation or agreement will be deemed to be the covenant, stipulation,
obligation or agreement of the Issuer to the full extent permitted by law.
12
<PAGE> 16
Section 1105. Obligations of Issuer Not Obligations of Officials
Individually. All obligations of the Issuer under the Bond Documents and the
Bond will be deemed to be obligations of the Issuer to the full extent permitted
by the Constitution and laws of the State. No obligation under any of the Bond
Documents or the Bond will be deemed to be an obligation of any present or
future officer (including, without limitation, City Councilors) or employee of
the Issuer in his or her individual capacity, and no officer of the Issuer who
executes the Bond will be personally liable on the Bond or be subject to any
personal liability or accountability by reason of the issuance of the Bond.
Section 1106. Payments Due on Days That Are Not Business Days. If the
date for any payment called for under any of the Bond Documents or the Bond is
not a Business Day, then such payment will be made on the next Business Day and
no interest on such payment will accrue for the period after such date.
Section 1107. Execution in Counterparts. Each of the Bond Documents may
be executed in multiple counterparts, all of which taken together will
constitute one instrument. Any Party may execute any of the Bond Documents by
executing any such counterpart of such Bond Document.
Section 1108. Applicable Law. The validity, construction and effect of
each of the Bond Documents will be governed by the law of the State applicable
to agreements made and to be performed in the State.
Section 1109. Survival. The provisions of Sections 901 and 902 of this
Indenture shall survive payment of the Bond and expiration or earlier
termination of this Indenture.
Section 1110. No Violation of Public Policies Retarding Indemnity. If a
court of competent jurisdiction determines that the provisions of Section 56-7-1
NMSA 1978, as amended, are applicable to this Agreement or any claim arising
under this Agreement, then any agreement to indemnify in connection with this
Agreement will not extend to liability, claims, damages, losses or expenses,
including attorney fees, arising out of:
(a) The preparation or approval of maps, drawings, opinions, reports,
surveys, change orders, designs or specifications by the indemnitee, or the
agents or employees of the indemnitee; or
(b) The giving of or the failure to give directions or instructions by
the indemnitee, or the agents or employees of the indemnitee, where such giving
or failure to give directions or instructions is the primary cause of bodily
injury to persons or damage to property.
Section 1111. Non-Merger. The provisions of this Indenture shall
survive the conveyance of the Project to the Issuer, the reconveyance of the
Project to the Company, and all other performances hereunder, and shall not be
deemed merged in any deed or other instrument or document delivered hereunder.
Section 1112. Limitation of Liability of Officials of Issuer. No
covenant,
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<PAGE> 17
agreement or obligation contained herein shall be deemed to be a covenant,
agreement or obligation of any present or future official, officer, employee,
agent or member of the Council of the Issuer in his individual capacity, and
neither the officials of the Issuer nor any officer thereof executing the Bond
shall be liable personally on the Bond or be subject to any personal liability
or accountability by reason of the issuance thereof. No official, officer,
employee, agent or member of the Council of the Issuer shall incur any personal
liability with respect to any other action taken by him pursuant to this
Indenture or the Act.
DATED AS OF December 1, 1996.
CITY OF RIO RANCHO, NEW MEXICO
By________________________________
Thomas E. Swisstack, Mayor
14
<PAGE> 18
PROPERTY BOND PURCHASER, INC.
By_______________________________
Scott A. Budoff, President
SUNWEST BANK OF ALBUQUERQUE,
N.A.
By________________________________
Its______________________________
STATE OF NEW MEXICO
COUNTY OF SANDOVAL
This instrument was acknowledged before me on December 20, 1996 by
Thomas E. Swisstack as Mayor of the City of Rio Rancho, New Mexico, a New Mexico
municipal corporation.
__________________________________
Notary Public
My commission expires:
12-21-2000
STATE OF NEW MEXICO
COUNTY OF SANDOVAL
This instrument was acknowledged before me on December 20,
1996 by Scott A. Budoff as President of Property Bond Purchaser, Inc., a New
Mexico corporation.
__________________________________
Notary Public
My commission expires:
12-21-2000
15
<PAGE> 19
STATE OF NEW MEXICO
COUNTY OF BERNALILLO
This instrument was acknowledged before me on December 20, 1996 by
______________ of Sunwest Bank of Albuquerque, N.A., a national banking
association.
__________________________________
Notary Public
My commission expires:
12-21-2000
159145
16
<PAGE> 20
THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR BY ANY STATE SECURITIES LAW AND
IS TRANSFERABLE ONLY UPON COMPLIANCE WITH THE
RESTRICTIVE TERMS PROVIDED BELOW AND IN
THE INDENTURE REFERRED TO BELOW.
No. R-1 - Up to $2,100,000
United States of America
State of New Mexico
City of Rio Rancho, New Mexico
Taxable Industrial Development Revenue Bond
(Fulcrum Properties, L.P. Project)
Series 1996
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE ISSUE DATE
<S> <C> <C>
December 1, 2021 8% per annum December__,1996
</TABLE>
CITY OF RIO RANCHO, NEW MEXICO, a municipal corporation existing under
the Constitution and laws of the State of New Mexico (the "Issuer"), for value
received, promises to pay, solely from the source described below, to Property
Bond Purchaser, Inc. (together with its successors and assigns, and transferees
as permitted below, the "Purchaser"), on the Maturity Date, Two Million One
Hundred Thousand Dollars (subject to prior optional or mandatory redemption as
described below) or so much of such amount as has been advanced by the Purchaser
and is outstanding and to pay, solely from such source, to the Purchaser under
the Indenture at the close of business on the day 15 days before the relevant
payment date, interest on principal amounts advanced with respect to this Bond
from the dates of such advances at the Interest Rate specified above (computed
on the basis of a 360-day year consisting of twelve 30- day months) until
payment of such principal amount. Such interest is payable semiannually on June
1 and December 1 in each year, beginning June 1, 1997.
This Bond is issued under and pursuant to the Constitution and laws of
the State of New Mexico, particularly Sections 3-32-1 to 3-32-16 NMSA 1978, as
amended, and under the home rule powers of the Issuer and pursuant to an
ordinance duly adopted by the Issuer.
The principal of, interest on and redemption price of this Bond are
payable solely from revenues derived by the Issuer from the Lease and Purchase
Agreement dated as of December 1, 1996 (the 'Agreement') between the Issuer and
Fulcrum Properties, L.P. (the "Company"), which Agreement relates to an
administrative office and warehouse facility in Rio Rancho, New
EXHIBIT A
17
<PAGE> 21
Mexico and which revenues have been pledged and assigned by the Issuer to the
Purchaser under the Indenture dated as of December 1, 1996 (together with any
amendments and supplements, the "Indenture") among the Issuer, the Purchaser and
Sunwest Bank of Albuquerque, N.A., as Depositary (the "Depositary").
Reference is made to the Indenture, the Agreement, and the Bond
Purchase Agreement (as defined in the Indenture) for the provisions, among
others, with respect to the custody and application of the proceeds of the sale
of this Bond, the collection and disposition of income and other revenues,
restrictions on transfer of this Bond, a description of the account charged with
and pledged to the payment of the principal of, interest on and redemption price
of this Bond, the nature and extent of the security, the terms and conditions
under which this Bond is issued and amounts are to be advanced with respect to
this Bond by the Purchaser, and the rights, duties and obligations of the
Issuer, the Company, the Purchaser and the Depositary. By accepting this Bond,
the holder accepts and undertakes to perform all of the obligations of the
Purchaser.
NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF NEW
MEXICO OR OF ANY OF ITS POLITICAL SUBDIVISIONS, INCLUDING THE ISSUER, IS PLEDGED
TO THE PAYMENT OF THE PRINCIPAL OF, INTEREST ON OR REDEMPTION PRICE OF THIS
BOND. THE PRINCIPAL OF, INTEREST ON AND REDEMPTION PRICE OF THIS BOND WILL NEVER
CONSTITUTE A DEBT OR INDEBTEDNESS OF THE ISSUER WITHIN THE MEANING OF ANY
PROVISION OR LIMITATION OF THE CONSTITUTION OR LAWS OF THE STATE OF NEW MEXICO
OR THE HOME RULE CHARTER OF THE ISSUER. THIS BOND WILL NEVER CONSTITUTE NOR GIVE
RISE TO A PECUNIARY LIABILITY OF THE STATE OF NEW MEXICO, ANY OF ITS POLITICAL
SUBDIVISIONS OR OF THE ISSUER OR A CHARGE AGAINST THEIR GENERAL CREDIT OR TAXING
POWERS.
This Bond may be called for redemption, as provided in the Indenture,
at the option of the Company as a whole or in part on any date selected by the
Company, at a redemption price equal to the principal amount to be redeemed plus
interest accrued on such principal amount to the redemption date.
If a Default (as defined in the Indenture) occurs, the Purchaser may
cause the then unpaid principal amount of this Bond and all accrued interest to
be immediately due and payable as provided in the Indenture. Neither the Issuer
nor the Depositary has any responsibility to act on behalf of the Purchaser with
respect to any Default.
The Purchaser is authorized to endorse on the schedule attached to this
Bond the date and amount of each advance by the Purchaser pursuant to Section
404 of the Indenture and each principal payment on and redemption in part of
this Bond and the resulting principal amount. Failure to make any such
endorsement or any error in such endorsement will not affect the rights or
obligations of the Issuer or the Purchaser.
This Bond may be transferred in whole but not in part. Upon any such
transfer, the transferee will give notice of the transfer and of the
transferee's address for notices and for
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<PAGE> 22
payment of principal of and interest on this Bond to the Issuer, the Company and
the Depositary in the manner provided in the Indenture.
All acts, conditions and things required to happen, exist and be
performed precedent to and in the issuance of this Bond and the execution of the
Indenture have happened, exist and have been performed as so required.
The validity, construction and performance of this Bond are governed by
the law of New Mexico applicable to agreements made and to be performed in New
Mexico.
CITY OF RIO RANCHO, NEW MEXICO
BY________________________________
Its Mayor
19
<PAGE> 23
<TABLE>
<CAPTION>
Amount of
Principal Resulting
Amount of Payment or Principal Notation
Date Advance Redemption Amount Made By
---- ------- ---------- ------ -------
<S> <C> <C> <C> <C>
</TABLE>
20
<PAGE> 24
REQUISITION AND CERTIFICATE
To: Sunwest Bank of Albuquerque, N.A., as Depositary
The undersigned, pursuant to the Indenture dated as of December 1, 1996
(the "Indenture"), among the City of Rio Rancho, New Mexico (the "Issuer"),
Property Bond Purchaser, Inc., and Sunwest Bank of Albuquerque, N.A , as
Depositary, requests on behalf of Fulcrum Properties, L.P. (the "Company") the
disbursement of $________________ from the Acquisition Account (as defined by
reference in the Indenture) to pay the following costs and expenses related to
the Project (as defined in the Indenture) or to the issuance of the Bond (as
defined in the Indenture):
<TABLE>
<CAPTION>
General
Classification
Amount of Expenditure Payee
------ -------------- -----
<S> <C> <C> <C>
$
Total: $
</TABLE>
The undersigned certifies that:
(1) obligations in the stated amounts were incurred for Related
Costs (as defined in the Indenture) and are due and payable (or, if the Company
is indicated as the payee, were duly paid by the Company) and that each item is
a proper charge against the Acquisition Account and has not been the subject of
a previous withdrawal from the Acquisition Account;
(2) to the best knowledge of the undersigned there has not been
filed with or served upon the Issuer or the Company notice of any lien, right or
attachment upon, or claim affecting the right of any such payee to receive
payment of, the respective amounts stated in such requisition which has not been
released or will not be released simultaneously with the payment of such
obligation; and
(3) with respect to any item for payment for labor or to
contractors, builders or materialmen, (i) the obligations stated have been
properly incurred, (ii) to the best knowledge of the undersigned, such work was
actually performed or such materials or supplies were actually furnished or
installed in or about the Project, and (iii) to the best knowledge of the
undersigned, either such materials or supplies are not subject to any lien or
security interest or
EXHIBIT B
21
<PAGE> 25
any such lien or security interest will be released or discharged upon payment
of this requisition.
DATED: _________________________.
___________________________________
Authorized Company Representative
22
<PAGE> 26
COMPLETION CERTIFICATE
The undersigned Authorized Company Representative, pursuant to Section
605 of the Indenture dated as of December 1, 1996 (the "Indenture"), among the
City of Rio Rancho, New Mexico (the "Issuer"), Property Bond Purchaser, Inc. and
Sunwest Bank of Albuquerque, N.A., as Depositary, states that, except for
specified amounts remaining in the Acquisition Account for any Related Costs
shown below incurred by the Company but not now due and payable, the Project is
complete and all costs of labor, services materials and supplies in connection
with the Project have been paid for or provisions have been made for their
payment. After the transfer of remaining moneys in the Acquisition Account to
the Company pursuant to Section 605 of the Indenture, the Company will have sole
responsibility for the payment of any Related Cost in excess of the amount
specified to be retained in the Acquisition Account.
Related Costs Not Yet Due and Payable
<TABLE>
<CAPTION>
Amount For
<S> <C>
$__________ ____________________________________
____________________________________
$__________ ____________________________________
____________________________________
$__________ ____________________________________
____________________________________
</TABLE>
DATED: __________________________________
____________________________________
Authorized Company Representative
EXHIBIT C
23
<PAGE> 1
EXHIBIT 10.19
LEASE
FULCRUM PROPERTIES, L.P. ("Landlord") and FULCRUM DIRECT, INC.
("Tenant") agree:
1. Definitions. As used in this Lease the following terms have the
following respective meanings:
"Annual Rent" means, for the Lease Year beginning on the Beginning
Date, $5.75 per Building Square Foot and, for each subsequent Lease Year, $5.75
per Building Square Foot multiplied by lesser of (I) the PPI Increase, if any,
or (ii) 1.03.
"Beginning Date" means December 20, 1995.
"Building" means the building, initially of approximately 79,200 square
feet, to be constructed on the Premises.
"Building Square Foot" means a square foot of the area of the Building
for which a certificate of occupancy has been issued.
"End Date" means December 19, 2005.
"Lease Term" means the period from the Beginning Date to the End Date.
"Lease Year" means the period from and including each December 20 to
and including the next December 19.
"PPI" means the Producer Price Index (Intermediate Materials, Supplies
and Components)(1984=100) published by the Bureau of Labor Statistics of the
United States Department of Labor, or any successor index, or, if such index or
successor is no longer published, such other wholesale price index as Landlord
may reasonably designate by notice to Tenant.
"PPI Increase" means, with respect to each Lease Year, the quotient
obtained by dividing the average PPI for the twelve calendar months immediately
preceding the beginning of such Lease Year for which the PPI has been published
by the average PPI for the next preceding twelve calendar months; provided that
if such quotient is less than one, the PPI Increase for such Lease Year will be
one.
"Premises" means the land in Sandoval County, New Mexico more
particularly described on Exhibit A.
"Quarterly Installments" means payments, to be made on each March 20,
June 20, September 20 and December 20, equal to one quarter of the then
applicable Annual
<PAGE> 2
Rent, with appropriate adjustments made for changes in the number of Building
Square Feet during the relevant period.
Other terms are defined throughout this Lease.
2. Lease and Use. Landlord leases the premises to Tenant and Tenant
leases the Premises from Landlord for one Lease Term, unless sooner terminated
or extended, to be occupied and used by Tenant only for general administrative
and sales offices and warehouse purposes. Tenant will not use the Premises or
permit anything to be done in or about the premises which will in any way
conflict with any law, statute, ordinance or governmental rule or regulation now
in force or which may be erected or promulgated after the date of this Lease,
including without limitation environmental laws and regulations, or any
covenants, conditions or restrictions now or hereafter affecting the Premises.
Tenant will, at the sole cost of Tenant, promptly comply with all laws,
statutes, ordinances and governmental rules, regulations or requirements now in
force or which may be in force after the date of this Lease, including without
limitation environmental laws and regulations, and with the requirements of any
board of fire insurance underwriters or other similar bodies now or constituted
after the date of this Lease relating to, or affecting the condition, use or
occupancy of the Premises, excluding structural changes not related to or
affected by the improvements or acts of Tenant, or any covenants, conditions or
restrictions now or hereafter affecting the Premises. The judgment of any court
of competent jurisdiction or the admission of Tenant in any action against
Tenant, whether Landlord is a party or not, that Tenant has violated any law,
statute, ordinance or governmental rule, regulation or requirement will be
conclusive of the fact as between Landlord and Tenant. Tenant will not use or
allow the Premises to be used for any improper, immoral, unlawful or
objectionable purpose, nor will Tenant cause, maintain or permit any nuisance
in, on or about the Premises. Tenant will not commit or suffer to be committed
any waste in or upon the Premises.
3. Rent. Tenant will pay to Landlord at the address of Landlord as
provided on the signature page, or to such other person or such other address
designated by notice sent to Tenant from Landlord, the Annual Rent in the
Quarterly Installments without deduction, setoff, prior notice or demand. The
first Quarterly Installment will be paid on the Beginning Date. No dispute
between Landlord and Tenant as to the obligations of Landlord or Tenant as
provided in this Lease will excuse the payment of rent or the faithful
performance of the other conditions of this Lease by Landlord or Tenant.
4. Real Property Taxes. Tenant will, promptly upon Landlord's demand,
reimburse Landlord for all real property taxes on the Premises. As used in this
Section, "real property taxes" means any form of assessment (both general and
special), levy, penalty or tax (other than estate or inheritance tax) or payment
in lieu of taxes imposed by any authority having direct or indirect power to tax
any legal or equitable interest of Landlord in the Premises, by statute,
ordinance, contract or otherwise, including tax on rent (other than income tax)
instead of or in addition to normal real property taxes or assessments.
5. Personal Property Taxes. Tenant will pay before delinquency all
taxes, assessments, license fees and other charges or payments in lieu of taxes
(collectively, "taxes")
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that are levied and assessed against the personal property installed or located
in or on the Premises and that become payable during the Lease Term. On demand
by Landlord, Tenant will furnish Landlord with satisfactory evidence of these
payments. If any taxes on the personal property are levied against Landlord or
the Building, or if the assessed value of the Building and other improvements on
the Premises is increased by the inclusion of a value placed on the personal
property, and if Landlord pays the taxes on any of these items or the taxes
based on the increased assessment of these items, Tenant, on demand, will within
ten days reimburse Landlord for the sum of the taxes levied against Landlord or
the proportion of the taxes resulting from the increase in the assessment of
Landlord.
6. Utilities. Tenant will pay all charges, including without limitation
meter charges and deposits, incurred for any utility services provided to the
Premises. Tenant will pay all utility charges within ten days of receipt.
7. Repairs and Maintenance. Tenant will, at the sole cost and expense
of Tenant, keep in good repair and condition the interior and exterior of the
Building and the rest of the Premises. The repair obligation of Tenant will
extend to the entire Premises, including but not limited to the roof, interior
and exterior walls, gutters, glass, heating, ventilation and air conditioning
systems, plumbing, pipes, fixtures and other equipment of or related to the
Building and all grounds, landscaping, and parking area. Landlord and its agents
and representatives will have the right to enter and inspect the Premises at any
time during reasonable business hours, for the purpose of ascertaining the
condition of the Premises or in order to make such repairs, additions or
alterations as may be required to be made by Tenant or Landlord as provided in
this Lease. If such repairs, additions or alterations are required to be made by
Tenant but are made by Landlord, Tenant will reimburse Landlord for the cost of
the same, promptly upon Landlord's demand. At the end or termination of this
Lease, Tenant will deliver up the Premises, with all improvements, in good
repair and condition, and will deliver all keys to Landlord.
8. Alterations. Tenant will not make or suffer to be made any
alterations in or additions to the Premises unless Tenant has obtained the
advance written permission of Landlord. The permission, if given, will be
subject to the express condition that no liens of mechanics, materialmen,
suppliers, laborers, architects, artisans, contractors, subcontractors, or any
other lien of any kind will be created or imposed upon the Premises, or any
part. Tenant, if requested by Landlord, will furnish Landlord with plans and
specifications, names and addresses of contractors, copies of contracts,
necessary permits and indemnification in form and amount satisfactory to
Landlord and waivers of lien against any and all claims, costs, damages,
liabilities and expenses which may arise in connection with the alterations or
additions. Whether or not Tenant furnishes Landlord the foregoing, Tenant will
indemnify and hold Landlord harmless from any and all claims, expenses
(including lawyers' fees), demands and liabilities which may arise out of or be
connected in any way with the alterations or additions. Before beginning any
work in connection with alterations or additions, Tenant, if requested by
Landlord, will furnish Landlord with certificates of insurance from all
contractors performing labor or furnishing materials insuring Landlord against
any and all liabilities which may arise out of or be connected in any way with
the additions or alterations. Tenant will pay the cost of the alterations and
additions and the cost of decorating the Premises occasioned by the alterations
and additions. Upon completing any alterations or additions, Tenant, if
requested by Landlord, will furnish
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<PAGE> 4
Landlord with affidavits from contractors and full and final waivers of lien and
receipted bills covering all labor and material exceeded arc used. All
alterations and additions will comply with al' insurance requirements and with
all relevant laws, ordinances or regulations of municipalities, counties or
state departments and agencies. All alterations and additions will be
constructed in a good workmanlike manner, and only good grades of materials will
be used. All additions, excluding fixtures other than light fixtures and the
trade fixtures and furniture of Tenant, will become the property of Landlord and
will remain upon the Premises at the end or termination of this Lease without
compensation credit to Tenant. All changes in partitions, doorways, wall and
floor coverings and HVAC (heating, ventilating, and air conditioning) ducts and
controls will be restored to their original condition at the cost of Tenant if
Landlord so requests.
9. Rights Reserved to Landlord. Landlord reserves the following
rights:
A. To have keys to the Building.
B. To have access for repairs, alterations, additions and
improvements to the Premises.
C. To show the premises to prospective tenants or brokers during
the last year of the Lease Term and to prospective purchasers at all reasonable
times, provided prior notice is given to Tenant in each case and the use and
occupancy by Tenant of the Premises will not be materially inconvenienced by any
action of Landlord.
D. To enter upon the Premises and exercise any or all of the
rights reserved to Landlord as provided in this Lease without being deemed
guilty of an eviction or disturbance of the use or possession of Tenant and
without be in liable in any manner to Tenant.
10. Landlord's Repairs. At all times, Landlord may make repairs,
alterations or improvements at Tenant's expense in or to the Building, or any
part, or the parking lot or the Premises, and during such operation may close
entrances, doors, corridors, elevators and other facilities, and may have access
to and open the ceilings, all without any liability to Tenant by reason of
interference, inconvenience or annoyance. The work will be done in such a manner
as to cause the least possible interference, inconvenience or annoyance to
Tenant.
11. Insurance, Liability and Indemnity. Tenant will, throughout the
Lease Term, at the sole cost of Tenant, provide and keep in force with
respectable insurance companies reasonably satisfactory to Landlord and to any
mortgagee of Landlord: (1) a policy of comprehensive public liability insurance
with a minimum of $1,000,000 bodily injury, $100,000 property damage and a
combined single limit of $5,000,000, and (2) a policy of fire, theft, casualty
and extended coverage insuring the replacement value of the Building and its
contents. Tenant will furnish Landlord with insurance certificates for the
insurance on or before the Beginning Date. The insurance certificates will name
the Landlord and any mortgagee of Landlord as loss payees and additional
insureds. Tenant will indemnify and hold harmless Landlord from all loss,
damage, liability or expense, including lawyers' fees, resulting from any injury
to any person or any loss of or damage to any property caused by or resulting
from the negligent or willful act or omission of Tenant and its employees,
agents, contractors, customers,
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<PAGE> 5
guests, licensees or invitees or any event or condition, including without
limitation, environmental contamination, occurring or commencing during the
Lease Term with respect to the Premises which do not result from the action or
inaction of Landlord, its employees, agents, contractors or representatives or
from the condition of the Premises or the Building on the Beginning Date.
Landlord and Tenant release each other, and their respective authorized
representatives, from any claims for damage to any person or to the Premises and
to the fixtures, personal property, improvements and alterations of either
Landlord or Tenant in or on the Premises that are caused by or result from risks
insured against under any insurance policies carried by Landlord or Tenant and
in force at the time of the damage. Tenant will not do or commit, or permit to
be done or committed, any act or thing which might cause any policy or policies
of insurance written in connection with the Building to become void or
suspended.
12. Mortgagee Protection. Tenant will Give any mortgagee of the
Premises, as to al or any portion of the Premises, by registered mail, a copy of
any notice of default served upon Landlord, provided that before the notice
Tenant has been notified in writing of the address of the mortgagee. Tenant will
not exercise any remedies available by virtue of a default unless Landlord fails
to cure the default within thirty days after receipt of notice of default or
such additional time as may be reasonably necessary to cure the default in the
case of a default incapable of being cured within thirty days. The mortgagee
will have an additional thirty days within which to cure the default, or if the
default cannot be cured within that time, then such additional time as may be
necessary, if within the thirty days the mortgagee has begun and is diligently
pursuing the remedies necessary to cure the default.
13. Damages or Destruction.
A. If the Building is damaged by any casualty, then Landlord may,
at the opt an of Landlord, either (1) repair the damage as soon as reasonably
possible (but not before the receipt of the insurance proceeds by Landlord) at
the cost of Landlord, in which event this Lease will continue in full force and
effect, or (2) give written notice to Tenant within thirty days after the date
of occurrence of the damage of the intention of Landlord to terminate this
Lease, as of the date of the occurrence of the damage of the intention of
Landlord elects to so terminate this Lease, this Lease will be terminated as of
the date of the occurrence of the damage.
B. If the Building is partially destroyed a. damaged and Landlord
or Tenant make repairs as provided in this Lease, the rent payable for the
period during which the damage and repair continues will be abated in proportion
to the extent which the use of the Building by Tenant is impaired.
C. Except for abatement of rent, if any, Tenant will have no claim
against Landlord for any damage suffered by reason of the damage, repair or
restoration.
D. If, as a result of the negligent or willful act or omission of
Tenant or its employees, agents, contractors, customers, guests, licensees or
invitees, the Building is damaged or destroyed, no abatement or reduction in
rent will occur whether Landlord may elect to restore or repair the Building or
terminate this Lease, and Tenant will continue to pay all rent
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<PAGE> 6
due until the End date. Tenant will pay for the restoration or repair not
covered by insurance within thirty days or written demand for the payment.
14. Eminent Domain.
A. If the Premises are taken, damaged or condemned by public
authority to an extent as to prevent further tenancy, then this Lease will
terminate as of the date possession is given the public authority, and Landlord
will not be obligated to Tenant for any difference between the fair rental value
of the Premises and the rental which would have been paid during the remaining
term of this Lease.
B. If the Premises are partially taken, damaged or condemned by
public authority, then the rental reserved will be adjusted so that Tenant will
be required to pay for the remainder of the Lease Term that portion of the rent
reserved in the proportion that the Building remaining after the taking,
damaging or condemnation bears to the whole of the Building before the taking,
damaging or condemnation, provided the remaining Premises are adequate for the
efficient operation of the business of Tenant. If the remaining Premises are
inadequate for the efficient operation of the business of Tenant, Tenant may
terminate this Lease by giving Landlord thirty days' written notice of
cancellation.
C. All damages and payments resulting from the taking, damaging or
condemnation of the Premises will accrue to and be paid to Landlord, and Tenant
waives any right to any part, except Tenant retains the right to file a separate
claim so long as the claim will not diminish or otherwise adversely affect the
award of Landlord.
15. Subordination. This Lease and all of the rights of Tenant are and
will be subject and subordinate to the lien of any mortgage now placed on the
Premises or any part of the Premises, or placed after the date of this Lease,
and to any and all renewals, modifications, consolidations, replacements,
extensions or substitutions of such mortgage. Tenant will execute any documents
required to effectuate such subordination or to make this Lease subordinate to
the lien of such a mortgage.
16. Attornment. If the holder of a mortgage on the Premises succeeds
to the rights of Landlord as provided in this Lease, whether through possession,
foreclosure or delivery of a new lease or deed, Tenant, upon the request of the
successor Landlord, will attorn to and recognize such successor Landlord as
Tenant's Landlord as provided in this Lease, and will promptly execute and
deliver any instrument that the successor Landlord may request to further attest
the attornment. Tenant irrevocably appoints Landlord the attorney-in-fact of
Tenant to execute and deliver fine instrument on behalf of Tenant, if Tenant
refuses or fails to do so promptly after request. Upon the attornment this Lease
will continue in full force and effect as, or as if the Lease were, a direct
lease between the successor Landlord and Tenant upon all of the terms provided
in this Lease.
17. Estoppel Certificates. Upon the request of e .he landlord or
Tenant, at any time, and from time to time, Landlord and Tenant will execute
and deliver to the other, within ten days after such request, a written
instrument, duly executed:
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A. certifying that this Lease has not been modified and is in full
force and effect or if a modification of this Lease has occurred, that this
Lease is in full force and effect as modified, stating the modification;
B. specifying the dates to which the rent and other payments due
as provided in this Lease have been paid;
C. stating whether, to the knowledge of the party executing the
instrument, the other party is in default and, if the party is in default,
stating the nature of the default;
D. stating the Beginning Date and the End Date of this Lease.
18. Sale of Premises by Landlord. Except in the case of the sale of
all or a portion of the Premises to the City of Rio Rancho, New Mexico in
connection with an industrial revenue bond transaction, as described below, if
the Premises are sold by Landlord, Landlord will be entirely freed and relieved
of all liability as provided in any and all of the obligations of Landlord as
provided in this Lease arising out of any act, occurrence or omission occurring
after the closing of the sale, and the purchaser of the Premises will be deemed,
without any further agreement between the parties or their
successors-in-interest or between the parties and the purchaser, to have assumed
and agreed to carry out any and all of the obligations of Landlord as provided
in this Lease.
19. Lease Assignment or Subletting. Tenant may not assign this Lease
or sublet all or any part of the Premises upon first obtaining the prior written
consent of Landlord. Tenant will not change or allow a change in the ownership
of the business in order to avoid this term, and will, at the request of
Landlord, provide whatever documentation is necessary to establish that Tenant
is in compliance with this term. If Landlord allows Tenant to assign or sublet
all or any part of the Premises, then Landlord may, at the sole option of
Landlord, collect directly from the assignee or subtenant all rents against any
sums due by Tenant, and no such collection will be construed to constitute a
novation or release of Tenant from the further performance of the obligations of
Tenant pursuant to this Lease. Otherwise, assignor or sublessor shall collect
rent on behalf of Landlord and immediately pay such rent to Landlord. The
assignor or sublessor may collect rent in the excess of the existing rates of
the Lease provided that any and all excess sums received by assignor or
sublessor must be immediately paid to Landlord. Upon an assignment of this Lease
or sublease of any or ail of the Premises, Landlord, in its sole discretion, may
terminate this Lease as it relates to such portion of the Premises assigned or
sublet and enter into a new agreement directly with the assignee or sublessee.
20. Quiet Enjoyment. Landlord warrants that Landlord has full right to
execute and to perform this Lease and that Tenant, upon payment of the required
rents and performing this Lease, will peaceably and quietly have, hold and enjoy
the Premises during the Lease Term as well as any extension or renewal of this
Lease. However, Tenant accepts this Lease subject and subordinate to any present
or future mortgage or other lien against the Premises or Building.
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<PAGE> 8
21. Default. The occurrence of any of the following- will constitute
an "Event of Default":
A. Tenant fails to pay the Annual Rent or any other monetary
obligation when due, if the failure continues for three days after written
notice of such failure has been given to Tenant.
B. Tenant abandons or vacates the Premises. Failure to occupy and
operate the Premises for ten consecutive days will be deemed an abandonment and
vacation.
C. Tenant is or becomes bankrupt or insolvent, makes an assignment
for the benefit of creditors, commences a voluntary bankruptcy proceeding or
fails to have an involuntary bankruptcy proceeding against it dismissed or
stayed within sixty days after commencement.
D. A writ of attachment or execution is levied on this Lease which
is not removed within ten days;
E. A receiver is appointed with authority to take possession of
the Premises and, if the receiver is not appointed with the consent or
acquiescence of Tenant, the receiver is not removed within sixty days.
F. Tenant dissolves, merges, consolidates or otherwise reorganizes
or a controlling percentage of the capital stock of Tenant or assets of Tenant
having a value of more than half of the value of the total assets of Tenant is
sold. The phrase "controlling percentage" means the ownership of and the right
to vote stock possessing at least fifty percent of the total combined voting
power of all classes of the capital stock of Tenant issued, outstanding and
entitled to vote for the election of directors.
G. Tenant assigns this Lease or sublets all or any portion of the
Premises without obtaining the prior written consent of Landlord.
H. Tenant makes (or has made) or furnishes (or has furnished) any
warranty, representation or statement to Landlord in connection with this Lease
(or any assignment of this Lease or of all or any part of the Premises) or any
other agreement to which Landlord and Tenant are parties, which is or was false
or misleading in any material respect when made or furnished.
I. Tenant fails to Perform any other term of this Lease if the
failure to perform is not cured within thirty days after written notice of such
failure has been given to Tenant; provided that, if the failure cannot
reasonably be cure within thirty days, the failure will not constitute an Event
of Default if Tenant begins to cu e the default within the thirty day period and
diligently and in good faith continues to cure the default.
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22. Landlord's Remedies.
A. All rights and remedies of Landlord will be construed as
cumulative and no one of them is exclusive of any other right or remedy. The
rights and remedies of Landlord will be continuing rights, none of which will be
exhausted by being exercised on one or more occasions. Landlord will be entitled
to an injunction in proper cases to enforce any part of this Lease or to prevent
or stop any violation or default on the part of Tenant. A waiver by Landlord of
any default, breach or failure of Tenant will not be construed as a continuing
waiver or as a waiver of any subsequent default, breach or failure. Whenever in
this Lease Landlord reserves or is given the right and power to give or withhold
the consent of Landlord to any action on the part of Tenant, the right and power
will not be exhausted by the exercise of the right and power on one or more
occasions, but will be a continuing right and power for the Lease Term and any
extension or renewal of this Lease.
B. The acceptance of any sums of money from Tenant after default in
any rental payment will be taken to be a payment on account by Tenant and will
not constitute a waiver by Landlord of any of the rights of Landlord, nor will
acceptance reinstate this Lease or, in and of itself, cure a default on the part
of Tenant.
C. After the occurrence and during the continuance of an Event of
Default, Landlord will have all rights and remedies provided by law including,
but not limited to, the following:
(1) Landlord may continue this Lease in 'full force and effect,
with or without terminating the right of Tenant to possession, and will have the
right to collect rent when due Landlord may enter the Promises and refer the
Premises, or any part of the Premises, to third parties for the account of
Tenant. Tenant will be liable immediately to Landlord for all costs Landlord
incurs in reletting the Premises, including, without limitation, broker's
commissions, costs of remodeling the Premises required by the reletting and like
costs. Reletting can be for a period shorter or longer than the remainder of the
Lease Term. Tenant will pay to Landlord the rent due as provided in this Lease
on the dates the rent is due, less the rent Landlord receives from any
reletting. No act by Landlord allowed by this paragraph will terminate this
Lease unless Landlord notifies Tenant that Landlord elects to terminate this
Lease. If Landlord elects to relet the Premises as provided in this Lease, rent
that Landlord receives from reletting will be applied to the payment of:
First, any indebtedness from Tenant to Landlord other than rent due from
Tenant;
Second, all costs incurred by Landlord in reletting;
Third, rent due and unpaid as provided in this Lease. After deducting the
payments referred to in this paragraph, any sum remaining from the rent
Landlord receives from reletting will be held by Landlord and applied in
payment of future rent as rent becomes due as provided in this Lease.
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Tenant will never be entitled to any excess rent received by Landlord. If, on
the date rent is due as provided in this Lease, the rent received from the
reletting is less than the rent due on that date, Tenant will pay to Landlord
the remaining rent due.
Landlord will be deemed to have used reasonable efforts to relet the
Premises I' Landlord leases the whole or any part of the Premises, separately or
with other property, for any period equal to or less than, or extending beyond,
the remainder of the Lease Term, for any sum, or to a person or for a use
Landlord deems reasonably satisfactory or appropriate. The failure or refusal of
Landlord to lease to a person or for a use Landlord deems objectionable is not a
failure to use reasonable efforts.
(2) Landlord may terminate this Lease and the right of Tenant to
possession.
Upon termination of this Lease or the right of Tenant to Possession, Tenant
will surrender possession and vacate the Premises and deliver possession to
Landlord, and Tenant grants to Landlord full and free license to enter into and
upon the Premises in such event, with or without process of law, to repossess
the Premises and to excel or remove Tenant and any others who may be occupying
or be within the Premises, and to remove any and all property using such force
as may be necessary, without being deemed in any manner guilty of trespass,
eviction or forcible entry or detainer and without relinquishing the rights of
Landlord to rent or any other right given to Landlord.
Any and all property which may be removed from the Premises by Landlord, to
which Tenant is or may be entitled, may be handled, removed and stored by
Landlord (as the agent of Tenant) at the risk and cost of Tenant. Tenant will
immediately pay to Landlord, upon demand, any and all reasonable costs incurred
in the removal and all reasonable storage charges against the property as long
as the property is in the possession or control of Landlord. Any property of
Tenant not removed from the Premises or retaken from storage by Tenant within
ten days after the end or termination of this Lease, will be conclusively deemed
to have been forever abandoned by Tenant.
(3) Landlord may sue for any payments at any time after default,
whether this Lease is terminated or whether the right of Tenant to possession is
terminated.
23. Landlord's Right to Cure Tenant's Default. All obligations and
agreements to be performed by Tenant as provided in this Lease will be performed
by Tenant at the sole cost of Tenant and without any abatement of rent. If
Tenant fails to pay any sum of money, other than rent, required to be paid by
Tenant or fails to perform any other act on the part of Tenant to be performed,
and the failure continues for three days after notice by Landlord, Landlord may,
but will not be obligated, without waiving or releasing Tenant from any of the
obligations of Tenant, to make the payment or perform the act on behalf of
Tenant.
24. Implied Surrender. No act or thing done by Landlord or the agents of
Landlord during the Lease Term or any extension or renewal of this Lease, will
be deemed an
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<PAGE> 11
acceptance of a surrender of the Premises, and no agreement to accept the
surrender will be valid unless in writing signed by Landlord or the designated
representative of Landlord. The delivery of keys to an employee of Landlord, or
of any agents of Landlord, will not operate as a termination of this Lease or a
surrender of the Premises. No payment by Tenant, or receipt by Landlord, of a
lesser amount than the Quarterly Installments of rent as provided in this Lease,
will be deemed to be other than on account of the earliest stipulated rent, nor
will any endorsement or statement on any check or any letter accompanying any
check, or payment as rent, be deemed an accord and satisfaction, and Landlord
may accept the check or payment without prejudice to the right of Landlord to
recover the balance of the rent or pursue any other right or remedy available to
Landlord.
25. Late Charge. Tenant acknowledges that late payment by Tenant
to Landlord of rent or other sums due will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which would be extremely
difficult and impractical to ascertain. Such costs include, but are nor limited
to, processing and accounting charges and late charges that may be imposed on
Landlord by the terms of any mortgage covering the Premises. If Tenant fails to
pay any sum due after such amount is due, Tenant will, upon being billed, pay to
Landlord as additional rent, a late charge equal to four percent of the amount
overdue.
26. Landlord's Lien and Uniform Commercial Code. As security for
the payment of rent, damages and all other payments required to be made by this
Lease by Tenant, Tenant grants to Landlord a lien upon all goods, wares,
equipment, furniture of Tenant now located upon the Premises or located upon the
Premises aster the date of this Lease. If Tenant abandons or vacates any
substantial portion of the Premises or is in default of the payment of any
rentals, damage or other payments required to be made by this Lease, Landlord
may enter upon the Premises, by force if necessary, and take possession of all
or part of the items, and may sell all or part of the items at public or Private
sale, in one or successive sales, with or without notice, to the highest bidder
for cash and on behalf of Tenant, sell and convey all or part to the bidder,
delivering to the bidder all of the title and interest of Tenant in the items
sold to the bidder. The proceeds of the sale will be applied by Landlord toward
the cost of the sale and then toward the payment of all sums then due by Tenant
to Landlord as provided in this Lease. The statutory lien of Landlord for rent
is not waived. The express contractual lien granted in this Lease is in addition
to the statutory lien. This Lease is intended as, and constitutes a security
agreement within the meaning of the New Mexico Uniform Commercial Code and,
Landlord, in addition to the rights of Landlord as provided in this Lease, will
have all of the rights, titles, liens and interests in the property of Tenant
now or subsequently located upon the Premises which are granted a secured party,
as that term is defined under the New Mexico Uniform Commercial Code, to secure
the payment to Landlord of the various amounts provided in this Lease and in
compliance with this Lease.
27. Costs and Lawyer's Fees. If by reason of any default on the
part of Tenant Landlord needs to employ a lawyer or if Landlord brings suit to
recover any rent due, or for breach of any term of this Lease or to recover
possession of the premises, or if Tenant brings any action and does nor prevail,
then Tenant will pay Landlord, the reasonable actual lawyers' fees and expenses
of Landlord and all costs spent or incurred by Landlord in connection with the
default or action.
-11-
<PAGE> 12
28. Brokerage Commissions. Landlord and Tenant each warrant to the other
that it has had no dealings with any broker or agent in connection with the
negotiation or execution of this Lease, and each will indemnify the other and
hold the other from any and all costs or liabilities for commissions or other
compensation or charges claimed by or awarded to any broker or agent with
respect to this Lease as a result of any action or omission by the indemnifying
party.
29. Holding Over. No holding over by Tenant after the end or termination
of this Lease, whether with or without the consent of Landlord, will operate to
extend or renew this Lease. Any holding over will be construed as a tenancy from
month-to-month at the rental fixed by Landlord at the time when the holding over
begins. The tenancy will be subject to all the other terms provided in this
Lease.
30. Recording. Except for recording a memorandum a, this Lease, Tenant
will not do any act which may encumber the interest or title of Landlord or the
assignees of Landlord in and to the Premises.
31. Notices. All notices, demands or other communications to be given by
one party to the other party under this Lease will be given in writing, mailed
or delivered to the relevant party at its address below its signature below or
to such other address as such party may from time to time specify by notice to
the other. Mailed notices will be sent by registered or certified mail, postage
prepaid, return receipt requested.
32. IRB Transaction. Landlord may convey all or a part of the Premises to
the City of Rio Rancho, New Mexico (the "City") and lease the portion of the
Premises so conveyed from the City under a lease (the "IRE Lease") between the
City and Landlord in connection with the issuance by the City of an industrial
revenue bond for the benefit of Landlord. In that event, this Lease will be
deemed to be a sublease as to the portion of the Premises conveyed to the City
for the duration of the IRB Lease and Tenant will take no action that would
result in a violation of the IRB Lease, but, otherwise, this Lease will remain
unchanged and in full force and effect.
33. Limitation on Indemnities. To the extent, if at all, Section 56-7-1
MESA 1978 is applicable to this Lease, no indemnity obligation provided in this
Lease will extend to liability, claims, damages, losses or expenses, including
attorney fees, relating to the construction, installation, alteration,
modification, repair, maintenance, servicing, demolition, excavation, drilling,
reworking, grading, paving, clearing, site preparation or development of any
real property or of any improvement on, above or under real property and arising
out of (1) the preparation of approval of maps, drawings, opinions, reports,
surveys, change orders, designs or specifications by the indemnitee, or the
agents or employees of the indemnitee, or (2) the giving of or the failure to
give directions or instructions by the indemnitee, or the agents or employees of
the indemnitee where the giving or failure to give directions or instructions is
the primary cause of bodily injury to persons or damage to property.
34. Binding Effect. This Lease binds and inures to the benefit of the
parties and their respective successors and assigns.
-12-
<PAGE> 13
35. Separability. The invalidity or unenforceability or any particular
term or this Lease will not affect any other terms of this Lease, and this Lease
will be construed in all respects as if the invalid or unenforceable terms were
omitted.
36. Entire Agreement. This Lease incorporates all of the agreements
between Landlord and Tenant, and all the agreements have been merged into this
Lease. No prior agreement or understanding, verbal or otherwise, of Landlord or
Tenant or their agents will be valid or enforceable unless provided in this
Lease.
37. Amendments. This Lease may not be amended or modified nor may the
performance of any party under this Lease be waived except in a written
instrument duly executed by the party against whom enforcement of such
amendment, modification or waiver is sought.
38. Headings. The section headings in this Lease are not a part of this
Lease and will have no effect upon the construction or interpretation of any
part of this Lease.
39. Time. Time is of the essence of this Lease and each and all of the
provisions of this Lease in which performance is a factor.
40. Governing Law. This Lease is governed by and is to be construed in
accordance with the law of New Mexico applicable to agreements made and to be
performed in New Mexico.
41. Consents. Except as specifically provided to the contrary in this
Lease, wherever consent is required, the consent will not be unreasonably
withheld, delayed or deferred.
42. Execution in Counterparts. This Lease may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together- will constitute one and the same instrument. Any party may execute
this Lease by executing any such counterpart.
43. Terms Are Covenants and Conditions. All terms of this Lease, whether
covenants or conditions, on the part of Tenant will be deemed to be both
covenants and conditions.
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<PAGE> 14
DATED: August 11, 1995.
FULCRUM PROPERTIES L.P. FULCRUM DIRECT, INC.
By: FULCRUM CAPITAL L.P., its general
partner By:___________________________
By: SAB, INC., its general partner Its:__________________________
Address:
By:____________________________
Scott A. Budoff 1501 Twelfth Street, N.W.
Chairman & President Albuquerque, NM 87104
Address:
1501 Twelfth Street, N.W.
Albuquerque, NM 87104
-14-
<PAGE> 1
EXHIBIT 10.19.1
LEASE AMENDMENT
FULCRUM PROPERTIES, L. P. ("Landlord") and FULCRUM DIRECT, INC. ("Tenant')
agree
1. Recitals. Landlord and Tenant are parties to a Lease dated August
11, 1995 (the "Lease"). Construction of the Building, as defined in the Lease,
has not been completed at the time contemplated by Landlord and Tenant at the
time the Lease was entered into. In addition, the Premises, as defined in the
Lease, has been replatted to comply with certain legal requirements.
Accordingly, Landlord and Tenant wish to amend the Lease in certain respects.
2. Amendments. The definitions of "Beginning Date," "End Date,"
"Lease Year" and "Quarterly Installments" in Section 1 of the Lease are amended
in their entirety to read as follows:
"Beginning Date" means January 1, 1996.
"End Date" means December 31, 2005.
"Lease Year" means the period from and including each January 1
to and including the next December 31.
"Quarterly Installments" means payments, to be made on each
January 1, April 1, July 1 and October 1, equal to one quarter of the
then applicable Annual Rent, with appropriate adjustments made for
changes in the number of Building Square Feet during the relevant
period.
Exhibit A to the Lease is amended to read in its entirety as follows:
Commerce Center at Enchanted Hills, Lot 1A, Block A, as the same is shown
and designated on the plat entitled "SUMMARY PLAT, LOT 1A, BLOCK A, A
REPLAT OF LOT 1 IN BLOCK A AND A PORTION OF UNPLATTED LANDS, COMMERCE
CENTER AT ENCHANTED HILLS, WITHIN THE UNPLATTED PORTION OF UNIT TWENTY,
BEING A PORTION OF SECTION 25, TOWNSHIP 13 NORTH, RANGE 3 EAST, NEW MEXICO
PRINCIPAL MERIDIAN, CITY OF RIO RANCHO, SANDOVAL COUNTY, NEW MEXICO", filed
in the office of the County Clerk of Sandoval County, New Mexico on October
27, 1995 in Vol. 3, Folio 1333-B, Instrument No. 81789 (Rio Rancho Estates
Plat Book No. 8, page 50).
The address for notices under the Lease to either Landlord or Tenant is amended
to be 4321 Fulcrum Way, N.E., Rio Rancho, New Mexico 87124.
<PAGE> 2
2. No Other Changes; Priority. Except as expressly provided in this Lease
Amendment (this "Amendment") the Lease remains unchanged and in full force and
effect. Landlord and Tenant intended that the Lease be prior and superior to the
Lease and Purchase Agreement dated as of December 1, 1995 (the "IRB Lease")
between the City of Rio Rancho, New Mexico and Landlord (notwithstanding
provisions in Section 31 of the Lease prohibiting Tenant from taking any action
that would result in a violation of the IRB Lease, which prohibition is hereby
specifically affirmed by Landlord and Tenant) and to survive any termination of
the IRB Lease. Nothing in this Amendment is intended to affect such priority.
3. Binding Effect. This Amendment binds and inures to the benefit of
Landlord and Tenant and their respective successors and assigns.
4. Amendment. This Amendment and the Lease as amended by this Amendment
may be amended or modified, or the performance by any party of its obligations
under the Lease as amended by this Amendment waived, only in a written
instrument duly executed by the party against whom enforcement of such
amendment, modification or waiver is sought.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which is an original and all of which taken together
constitute one instrument. Any party may execute this Amendment by executing any
such counterpart.
6. Governing Law. This Amendment is governed by and is to be construed in
accordance with the law of New Mexico applicable to agreements made and to be
performed in New Mexico.
DATED: December 29, 1995.
FULCRUM PROPERTIES L.P. FULCRUM DIRECT, INC.
By: FULCRUM CAPITAL L.P., its general
partner By:___________________________
By: SAB, INC., its general partner
By:____________________________
Scott A. Budoff
President
-2-
<PAGE> 1
EXHIBIT 10.19.2
LEASE AMENDMENT
FULCRUM PROPERTIES, L. P. ("Landlord") and FULCRUM DIRECT, INC. ("Tenant") agree
1. Recitals. Landlord and Tenant are parties to a Lease dated August 11, 1995,
as amended by a Lease Amendment dated December 29, 1995 (as so amended, the
"Lease"). The Premises and the Building, as defined in the Lease, are being
expended. Accordingly, Landlord and Tenant wish to amend the Lease in certain
respects.
2. Amendments. The definition of "Annual Rent" in Section 1 of the Lease is
amended in its entirety to read as follows:
"Annual Rents means, for the Lease Year beginning on January 1, 1997,
$5.00 per Building Square Foot and, for each subsequent Lease Yea_, $5.00
per Building Square Foot multiplied by the lesser of (I) the PPI Increase,
if any, or (ii) 1.03.
Exhibit A to the Lease is amended to read in its entirety as follows:
Commerce Center at Enchanted Hills, Lot lA-1, Block A, as the same is shown
and designated on the plat entitled "SUMMARY PLAT, LOT lA-1, BLOCK A, A
REPLAT OF LOT 1A IN BLOCK A AND A PORTION OF UNPLATTED LANDS, COMMERCE
CENTER AT ENCHANTED HILLS, WITHIN THE UNPLATTED PORTION OF UNIT TWENTY,
BEING A PORTION OF SECTION 25, TOWNSHIP 13 NORTH, RANGE 3 EAST, NEW MEXICO
PRINCIPAL MERIDIAN, CITY OF RIO PANCHO, SANDOVAL COUNTY, NEW MEXICO", filed
in the office of the County Clerk of Sandoval County, New Mexico on
September 20, 1996 in Vol. 3, Folio 1528-A, Instrument No. 8294 (Rio Rancho
Estates Plat Book No. 9, page 90).
2. No Other Chances. Priority. Except as expressly provided in this Lease
Amendment (this "Amendment") the Lease remains unchanged and in full force and
effect. Landlord and Tenant intended that the Lease be prior and superior to the
Lease and Purchase Agreement dated as of December 1, 1995 (the "IRB Lease")
between the City of Rio Rancho, New Mexico (the "City") and Landlord
Notwithstanding provisions in Section 31 of the Lease prohibiting Tenant from
taking any action that would result in a violation of the IRB Lease, which
prohibition is hereby specifically affirmed by Landlord and Tenant) and the
Lease and Purchase Agreement dated as of December 1, 1996 (the "Second IRB
Lease") expected to be entered into by the City and Landlord and to survive any
termination of the IRB Lease or the Second IRB Lease. Nothing in this Amendment
is intended to affect such priority.
<PAGE> 2
3. Effective Date. This Amendment will be effective as of January 1,
l997. This Amendment will have no effect on any period prior to that date.
4. Binding Effect. This Amendment binds and inures to the benefit of
Landlord and Tenant and their respective successors and assigns.
5. Amendment. This Amendment and the Lease as amended by this Amendment
may be amended or modified, or the performance by any party of its obligations
under the Lease as amended by this Amendment waived, only in a written
instrument duly executed by the party against whom enforcement of such
amendment, modification or waiver is sought.
6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which is an original and all of which taken together
constitute one instrument. Any party may execute this Amendment by executing any
such counterpart.
7. Governing Law. This Amendment is governed by and is to be construed in
accordance with the law of New Mexico applicable to agreements made and to be
performed in New Mexico.
DATED: September 24, 1996.
FULCRUM PROPERTIES L.P. FULCRUM DIRECT, INC.
By: FULCRUM CAPITAL L.P., its general
partner By:___________________________
By: SAB, INC., its general partner
By:____________________________
-2-
<PAGE> 1
EXHIBIT 10.23
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
AMONG
FULCRUM DIRECT, INC.,
WHITNEY SUBORDINATED DEBT FUND, L.P.
WHITNEY EQUITY PARTNERS, L.P.
GREENBERG FAMILY FUND LLC
AND
MAUREEN C. SULLIVAN, REVOCABLE TRUST - 1995
--------------------------------
Dated as of June 30, 1997
--------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SECURITIES PURCHASE AGREEMENT
AGREEMENT, dated as of June 30, 1997 among FULCRUM DIRECT,
INC. (the "Company"), a Delaware corporation, WHITNEY SUBORDINATED DEBT FUND,
L.P. ("WSDF"), a Delaware limited partnership, WHITNEY EQUITY PARTNERS, L.P., a
Delaware limited partnership ("WEP" and together with WSDF, the "Whitney
Purchasers"), GREENBERG FAMILY FUND LLC and MAUREEN C. SULLIVAN, REVOCABLE TRUST
- - 1995 (the "Individual Purchasers" and, together with the Whitney Purchasers,
the "Purchasers").
W I T N E S S E T H:
WHEREAS, subject to the terms and conditions set forth herein,
the Company wishes to sell to the Purchasers, and the Purchasers wish to
purchase from the Company (i) senior subordinated promissory notes (the "Notes")
due October 21, 2003 in the aggregate principal amount of $10,000,000, and (ii)
warrants (the "Warrants") to purchase up to an aggregate of 200,000 shares of
common stock, $.01 par value per share, of the Company (the "Common Stock") in
each case upon the terms and subject to the conditions hereinafter set forth;
and
WHEREAS, the Company wishes to sell to the Purchasers, and the
Purchasers wish to purchase from the Company 1,450,000 shares of Common Stock
(the "Shares") for an aggregate purchase price of $10,000,000, upon the terms
and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"Affiliate" of any specified Person means any other Person who
is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, except with respect to the Company and its Subsidiaries
such term shall not include the Purchasers or any of their respective
"affiliates" (as defined in such rule).
"Agreement" means this Agreement, including the exhibits and
schedules attached hereto, as the same may be amended, supplemented or modified
in accordance with the terms hereof.
"Budoff" means Scott A. Budoff.
"Budoff Employment Agreement" means the Employment Agreement
between the Company and Budoff, dated October 21, 1996.
<PAGE> 3
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.
"By-laws" means the By-laws of the Company as in effect on the
Closing Date.
"Capital Expenditures" means the aggregate expenditures
(whether or not financed) made by the Company and its Subsidiaries for fixed or
capital assets or improvements (including, without limitation, capitalized
intellectual and proprietary property), or for replacements, substitutions or
additions thereto, that have an anticipated useful service life of at least one
year or more at the time the asset is acquired by the Company or one of its
Subsidiaries, and are used in the production, distribution and/or the sale of
the goods or services or offered for sale by the Company or one of its
Subsidiaries, all as determined in accordance with GAAP.
"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP consistently applied.
"Cash" shall mean currency of the United States of America.
"Cash Flow Coverage Ratio" means, with respect to the Company
and its Subsidiaries on a consolidated basis as of the end of any fiscal
quarter, the ratio of (a) EBITDA for such fiscal quarter and the three preceding
fiscal quarters (treated as a single accounting period) less Capital
Expenditures for such period to (b) Cash Interest Expense.
"Cash Interest Expense" means, with respect to the Company and
its Subsidiaries on a consolidated basis, Interest Expense less the sum of (a)
pay-in-kind Interest Expense, (b) the amortization of debt discounts, if any,
(c) the amortization of all fees payable in connection with the incurrence of
Indebtedness to the extent included in interest expense and (d) any other
expense classified under GAAP as interest expense that is not paid or payable in
Cash.
"Certificate of Incorporation" means the Certificate of
Incorporation of the Company as in effect on the Closing Date.
"Closing" has the meaning assigned to that term in Section
2.7.
"Closing Date" means the date specified in Section 2.7.
"Code" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto.
2
<PAGE> 4
"Commission" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" has the meaning assigned to that term in the
first Whereas clause hereof, or any other capital stock of the Company into
which such stock is reclassified or reconstituted.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability of that Person with respect to any Indebtedness,
lease, dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "primary obligation") of another Person (the "primary obligor"),
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to perform in respect
thereof. The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determinable amount of the primary obligation in respect
of which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof.
"Contractual Obligations" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.
"Defined Benefit Plan" means a defined benefit plan within the
meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded
or unfunded, qualified or non-qualified (whether or not subject to ERISA or the
Code).
"EBITDA" means, with respect to the Company and its
Subsidiaries on a consolidated basis for any period, the sum of (a) Net Income
for such period, (b) Interest Expense for such period, (c) Federal, state and
local income and franchise taxes deducted from revenue in determining such Net
Income, (d) depreciation and amortization deducted from revenue in determining
such Net Income.
"Environmental Laws" means any Federal, state, territorial,
provincial or local law, common law doctrine, rule, order, decree, judgment,
injunction, license, permit or regulation relating to environmental matters,
including those pertaining to land use, air, soil, surface water, ground water
(including the protection, cleanup, removal, remediation or damage thereof),
public or employee health or safety or any other environmental matter, together
with any other laws (Federal, state, territorial, provincial or local) relating
to emissions, discharges, releases or threatened releases of any pollutant or
contaminant including, without limitation, medical, chemical, biological,
biohazardous or radioactive waste and materials, into ambient air, land, surface
water, groundwater,
3
<PAGE> 5
personal property or structures, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transportation,
discharge or handling of any contaminant, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C.
9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. 1801 et
seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the
Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the Clean Air Act
(42 U.S.C. 1251 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et
seq.), and the Occupational Safety and Health Act (29 U.S.C. 651 et seq.), as
such laws have been, or are, amended, modified or supplemented heretofore or
from time to time hereafter and any analogous future Federal, or present or
future state or local laws, statutes and regulations promulgated thereunder.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" means any Person that is treated as a single
employer with the Company or any of its Subsidiaries under Section 414(b), (c),
(m) or (o) of the Code.
"Event of Default" has the meaning assigned to such term in
the Notes.
"Exercisable Shares" has the meaning assigned to that term in
Section 8.7 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"Fulcrum Brands Trademark License Agreement" means the
Trademark License and Option Agreement between the Company and Fulcrum Brands,
L.P., dated April 1, 1994, as amended.
"Fulcrum Properties Lease" means the lease between Fulcrum
Properties, L.P. and the Company, dated August 11, 1995, as amended.
"Fulcrum Retail Option Agreement" means the agreement between
Fulcrum Retail, Inc. and WEP, dated October 21, 1996.
"GAAP" means generally accepted accounting principles in
effect on the date hereof within the United States.
"Governmental Authority" means the government of any nation,
state, city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"Hazardous Materials" means those substances which are
regulated by or form the basis of liability under any Environmental Laws.
4
<PAGE> 6
"Indebtedness" means as to any Person (a) all obligations of
such Person for borrowed money (including, without limitation, reimbursement and
all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business, (d) all interest rate
and currency swaps, caps, collars and similar agreements or hedging devices
under which payments are obligated to be made by such Person, whether
periodically or upon the happening of a contingency, (e) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (f) all obligations of
such Person under leases which have been or should be, in accordance with GAAP,
recorded as capital leases, (g) all indebtedness secured by any Lien (other than
Liens in favor of lessors under leases other than leases included in clause (f))
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is
non-recourse to the credit of that Person, and (h) any Contingent Obligation of
such Person.
"Initial Public Offering" means the sale by either the Company
or any of its Subsidiaries of its capital stock pursuant to a registration
statement on Form S-1 or otherwise under the Securities Act in which the Company
or any of its Subsidiaries receives at least $20,000,000 of Net Cash Proceeds.
"Interest Expense" shall mean, with respect to the Company and
its Subsidiaries on a consolidated basis for any period, the sum of (a) gross
interest expense of the Company and its Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP consistently applied, including
(i) the amortization of debt discounts, (ii) the amortization of all fees
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense, (iii) the portion of any payments or accruals with respect
to Capital Lease Obligations allocable to interest expense and (iv) all
commissions paid to factors during such period, and (b) any other capitalized
interest of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP consistently applied.
"Lederman" means Michael G. Lederman.
"Lederman Employment Agreement" means the Employment Agreement
between the Company and Lederman, dated October 21, 1996.
"Leverage Ratio" means, with respect to the Company and its
Subsidiaries on a consolidated basis as of the end of any fiscal quarter, the
ratio of (a) the aggregate Indebtedness of the Company and its Subsidiaries as
of the end of such fiscal quarter to (b) EBITDA for such fiscal quarter and the
three immediately preceding fiscal quarters (treated as a single accounting
period).
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or
5
<PAGE> 7
preferential arrangement of any kind or nature whatsoever (excluding preferred
stock and equity related preferences) including, without limitation, those
created by, arising under or evidenced by any conditional sale or other title
retention agreement, the interest of a lessor under a Capital Lease Obligation,
or any financing lease having substantially the same economic effect as any of
the foregoing.
"Material Adverse Effect" shall mean a material adverse effect
on (i) the results of operations, business or financial condition of the
Company, (ii) the Rights of the Company, or (iii) the legality, validity or
enforceability of, the Transaction Documents.
"Net Cash Proceeds" means (X) the cash proceeds received by
the Company or any of its Subsidiaries from an Initial Public Offering minus (Y)
reasonable brokerage commissions or underwriting fees and other reasonable fees
and expenses (including, without limitation, reasonable fees, charges and
disbursements of counsel and accountants and reasonable fees and expenses of
investment bankers) relating to an Initial Public Offering.
"Net Income" shall mean, for any period, the net income (or
loss) of the Company and its Subsidiaries on a consolidated basis for such
period, as determined in accordance with GAAP consistently applied, but
excluding any extraordinary or nonrecurring charges, expenses, gains or losses
and any insurance proceeds received by the Company or any of its Subsidiaries.
"Notes" means the senior subordinated promissory notes
referred to in the first Whereas clause hereof and substantially in the form
attached hereto as Exhibit A.
"Outstanding Borrowings" means all Indebtedness of the Company
and its Subsidiaries for money borrowed that is outstanding at the relevant time
of determination.
"Permitted Investor" shall mean any Person other than (i) the
Persons listed on Exhibit C annexed hereto, (ii) Persons and their Affiliates
who have initiated hostile takeovers, proxy contests or other change of control
transactions, (iii) Persons and their Affiliates who are in the business of
acquiring distressed equity or debt (e.g., vulture investors), (iv) Persons and
their Affiliates who are in the business of purchasing claims in bankruptcy and
(v) hedge funds and their Affiliates formed for the purpose of engaging in the
activities described in clauses (ii) through (iv) above.
"Person" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, Governmental Authority or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"Plans" has the meaning assigned to that term in Section 5.23
of this Agreement.
"Pro Forma Balance Sheet" means the pro forma consolidated
balance sheet of the Company and its Subsidiaries delivered pursuant to Section
3.14.
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<PAGE> 8
"Proposed Joint Venture" shall mean the proposed joint venture
between the Company and Yamano Associates.
"Requirements of Law" means as to any Person, the Certificate
of Incorporation and By-laws or other organizational or governing documents of
such Person, and any law, treaty, rule, regulation, right, privilege,
qualification, license or franchise or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable or binding upon such
Person or any of its property or to which such Person or any of its property is
subject or pertaining to any or all of the transactions contemplated or referred
to herein.
"Restricted Payment" means (a) any dividend or other
distribution on any share of the Company's capital stock (except dividends
payable solely in shares of its capital stock) or (b) any payment by the Company
or any Subsidiary on account of the direct or indirect purchase, redemption
(other than pursuant to existing or future repurchase agreements with employees
other than Lederman and Budoff), retirement or other acquisition of (i) any
shares of the Company's capital stock (except shares acquired upon the
conversion thereof into other shares of its capital stock), (ii) any shares of
any Subsidiary's capital stock from any Person other than the Company, or (iii)
any option, warrant or other right to acquire shares of the Company's or any
Subsidiary's capital stock.
"Securities" means, collectively, the Notes, the Warrants and
the Shares.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated October 21, 1996, among the Company, WEP and WSDF.
"Senior Indebtedness" means all Indebtedness of the Company
senior to the Indebtedness represented by the Note of the Company currently
outstanding or incurred in the future pursuant to any borrowing by the Company
from any bank or institutional lender not affiliated with Lederman, Budoff or
the Company and any renewals, extensions, refinancings or refundings thereof,
provided, that it shall not include any capital lease obligations and
Indebtedness represented by the Note.
"Shares" has the meaning assigned to that term in the second
Whereas clause.
"Solvent" means, with respect to the Company and its
Subsidiaries considered as a whole, based on the Pro Forma Balance Sheet, (i)
the assets and the property of the Company and its Subsidiaries, considered as a
whole, exceed the aggregate liabilities (including contingent and unliquidated
liabilities) of the Company and its Subsidiaries, considered as a whole, (ii)
after giving effect to the transactions contemplated by this Agreement, the
Company and its Subsidiaries, considered as a whole, will not be left with
unreasonably small capital, and (iii) after giving effect to the transactions
contemplated by this Agreement, the Company and its Subsidiaries, considered as
a whole, are able to both service and pay their liabilities as they mature. In
computing the amount of contingent or unliquidated liabilities at any time, such
liabilities will be computed as the amount
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<PAGE> 9
that, in light of all the facts and circumstances existing at such time,
represents the amount that is likely to become an actual or matured liability.
"Storybook Acquisition" means the acquisition by the Company
of Storybook Heirlooms, Inc., a California corporation.
"Subsidiary" means, with respect to any Person, a corporation
or other entity of which 50% or more of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of
the Company.
"Stockholders Agreement" means the Stockholders Agreement
between the Company and certain of its stockholders, dated October 21, 1996.
"Transaction Documents" means collectively, this Agreement,
the Notes, the Warrants, and the Certificate of Incorporation and the By-laws of
the Company as in effect on the Closing Date.
"Warrants" means the warrants referred to in the first Whereas
clause hereof, which warrants are substantially in the form attached hereto as
Exhibit B.
1.2 Accounting Terms: Financial Statements. All accounting
terms used herein not expressly defined in this Agreement shall have the
respective meanings given to them in accordance with sound accounting practice.
The term "sound accounting practice" shall mean such accounting practice as, in
the opinion of the independent certified public accountants regularly retained
by the Company, conforms at the time to GAAP applied on a consistent basis
except for changes with which such accountants concur. If any changes in
accounting principles are hereafter occasioned by promulgation of rules,
regulations, pronouncements or opinions of or are otherwise required by, the
Financial Accounting Standards Board or the American Institute of Certified
Public Accountants (or successors thereto or agencies with similar functions),
and any of such changes results in a change in the method of calculation of, or
affects the results of such calculation of, any of the financial covenants,
standards or terms found herein, then the parties hereto agree to enter into and
diligently pursue negotiations in order to amend such financial covenants,
standards or terms so as to reflect fairly and equitably such changes, with the
desired result that the criteria for evaluating the Company's financial
condition and results of operations shall be the same after such changes as if
such changes had not been made. In computing the financial covenants set forth
in Section 9.8 hereof, the historical positive earnings from acquisitions (other
than the Storybook Acquisition) that are not "Significant Acquisitions" (as
defined in the Note) shall be taken into account.
1.3 Knowledge of the Company. All references to the knowledge
of the Company or to facts known by the Company shall mean actual knowledge or
notice of Lederman or Budoff.
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<PAGE> 10
ARTICLE 2
PURCHASE AND SALE OF NOTES, WARRANTS AND SHARES
2.1 Purchase and Sale of Note. Subject to the terms and
conditions herein set forth, the Company agrees that it will issue to the
Purchasers, and the Purchasers agree that they will acquire from the Company on
the Closing Date, Notes in the principal amount set forth opposite each such
Purchaser's name on Schedule I attached hereto, substantially in the form
attached hereto as Exhibit A, appropriately completed in conformity herewith for
accounting and tax purposes. The aggregate purchase price of the Notes shall be
the amount set forth in the valuation to be provided by Hambrecht & Quist within
90 days of the date hereof. The aggregate purchase price of the Notes and the
Warrants shall be $10,000,000.
2.2 Purchase and Sale of the Warrants. Subject to the terms
and conditions herein set forth (including Section 2.7 below), the Company
agrees that it will issue to the Purchasers, and the Purchasers agree that they
will acquire from the Company on the Closing Date, Warrants to acquire the
number of Shares set forth opposite each such Purchaser's name on Schedule I
attached hereto substantially in the form attached hereto as Exhibit B,
appropriately completed in conformity herewith. For accounting and tax purposes,
the aggregate purchase price for the Warrants shall be the amount set forth in
the valuation to be provided by Hambrecht & Quist within 90 days of the date
hereof. The aggregate purchase price of the Notes and the Warrants shall be
$10,000,000.
2.3 Purchase and Sale of the Shares. Subject to the terms and
conditions herein set forth, the Company agrees that it will issue to the
Purchasers and the Purchasers agree that they will acquire from the Company on
the Closing Date, the number of Shares set forth opposite such Purchaser's name
on Schedule I attached hereto. The purchase price for the Shares shall be
approximately $6.90 per share for an aggregate purchase price of $10,000,000.
2.4 Fees. Concurrently with the issuance of the Notes, the
Company shall pay to the Purchasers of the Notes a debt placement fee of
$300,000, payable in the amounts set forth opposite each such Purchaser's name
on Schedule I attached hereto and shall reimburse all of the Purchasers'
reasonable out-of-pocket expenses (including lawyer's fees, charges and direct
disbursements) incurred in connection with the transactions contemplated by this
Agreement, which payments shall be made by wire transfer of immediately
available funds to an account or accounts designated by the Purchasers. The
Company shall also pay Fulcrum Capital Partners L.P. ("FCP") an advisory fee of
$100,000, which payment will be made at closing in cash or Company Common Stock
at a price of $6.90 per share.
2.5 Closing. The purchase and issuance of the Securities shall
take place at the closing (the "Closing") to be held at the offices of Kirkland
& Ellis, Citicorp Center, 153 East 53rd Street, New York, New York 10022 at
10:00 a.m., Eastern Standard Time, on June 24, 1997, or at such other time and
place as the Company and the Purchasers may agree in writing (the "Closing
Date"). At the Closing, the Company shall deliver: (a) the Notes and the debt
placement fee to the Purchasers against delivery by the Purchasers to the
Company of the purchase price therefor by wire transfer of immediately available
funds, (b) the Warrants to the Purchasers against delivery by the
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<PAGE> 11
Purchasers to the Company of the purchase price therefor by wire transfer
of immediately available funds, and (c) the Shares to the Purchasers against
delivery by the Purchasers to the Company of the purchase price therefor by wire
transfer of immediately available funds.
2.6 Financial Accounting Positions; Tax Reporting. Each of the
parties hereto agrees to take reporting and other positions with respect to the
Securities which are consistent with the purchase price of the Securities set
forth herein for all financial accounting purposes, unless otherwise required by
applicable GAAP or Commission rules (in which case the parties agree only to
take positions inconsistent with the purchase price of the Securities set forth
herein provided that the Purchasers have consented thereto, which consent shall
not be unreasonably withheld). Each of the parties to this Agreement agrees to
take reporting and other positions with respect to the Securities which are
consistent with the purchase price of the Securities set forth herein for all
other purposes, including without limitation, for all Federal, state and local
tax purposes.
2.7 Additional Warrant Issuances. If any amounts shall remain
outstanding under the Notes as of the following dates, then the Company shall
issue to the Purchasers (pro rata based on the number of Shares set forth
opposite such Purchaser's name on Schedule I attached hereto) warrants,
substantially in the form of Exhibit B hereto, to purchase, at an exercise price
of $.01 per share, the number of shares of Common Stock determined by
multiplying the Base Number set forth opposite such date below by a fraction,
the numerator of which is the aggregate amount then outstanding under each of
the Notes and the denominator of which is $10,000,000:
<TABLE>
<CAPTION>
Date Base Number
---- -----------
<S> <C>
December 31, 1997 75,000
June 30, 1998 75,000
December 31, 1998 50,000
</TABLE>
Any warrants issued pursuant to this Section 2.7 shall be in the form of,
entitled to the same rights as, and subject to the same conditions as, the
Warrants and all representations contained in Article 5 hereof with respect to
the warrants shall be true and correct with respect to the warrants issued
pursuant to this Section 2.7. At the earlier of the time warrants are issued
pursuant to this Section 2.7 or the consummation of an Initial Public Offering,
the Company shall reserve for issuance the number of shares of Common Stock
issuable upon exercise of such warrants. No issuance of warrants pursuant to
this Section 2.7 shall be deemed to reduce the amounts then outstanding under
the Notes.
ARTICLE 3
CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE
The obligation of the Purchasers to purchase the Securities to
pay the purchase prices therefor at the Closing and to perform any obligations
hereunder shall be subject to the satisfaction as determined by, or waiver by,
the Purchasers of the following conditions on or before the Closing Date. The
Purchasers shall not be obligated to purchase the Notes unless the purchase and
sale of
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<PAGE> 12
the Warrants and the Shares occurs simultaneously therewith, shall not be
obligated to purchase the Warrants unless the purchase and sale of the Notes and
the Shares and occurs simultaneously therewith and shall not be obligated to
purchase the Shares unless the purchase and sale of the Notes and the Warrants
occurs simultaneously therewith.
3.1 Representations and Warranties. The representations and
warranties of the Company contained in Article 5 hereof shall be true and
correct at and as of the Closing Date as if made at and as of such date.
3.2 Compliance with this Agreement. The Company shall have
performed and complied with all of its agreements and conditions set forth or
contemplated herein that are required to be performed or complied with by the
Company on or before the Closing Date.
3.3 Secretary's Certificates. The Purchasers shall have
received certificates from the Company, dated the Closing Date and signed by the
Secretary or an Assistant Secretary of the Company, certifying (a) that the
attached copies of the Certificate of Incorporation and By-laws of the Company,
and resolutions of the Board of Directors of the Company, approving the
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, are all true, complete and correct and remain unamended and
in full force and effect, and (b) as to the incumbency and specimen signature of
each officer of the Company executing any Transaction Document to which it is a
party or any other document delivered in connection herewith on behalf of the
Company.
3.4 Documents. The Purchasers shall have received true,
complete and correct copies of such agreements, schedules, exhibits,
certificates, documents, financial information and filings as they may request
in connection with or relating to the transactions contemplated hereby, all in
form and substance satisfactory to the Purchasers.
3.5 Purchase of Securities Permitted by Applicable Laws. The
acquisition of and payment for the Securities to be acquired by the Purchasers
hereunder and the consummation of the transactions contemplated hereby and by
the Transaction Documents (a) shall not be prohibited by any Requirement of Law,
(b) shall not subject the Purchasers to any penalty or other onerous condition
under or pursuant to any Requirement of Law, and (c) shall be permitted by all
Requirements of Law to which the Purchasers or the transactions contemplated by
or referred to herein or in the Transaction Documents are subject; and the
Purchasers shall have received such certificates or other evidence as they may
reasonably request to establish compliance with this condition.
3.6 Opinion of Counsel. The Purchasers shall have received an
opinion of outside counsel to the Company, dated the Closing Date, relating to
the transactions contemplated by or referred to herein, in form and substance
acceptable to the Purchasers.
3.7 Approval of Counsel to the Purchasers. All actions and
proceedings hereunder and all agreements, schedules, exhibits, certificates,
financial information, filings and other documents required to be delivered by
the Company hereunder or in connection with the
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<PAGE> 13
consummation of the transactions contemplated hereby, and all other related
matters, shall have been in form and substance acceptable to Morrison Cohen
Singer & Weinstein, LLP, counsel to the Purchasers, in its reasonable judgment
(including, without limitation, the opinion of counsel referred to in Section
3.6 hereof).
3.8 Consents and Approvals. All consents, exemptions,
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Company necessary,
desirable, or required in connection with the execution, delivery or performance
(including, without limitation, the payment of interest on the Notes and the
issuance of Common Stock upon the exercise of the Warrants) by the Company, or
enforcement against the Company, of the Transaction Documents to which it is a
party shall have been obtained and be in full force and effect, and the
Purchasers shall have been furnished with appropriate evidence thereof, and all
waiting periods shall have lapsed without extension or the imposition of any
conditions or restrictions.
3.9 No Material Judgment or Order. There shall not be on the
Closing Date any judgment or order of a court of competent jurisdiction or any
ruling of any Governmental Authority or any condition imposed under any
Requirement of Law which, in the judgment of the Purchasers, would prohibit the
purchase of the Securities hereunder or subject the Purchasers to any penalty or
other onerous condition under or pursuant to any Requirement of Law if the
Securities were to be purchased hereunder.
3.10 Pro Forma Balance Sheet. The Company shall have delivered
to the Purchasers as of the Closing Date the pro forma consolidated balance
sheet of the Company specified in Section 5.12(b) hereof, certified by the chief
financial officer of the Company that it fairly presents in all material
respects the pro forma adjustments reflecting the consummation of the
transactions contemplated in this Agreement, including all material fees and
expenses in connection therewith.
3.11 Goodstanding Certificates. The Company shall have
delivered to the Purchasers as of the Closing Date, goodstanding certificates
for the Company for its jurisdiction of incorporation and all other
jurisdictions where it does business.
3.12 Storybook Heirlooms Acquisition. The Storybook
Acquisition shall have closed, subject only to delivery of the purchase price.
ARTICLE 4
CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO CLOSE
The obligations of the Company to issue and sell the
Securities and to perform its other obligations hereunder shall be subject to
the satisfaction as determined by, or waiver by, the Company of the following
conditions on or before the Closing Date:
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<PAGE> 14
4.1 Representations and Warranties. The representations and
warranties of the Purchasers contained in Article 6 hereof shall be true and
correct at and as of the Closing Date, as if made at and as of such date.
4.2 Compliance with this Agreement. The Purchasers shall have
performed and complied with all of their respective agreements and conditions
set forth or contemplated herein that are required to be performed or complied
with by the Purchasers on or before the Closing Date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchasers,
after giving effect to the transactions contemplated by this Agreement, as
follows:
5.1 Corporate Existence and Power. The Company: (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation; (b) has all requisite corporate power
and authority to own and operate its property, to lease the property it operates
as lessee and to conduct the business in which it is currently, or is currently
proposed to be, engaged; (c) is, duly qualified as a foreign corporation,
licensed and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to do so
would not have a Material Adverse Effect; and (d) has the corporate power and
authority to execute, deliver and perform its obligations under each Transaction
Document to which it is or will be a party and to borrow hereunder.
5.2 Corporate Authorization; No Contravention. The execution,
delivery and performance by the Company of each Transaction Document to which it
is a party and the consummation of the transactions contemplated hereby and
thereby, including without limitation the issuance of the Securities: (a) has
been duly authorized by all necessary corporate, and if required, stockholder
action; (b) does not contravene the terms of the Company's certificate of
incorporation or by-laws, or any amendment thereof; and (c) will not violate,
conflict with or result in any breach or contravention of or the creation of any
Lien under, any Contractual Obligation of the Company or any Requirement of Law
applicable to the Company, except where such violation, conflict or result could
not reasonably be expected to have a Material Adverse Effect.
5.3 Governmental Authorization; Third Party Consents. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by (including, without limitation, the payment of
interest on the Notes and the issuance of Common Stock upon the exercise of the
Warrants), or enforcement against, the Company of the Transaction Documents to
which it is a party or the consummation of the transactions contemplated hereby
or thereby, except where the failure to comply with such Requirement of Law
could not reasonably be expected to have a Material Adverse Effect.
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<PAGE> 15
5.4 Binding Effect. Each of the Transaction Documents to which
it is a party has been duly executed and delivered by the Company, and
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors' rights generally and by general principles of
equity relating to enforceability.
5.5 No Legal Bar. Neither the execution, delivery and
performance of the Transaction Documents nor the issuance of or performance of
the terms of the Securities will violate any Requirement of Law or any
Contractual Obligation of the Company, except where such violation could not
reasonably be expected to have a Material Adverse Effect. The Company has not
previously entered into any agreement which is currently in effect or to which
the Company is currently bound, granting any rights to any Person which are
inconsistent with the rights to be granted by the Company in the Transaction
Documents.
5.6 Litigation. Except as set forth on Schedule 5.6, there are
no legal actions, suits, proceedings, claims or disputes pending or, to the
Company's knowledge, threatened, at law, in equity, in arbitration or before any
Governmental Authority against or affecting the Company. No injunction, writ,
temporary restraining order, decree or any order of any nature has been issued
by any court or other Governmental Authority purporting to enjoin or restrain
the execution, delivery or performance of the Transaction Documents.
5.7 Compliance with Laws. The Company is in compliance with
all Requirements of Law, except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect.
5.8 No Default or Breach. No event has occurred and is
continuing or would result from the incurring of obligations by the Company
under the Transaction Documents which constitutes or, with the giving of notice
or lapse of time or both, would constitute an Event of Default. The Company is
not in default under or with respect to any Contractual Obligation, except where
such default could not reasonably be expected to have a Material Adverse Effect.
5.9 Title to Properties. The Company does not own any real
property.
5.10 Use of Real Property. The leased real properties used in
connection with the business of the Company, are used and operated in compliance
and conformity with all applicable leases, contracts, commitments, licenses and
permits, except to the extent that the failure so to conform could not
reasonably be expected to have, in the aggregate, a Material Adverse Effect. The
Company has not received notice of violation of any applicable zoning or
building regulation, ordinance or other law, order, regulation or requirement
relating to the operations of the Company; and there is no such violation,
except where such violation could not reasonably be expected to have a Material
Adverse Effect. All plants and other buildings that are covered by leases used
in connection with the business of the Company substantially conform with all
applicable ordinances, codes, regulations and requirements except where the
failure to so conform could not reasonably be expected to have a Material
Adverse Effect, and no law or regulation presently in effect or condition
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<PAGE> 16
precludes or materially restricts continuation of the present use of such
properties. The Company holds interests as lessees under leases in full force
and effect in all real property used in connection with its business. The
Fulcrum Properties Lease is in full force and effect and the Company enjoys
peaceful and undisturbed possession thereunder. There is no default on the part
of the Company or Fulcrum Properties L.P. or event or condition which with
notice or lapse of terms, or both, would constitute a default on the part of the
Company or Fulcrum Properties L.P. under such lease.
5.11 Taxes. The Company and each of its Subsidiaries have
filed or caused to be filed, or have properly filed extensions for, all tax
returns which are required to be filed and have paid or caused to be paid all
taxes required to be paid by them and all assessments received by them to the
extent that such taxes have become due, except taxes the validity or amount of
which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside. The Company and each of
its Subsidiaries have paid or caused to be paid, or have established reserves
that the Company reasonably believes to be adequate in all material respects,
for all tax liabilities applicable to the Company and its Subsidiaries for all
fiscal years which have not been examined and reported on by the taxing
authorities (or closed by applicable statutes).
5.12 Financial Condition.
(a) The Company has attached hereto as Exhibit 5.12A
true and complete copies of (i) the audited consolidated balance sheets of the
Company and its Subsidiaries as of December 28, 1996 and December 30, 1995 and
the related consolidated statements of operations and cash flows, together with
the notes thereto, of the Company and its Subsidiaries for the years ended
December 28, 1996 and December 30, 1995 (the "Audited Financial Statements"),
and (ii) the unaudited consolidated balance sheets of the Company and its
Subsidiaries as of May 24, 1997 and the related consolidated statements of
operations and cash flows, together with the notes thereto, of the Company and
its Subsidiaries for the period ended May 24, 1997 (the "1997 Financial
Statements"). The Audited Financial Statements and the 1997 Financial Statements
fairly present, in all material respects, the financial position of the Company
and the results of operations and cash flows of the Company as of the respective
dates or for the respective periods set forth therein, except that the 1997
Financial Statements are subject to normal year-end audit adjustments. The
Audited Financial Statements were prepared in conformity with GAAP consistently
applied during the periods involved, except as otherwise set forth in the notes
thereto. The 1997 Financial Statements were prepared by the Company consistent
with past practice.
(b) The Company has attached hereto as Exhibit 5.12B
the Pro Forma Balance Sheet which sets forth, as of May 24, 1997, the assets and
liabilities of the Company on a pro forma basis after taking into account the
consummation of the transactions contemplated in this Agreement. The Pro Forma
Balance Sheet has been prepared by the Company consistent with past practice
and, in the opinion of management, fairly presents in all material respects the
assets and liabilities of the Company, reflecting the consummation of the
transactions contemplated in this Agreement and based on the assumptions set
forth therein.
5.13 ERISA. The execution and delivery of the Transaction
Documents, the purchase and sale of the Securities hereunder and the
consummation of the transactions contemplated
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<PAGE> 17
hereby and thereby will not result in any prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code.
5.14 Disclosure.
(a) Agreement and Other Documents Are True. This
Agreement, together with all exhibits and schedules hereto, and the agreements,
certificates and other documents furnished to the Purchasers by the Company at
the Closing, do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained herein
or therein, in the light of the circumstances under which they were made, not
misleading.
(b) No Material Adverse Effect. There is no fact
known to the Company, which the Company has not disclosed to the Purchasers in
writing which would have a Material Adverse Effect.
5.15 Absence of Certain Changes or Events. Since May 24, 1997,
except as set forth on Schedule 5.15, the Company has not (i) issued any stock,
bonds or other corporate securities, (ii) borrowed any amount or incurred any
liabilities (absolute or contingent), other than in the ordinary course of
business, in excess of $10,000, (iii) discharged or satisfied any lien or
incurred or paid any obligation or liability (absolute or contingent), other
than in the ordinary course of business, in excess of $10,000, (iv) declared or
made any payment or distribution to stockholders or purchased or redeemed any
shares of its capital stock or other securities, (v) mortgaged, pledged or
subjected to lien any of its assets, tangible or intangible, (vi) sold, assigned
or transferred any of its tangible assets, or cancelled any debts or claims
other than in the ordinary course of business, (vii) sold, assigned or
transferred any patents, trademarks, trade names, copyrights, trade secrets or
other intangible assets, other than in the ordinary course of business, (viii)
suffered any losses of property, or waived any rights of substantial value, (ix)
suffered any Material Adverse Effect, (x) granted any bonuses or extraordinary
salary increases, (xi) entered into any transaction involving consideration in
excess of $50,000 except as otherwise contemplated hereby, other than in the
ordinary course of business or (xii) entered into any agreement or transaction,
or amended or terminated any agreement with an Affiliate, except to the extent
contemplated hereunder. To the knowledge of the Company, no Material Adverse
Effect is threatened or reasonably likely to occur.
5.16 Environmental Matters.
(a) The property, assets and operations of the
Company are and have been in compliance with all applicable Environmental Laws;
there are no Hazardous Materials stored or otherwise located in, on or under any
of the property or assets of the Company including the groundwater except in
compliance with applicable Environmental Laws; and to the Company's knowledge,
there have been no releases or threatened releases of Hazardous Materials in, on
or under any property adjoining any of the property or assets of the Company
which have not been remediated to the satisfaction of the appropriate
Governmental Authorities.
(b) None of the property, assets or operations of the
Company is the subject of any Federal, state or local investigation evaluating
whether (i) any remedial action is
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<PAGE> 18
needed to respond to a release or threatened release of any Hazardous Materials
into the environment or (ii) any release or threatened release of any Hazardous
Materials into the environment is in contravention of any Environmental Law.
(c) The Company has not received any notice or claim,
nor are there pending, threatened or reasonably anticipated, lawsuits or
proceedings against any of them, with respect to violations of an Environmental
Law or in connection with the presence of or exposure to any Hazardous Materials
in the environment or any release or threatened release of any Hazardous
Materials into the environment, and the Company is not and has not been the
owner or operator of any property which (i) pursuant to any Environmental Law
has been placed on any list of Hazardous Materials disposal sites, including,
without limitation, the "National Priorities List" or "CERCLIS List," (ii) has,
or had, any subsurface storage tanks located thereon, or (iii) has ever been
used as or for a waste disposal facility, a mine, a gasoline service station or,
other than for petroleum substances stored in the ordinary course of business, a
petroleum products storage facility.
(d) The Company does not have any present or
contingent liability in connection with the presence either on or off the
property or assets of the Company of any Hazardous Materials in the environment
or any release or threatened release of any Hazardous Materials into the
environment.
5.17 Investment Company/Government Regulations. The Company is
not an "investment company" within the meaning of the Investment Company Act of
1940, as amended. The Company is not subject to regulation under the Public
Utility Holding Company Act of 1935, as amended, the Federal Power Act, the
Interstate Commerce Act, or any federal or state statute or regulation limiting
its ability to incur Indebtedness.
5.18 Subsidiaries. The Company has no Subsidiaries other than
Equipment Bond Purchaser, Inc., a New Mexico corporation. Equipment Bond
Purchaser, Inc. is wholly owned by the Company and has no operations and is only
used by the Company as a pass-through entity in connection with the Company's
industrial revenue bond financing. Except for shares of Equipment Bond
Purchaser, Inc., the Company does not own of record or beneficially, directly or
indirectly, (i) any shares of outstanding capital stock or securities
convertible into capital stock of any other corporation, or (ii) any
participating interest in any partnership, joint venture or other non-corporate
business enterprises.
5.19 Capitalization.
(a) As of the Closing Date, the authorized capital
stock of the Company consists of 5,000,000 shares of Preferred Stock and
25,000,000 shares of Common Stock. As of the Closing Date, prior to consummation
of the transactions contemplated herein, there were (i) no shares of Preferred
Stock issued and outstanding, (ii) 6,416,953 shares of Common Stock issued and
outstanding, (iii) 600,000 shares of Common Stock reserved for issuance upon
exercise of the FCP Warrant (as defined in the Securities Purchase Agreement),
(iv) 405,460 shares of Common Stock reserved for issuance upon exercise of the
WSDF Warrant (as defined in the Securities Purchase Agreement), (v) 121,350
shares of Common Stock reserved for issuance upon exercise of the WEP
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Warrant (as defined in the Securities Purchase Agreement, and (vi) 765,000
shares of Common Stock reserved for issuance pursuant to stock options
("Management Options") granted to certain employees of the Company. The FCP
Warrant, the WSDF Warrant, the WEP Warrant, the Warrants, the Management Options
and all outstanding shares of capital stock of the Company have been duly
authorized by all necessary corporate action. All outstanding shares of capital
stock of the Company are, and the shares of Common Stock issuable upon exercise
of the Warrants, the FCP Warrant, the WSDF Warrant, the WEP Warrant, and the
Management Options when issued will be, validly issued, fully paid and
nonassessable. Schedule 5.19 provides an accurate list of (A) all stockholders
owning the issued and outstanding Common Stock, together with the number held by
each, and (B) all of the holders of warrants, options, rights and securities
convertible into Common Stock of the Company, together with the number of shares
of Common Stock to be issued upon the exercise or conversion of such warrants,
options, rights and convertible securities.
(b) On the Closing Date, prior to consummation of the
transactions contemplated herein, except for the FCP Warrant, the WSDF Warrant,
the WEP Warrant and the Management Options, there are no outstanding securities
convertible into or exchangeable for capital stock of the Company or options,
warrants or other rights to purchase or subscribe to capital stock of the
Company or contracts, commitments, agreements, understandings or arrangements of
any kind to which the Company is a party relating to the issuance of any capital
stock of the Company, any such convertible or exchangeable securities or any
such options, warrants or rights.
5.20 Private Offering. No form of general solicitation or
general advertising was used by the Company or its representatives in connection
with the offer or sale of the Securities. No registration of the Securities or
Common Stock issuable upon the exercise of the Warrants pursuant to the
provisions of the Securities Act or the state securities or "blue sky" laws will
be required by the offer, sale or issuance of the Securities pursuant to this
Agreement or of the Common Stock issuable upon the exercise of the Warrants.
5.21 Broker's, Finder's or Similar Fees. Except as provided in
Section 2.5, there are no brokerage commissions, finder's fees or similar fees
or commissions payable in connection with the transactions contemplated hereby
based on any agreement, arrangement or understanding with the Company, or any
action taken by any such entity.
5.22 Labor Relations. The Company has not committed and is not
engaged in any unfair labor practice with respect to its employees. There is (a)
no unfair labor practice complaint pending or threatened against the Company
before the National Labor Relations Board and no grievance or arbitration
proceeding arising out of or under collective bargaining agreements is so
pending or threatened, (b) no strike, labor dispute, slowdown or stoppage
pending or threatened against the Company, and (c) no union representation
question existing with respect to the employees of the Company and no union
organizing activities are taking place. The Company is not a party to any
collective bargaining agreement.
5.23 Employee Benefit Plans. Neither the Company nor any ERISA
Affiliate has any actual or contingent, direct or indirect, liability in respect
of any employee benefit plan (as defined in Section 3(3) of ERISA) or other
employee benefit arrangement (collectively, the "Plans").
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The Company has delivered to the Purchasers accurate and complete copies of all
of the Plans. All of the Plans are in substantial compliance with all applicable
Requirements of Law. No "prohibited transaction," as defined in Section 406 of
ERISA and Section 4975 of the Code, has occurred in respect of any of the Plans,
and no civil or criminal action brought pursuant to Part 5 of Title I of ERISA
is pending or, to the best of the Company's knowledge, is threatened against any
fiduciary of any such Plan. No Plan: (i) is subject to Title IV of ERISA, or is
otherwise a Defined Benefit Plan, or is a multiple employer plan (within the
meaning of Section 413(c) of the Code); or (ii) provides for post-retirement
welfare benefits or a "parachute payment" (within the meaning of Section 280G(b)
of the Code).
5.24 Patents, Trademarks, Etc. The Company owns or is licensed
or otherwise has the right to use all patents, trademarks, service marks, trade
names, copyrights, licenses, franchises and other rights (collectively, the
"Rights") being used to conduct its business as now operated (a complete list of
licenses or other contracts relating to the Company's Rights and of
registrations of patents, trademarks, service marks and copyrights including any
applications therefor constituting such Rights, is attached hereto as Schedule
5.24). The Company's use of the registered trademark "After the Stork" in the
United States does not infringe upon the Rights that are owned by others. The
Company is the exclusive licensee of the trademarks "After the Stork","Little
Feet", "Sunskins" and "Discount Direct" under the Fulcrum Brands Trademark
License Agreement, which agreement is in full force and effect. Fulcrum Brands
L.P. is the owner of the trademarks "After the Stork","Little Feet", Sunskins"
and "Discount Direct" in the United States. "After the Stork" is a valid and
subsisting trademark in the United States and is registered with the U.S. Patent
and Trademark Office under U.S. Registration No. 1,435,045, which registration
is in full force and effect. "Playclothes", "Little Feet", "Sunskins" and
"Discount Direct" are valid and subsisting trademarks in the United States and
applications for registration therefor with the U.S. Patent and Trademark Office
are pending. To the Company's knowledge, no Right including, without limitation,
the trademarks "Playclothes", "Little Feet", "Sunskins" and "Discount Direct",
or product, process, method, substance or other material presently sold by or
employed by the Company, or which the Company contemplates selling or employing,
infringes upon the Rights that are owned by others. No litigation is pending and
no claim has been made against the Company or, to the Company's knowledge, is
threatened, contesting the right of the Company to sell or use any Right or
product, process, method, substance or other material presently sold by or
employed by the Company. The Company is not currently asserting any claim of
infringement, misappropriation or misuse by any Person of any Rights owned by
the Company or to which it has exclusive use. No employee, officer or consultant
of the Company has any proprietary, financial or other interest in any Rights
owned or used by the Company in its business, except for the Fulcrum Brands
Trademark License Agreement. Except as set forth on Schedule 5.24, to the
Company's knowledge, the Company does not have any obligation to compensate any
Person for the use of any Rights and the Company has not granted any license or
other right to use any of the Rights of the Company, whether requiring the
payment of royalties or not. The Company has taken all reasonable measures to
protect and preserve the security, confidentiality and value of its Rights,
including trade secrets and other confidential information except where the
failure to so protect and preserve could not reasonably be expected to have a
Material Adverse Effect. To the Company's knowledge, all trade secrets and other
confidential information of the Company are presently valued and predictable and
are not part of the public domain or knowledge, nor have they been used,
divulged or appropriated for the benefit
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of any Person other than the Company or otherwise to the detriment of the
Company. To the Company's knowledge, no employee or consultant of the Company
has used any trade secrets or other confidential information of any other Person
in the course of his work for the Company. To the Company's knowledge, no
patent, invention, device, principle or any statute, law, rule, regulation,
standard or code is pending or proposed which would restrict the Company's
ability to use any of the Rights.
5.25 Potential Conflicts of Interest. Except as set forth on
Schedule 5.25, neither Lederman nor Budoff: (a) owns, directly or indirectly,
any interest in (excepting less than 5% stock holdings for investment purposes
in securities of publicly held and traded companies), or is an officer,
director, employee, partner or consultant of, any Person that is, or is engaged
in business as, a competitor, lessor, lessee, supplier, distributor, sales agent
or customer of, or lender to or borrower from, the Company; (b) owns, directly
or indirectly, in whole or in part, any tangible or intangible property that the
Company uses in the conduct of its business; or (c) has any cause of action or
other claim whatsoever against, or owes any amount to, or is owed any amount by,
the Company, except for claims in the ordinary course of business such as for
accrued vacation pay, accrued benefits under employee benefit plans, and similar
matters and agreements existing on the date hereof.
5.26 Trade Relations. The Company has no supplier, customer or
group of customers, the loss of which would have a Material Adverse Effect. To
the Company's knowledge, all suppliers of the Company are readily replaceable by
the Company.
5.27 Outstanding Borrowings. Schedule 5.27 lists (i) the
amount of all Outstanding Borrowings of the Company (other than Indebtedness
under this Agreement) as of the closing of the transactions contemplated hereby,
(ii) the Liens that relate to such Outstanding Borrowings and that encumber the
assets of the Company and (iii) the name of each lender thereof.
5.28 Material Contracts. The Company is not a party to any
Contractual Obligation, and is not subject to any charge, corporate restriction,
judgment, injunction, decree, or Requirement of Law, which could reasonably be
expected to have a Material Adverse Effect. Schedule 5.28 lists all contracts,
agreements and commitments of the Company as of the Closing Date, whether
written or oral, other than (a) the Transaction Documents, (b) purchase orders
in the ordinary course of business, and (c) any other contracts, agreements and
commitments of the Company that do not extend beyond one year and involve the
receipt or contractual obligation of the Company to pay not more than $100,000.
Each of the contracts, agreements and commitments of the Company set forth on
Schedule 5.28 is in full force and effect.
5.29 Insurance. Schedule 5.29 accurately summarizes all of the
insurance policies or programs of the Company in effect as of the date hereof,
and indicates the insurance broker's name, amount of coverage, type of coverage,
and also indicates any self-insurance program that is in effect. All such
policies are in full force and effect, are underwritten by reputable insurers
and are sufficient for all applicable requirements of law. All such policies
will remain in full force and effect and will not in any way be affected by, or
terminate or lapse by reason of any of the transactions contemplated hereby.
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5.30 Solvency. The Company is Solvent.
5.31 Inventories. The inventory of the Company reflected on
the latest balance sheet of the Company included in the 1997 Financial
Statements, are carried at not in excess of the lower of cost or net realizable
value, and do not include any inventory which is obsolete, surplus or not usable
or saleable in the lawful and ordinary course of business of the Company as
heretofore conducted, in each case net of reserves provided therefor on such
balance sheet. No more than $90,000 of all inventory acquired by the Company
since the latest balance sheet date included in the 1997 Financial Statements
and prior to the Closing Date is obsolete or surplus inventory. As used herein
and in Section 9.2, "obsolete inventory" is inventory which, at the balance
sheet date or in the case of the preceding sentence, one day prior to the
Closing Date, was not usable or saleable, because of legal restrictions, failure
to meet specifications, loss of market, damage, physical deterioration or for
any other cause; and "surplus inventory" is inventory that, at the balance sheet
date, exceeded known or anticipated requirements in the reasonable business
judgment of the Seller.
5.32 Beneficial Owners. Lederman and Budoff, directly or
indirectly, are the beneficial owners of at least eighty-five percent (85%) of
the partnership interests in each of Fulcrum Capital Partners L.P. and Fulcrum
Capital L.P.
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS
Each Purchaser hereby represents and warrants as to itself as
follows:
6.1 Authorization; No Contravention. The execution, delivery
and performance by it of this Agreement: (a) is within its power and authority
and has been duly authorized by all necessary action; (b) does not contravene
the terms of its organizational documents or any amendment thereof; and (c) will
not violate, conflict with or result in any breach or contravention of any of
its Contractual Obligations, or any order or decree directly relating to it.
6.2 Binding Effect. This Agreement has been duly executed and
delivered by it and this Agreement constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally or by equitable
principles relating to enforceability.
6.3 No Legal Bar. The execution, delivery and performance of
this Agreement by it will not violate any Requirement of Law applicable to it.
6.4 Purchase for Own Account. The Securities to be acquired by
it pursuant to this Agreement are being or will be acquired for its own account
and with no intention of distributing or reselling such securities or any part
thereof in any transaction that would be in violation of the
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securities laws of the United States of America, or any state, without
prejudice, however, to its right at all times to sell or otherwise dispose of
all or any part of the Securities acquired by it under an effective registration
statement under the Securities Act, or under an exemption from such registration
available under the Securities Act, and subject, nevertheless, to the
disposition of its property being at all times within its control. If a
Purchaser should in the future decide to dispose of the Notes, the Shares or the
Warrants, such Purchaser understands and agrees that it may do so only in
compliance with the Securities Act and applicable state securities laws, as then
in effect. It agrees to the imprinting of a legend on certificates representing
the Notes, the Shares and the Warrants to the following effect: "THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS."
6.5 ERISA. No part of the funds used by it to purchase the
Securities hereunder constitutes assets of any "employee benefit plan" (as
defined in Section 3(3) of ERISA) or "plan" (as defined in Section 4975 of the
Code) listed on Schedule 5.23.
6.6 Broker's, Finder's or Similar Fees. There are no brokerage
commissions, finder's fees or similar fees or commissions payable in connection
with the transactions contemplated hereby based on any agreement, arrangement or
understanding with it or any action taken by it.
6.7 Governmental Authorization; Third Party Consent. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person in
respect of any Requirement of Law, and no lapse of a waiting period under a
Requirement of Law, is necessary or required in connection with the execution,
delivery or performance by it or enforcement against it of this Agreement or the
transactions contemplated hereby.
ARTICLE 7
INDEMNIFICATION
7.1 Indemnification. In addition to all other sums due
hereunder or provided for in this Agreement, the Company agrees to indemnify and
hold harmless the Purchasers and their respective Affiliates and each of their
respective officers, directors, agents, employees, subsidiaries, partners,
attorneys, accountants and controlling persons (each, an "Indemnified Party") to
the fullest extent permitted by law from and against any and all losses, claims,
damages, expenses (including, without limitation, reasonable fees, disbursements
and other charges of counsel incurred by an Indemnified Party in any action or
proceeding between the Company and such Indemnified Party (or Indemnified
Parties) or between an Indemnified Party (or Indemnified Parties) and any third
party or otherwise) or other liabilities (collectively, "Liabilities") resulting
from or arising out of any
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breach of any representation or warranty, covenant or agreement of the Company
in this Agreement, the Certificate of Incorporation, the Notes, or the Warrants,
including without limitation, the failure to make payment when due of amounts
owing pursuant to the Note on the due date thereof (whether at the scheduled
maturity, by acceleration or otherwise) or any legal, administrative or other
actions (including actions brought by either of the Purchasers, the Company, its
Subsidiaries or any equity holders of the Company or derivative actions brought
by any Person claiming through or in the Company's name), proceedings or
investigations (whether formal or informal), or written threats thereof, based
upon, relating to or arising out of the Transaction Documents, the transactions
contemplated thereby, or any Indemnified Party's role therein or in the
transactions contemplated thereby; provided, however, that the Company shall not
be liable under this Section 7.1 to an Indemnified Party: (a) for any amount
paid by the Indemnified Party in settlement of claims by the Indemnified Party
without the Company's consent (which consent shall not be unreasonably
withheld), (b) to the extent that it is finally judicially determined that such
Liabilities resulted primarily from the willful misconduct or gross negligence
of such Indemnified Party or (c) to the extent that it is finally judicially
determined that such Liabilities resulted primarily from the breach by such
Indemnified Party of any representation, warranty, covenant or other agreement
of such Indemnified Party contained in this Agreement; provided, further, that
if and to the extent that such indemnification is unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of such Liabilities which shall be permissible under applicable laws. In
connection with the obligation of the Company to indemnify for expenses as set
forth above, the Company further agrees, upon presentation of appropriate
invoices containing reasonable detail, to reimburse each Indemnified Party for
all such expenses (including fees, disbursements and other charges of counsel
incurred by an Indemnified Party in any action or proceeding between the Company
and such Indemnified Party (or Indemnified Parties) or between an Indemnified
Party (or Indemnified Parties) and any third party or otherwise) as they are
incurred by such Indemnified Party; provided, however, that if an Indemnified
Party is reimbursed hereunder for any expenses, such reimbursement of expenses
shall be refunded to the extent it is finally judicially determined that the
Liabilities in question resulted primarily from (i) the willful misconduct or
gross negligence of such Indemnified Party or (ii) the breach by such
Indemnified Party of any representation, warranty, covenant or other agreement
of such Indemnified Party contained in this Agreement or any other Transaction
Document.
7.2 Notification. Each Indemnified Party under this Article 7
will, promptly after the receipt of notice of the commencement of any action,
investigation, claim or other proceeding against such Indemnified Party in
respect of which indemnity may be sought from the Company under this Article 7,
notify the Company in writing of the commencement thereof. The omission of any
Indemnified Party so to notify the Company of any such action shall not relieve
the Company from any liability which it may have to such Indemnified Party (a)
other than pursuant to this Article 7 or (b) under this Article 7 unless, and
only to the extent that, such omission results in the Company's forfeiture of
substantive rights or defenses or other damage. In case any such action, claim
or other proceeding shall be brought against any Indemnified Party and it shall
notify the Company of the commencement thereof, the Company shall be entitled to
assume the defense thereof at its own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense. Notwithstanding the foregoing, in any action, claim
or proceeding in
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which the Company, on the one hand, and an Indemnified Party, on the other hand,
is, or is reasonably likely to become, a party, such Indemnified Party shall
have the right to employ separate counsel at the Company's expense and to
control its own defense of such action, claim or proceeding if, in the
reasonable opinion of counsel to such Indemnified Party, a conflict or potential
conflict exists between the Company, on the one hand, and such Indemnified
Party, on the other hand, that would make such separate representation
advisable; provided, however, that in no event shall the Company be required to
pay fees and expenses under this Article 7 for more than one firm of attorneys
in any jurisdiction in any one legal action or group of related legal actions.
The Company agrees that it will not, without the prior written consent of the
Purchasers, settle, compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated hereby (if any Indemnified Party is a party thereto or has been
actually threatened to be made a party thereto) unless such settlement,
compromise or consent includes an unconditional release of the Purchasers and
each other Indemnified Party from all liability arising or that may arise out of
such claim, action or proceeding. The Company shall not be liable for any
settlement of any claim, action or proceeding effected against an Indemnified
Party without its written consent, which consent shall not be unreasonably
withheld. The rights accorded to Indemnified Parties hereunder shall be in
addition to any rights that any Indemnified Party may have at common law, by
separate agreement or otherwise.
7.3 Registration Rights. Notwithstanding anything to the
contrary in this Article 7, the indemnification and contribution set forth in
the Stockholders Agreement shall govern any claim made with respect to
registration statements filed pursuant thereto or sales made thereunder.
7.4 Environmental Liabilities. Notwithstanding anything to the
contrary in this Section 7, the Company shall not be liable for the first
$50,000 in the aggregate of amounts for which it otherwise would be responsible
to Purchasers as a result of breaches of the representations and warranties
contained in subsection 5.16(a) hereof.
ARTICLE 8
AFFIRMATIVE COVENANTS
Until the payment by the Company of all principal of and
interest on the Note and all other amounts due at the time of payment of such
principal and interest to Purchasers under this Agreement, including, without
limitation, all fees, expenses and amounts due at such time in respect of
indemnity obligations under Article 7, the Company hereby covenants and agrees
with the Purchasers as set forth in Sections 8.1 through 8.6, Sections 8.8
through 8.12 and Section 8.14; provided, however, that upon consummation of an
Initial Public Offering, the Company shall no longer be obligated to comply with
Sections 8.1, 8.13 and 8.14. So long as a Purchaser remains the beneficial owner
of any Warrants, the Company hereby covenants and agrees with the Purchasers as
set forth in Section 8.7.
8.1 Financial Statements and Other Information. The Company
shall deliver to the Purchasers, in form satisfactory to the Purchasers:
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(a) commencing with the fiscal year ending on
December 28, 1997, as soon as available, but not later than one hundred five
(105) days after the end of each fiscal year of the Company, a copy of the
audited consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such year and the related consolidated and
consolidating statements of operations and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the previous
year, all in reasonable detail and accompanied by a management summary and
analysis of the operations of the Company and its Subsidiaries for such fiscal
year and by the opinion of Arthur Andersen LLP (or any successor thereto) or
another nationally recognized independent certified public accounting firm which
report shall state without qualification that such consolidated and
consolidating financial statements present fairly the financial condition as of
such date and results of operations and cash flows for the periods indicated in
conformity with GAAP applied on a consistent basis;
(b) commencing with the fiscal period ending on June
28, 1997, as soon as available, but in any event not later than forty-five (45)
days after the end of each of the first three fiscal quarters of each year, the
unaudited consolidated and consolidating balance sheets of the Company and its
Subsidiaries, and the related consolidated and consolidating statements of
operations and cash flows for such quarter and for the period commencing on the
first day of the fiscal year and ending on the last day of such quarter, all
certified by an appropriate officer of the Company as presenting fairly in all
material respects the financial condition as of such date and results of
operations and cash flows for the periods indicated applied on a consistent
basis, subject to normal year-end audit adjustments and the absence of footnotes
required by GAAP;
(c) commencing with the fiscal period ending on June
28, 1997, as soon as available, but in any event not later than forty-five (45)
days after the end of each month (other than January and February so long as the
fiscal year end is December 31) and simultaneous with the delivery of the
financial statements pursuant to subsection 8.1(a) with respect to January and
February, the unaudited consolidated and consolidating balance sheets of the
Company and its Subsidiaries, and the related consolidated and consolidating
statements of operations and cash flows for such month and for the period
commencing on the first day of the fiscal year and ending on the last day of
such month, all certified by an appropriate officer of the Company as presenting
fairly in all material respects the financial condition as of such date and
results of operations and cash flows for the periods indicated on a consistent
basis, subject to normal year-end audit adjustments and the absence of footnotes
required by GAAP;
(d) the Company's flash closing report with respect
to each month, as soon as available, but in any event not later than thirty (30)
days after the end of each such month;
(e) annual budgets and such other financial and
operating data of the Company and its Subsidiaries, as the Purchasers may
reasonably request from time to time; and
(f) contemporaneously with each submission of a
filing, a copy of any report, registration statement, proxy statement, financial
statement, notice of other document, whether periodic or otherwise: submitted to
the shareholders of the Company; or submitted to or filed by the Company with
any governmental authority involving or affecting (i) any registration of
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the Company or its securities, or (ii) any of the transactions contemplated in
this Agreement, including, without limitation, those submitted or filed pursuant
to the Securities Act, as amended, the Securities Exchange Act of 1934, as
amended, any state securities, blue sky or other applicable laws, the rules and
regulations or any securities exchange or organization with or on which any of
its securities are listed or quoted, the National Labor Relations Act, as
amended, or any other applicable laws respecting the rights of employees or
unions.
8.2 Certificates. The Company shall deliver to the Purchasers:
(a) concurrently with the delivery of the financial
statements referred to in Section 8.1(a), a certificate of the Company's Chief
Financial Officer stating that to his or her knowledge no Event of Default shall
have occurred during the period covered thereby, except as specified in such
certificate; and
(b) concurrently with the delivery of the financial
statements referred to in Sections 8.1(a) and (b), a certificate of an officer
of the Company including calculations set forth in reasonable detail showing the
Company's compliance with the financial covenants contained herein.
8.3 Preservation of Corporate Existence. The Company shall,
and shall cause each of its Subsidiaries to:
(a) preserve and maintain in full force and effect
its corporate existence, except as otherwise permitted by Section 9.1;
(b) conduct its business in accordance with sound
business practices, keep its properties in good working order and condition
(normal wear and tear excepted), and from time to time make all needed repairs
to, renewals of or replacements of its properties (except to the extent that any
of such properties are obsolete or are being replaced) so that the efficiency of
its business operations shall be fully maintained and preserved; and
(c) file or cause to be filed in a timely manner all
reports, applications, estimates and licenses that shall be required by a
Governmental Authority, except where the failure to so comply could not
reasonably be expected to have a Material Adverse Effect (it being acknowledged
that for purposes of this Section 8.3(c), a Material Adverse Effect shall be
deemed to occur upon any failure to make a timely filing with the Securities and
Exchange Commission, which failure restricts the ability of a Purchaser to sell
shares of Common Stock pursuant to Rule 144 promulgated under the Securities
Act).
8.4 Payment of Obligations. The Company shall, and shall cause
each of its Subsidiaries to, pay and discharge as the same shall become due and
payable, all their respective obligations and liabilities, including without
limitation:
(a) all tax liabilities, assessments and governmental
charges or levies upon it or its properties or assets, unless the same are being
contested in good faith by appropriate
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<PAGE> 28
proceedings and adequate reserves in accordance with GAAP are being maintained
by the Company or such Subsidiary;
(b) all lawful claims which the Company, and each of
its Subsidiaries is obligated to pay, which are due and which, if unpaid, might
by law become a Lien upon its property, unless the same are being contested in
good faith by appropriate proceedings and adequate reserves in accordance with
GAAP are being maintained by the Company or such Subsidiary; and
(c) all payments of principal, interest and other
amounts when due on Indebtedness.
8.5 Compliance with Laws. The Company shall comply, and shall
cause each of its Subsidiaries to comply, with all Requirements of Law and with
the directions of any Governmental Authority having jurisdiction over them or
their business or property (including all applicable Environmental Laws), except
where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.
8.6 Notices. Within 5 days of obtaining knowledge of the
Company of the events described below, the Company shall give written notice to
the Purchasers:
(a) of the occurrence of any Event of Default or any
event that, after notice or lapse of time or both, would become an Event of
Default;
(b) of any (i) material default or event of default
under any material Contractual Obligation of the Company or any of its
Subsidiaries, or (ii) material dispute, litigation, investigation, proceeding or
suspension which may exist at any time between the Company or any of its
Subsidiaries and any Governmental Authority or third party; and
(c) any other matter that has resulted in or could
reasonably be expected to result in a Material Adverse Effect.
Each notice pursuant to this Section 8.6 shall be accompanied
by an officer's certificate signed by the Chief Executive Officer, President or
Chief Financial Officer of the Company setting forth details of the occurrence
referred to therein and stating what action the Company proposes to take with
respect thereto.
8.7 Reservation of Shares. The Company shall at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance or delivery upon exercise of the FCP Warrant, the WSDF
Warrant, the WEP Warrant, the Warrants, and the Management Options, the maximum
number of shares of capital stock that may be issuable or deliverable upon such
exercise and will reserve and keep available out of its authorized Common Stock,
solely for the purpose of issuance or delivery upon exercise of the options
issuable under Section 2.7 hereof as provided in Section 2.7 (the "Exercisable
Shares"). The Exercisable Shares shall, when issued or delivered in accordance
with the FCP Warrant, the WSDF Warrant, the WEP Warrant, the Warrants, or the
Management Options, as the case may be, be duly and validly issued
27
<PAGE> 29
and fully paid and non-assessable. The Company shall issue such capital stock in
accordance with the provisions of the FCP Warrant, the WSDF Warrant, the WEP
Warrant, the Warrant, or the Management Options, as the case may be, and shall
otherwise comply, in each case, with the terms thereof.
8.8 Inspection. The Company will permit, and will cause each
of its Subsidiaries to permit, representatives of the Purchasers to visit and
inspect any of their properties, to examine their corporate, financial and
operating records and make copies thereof or abstracts therefrom, and to discuss
their affairs, finances and accounts with their respective directors, officers
and independent public accountants, all at such reasonable times during normal
business hours and as often as may be reasonably requested, upon advance notice
of at least 48 hours. Notwithstanding the foregoing, the Purchasers agree to use
reasonable best efforts to (a) avoid disruption of the Company's business and
(b) maintain the confidentiality of any confidential information obtained by the
Purchasers through such inspections, examinations and discussions.
8.9 Payment of Notes. The Company shall pay the principal of,
interest on and other amounts due in respect of, the Notes on the dates and in
the manner provided in the Notes.
8.10 Insurance. The Company and each of its Subsidiaries shall
maintain insurance with insurance companies or associations with a rating of
"BBB" or better as established by Best's Rating Guide (or an equivalent rating
with such other publication of a similar nature as shall be in current use) in
such amounts and covering such risks as are usually and customarily carried with
respect to similar businesses according to their respective locations.
8.11 Books and Records. The Company shall, and shall cause
each of its Subsidiaries to, keep proper books of record and account, in which
full and correct entries shall be made of all financial transactions and the
assets and business of the Company and each of its Subsidiaries in accordance
with GAAP consistently applied to the Company and its Subsidiaries taken as a
whole.
8.12 Use of Proceeds. The Company shall use the proceeds of
the sale of Securities hereunder only as follows: for working capital and
general corporate purposes and for the payment of fees and expenses in
connection with the transactions contemplated hereunder and in the Transaction
Documents.
8.13 Appointment of WEP's Nominee to Board. The Company shall
use its best efforts to have a nominee designated by WEP elected to the
Company's Board of Directors. The Company shall provide to such director the
same information concerning the Company and its Subsidiaries, and access
thereto, provided to other members of the Company's Board of Directors. The
reasonable travel expenses incurred by any such director in attending any such
meetings shall be reimbursed by the Company to the extent consistent with the
Company's then existing policy of reimbursing directors generally for such
expenses.
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<PAGE> 30
ARTICLE 9
NEGATIVE COVENANTS
Until the payment by the Company of all principal of and
interest on the Notes and all other amounts due at the time of payment of such
principal and interest to the Purchasers under this Agreement, including,
without limitation, all fees, expenses and amounts due at such time in respect
of indemnity obligations under Article 7, the Company hereby covenants and
agrees with the Purchasers as set forth in Sections 9.1 through 9.9; provided,
however, that upon consummation of an Initial Public Offering, the Company shall
no longer be obligated to comply with Sections 9.1 and 9.6 So long as the
Purchasers remain the beneficial owners of 5% of the Common Stock on a fully
diluted basis (assuming the Warrants are fully exercised), the Company hereby
covenants and agrees with the Purchasers as set forth in Sections 9.1 and 9.2.
9.1 Consolidations, Mergers and Investments. The Company shall
not merge (other than with or into a wholly-owned Subsidiary), consolidate with
or into, or convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whenever acquired) or liquidate except for the Storybook Acquisition or
a merger, consolidation, disposition, sale or liquidation in which the Company
or its shareholders, as the case may be, receives consideration equal to or more
than $8.25 per share (in cash and/or securities). If the Company wishes to
complete a merger, consolidation, disposition, sale or liquidation wherein the
consideration to be received will be less than $8.25 per share, it shall notify
the Purchasers of the proposed consideration and pursuant to the other terms and
conditions thereof. Within ten (10) days of the receipt of such notice, the
Purchasers shall either (i) consent to such transaction, in which event the
Company will have the right to consummate such transaction within ninety days of
its receipt of such consent for the consideration and the other terms and
conditions set forth in its notice or (ii) object to such transaction, in which
event the Company will have the right to consummate such transaction within one
hundred eighty (180) days of its receipt of such objection for the consideration
and the other terms and conditions set forth in its notice provided that
simultaneous with the closing of such transaction, the Company purchases all the
Shares beneficially owned by the Purchasers at such time for $8.25 in cash per
share. Except for the proposed joint venture with Esprit, the Company shall not
form or invest in a Subsidiary unless it is wholly-owned by the Company.
9.2 Transactions with Affiliates.
(a) The Company shall not, and shall not permit any
of its Subsidiaries to, (i) enter into any transaction or agreement with, or
make any payment to, Lederman, Budoff or any of their respective Affiliates
(other than pursuant to agreements existing on the date hereof or subsequently
approved by the Purchasers including without limitation, the (aa) Advisory
Agreement, dated April 1, 1994, as amended January 1, 1996, between the Company
and Fulcrum Capital Partners, L.P., (bb) Fulcrum Retail Option Agreement, (cc)
Fulcrum Brands Trademark License Agreement, (dd) Lederman Employment Agreement,
and (ee) Budoff Employment Agreement), (ii) amend or terminate any existing
agreement with Lederman, Budoff or any of their respective
29
<PAGE> 31
Affiliates, including without limitation the Fulcrum Brands Trademark License
Agreement and the Fulcrum Properties Lease, (iii) purchase from or provide to
Lederman, Budoff or any of their respective Affiliates any selling, general,
management or administrative services (other than services having an aggregate
fair market value not in excess of $125,000 in any single fiscal year), (iv)
directly or indirectly make any sales to or purchases from Lederman, Budoff or
any of their respective Affiliates (other than purchases made under the same
terms offered to other employees of the Company), (v) amend either the Lederman
Employment Agreement or Budoff Employment Agreement, or (vi) purchase any
trademarks being licensed to the Company under the Fulcrum Brands Trademark
License Agreement (other than a purchase of such trademarks by the Company
contemporaneously with or immediately following an Initial Public Offering).
(b) Notwithstanding Sections 9.2(a) and 9.7, the
Company may continue to sell to Fulcrum Retail, Inc. in accordance with past
practice, any inventory which is obsolete or not useable or saleable in the
ordinary course of business of the Company and its Subsidiaries as heretofore
conducted so long as (i) the Company's aggregate revenues from such sales do not
exceed $5,000,000 in any single fiscal year, (ii) the Company sells such
inventory on average at no less than 50% of the cost of such inventory (on net
60 day terms), and (iii) Fulcrum Retail, Inc. provides annual financial
statements to the Purchasers within one-hundred-five (105) days after the end of
each fiscal year and unaudited quarterly financial statements to the Purchasers
within forty-five (45) days after the end of each fiscal quarter. The Company
shall pay the costs associated with preparation of Fulcrum Retail, Inc.'s
financial statements.
9.3 No Inconsistent Agreements. Neither The Company nor any of
its Subsidiaries shall enter into any Contractual Obligation or enter into any
amendment or other modification to any currently existing Contractual Obligation
of the Company, or any of its Subsidiaries, which by its terms restricts or
prohibits the ability of the Company to pay the principal of or interest on the
Note.
9.4 Limitation on Indebtedness. The Company shall not, and
shall not cause, suffer or permit any of its Subsidiaries to, directly or
indirectly, collectively and in the aggregate, issue, assume or otherwise incur
any Indebtedness, other than: (a) Indebtedness under the Transaction Documents;
(b) Senior Indebtedness, up to an aggregate principal amount of $25,000,000, or
other Indebtedness, up to an aggregate principal amount of $5,000,000; provided,
however, that Senior Indebtedness may exceed an aggregate principal amount of
$25,000,000 if the ratio of total Indebtedness to total share capital (including
retained earnings) of the Company as reflected on the Company's most recent
quarterly balance sheet, is less than 2.5 to 1.0; and, provided, further, that
under no circumstances shall Senior Indebtedness exceed $30,000,000; (c)
Indebtedness listed on Schedule 5.27; (d) non-current liabilities for
post-employment healthcare and other insurance benefits; (e) trade payables and
accrued expenses, in each case arising in the ordinary course of business; (f)
Indebtedness secured by a Lien permitted under Section 9.5; (g) refinancings,
refundings or extensions of the foregoing; provided, that any such refinancings,
refundings or extensions shall not (i) exceed the principal amount refinanced,
refunded or extended, (ii) shorten the maturity (or weighted average life to
maturity) of such Indebtedness, (iii) increase the interest rate applicable to
such Indebtedness, (iv) facilitate the exercise or enforcement of any remedies
of any obligee of such Indebtedness in respect of any default or event of
default thereunder, or (v) result
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<PAGE> 32
in any amendments or modifications of any of the subordination provisions
applicable to such Indebtedness; and (h) Indebtedness existing at the time of
acquisition on assets or a company acquired by the Company.
9.5 Limitation on Liens. The Company shall not, and shall not
permit, cause or suffer any of its Subsidiaries to, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
other than: (a) Liens securing the Senior Indebtedness (b) Liens existing on the
date of this Agreement and disclosed on Schedule 5.27, (c) Liens for taxes,
statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and
materialmen, in each case only to the extent the obligations thereto are not yet
due or are being contested in good faith by appropriate proceedings diligently
pursued; (d) Liens to secure performance of tenders, bids, statutory obligations
or government contracts, and similar Liens not securing Indebtedness and arising
in the ordinary course of business; (e) Liens existing at the time of
acquisition on assets or a company acquired by it; and (f) any Lien on equipment
or real property securing Indebtedness (including Capital Lease Obligations)
incurred or assumed for the sole purpose of financing all or part of the cost of
acquiring such equipment or real property, provided that such Lien (i) attaches
to such asset concurrently with or within 10 days after the acquisition thereof,
(ii) the Indebtedness secured thereby does not encumber any other property of
the Company or its Subsidiaries and (iii) does not exceed the purchase price of
such asset.
9.6 Limitations on Restricted Payments. The Company shall not,
and shall not permit any of its Subsidiaries to declare, or make any Restricted
Payment.
9.7 Dispositions of Assets. The Company shall not, and shall
not permit any of its Subsidiaries to, sell, transfer, lease or otherwise
dispose of (in one transaction or in a series of transactions) all or any part
of their assets or properties or any of the capital stock of any of its
Subsidiaries, other than (a) assets or properties sold, leased or rented in the
ordinary course of business consistent with past practice, (b) assets or
properties, including obsolete assets (other than inventory), sales of which do
not exceed in the aggregate $100,000 in any 12-month period, and (c) sales of
inventory to Fulcrum Retail, Inc. in accordance with Section 9.2(b).
9.8 Financial Covenants.
(a) EBITDA. As of the end of each fiscal quarter
specified below, the Company shall not permit EBITDA (for such fiscal quarter
and the three immediately preceding fiscal quarters treated as a single
accounting period) to be less than the corresponding amount set forth below:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Fiscal Year 1997
Third Quarter $ 2,500,000
Fourth Quarter $ 8,000,000
</TABLE>
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<PAGE> 33
<TABLE>
<S> <C>
Fiscal Year 1998
First Quarter $ 8,500,000
Second Quarter $ 9,000,000
Third Quarter $ 9,000,000
Fourth Quarter $10,000,000
Each Fiscal Quarter Thereafter $10,000,000
</TABLE>
(b) Cash Flow Coverage Ratio. As of the end of each
fiscal quarter specified below, the Company shall not permit the Cash Flow
Coverage Ratio to be less than the corresponding ratio set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1998
Second Quarter 2.75 to 1.0
Third Quarter 3.0 to 1.0
Fourth Quarter 3.5 to 1.0
Each Fiscal Quarter Thereafter 3.5 to 1.0
</TABLE>
(c) Leverage Ratio. As of the end of each fiscal
quarter specified below, the Company shall not permit the Leverage Ratio to be
more than the corresponding ratio set forth below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Fiscal Year 1997
Third Quarter 6.5 to 1.0
Fourth Quarter 3.0 to 1.0
Fiscal Year 1998
First Quarter 2.25 to 1.0
Second Quarter 2.0 to 1.0
Third Quarter 2.0 to 1.0
Fourth Quarter 2.0 to 1.0
Each Fiscal Quarter Thereafter 2.0 to 1.0
</TABLE>
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<PAGE> 34
9.9 Limitation on Business of the Company. The Company shall
not engage in any business other than the manufacturing and distribution of
children's consumer products; provided, however, that the Company may engage in
the manufacturing and distribution of adult consumer products to the extent that
no more than twenty-five percent (25%) of the Company's revenues are derived
from the sale of adult consumer products.
ARTICLE 10
PREPAYMENT
10.1 Optional Prepayment. The Company may prepay outstanding
principal (together with accrued interest) on the Notes only if the Notes are
prepaid in accordance with the "Optional Prepayment" provisions set forth in
Section 3 of the Notes.
10.2 Mandatory Prepayment. Subject to Section 7 of the Notes,
the Company shall prepay outstanding principal (together with accrued interest)
on the Notes in accordance with the "Mandatory Prepayment" provisions set forth
in Section 3 of the Notes.
10.3 Pro Rata Prepayment. Any prepayment made pursuant to this
Article 10 shall be made to each of the Notes pro rata.
ARTICLE 11
MISCELLANEOUS
11.1 Survival of Representations and Warranties. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement, any investigation by or on behalf of the Purchasers,
acceptance of the Securities and payment therefor, or termination of this
Agreement, but such representations and warranties shall terminate on the
earlier to occur of (a) the consummation of an Initial Public Offering and
payment by the Company of all principal and interest on the Note and all other
amounts due at the time of payment of such principal and interest to the
Purchasers under this Agreement, including, without limitation, all fees,
expenses and amounts due at such time in respect of indemnity obligations under
Article 7, or (b) December 31, 1998.
11.2 Notices. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier,
courier service or personal delivery:
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<PAGE> 35
(a) if to WSDF:
Whitney Subordinated Debt Fund, L.P.
177 Broad Street
Stanford, Connecticut 06901
Telecopier No.: (203) 973-1422
Attention: Mr. Daniel J. O'Brien
with a copy to:
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: David A. Scherl, Esq.
(b) if to WEP:
Whitney Equity Partners, L.P.
177 Broad Street
Stamford, Connecticut 06901
Telecopier No.: (203) 973-1422
Attention: Mr. Daniel J. O'Brien
with a copy to:
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Telecopier No.: (212) 735-8708
Attention: David A. Scherl, Esq.
(c) If to Arnold Greenberg:
1260 Meadow Lane
Southhampton, NY 11968
(516) 283-3713
(d) If to Patrick K. Sullivan:
60 Bluff Road
Barrington, RI 02806
(401) 831-8304
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<PAGE> 36
(e) if to the Company:
Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, New Mexico 87124
Telecopier: (505) 867-7100
Attention: Michael G. Lederman
Scott A. Budoff
with a copy to:
Kirkland & Ellis
153 East 53rd Street, 39th Floor
New York, New York 10022
Telecopier: (212) 446-4900
Attention: Frederick A. Tanne, Esq.
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; when delivered
by courier, if delivered by commercial overnight courier service; five Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged, if telecopied.
11.3 Successors and Assigns. All covenants and agreements in
this Agreement contained by or on behalf of the parties hereto shall inure to
the benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Subject to applicable securities laws and this Section 11.3, the
Purchasers may assign any of their respective rights under any of the
Transaction Documents to any Person. So long as the Notes, the Warrants, Fulcrum
Retail Option Agreement or the Common Stock acquired hereunder, as the case may
be, has not been registered under the Securities Act, the Purchasers (and any
subsequent transferees) may not transfer the Note, such Common Stock, Fulcrum
Retail Option Agreement or the Warrants, as the case may be, to any Person other
than to a Permitted Investor (upon providing the Company with 30 days prior
written notice of such transfer) or to a limited partner of a Purchaser (upon
providing the Company with ten (10) days prior written notice of such transfer,
provided that such ten (10) day notice need not be given after an Initial Public
Offering). The Purchasers agree to provide the Company with a list of their
respective limited partners and to update such lists periodically. Upon
registration of the Notes, the Warrant, Fulcrum Retail Option Agreement or the
Common Stock acquired hereunder, as the case may be, under the Securities Act,
the holder thereof may transfer any such Notes, Warrants, Fulcrum Retail Option
Agreement or Common Stock to any other Person without restriction.
Notwithstanding the foregoing, any holder of such Notes, Warrants, Fulcrum
Retail Option Agreement or Common Stock, as the case may be, may transfer such
Notes, Warrants, Fulcrum Retail Option Agreement or Common Stock pursuant to
Rule 144 as promulgated under the Securities Act, without restriction, other
than those contained in the securities laws. The Company may not assign any of
its rights under this Agreement without the prior written consent of the
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<PAGE> 37
Purchasers. Except as provided in Article 7, no Person other than the parties
hereto and their successors and permitted assigns is intended to be a
beneficiary of any of the Transaction Documents.
11.4 Amendment and Waiver.
(a) No failure or delay on the part of any of the
parties hereto in exercising any right, power or remedy hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
parties hereto at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective (i) only if it is made or given
in writing and signed by Fulcrum, WEP and WSDF, and (ii) only in the specific
instance and for the specific purpose for which made or given. Except where
notice is specifically required by this Agreement, no notice to or demand on the
Company in any case shall entitle the Company to any other or further notice or
demand in similar or other circumstances.
11.5 Counterparts. This Agreement may be executed in any
number of counterparts and by the 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 one and the same agreement.
11.6 Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
11.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.
11.8 Determinations, Request or Consents. All determinations,
requests, consents, waivers or amendments to be made by the Purchasers in their
respective opinions or judgments or with their approval or otherwise pursuant to
the Transaction Documents shall be made with respect to each Security by the
holder thereof.
11.9 JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE NOTES, THE SHARES, THE WARRANTS OR ANY
AGREEMENTS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY BE BROUGHT IN THE
COURTS OF THE STATE OF NEW YORK OR OF THE UNITED
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<PAGE> 38
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND HEREBY EXPRESSLY
SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES
THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH
COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 11.2, SUCH SERVICE TO
BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.
11.10 Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
11.11 Rules of Construction. Unless the context otherwise
requires, "or" is not exclusive, and references to sections or subsections refer
to sections or subsections of this Agreement.
11.12 Entire Agreement. This Agreement, together with the
exhibits and schedules hereto and the other Transaction Documents, is intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement, together with
the exhibits and schedules hereto, and the other Transaction Documents supersede
all prior agreements and understandings between the parties with respect to such
subject matter.
11.13 Certain Expenses. The Company will pay all reasonable
expenses of the Purchasers (including reasonable fees, charges and disbursements
of counsel) in connection with any amendment, supplement, modification or waiver
of or to any provision of this Agreement, the Notes or the Warrants, or consent
to any departure by the Company from, the terms of any provision of this
Agreement, the Notes or the Warrants.
11.14 Publicity. Except as may be required by applicable law,
none of the parties hereto shall issue a publicity release or announcement or
otherwise make any public disclosure concerning this Agreement or the
transactions contemplated hereby, without prior approval by the other party
hereto. If any announcement is required by law to be made by any party hereto,
prior to making such announcement such party will deliver a draft of such
announcement to the other parties and shall give the other parties an
opportunity to comment thereon.
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<PAGE> 39
11.15 Further Assurances. Each of the parties shall execute
such documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations, or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
38
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective officers hereunto
duly authorized as of the date first above written.
FULCRUM DIRECT, INC.
By: ____________________________________
Name: Scott A. Budoff
Title: President and COO
WHITNEY SUBORDINATED DEBT FUND, L.P.
By: ____________________________________
Name: Ray E. Newton
A General Partner
WHITNEY EQUITY PARTNERS, L.P.
By: ____________________________________
Name: Ray E. Newton, III
Member
GREENBERG FAMILY FUND LLC
By: ____________________________________
Name: Arnold Greenberg
Member
MAUREEN C. SULLIVAN, REVOCABLE TRUST - 1995
By: ____________________________________
Name:
39
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1
DEFINITIONS........................................................... 1
1.1 Definitions.................................................. 1
1.2 Accounting Terms: Financial Statements....................... 8
1.3 Knowledge of the Company..................................... 8
ARTICLE 2
PURCHASE AND SALE OF NOTES, WARRANTS AND SHARES....................... 9
2.1 Purchase and Sale of Note.................................... 9
2.2 Purchase and Sale of the Warrants............................ 9
2.3 Purchase and Sale of the Shares.............................. 9
2.4 Fees......................................................... 9
2.5 Closing...................................................... 9
2.6 Financial Accounting Positions; Tax Reporting................ 10
2.7 Additional Warrant Issuances................................. 10
ARTICLE 3
CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE............... 10
3.1 Representations and Warranties............................... 11
3.2 Compliance with this Agreement............................... 11
3.3 Secretary's Certificates..................................... 11
3.4 Documents.................................................... 11
3.5 Purchase of Securities Permitted by Applicable Laws.......... 11
3.6 Opinion of Counsel........................................... 11
3.7 Approval of Counsel to the Purchasers........................ 11
3.8 Consents and Approvals....................................... 12
3.9 No Material Judgment or Order................................ 12
3.10 Pro Forma Balance Sheet...................................... 12
3.11 Goodstanding Certificates.................................... 12
3.12 Storybook Heirlooms Acquisition.............................. 12
ARTICLE 4
CONDITIONS TO THE OBLIGATION.......................................... 12
4.1 Representations and Warranties............................... 13
4.2 Compliance with this Agreement............................... 13
</TABLE>
<PAGE> 42
<TABLE>
<S> <C>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................... 13
5.1 Corporate Existence and Power................................ 13
5.2 Corporate Authorization; No Contravention.................... 13
5.3 Governmental Authorization; Third Party Consents............. 13
5.4 Binding Effect............................................... 14
5.5 No Legal Bar................................................. 14
5.6 Litigation................................................... 14
5.7 Compliance with Laws......................................... 14
5.8 No Default or Breach......................................... 14
5.9 Title to Properties.......................................... 14
5.10 Use of Real Property......................................... 14
5.11 Taxes........................................................ 15
5.12 Financial Condition.......................................... 15
5.13 ERISA........................................................ 15
5.14 Disclosure................................................... 16
5.15 Absence of Certain Changes or Events......................... 16
5.16 Environmental Matters........................................ 16
5.17 Investment Company/Government Regulations.................... 17
5.18 Subsidiaries................................................. 17
5.19 Capitalization............................................... 17
5.20 Private Offering............................................. 18
5.21 Broker's, Finder's or Similar Fees........................... 18
5.22 Labor Relations.............................................. 18
5.23 Employee Benefit Plans....................................... 18
5.24 Patents, Trademarks, Etc..................................... 19
5.25 Potential Conflicts of Interest.............................. 20
5.26 Trade Relations.............................................. 20
5.27 Outstanding Borrowings....................................... 20
5.28 Material Contracts........................................... 20
5.29 Insurance.................................................... 20
5.30 Solvency..................................................... 21
5.31 Inventories.................................................. 21
5.32 Beneficial Owners............................................ 21
ARTICLE 6
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS.......................................... 21
6.1 Authorization; No Contravention.............................. 21
</TABLE>
ii
<PAGE> 43
<TABLE>
<S> <C>
6.2 Binding Effect............................................... 21
6.3 No Legal Bar................................................. 21
6.4 Purchase for Own Account..................................... 21
6.5 ERISA........................................................ 22
6.6 Broker's, Finder's or Similar Fees........................... 22
6.7 Governmental Authorization; Third Party Consent.............. 22
ARTICLE 7
INDEMNIFICATION....................................................... 22
7.1 Indemnification.............................................. 22
7.2 Notification................................................. 23
7.3 Registration Rights.......................................... 24
7.4 Environmental Liabilities.................................... 24
ARTICLE 8
AFFIRMATIVE COVENANTS................................................. 24
8.1 Financial Statements and Other Information................... 25
8.2 Certificates................................................. 26
8.3 Preservation of Corporate Existence.......................... 26
8.4 Payment of Obligations....................................... 27
8.5 Compliance with Laws......................................... 27
8.6 Notices...................................................... 27
8.7 Reservation of Shares........................................ 27
8.8 Inspection................................................... 28
8.9 Payment of Notes............................................. 28
8.10 Insurance.................................................... 28
8.11 Books and Records............................................ 28
8.12 Use of Proceeds.............................................. 28
8.13 Appointment of WEP's Nominee to Board........................ 28
ARTICLE 9
NEGATIVE COVENANTS.................................................... 29
9.1 Consolidations, Mergers and Investments...................... 29
9.2 Transactions with Affiliates................................. 29
9.3 No Inconsistent Agreements................................... 30
9.4 Limitation on Indebtedness................................... 30
9.5 Limitation on Liens.......................................... 31
9.6 Limitations on Restricted Payments........................... 31
9.7 Dispositions of Assets....................................... 31
9.8 Financial Covenants.......................................... 31
9.9 Limitation on Business of the Company........................ 33
</TABLE>
iii
<PAGE> 44
<TABLE>
<S> <C>
ARTICLE 10
PREPAYMENT............................................................ 33
10.1 Optional Prepayment.......................................... 33
10.2 Mandatory Prepayment......................................... 33
10.3 Pro Rata Prepayment.......................................... 33
ARTICLE 11
MISCELLANEOUS......................................................... 34
11.1 Survival of Representations and Warranties................... 34
11.2 Notices...................................................... 34
11.3 Successors and Assigns....................................... 36
11.4 Amendment and Waiver......................................... 36
11.5 Counterparts................................................. 37
11.6 Headings..................................................... 37
11.7 GOVERNING LAW................................................ 37
11.8 Determinations, Request or Consents.......................... 37
11.9 JURISDICTION................................................. 37
11.10 Severability................................................. 37
11.11 Rules of Construction........................................ 37
11.12 Entire Agreement............................................. 38
11.13 Certain Expenses............................................. 38
11.14 Publicity.................................................... 38
11.15 Further Assurances........................................... 38
</TABLE>
iv
<PAGE> 45
EXHIBITS
A. Note
B. Warrant
C. List of Prohibited Investors
SCHEDULES
I Purchasers
5.6 Litigation
5.12A Financial Statements
5.12B Pro Forma Balance Sheet
5.15 Absence of Certain Changes or Events
5.19 Capitalization
5.23 Employee Benefit Plans
5.24 Patents, Trademarks, Etc.
5.25 Potential Conflicts of Interest
5.27 Outstanding Borrowings
5.28 Material Contracts
5.29 Insurance
v
<PAGE> 46
SCHEDULE I
<TABLE>
<CAPTION>
Shares Notes Warrants Debt Placement
Fee
<S> <C> <C> <C> <C>
WEP 1,160,000 0 0 0
WSDF 0 $8,000,000 160,000 240,000
Greenberg Family 271,875 $1,875,000 37,500 56,250
Fund LLC
Maureen C 18,125 $ 125,000 2,500 3,750
Sullivan,
Revocable Trust -
1995
</TABLE>
<PAGE> 1
EXHIBIT 10.24
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT AND SUCH LAWS. THE SALE OR OTHER TRANSFER OF THIS
NOTE IS ALSO SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH
IN SECTION 11.3 OF THE "PURCHASE AGREEMENT" (AS HEREINAFTER
DEFINED).
THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT, AS
SUCH TERM IS DEFINED IN SECTION 1271 ET SEQ. OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED. UPON INQUIRY MADE BY ANY
HOLDER HEREOF, ADDRESSED TO FULCRUM DIRECT, INC., 4321 FULCRUM
WAY, RIO RANCHO, NEW MEXICO 87124, ATTENTION: SCOTT A. BUDOFF,
FULCRUM DIRECT, INC. WILL PROVIDE A STATEMENT SETTING FORTH
THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE
ISSUE DATE AND THE YIELD TO MATURITY WITH RESPECT TO THE NOTE
HELD BY SUCH HOLDER.
FULCRUM DIRECT, INC.
10.101% SENIOR SUBORDINATED PROMISSORY NOTE
DUE OCTOBER 21, 2003
$8,000,000 New York, New York
June 30, 1997
FOR VALUE RECEIVED, the undersigned, FULCRUM DIRECT, INC., a
Delaware corporation (the "Borrower"), hereby promises to pay to the order of
Whitney Subordinated Debt Fund, L.P. or its registered assigns (the "Holder"),
the principal sum of Eight Million Dollars ($8,000,000) on October 21, 2003 (the
"Maturity Date"), with interest thereon from time to time as provided herein.
1. Purchase Agreement. This Senior Subordinated Promissory
Note (the "Note") is issued by the Borrower pursuant to the Securities Purchase
Agreement, dated as of the date hereof, between the Borrower, Whitney
Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P.,
<PAGE> 2
Arnold Greenberg and Patrick K. Sullivan (the "Purchase Agreement"), and the
Holder is entitled to the benefits of this Note and the Purchase Agreement, as
it relates to the Note, and may enforce the agreements of the Borrower contained
herein and therein and exercise the remedies provided for hereby and thereby or
otherwise available in respect hereto and thereto. Capitalized terms used herein
without definition are used herein with the meanings ascribed to such terms in
the Purchase Agreement.
2. Interest. The Borrower promises to pay interest on the
principal amount of this Note at the rate of 10.101% per annum. The Borrower
shall pay accrued interest quarterly on each March 31, June 30, September 30 and
December 31 of each year or, if any such date shall not be a Business Day, on
the next succeeding Business Day to occur after such date (each date upon which
interest shall be so payable, an "Interest Payment Date" ), beginning on
September 30, 1997. Interest on this Note shall be paid by wire transfer of
immediately available funds to an account at a bank designated by the Holder.
Interest on this Note shall accrue from the date of issuance until repayment of
the principal and payment of all accrued interest in full. Interest shall accrue
and be computed on the basis of a 360-day year of twelve 30-day months.
Notwithstanding the foregoing provisions of this Section 2, but subject to
applicable law, any overdue principal of and overdue interest on this Note shall
bear interest, payable on demand in immediately available funds, for each day
from the date payment thereof was due to the date of actual payment, at a rate
equal to the rate of interest otherwise in effect pursuant to the first sentence
of this Section 2 plus 2% per annum, and, upon and during the occurrence of an
Event of Default (as hereinafter defined), this Note shall bear interest, from
the date of the occurrence of such Event of Default until such Event of Default
is cured or waived, payable on demand in immediately available funds, at a rate
equal to the rate of interest otherwise in effect pursuant to the first sentence
of this Section 2 plus 2% per annum. Subject to applicable law, any interest
that shall accrue on overdue interest on this Note as provided in the preceding
sentence and shall not have been paid in full on or before the next Interest
Payment Date to occur after the Interest Payment Date on which the overdue
interest became due and payable shall itself be deemed to be overdue interest on
this Note to which the preceding sentence shall apply.
3. Mandatory Prepayment.
(a) Initial Public Offering.
(i) Subject to the subordination
provisions of Section 7(b) hereof, upon the consummation of an Initial Public
Offering (as hereinafter defined), the Borrower shall prepay this Note (together
with interest accrued thereon), to the extent of the lessor of (X) seventy
percent (70%) of the principal amount hereof and (Y) the Net Cash Proceeds (as
hereinafter defined) received from the Initial Public Offering, within 5
Business Days after receipt by either the Borrower or any of its Subsidiaries of
the proceeds of such Initial Public Offering.
(ii) Subject to the subordination
provisions of Section 7(b) hereof and notwithstanding Section 3(a)(i) hereof, in
the event that the Borrower does not acquire all of the
2
<PAGE> 3
trademarks and the goodwill pertaining thereto being licensed to the Company
under the Fulcrum Brands Trademark License Agreement, within 60 days after
consummation of an Initial Public Offering, the Borrower shall immediately
prepay this Note, in an amount equal to the total outstanding principal amount
of this Note, together with interest accrued thereon.
For the purposes hereof, "Initial Public Offering"
means the sale by either the Borrower or any of its Subsidiaries of its capital
stock pursuant to a registration statement on Form S-1 or otherwise under the
Securities Act in which the Borrower or any of its Subsidiaries receives at
least $20,000,000 in Net Cash Proceeds.
For the purposes hereof, "Net Cash Proceeds" means
(X) the cash proceeds received by the Borrower or any of its Subsidiaries from
an Initial Public Offering minus (Y) reasonable brokerage commissions or
underwriting fees and other reasonable fees and expenses (including, without
limitation, reasonable fees, charges and disbursements of counsel and
accountants and reasonable fees and expenses of investment bankers) relating to
such Initial Public Offering.
(b) Change of Control. Subject to the subordination
provisions of Section 7(b) hereof, upon a Change of Control (as hereinafter
defined), the Borrower shall prepay the outstanding principal amount of this
Note (together with interest accrued thereon), within 5 Business Days after the
occurrence of a Change of Control.
For the purposes hereof, "Change of Control" means
(i) any transaction or series of transactions in which any Person (as such term
is defined in Section 13(d)(3) of the Exchange Act) or group, other than Michael
G. Lederman and/or Scott A. Budoff, becomes the direct or indirect beneficial
owner (as such term is defined in Rule 13d-3 promulgated under the Exchange Act)
of more of the then outstanding Common Stock than that beneficially owned in the
aggregate by Michael G. Lederman and Scott A. Budoff, (ii) any transaction or
series of transactions in which Michael G. Lederman and Scott A. Budoff together
cease to be the direct or indirect beneficial owners of at least 25% of the then
outstanding Common Stock, (iii) the sale of all or substantially all of the
Borrower's assets, (iv) the liquidation of the Borrower, (v) the election of a
majority of the members of the Board of Directors who were not placed in
nomination for that office by the Board of Directors, or (vi) the combination of
Borrower with another company, as a result of which the shareholders of Borrower
hold less than 50.01% of the total of all voting shares outstanding or
Borrower's directors constitute less than a majority of the Board of Directors
of the combined entity.
(c) Significant Acquisitions. If the Borrower wishes
to acquire (whether in one transaction or in a series of transactions) assets
(other than inventory in the ordinary course of business) from or securities in
any Person and if the revenues derived from such acquired assets or securities
for the trailing twelve month period at the time of such acquisition will
represent more than 30% of the total revenues of the Borrower on a pro forma
basis after giving effect to such acquisition (each such acquisition being a
"Significant Acquisition"), the Borrower shall notify the
3
<PAGE> 4
Holder of the proposed Significant Acquisition, describing in detail the
purchase price and the other terms and conditions thereof. Within ten (10) days
of the receipt of such notice, the Holder shall either (i) consent in writing to
such Significant Acquisition, in which event the Borrower will have the right to
consummate such Significant Acquisition within ninety (90) days of its receipt
of such consent for the purchase price and other terms and conditions set forth
in its notice or (ii) object in writing to such Significant Acquisition, in
which event the Borrower will have the right to consummate such Significant
Acquisition within 180 days of its receipt of such objection for the purchase
price and other terms and conditions set forth in its notice and simultaneous
with the closing of such Significant Acquisition the outstanding principal
amount of this Note together with the interest accrued thereon shall become
immediately due and payable.
(d) Notice. The Borrower shall give written notice to
the Holder of any mandatory prepayment pursuant to this Section 3 at least 3
Business Days prior to the date of such prepayment. Such notice shall be given
in the manner specified in Section 12.2 of the Purchase Agreement.
4. Optional Prepayment.
(a) Upon notice given to the Holder as provided in
Section 4(b), the Borrower, at its option, may prepay all or any portion of this
Note at any time, by paying an amount equal to the outstanding principal amount
of this Note, or the portion of this Note called for prepayment, together with
interest accrued and unpaid thereon to the date fixed for prepayment, together
with costs and expenses (including, without limitation, reasonable fees, charges
and disbursements of counsel), if any, associated with such prepayment, without
penalty or premium; provided, however, each prepayment of less than the full
outstanding principal balance of the Note shall be in an aggregate principal
amount of $400,000 or a whole multiple thereof, and provided, further, that
unless this Note shall be paid in full, the aggregate principal balance of this
Note outstanding at any time shall be at least $1,200,000.
(b) The Borrower may give written notice of
prepayment of this Note or any portion thereof not less than 10 nor more than 60
days prior to the date fixed for such prepayment. Such notice of prepayment
shall be given in the manner specified in Section 11.2 of the Purchase
Agreement. Upon notice of prepayment being given by the Borrower, the Borrower
covenants and agrees that it will prepay, on the date therein fixed for
prepayment, this Note or the portion hereof so called for prepayment, at the
outstanding principal amount thereof or the portion thereof so called for
prepayment together with interest accrued and unpaid thereon to the date fixed
for such prepayment, together with the costs and expenses referred to in Section
4(a).
(c) All prepayments under Section 3 and Section 4
shall include payment of accrued interest on the principal amount so prepaid and
shall be applied first to all costs, expenses and indemnities payable under the
Purchase Agreement, then to payment of default interest, if any, then to payment
of accrued interest, and thereafter to principal.
4
<PAGE> 5
5. Amendment. Amendments and modifications of this Note may be
made only in the manner provided in Section 11.4 of the Purchase Agreement.
6. Defaults and Remedies.
(a) Events of Default. An "Event of Default" shall
occur if:
(i) the Borrower shall default in the
payment of the principal of this Note, when and as the same shall become due and
payable, whether at maturity or at a date fixed for prepayment or by
acceleration or otherwise; or
(ii) the Borrower shall default in the
payment of any installment of interest on this Note according to its terms, when
and as the same shall become due and payable and such default shall continue for
a period of 10 days; or
(iii) the Borrower shall default in the due
observance or performance of any covenant to be observed or performed pursuant
to Section 8.3(a), 8.6(a), 8.12, 9.1, 9.2, 9.3, 9.6 or 9.7 of the Purchase
Agreement; or
(iv) the Borrower or any of its
Subsidiaries shall default in the due observance or performance of any other
covenant, condition or agreement on the part of the Borrower or any of its
Subsidiaries to be observed or performed pursuant to the terms hereof or
pursuant to the terms of the Purchase Agreement or any of the Transaction
Documents (other than those referred to in clauses (i), (ii) or (iii) of this
Section 6(a)), and such default shall continue for 45 days after the earliest of
(A) the date the Borrower is required to give notice thereof to the Holder
(whether or not such notice is actually given) or (B) the date of written notice
thereof, specifying such default and, if such default is capable of being
remedied, requesting that the same be remedied, shall have been given to the
Borrower by the Holder; or
(v) any representation, warranty or
certification made by or on behalf of the Borrower or its Subsidiaries in the
Purchase Agreement, this Note, the Transaction Documents or in any certificate
or other document delivered pursuant hereto or thereto shall have been incorrect
on the date as of which made, the result of which could reasonably be expected
to have a Material Adverse Effect; or
(vi) any event or condition shall occur
that results in the acceleration of the maturity of any Indebtedness of Borrower
or any of its Subsidiaries, in a principal amount aggregating $250,000 or more;
or
(vii) any uninsured damage to or loss,
theft or destruction of any assets of the Borrower or any of its Subsidiaries
shall occur that is in excess of $500,000; or
5
<PAGE> 6
(viii) an involuntary proceeding shall be
commenced or an involuntary petition shall be filed in a court of competent
jurisdiction seeking (a) relief in respect of the Borrower or any of its
Subsidiaries, or of a substantial part of their property or assets, under Title
11 of the United States Code, as now constituted or hereafter amended, or any
other Federal or state bankruptcy, insolvency, receivership or similar law, (b)
the appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any of its Subsidiaries, or for a
substantial part of their property or assets, or the winding up or liquidation
of either the Borrower or any of its Subsidiaries; and such proceeding or
petition shall continue undismissed for 60 days, or an order or decree approving
or ordering any of the foregoing shall be entered; or
(ix) the Borrower or any of its
Subsidiaries shall (a) voluntarily commence any proceeding or file any petition
seeking relief under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law, (b) consent to the institution of, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in paragraph (viii) of this Section 6(a), apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any of its Subsidiaries, or
for a substantial part of their property or assets, (d) file an answer admitting
the material allegations of a petition filed against it in any such proceeding,
(e) make a general assignment for the benefit of creditors, (f) become unable,
admit in writing its inability or fail generally to pay its debts as they become
due or (g) take any action for the purpose of effecting any of the foregoing; or
(x) one or more judgments for the payment
of money in an aggregate amount in excess of $250,000 (to the extent not covered
by insurance) shall be rendered against the Borrower or any of its Subsidiaries
and the same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to levy upon assets or properties of the Borrower or any
of its Subsidiaries to enforce any such judgment; or
(xi) Failure to purchase the Warrant held
by the Holder pursuant to Section 2(a) of the Warrant.
For purposes hereof, the term "Material Adverse Effect" shall
have the meaning assigned to that term in the Purchase Agreement.
(b) Acceleration. If an Event of Default occurs under
Section 6(a)(viii) or (ix), then the outstanding principal of and all accrued
interest on this Note shall automatically become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived. If any other Event of Default occurs and is continuing
the Holder, by written notice to the Borrower, may declare the principal of and
accrued interest on this Note to be due and payable immediately. Upon such
declaration, such principal and interest shall become immediately due and
payable. The Holder may rescind an acceleration and its consequences
6
<PAGE> 7
if all existing Events of Default have been cured or waived, except nonpayment
of principal or interest that has become due solely because of the acceleration,
and if the rescission would not conflict with any judgment or decree. Any notice
or rescission shall be given in the manner specified in Section 11.2 of the
Purchase Agreement.
7. Subordination. Subject to the limitations set forth in
Section 7(p) below, this Note shall at all times be wholly subordinate and
junior in right of payment to all Senior Indebtedness to the extent and in the
manner provided in this Section 7.
(a) Definitions. As used in this Section 7, the
following terms shall have the following meanings:
"Indebtedness" shall have the meaning assigned to that term in
the Purchase Agreement.
"Senior Covenant Default" shall mean any event of default as
defined under any agreement pertaining to Senior Indebtedness of the Borrower,
other than a Senior Payment Default.
"Senior Indebtedness" shall have the meaning assigned to it in
the Purchase Agreement.
"Senior Default" shall mean a Senior Payment Default or a
Senior Covenant Default.
"Senior Payment Default" shall mean any default in the payment
of any Senior Indebtedness.
"Subordinated Indebtedness" shall mean (i) the principal of
and interest on this Note; and (ii) any other obligations of the Borrower
arising out of or in connection with the Purchase Agreement or this Note.
(b) General. Upon the maturity of any Senior
Indebtedness by lapse of time, acceleration, required prepayment or otherwise,
all Senior Indebtedness shall first be paid in full, or such payment duly
provided for in cash or in a manner satisfactory to the holders of such Senior
Indebtedness, before any payment is made on account of the Subordinated
Indebtedness or by the Borrower to acquire this Note, except that (i) the
Borrower may prepay this Note in accordance with the provisions of Section 3 or
Section 4 so long as no Senior Default has occurred and is continuing and (ii)
the Holder may receive any distributions provided for in Section 7(e)(ii) or
7(e)(iv) hereof.
7
<PAGE> 8
(c) Limitation on Payment.
(i) Upon receipt by the Borrower and the
Holder of a Blockage Notice (as defined below), then unless and until (1) all
Senior Defaults that gave rise to the Blockage Notice shall have been remedied
or effectively waived or shall have ceased to exist, or (2) the Senior
Indebtedness in respect of which such Senior Defaults shall have occurred shall
have been paid in full, no direct or indirect payment (in cash, property,
securities or by set-off or otherwise) of or on account of the principal of or
interest on this Note or as a sinking fund for this Note or in respect of any
redemption, retirement, purchase or other acquisition of this Note shall be made
during any period prior to the expiration of the Blockage Period (as defined
below).
(ii) For purposes of this Section 7, a
"Blockage Notice" is a notice of a Senior Default that in fact has occurred and
is continuing, given to the Borrower and the Holder by the holders of a majority
in principal amount of the Senior Indebtedness then outstanding (or their
authorized agent); provided, however, that no such notice of a Senior Covenant
Default shall be effective as a Blockage Notice if an effective Blockage Notice
based on a Senior Covenant Default shall have been given within 360 days prior
thereto; and provided further, however, that no Senior Default on which a
Blockage Notice is based shall be used as the basis of any subsequent Blockage
Notice unless the same shall have ceased to exist for a period of at least 90
consecutive days.
(iii) For purposes of this Section 7, a
"Blockage Period" with respect to a Blockage Notice is the period commencing
upon the Borrower's receipt of such Blockage Notice and having a duration as
follows:
(1) 179 days if the Senior Default to which
the Blockage Notice refers is a Senior Payment Default; or
(2) 89 days if the Senior Default to which
the Blockage Notice refers is a Senior Covenant Default.
(d) Limitation on Remedies. As long as any Senior
Indebtedness remains outstanding, upon the occurrence of an Event of Default
under this Note, the Holder shall not declare or join in any declaration of this
Note to be due and payable by reason of such Event of Default or otherwise take
any action against the Borrower (including, without limitation, commencing any
legal action against the Borrower or filing or joining in the filing of any
insolvency petition against the Borrower) prior to the expiration of 30 days
after the written notice of intention to accelerate on account of the occurrence
of such Event of Default (a "Remedy Notice") shall have been given by the Holder
to the Borrower and the holders of the Senior Indebtedness (a "Remedy Standstill
Period") unless the holders of any Senior Indebtedness shall have caused such
Senior Indebtedness to become due prior to its stated maturity or any Event of
Default pursuant to Section 6(a)(viii) or (ix) of this Note shall have
commenced; provided, however, that such Remedy Standstill Period shall be
extended (i) to 89 days from the date of such Remedy Notice if, at the time the
Remedy Standstill
8
<PAGE> 9
Period would otherwise expire, there exists any Senior Covenant Default and (ii)
to 179 days from the date of such Remedy Notice if, at the time the Remedy
Standstill Period would otherwise expire, there exists any Senior Payment
Default and if, in any case, an effective Blockage Notice is given in accordance
with, and subject to the limitations of, Section 7(ii).
Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(a)(viii) or (ix) shall have occurred. In addition, any Blockage Period shall
cease to be effective if at any time during such period: (i) substantial assets
of the Borrower or its Subsidiaries are sold or otherwise disposed of outside of
the ordinary course of business for less than fair value or (ii) payment or any
distribution of any character, whether in cash, securities or other property of
the Borrower or its Subsidiaries shall be made to or received by any creditor on
any Indebtedness which is on the same level of priority with or junior and
subordinate in right of payment to this Note.
Upon the expiration or termination of any Blockage Period, the
Holder shall be entitled to exercise any of its rights with respect to this Note
other than any right to accelerate the maturity date of this Note based upon the
occurrence of any Event of Default in respect thereto which has been cured or
otherwise remedied during the Blockage Period.
(e) Subordination Upon Certain Events. Upon the
occurrence of any Event of Default with respect to the Borrower (but not its
Subsidiaries) under Sections 6(a)(viii) or (ix) of this Note:
(i) Upon any payment or distribution of
assets of the Borrower to creditors of such Borrower, holders of Senior
Indebtedness shall be entitled to receive indefeasible payment in full of all
obligations with respect to the Senior Indebtedness before the Holder shall be
entitled to receive any payment in respect of the Subordinated Indebtedness.
(ii) Until all Senior Indebtedness is paid
in full, any distribution to which the Holder would be entitled but for this
Section 7 shall be made to the holders of Senior Indebtedness, as their
interests may appear, except that the Holder may, pursuant to a plan of
reorganization under Chapter 11 of the Bankruptcy Code of 1978, as amended, or
any similar provision of any successor legislation thereto, receive securities
that are subordinate to the Senior Indebtedness to at least the same extent as
this Note if pursuant to such plan the distributions to the holders of the
Senior Indebtedness in the form of cash, securities or other property, by
set-off or otherwise, provide for payment of the full amount of the allowed
claim of the holders of the Senior Indebtedness.
(iii) For purposes of this Section 7, a
distribution may consist of cash, securities or other property, by set-off or
otherwise.
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<PAGE> 10
(iv) Notwithstanding the foregoing
provisions of Section 7(b), or (e), if payment or delivery by the Borrower of
cash, securities or other property to the Holder is authorized by an order or
decree giving effect, and stating in such order or decree that effect is given,
to the subordination of this Note to the Senior Indebtedness, and made by a
court of competent jurisdiction in a proceeding under any applicable bankruptcy
or reorganization law, payment or delivery by such Borrower of such cash,
securities or other property shall be made to the Holder in accordance with such
order or decree.
(f) Payments and Distributions Received. If the
Holder shall have received any payment from or distribution of assets of the
Borrower in respect of the Subordinated Indebtedness in contravention of the
terms of this Section 7 before all Senior Indebtedness is paid in full, then and
in such event such payment or distribution shall be received and held in trust
for and shall be promptly paid over or delivered to the holders of Senior
Indebtedness to the extent necessary to pay all such Senior Indebtedness in
full.
(g) Proofs of Claim. If, while any Senior
Indebtedness is outstanding, any Event of Default under Section 6(a)(viii) or
(ix) of this Note occurs with respect to the Borrower (but not its
Subsidiaries), the Holder shall duly and promptly take such action as any holder
of Senior Indebtedness may reasonably request to collect any payment with
respect to this Note for the account of the holders of the Senior Indebtedness
and to file appropriate claims or proofs of claim in respect of this Note. Upon
the failure of the Holder to take any such action, each holder of Senior
Indebtedness is hereby irrevocably authorized and empowered (in its own name or
otherwise), but shall have no obligation, to demand, sue for, collect and
receive every payment or distribution referred to in respect of this Note and to
file claims and proofs of claim and take such other action as it may deem
necessary or advisable for the exercise or enforcement of any of the rights or
interests of the holder with respect to this Note.
(h) Subrogation. After all amounts payable under or
in respect of Senior Indebtedness are paid in full, the Holder shall be
subrogated to the rights of holders of Senior Indebtedness to receive payments
or distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the Holder have been applied to the payment
of Senior Indebtedness. A distribution made under this Section 7 to a holder of
Senior Indebtedness which otherwise would have been made to the Holder is not,
as between the Borrower and the Holder, a payment by the Borrower on Senior
Indebtedness.
(i) Relative Rights. This Section defines the
relative rights of the Holder and the holders of Senior Indebtedness. Nothing in
this Section shall: (1) impair, as between the Borrower and the Holder, the
obligation of the Borrower, which is absolute and unconditional, to pay
principal of and interest (including default interest) on this Note in
accordance with its terms; (2) affect the relative rights of the Holder and
creditors of the Borrower other than holders of Senior Indebtedness or (3)
prevent the Holder from exercising its available remedies upon a default or
Event of Default, subject to the rights, if any, under this Section 7 of holders
of Senior Indebtedness.
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<PAGE> 11
(j) Subordination May Not Be Impaired by the
Borrower. No right of any holder of any Senior Indebtedness to enforce the
subordination of the Indebtedness evidenced by this Note shall be impaired by
any failure to act by the Borrower or such holder of Senior Indebtedness or by
the failure of the Borrower or such holder to comply with this Note. The
provisions of this Section 7 shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any of the Senior Indebtedness is
rescinded or must otherwise be returned by any holder of Senior Indebtedness as
a result of the insolvency, bankruptcy or reorganization of the Borrower or any
of its Subsidiaries or otherwise, all as though such payment had not been made.
(k) Payments. A payment with respect to principal of
or interest on the Subordinated Indebtedness shall include, without limitation,
payment of principal of, and interest on this Note, any depositing of funds for
the defeasance of the Subordinated Indebtedness, any sinking fund and any
payment on account of mandatory prepayment or optional prepayment provisions.
(l) Section Not to Prevent Events of Default. The
failure to make a payment on account of principal of or interest on or other
amounts constituting Subordinated Indebtedness by reason of any provision of
this Section 7 shall not be construed as preventing the occurrence of an Event
of Default under Section 6.
(m) Subordination Not Impaired: Benefit of
Subordination. The Holder agrees and consents that without notice to or assent
by such Holder, and without affecting the liabilities and obligations of the
Borrower and the rights and benefits of the holders of the Senior Indebtedness
set forth in this Section 7:
(i) The obligations and liabilities of the
Borrower and any other party or parties for or upon the Senior Indebtedness may,
from time to time, be increased, renewed, refinanced, extended, modified,
amended, restated, compromised, supplemented, terminated, waived or released,
except as prohibited by Section 9.3 or 9.4 of the Purchase Agreement;
(ii) The holders of Senior Indebtedness,
and any representative or representatives acting on behalf thereof, may exercise
or refrain from exercising any right, remedy or power granted by or in
connection with any agreements relating to the Senior Indebtedness; and
(iii) Any balance or balances of funds with
any holder of Senior Indebtedness at any time outstanding to the credit of the
Borrower may, from time to time, in whole or in part, be surrendered or
released;
all as the holders of the Senior Indebtedness, and any representative or
representatives acting on behalf thereof, may deem advisable, and all without
impairing, abridging, diminishing, releasing or affecting the subordination of
the Subordinated Indebtedness to the Senior Indebtedness provided for herein.
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<PAGE> 12
(n) Modification of Section 7. The provisions of this
Section 7 are for the benefit of the holders from time to time of Senior
Indebtedness and, so long as any Senior Indebtedness remains unpaid, may not be
modified, rescinded or canceled in whole or in part without the prior written
consent thereto of all holders of Senior Indebtedness.
(o) Covenants of Holder. Until all of the Senior
Indebtedness has been fully paid:
(i) The Holder shall not hereafter give any
subordination in respect of this Note.
(ii) Upon the occurrence and during the
continuance of a Senior Default, the Holder shall not release, exchange, extend
the time of payment of, compromise, set off or otherwise discharge any part of
this Note or modify or amend this Note; provided, however, that at such time or
times as the actions referred to in this Section 7(o)(ii) may be taken by the
Holder, such Holder shall give the Lender five Business Days prior written
notice before taking any of such actions.
(iii) The Holder hereby undertakes and
agrees for the benefit of the holders of Senior Indebtedness that, upon the
occurrence and during the continuance of a Senior Default, it shall take any
actions reasonably requested by any holder of Senior Indebtedness to effectuate
the full benefit of the subordination contained herein.
(p) Covenant of the Borrower; Limitation on Senior
Indebtedness. Until all Subordinated Indebtedness shall have been paid in full,
the Borrower shall not, and shall not cause, suffer or permit any of its
Subsidiaries to, directly or indirectly, collectively and in the aggregate,
issue, assume or otherwise incur Senior Indebtedness in an aggregate principal
amount which is in excess of $25,000,000 or other Indebtedness in an aggregate
principal amount which is in excess of $5,000,000 provided, however, that Senior
Indebtedness may exceed an aggregate principal amount of $25,000,000 if the
ratio of total Indebtedness to total share capital (including retained earnings)
of the Company, as reflected on the Company's most recent balance sheet, is less
than 2.5 to 1.0; and provided, further that under no circumstances shall Senior
Indebtedness exceed $30,000,000.
(q) Miscellaneous.
(i) To the extent permitted by applicable
law, the Holder and the Borrower hereby waives (1) notice of acceptance hereof
by the holders of the Senior Indebtedness, and (2) all diligence in the
collection or protection of or realization upon the Senior Indebtedness.
(ii) The Borrower and the Holder hereby
expressly agree that the holders of Senior Indebtedness may enforce any and all
rights derived herein by suit, either in equity
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<PAGE> 13
or law, for specific performance of any agreement contained in this Section 7 or
for judgment at law and any other relief whatsoever appropriate to such action
or procedure.
(iii) The Holder acknowledges and agrees
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration to each holder of Senior Indebtedness, whether
such Senior Indebtedness was created or acquired before or after the issuance of
this Agreement, and each holder of Senior Indebtedness shall be deemed
conclusively to have relied upon such subordination provisions in acquiring and
continuing to hold such Senior Indebtedness.
8. Use of Proceeds. The Borrower shall use the principal from
this Note (a) for the payment of fees and expenses in connection with the
transactions contemplated in the Transaction Documents, and (b) for general
corporate purposes.
9. Suits for Enforcement.
(a) Subject to Section 7, upon the occurrence of any
one or more Events of Default, the Holder of this Note may proceed to protect
and enforce its rights hereunder by suit in equity, action at law or by other
appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in the Purchase Agreement or this Note or in aid of the
exercise of any power granted in the Purchase Agreement or this Note, or may
proceed to enforce the payment of this Note, or to enforce any other legal or
equitable right of the Holders of this Note.
(b) In case of any default under this Note, the
Borrower will pay to the Holder such amounts as shall be sufficient to cover the
costs and expenses of such Holder due to such default, as provided in Article 7
of the Purchase Agreement.
10. Remedies Cumulative. No remedy herein conferred upon the
Holder is intended to be exclusive of any other remedy and each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
11. Remedies Not Waived. No course of dealing between the
Borrower and the Holder or any delay on the part of the Holder in exercising any
rights hereunder shall operate as a waiver of any right.
12. Transfer.
(a) The term "Holder" as used herein shall also
include any transferee of this Note whose name has been recorded by the Borrower
in the Note Register. Each transferee of this Note acknowledges that this Note
has not been registered under the Securities Act, and may be transferred only
pursuant to an effective registration under the Securities Act or pursuant to an
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<PAGE> 14
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<PAGE> 15
applicable exemption from the registration requirements of the Securities Act,
subject to the restrictions on transfer set forth in Section 11.3 of the
Purchase Agreement.
(b) The Borrower shall maintain a register (the "Note
Register") in its principal offices for the purpose of registering the Note and
any transfer thereof, which register shall reflect and identify, at all times,
the ownership of any interest in the Note. Upon the issuance of this Note, the
Borrower shall record the name of the initial purchaser of this Note in the Note
Register as the first Holder. Upon surrender for registration of transfer or
exchange of this Note at the principal offices of the Borrower, the Borrower
shall, at its expense, execute and deliver one or more new Notes of like tenor
and of denominations of at least $500,000 (except as may be necessary to reflect
any principal amount not evenly divisible by $500,000) of a like aggregate
principal amount, registered in the name of the Holder or a transferee or
transferees. Every Note surrendered for registration of transfer or exchange
shall be duly endorsed, or be accompanied by written instrument of transfer duly
executed by the Holder of such Note or such holder's attorney duly authorized in
writing.
13. Replacement of Note. On receipt by the Borrower of an
affidavit of an authorized representative of the Holder stating the
circumstances of the loss, theft, destruction or mutilation of this Note (and in
the case of any such mutilation, on surrender and cancellation of such Note),
the Borrower, at its expense, will promptly execute and deliver, in lieu
thereof, a new Note of like tenor. If required by the Borrower, such Holder must
provide an indemnity bond or other indemnity sufficient in the judgment of the
Borrower to protect the Borrower from any loss which it may suffer if a lost,
stolen or destroyed Note is replaced.
14. Covenants Bind Successors and Assigns. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Borrower shall bind its successors and assigns, whether so expressed or not.
15. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.
16. Headings. The headings in this Note are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
FULCRUM DIRECT, INC.
By: ________________________________
Name: Scott A. Budoff
Title: President & Chief Operating Officer
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<PAGE> 1
EXHIBIT 10.25
June 30, 1997
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THE SALE
OR OTHER TRANSFER OF THIS WARRANT IS ALSO SUBJECT TO THE RESTRICTIONS
ON TRANSFER SET FORTH IN SECTION 11.3 OF THE "PURCHASE AGREEMENT" (AS
HEREINAFTER DEFINED).
No. A-4 Warrant to Purchase 160,000
Shares of Common Stock
FULCRUM DIRECT, INC.
COMMON STOCK PURCHASE WARRANT
Void after October 21, 2006
FULCRUM DIRECT, INC. (the "Company" ), a Delaware corporation, hereby
certifies that for value received, Whitney Subordinated Debt Fund, L.P. or
assigns (the "Holder"), is entitled to purchase, subject to the terms and
conditions hereinafter set forth, an aggregate of 160,00 fully paid and
nonassessable shares of Common Stock (as hereinafter defined) of the Company, at
an exercise price of $.01 per share (the "Purchase Price"), subject to
adjustment as provided herein, at any time or from time to time beginning on the
date hereof and prior to 5:00 P.M., New York City time, on October 21, 2006 (the
"Expiration Date").
This Warrant is issued pursuant to the Securities Purchase Agreement
(the "Purchase Agreement"), dated as of the date hereof, among the Company,
Whitney Subordinated Debt Fund, L.P., Whitney Equity Partners, L.P., Arnold
Greenberg and Patrick K. Sullivan and is subject to the terms thereof.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned such terms in the Purchase Agreement. The Holder is entitled to the
rights and subject to the obligations contained in the Purchase Agreement and
the Stockholders Agreement relating to this Warrant and the shares of Common
Stock issuable upon exercise of this Warrant.
<PAGE> 2
1. Definitions. For the purposes of this Warrant, the following terms
shall have the meanings indicated:
"Applicable Price" shall mean the higher of (a) the Current Market
Price per share of Common Stock on the applicable record or other relevant date
and (b) the Dilution Price.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law or executive order to close.
"Change of Control" means (i) any transaction or series of
transactions in which any Person (as such term is defined in Section 13(d)(3) of
the Exchange Act) or group, other than Lederman and/or Budoff, becomes the
direct or indirect beneficial owner (as such term is defined in Rule 13d-3 as
promulgated under the Exchange Act) of more of the then outstanding Common Stock
than that beneficially owned in the aggregate by Lederman and Budoff, (ii) any
transaction or series of transactions in which Lederman and Budoff together
cease to be the direct or indirect beneficial owners of at least 50% of the then
outstanding Common Stock, (iii) the sale of all or substantially all of the
Borrower's assets, (iv) the liquidation of the Borrower, (v) the election of a
majority of the Board of Directors who were not placed in nomination for that
office by the Board of Directors, or (vi) the combination of Borrower with
another company, as a result of which the shareholders of Borrower hold less
than 50.01% of the total of all voting shares outstanding or Borrower's
directors constitute less than a majority of the Board of Directors of the
combined entity.
"Cancellation Portion" has the meaning ascribed to such term in
Subsection 2(b).
"Closing Price" shall mean, with respect to each share of Common
Stock for any day, (a) the last reported sale price regular way or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices regular way, in either case as reported on the principal national
securities exchange on which the Common Stock is listed or admitted for trading
or (b) if the Common Stock is not listed or admitted for trading on any national
securities exchange, the last reported sale price or, in case no such sale takes
place on such day, the average of the highest reported bid and the lowest
reported asked quotation for the Common Stock, in either case as reported on the
NASDAQ or a similar service if NASDAQ is no longer reporting such information.
"Common Stock" means the common stock, par value $.01 per share, of
the Company, and any class of stock resulting from successive changes or
reclassification of such Common Stock.
"Company" has the meaning ascribed to such term in the first
paragraph of this Warrant.
"Current Market Price" shall be determined in accordance with
Subsection 3(e).
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<PAGE> 3
"Dilution Price" shall mean, with respect to each share of Common
Stock, $4.82, subject to appropriate adjustment for events described in
Subsection 3(a).
"Exercise Date" has the meaning ascribed to such term in Subsection
2(d).
"Expiration Date" has the meaning ascribed to such term in the first
paragraph of this Warrant.
"Fair Market Value" with respect to a security shall mean the
average of the closing prices of such security's sales on the principal
securities exchanges on which such security may at the time be listed, or, if
there has been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, or, if on any day such security is not quoted in the NASDAQ
System, the average of the highest bid and lowest asked prices on such day in
the domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of 21 days consisting of the day as of which "Fair Market
Value" is being determined and the 20 consecutive business days prior to such
day.
"Holder" has the meaning ascribed to such term in the first
paragraph of this Warrant.
"Initial Public Offering" means the sale by either the Company or
any of its Subsidiaries of its capital stock pursuant to a registration
statement on Form S-1 or otherwise under the Securities Act in which the Company
or any of its Subsidiaries receives at least $20,000,000 of Net Cash Proceeds.
"NASDAQ" shall mean the Automatic Quotation System of the National
Association of Securities Dealers, Inc.
"Net Cash Proceeds" means (X) the cash proceeds received by the
Borrower or any of its Subsidiaries from an Initial Public Offering minus (Y)
reasonable brokerage commissions or underwriting fees and other reasonable fees
and expenses (including, without limitation, reasonable fees, charges and
disbursements of counsel and accountants and reasonable fees and expenses of
investment bankers) relating to an Initial Public Offering.
"Notes" shall mean the Senior Subordinated Promissory Notes, dated
the date hereof, with the Company as the maker thereof, and the Purchasers (as
defined in the Purchase Agreement) as the payee thereof.
"Person" shall mean any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, government (or an agency or
3
<PAGE> 4
political subdivision thereof) or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"Purchase Agreement" has the meaning ascribed to such term in the
second paragraph of this Warrant.
"Purchase Price" has the meaning ascribed to such term in the first
paragraph of this Warrant.
"Stockholders Agreement" means the Stockholders Agreement as defined
in the Purchase Agreement.
"Subsidiary" shall mean, with respect to any Person, a corporation
or other entity of which 50% or more of the voting power of the voting equity
securities or equity interests is owned, directly or indirectly, by such Person.
"Warrant" shall mean this Warrant and any subsequent Warrant issued
pursuant to Subsection 2(c).
"Warrant Register" has the meaning ascribed to such term in
Subsection 10(d).
2. Exercise of Warrant.
(a) Exercise. This Warrant may be exercised, in whole or in part, at
any time or from time to time during the period beginning on the earliest to
occur of (i) four years from the date hereof, (ii) a Change of Control, (iii)
(x) the Holder receiving an "Outside Sale Notice" (as such term is defined in
subsection 3(c) of the Stockholders Agreement) or (y) the Holder receiving a
registration notice pursuant to Section 7 of the Stockholders Agreement, but
only pursuant to clauses (iii)(x) or (iii)(y) to the extent such Holder has the
right to participate in the sale of Shares (as such term is defined in Section 1
of the Stockholders Agreement), and ending on the Expiration Date, by
surrendering to the Company at its principal office this Warrant, with the form
of Election to Purchase Shares (the "Election to Purchase Shares") attached
hereto as Exhibit A duly executed by the Holder and accompanied by payment of
the Purchase Price for the number of shares of Common Stock specified in such
form. Notwithstanding anything to the contrary in this Section 2(a), following
the first anniversary of the date hereof, if the Company has consummated an
initial public offering and if the Holder desires to exercise the Warrant in
order to distribute the underlying shares to its limited partners or to sell
such shares in order to distribute the proceeds thereof to such limited
partners, then it may request that the Board of Directors of the Company amend
this Warrant to provide for immediate exercise of this Warrant (the "Request
Date") and in the event such request is not granted within 15 days following the
Request Date the Holder shall have the right to require the Company to purchase
this Warrant 45 days following the Request Date at a price equal to the Fair
Market Value of the Common Stock into which this Warrant is exercisable less the
Purchase
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<PAGE> 5
Price in respect of such Common Stock. The failure to purchase the Warrant
within 45 days following a request by the Holder shall constitute an Event of
Default pursuant to Section 6(a)(xi) of the 10.101% Senior Subordinated
Promissory Note due October 21, 2003 and Section 6(a)(xi) of the 10.101% Senior
Subordinated Promissory Note due October 21, 2003.
(b) Delivery of Shares; Payment of Purchase Price. As soon as
practicable after surrender of this Warrant and receipt of payment, the Company
shall promptly issue and deliver to the Holder a certificate or certificates for
the number of shares of Common Stock set forth in the Election to Purchase
Shares, in such name or names as may be designated by such Holder, along with a
check for the amount of cash to be paid in lieu of issuance of fractional
shares, if any. Payment of the Purchase Price may be made as follows (or by any
combination of the following): (i) in United States currency by cash or delivery
of a certified check, bank draft or postal or express money order payable to the
order of the Company, (ii) by assigning to the Company all or any part of the
unpaid principal amount of the Notes held by the Holder in a principal amount
equal to the Purchase Price, (iii) by surrender of a number of shares of Common
Stock held by the Holder equal to the quotient obtained by dividing (A) the
Purchase Price payable with respect to the portion of this Warrant then being
exercised by (B) the Current Market Price per share of Common Stock on the
Exercise Date, or (iv) by cancellation of any portion of this Warrant (the
"Cancellation Portion") with respect to the number of shares of Common Stock
equal to the quotient obtained by dividing (A) the sum of the Purchase Price
payable with respect to the portion of this Warrant then being exercised by
cancellation of the Cancellation Portion and the Purchase Price that would be
payable with respect to the Cancellation Portion if such portion was being
exercised rather than canceled by (B) the Current Market Price per share of
Common Stock on the Exercise Date.
(c) Partial Exercise. If this Warrant is exercised for less than all
of the shares of Common Stock purchasable under this Warrant, the Company shall
cancel this Warrant upon surrender hereof and shall execute and deliver to the
Holder a new Warrant of like tenor for the balance of the shares of Common Stock
purchasable hereunder.
(d) When Exercise Effective. The exercise of this Warrant shall be
deemed to have been effective immediately prior to the close of business on the
Business Day on which this Warrant is surrendered to and the Purchase Price is
received by the Company as provided in this Section 2 (the "Exercise Date") and
the Person in whose name any certificate for shares of Common Stock shall be
issuable upon such exercise, as provided in Subsection 2(b), shall be deemed to
be the record holder of such shares of Common Stock for all purposes on the
Exercise Date.
(e) Continued Validity. A Holder of shares of Common Stock issued
upon the exercise of this Warrant, in whole or in part, shall continue to be
entitled to all of the rights and subject to all of the obligations set forth in
Section 10.
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<PAGE> 6
3. Adjustment of Purchase Price and Number of Shares. The Purchase
Price and the number of shares of Common Stock issuable upon exercise of this
Warrant shall be adjusted from time to time upon the occurrence of the following
events:
(a) Dividend, Subdivision, Combination or Reclassification of Common
Stock. If the Company shall, at any time or from time to time, (i) declare a
dividend on the Common Stock payable in shares of its capital stock (including
Common Stock), (ii) subdivide the outstanding Common Stock into a larger number
of shares of Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of shares of its Common Stock, or (iv) issue any shares of its
capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then in each such case, the Purchase
Price in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date shall be
proportionately adjusted so that the Holder of any Warrant exercised after such
date shall be entitled to receive, upon payment of the same aggregate amount as
would have been payable before such date, the aggregate number and kind of
shares of capital stock which, if such Warrant had been exercised immediately
prior to such date, such Holder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. Any such adjustment shall become effective immediately after
the record date of such dividend or the effective date of such subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur. If a dividend is declared and such
dividend is not paid, the Purchase Price shall again be adjusted to be the
Purchase Price in effect immediately prior to such record date.
(b) Issuance of Rights to Purchase Common Stock Below Current Market
Price or Dilution Price. If the Company shall, at any time or from time to time,
fix a record date for the issuance of rights, options or warrants to all holders
of Common Stock entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Common Stock, or securities
convertible into Common Stock at a price per share of Common Stock or having a
conversion price per share of Common Stock if a security is convertible into
Common Stock (determined in either such case by dividing (x) the total
consideration payable to the Company upon exercise, conversion or exchange of
such rights, options, warrants or other securities convertible into Common Stock
by (y) the total number of shares of Common Stock covered by such rights,
options, warrants or other securities convertible into Common Stock) lower than
either the Current Market Price per share of Common Stock on such record date
(or, if an ex-dividend date has been established for such record date, on the
day next preceding such ex-dividend date) or the Dilution Price, then, the
Purchase Price shall be reduced to the price determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock so to be offered (or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at the Applicable Price
and the denominator of which
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<PAGE> 7
shall be the number of shares of Common Stock outstanding on such record date
plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such price for subscription or
purchase may be paid in a consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be determined in good
faith by the Board of Directors of the Company. Any such adjustment shall become
effective immediately after the record date for such rights or warrants. Such
adjustment shall be made successively whenever such a record date is fixed. If
such rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to the Purchase Price in effect immediately prior to such record date.
(c) Certain Distributions. If the Company shall, at any time or from
time to time, fix a record date for the distribution to all holders of Common
Stock (including any such distribution made in connection with a consolidation
or merger in which the Company is the continuing corporation) of evidences of
indebtedness, assets or other property (other than regularly scheduled cash
dividends or cash distributions payable out of consolidated earnings or earned
surplus or dividends payable in capital stock for which adjustment is made under
Subsection 3(a)) or subscription rights, options or warrants (excluding those
referred to in Subsection 3(b)), then the Purchase Price shall be reduced to the
price determined by multiplying the Purchase Price in effect immediately prior
to such record date by a fraction (which shall in no event be less than zero),
the numerator of which shall be the Current Market Price per share of Common
Stock on such record date (or, if an ex-dividend date has been established for
such record date, on the next day preceding such ex-dividend date), less the
fair market value (as determined in good faith by the Board of Directors of the
Company) of the portion of the assets, evidences of indebtedness, other
property, subscription rights or warrants so to be distributed applicable to one
share of Common Stock and the denominator of which shall be such Current Market
Price per share of Common Stock. Any such adjustment shall become effective
immediately after the record date for such distribution. Such adjustments shall
be made successively whenever such a record date is fixed. In the event that
such distribution is not so made, the Purchase Price shall be adjusted to the
Purchase Price in effect immediately prior to such record date.
(d) Issuance of Common Stock Below Current Market Price or Dilution
Price. If the Company shall, at any time and from time to time, after the date
hereof, directly or indirectly, sell or issue shares of Common Stock (regardless
of whether originally issued or from the Company's treasury), or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase shares of Common Stock (excluding shares issued (i)
in any of the transactions described in Subsections 3(a), (b) and (c) hereof,
(ii) upon exercise of this Warrant, (iii) upon the exercise or conversion of
options, warrants or any other securities convertible into or exchangeable for
shares of Common Stock outstanding as of the date hereof, and (iv) to the
Company's or its Subsidiaries' employees under bona fide employee benefit plans
approved or adopted by the Company's Board of Directors which, in the aggregate,
shall not be convertible or exercisable into more than five percent (5%) of the
fully diluted capital stock of the Company (and provided that the same shall be
exercisable at the then Current Market Price), and (v) in any arm's
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<PAGE> 8
length institutional financing of debt and equity to persons other than Budoff,
Lederman or their Affiliates in which shares of Common Stock or rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock are issued as part of a unit,
if such shares would otherwise be included in this Section 3(d)) at a price per
share of Common Stock (determined, in the case of rights, options, warrants or
convertible or exchangeable securities, by dividing (x) the total consideration
received or receivable by the Company in consideration of the sale or issuance
of such rights, options, warrants or convertible or exchangeable securities,
plus the total consideration payable to the Company upon exercise or conversion
or exchange thereof, by (y) the total number of shares of Common Stock covered
by such rights, options, warrants or convertible or exchangeable securities)
lower than either the Current Market Price per share of Common Stock or the
Dilution Price immediately prior to such sale or issuance, then the Purchase
Price shall be reduced to a price determined by multiplying the Purchase Price
in effect immediately prior thereto by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding immediately prior
to such sale or issuance plus the number of shares of Common Stock which the
aggregate consideration received (determined as provided below) for such sale or
issuance would purchase at the Applicable Price and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
after such sale or issuance. Such adjustment shall be made successively whenever
such sale or issuance is made. For the purposes of such adjustments, the shares
of Common Stock which the holder of any such rights, options, warrants, or
convertible or exchangeable securities shall be entitled to subscribe for or
purchase shall be deemed to be issued and outstanding as of the date of such
sale or issuance and the consideration "received" by the Company therefor shall
be deemed to be the consideration actually received or receivable by the Company
(plus any underwriting discounts or commissions in connection therewith) for
such rights, options, warrants or convertible or exchangeable securities, plus
the consideration stated in such rights, options, warrants or convertible or
exchangeable securities to be payable to the Company for the shares of Common
Stock covered thereby. If the Company shall sell or issue shares of Common Stock
for a consideration consisting, in whole or in part, of property other than cash
or its equivalent, then in determining the "price per share of Common Stock" and
the "consideration" received or receivable by or payable to the Company for
purposes of the first sentence and the immediately preceding sentence of this
Subsection 3(d), the fair value of such property shall be determined in good
faith by the Board of Directors of the Company. The determination of whether any
adjustment is required under this Subsection 3(d) by reason of the sale and
issuance of rights, options, warrants or convertible or exchangeable securities
and the amount of such adjustment, if any, shall be made only at the time of
such issuance or sale and not at the subsequent time of issuance of shares of
Common Stock upon the exercise of such rights to subscribe or purchase.
(e) Determination of Current Market Price. For the purpose of any
computation under Subsections (b), (c) or (d) of this Section 3 or any other
provision of this Warrant, the Current Market Price per share of Common Stock on
any date shall be deemed to be the average of the daily Closing Prices per share
of Common Stock for the 10 consecutive trading days commencing 15 trading days
before such date. If on any such date the shares of Common Stock are not listed
or
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<PAGE> 9
admitted for trading on any national securities exchange or quoted by NASDAQ or
a similar service, then the Company, on the one hand, and WSDF on the other
hand, shall each promptly appoint as an appraiser an individual who shall be a
member of a nationally recognized investment banking firm. Each appraiser shall
be instructed to, within 30 days of appointment, determine the Current Market
Price per share of Common Stock which shall be deemed to be equal to the fair
market value per share of Common Stock as of such date. If the two appraisers
are unable to agree on the Current Market Price per share of Common Stock within
such 30 day period, then the two appraisers, within 10 days after the end of
such 30 day period shall jointly select a third appraiser. The third appraiser
shall, within 30 days of its appointment, determine, in good faith, the Current
Market Price per share of Common Stock and such determination shall be
controlling. If any party fails to appoint an appraiser or if one of the two
initial appraisers fails after appointment to submit its appraisal within the
required period, the appraisal submitted by the remaining appraiser shall be
controlling. The cost of the foregoing appraisals shall be shared one-half by
the Company and one-half by WSDF, provided, however, in the event a third
appraiser is utilized and one of the two initial appraisals (but not the other
initial appraisal) is greater than or less than the appraisal by such third
appraiser by 10% or more, then the cost of all of the foregoing appraisals shall
be borne by the party who appointed the appraiser who made such initial
appraisal.
(f) De Minimis Adjustments. No adjustment in the Purchase Price
shall be made if the amount of such adjustment would result in a change in the
Purchase Price per share of less than $0.05, but in such case any adjustment
that would otherwise be required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment, which
together with any adjustment so carried forward, would result in a change in the
Purchase Price of $0.05 per share or more. If the Company shall, at any time or
from time to time, issue Common Stock by way of dividends on any stock of the
Company or subdivide or combine the outstanding shares of the Common Stock, such
amount of $0.05 (as theretofore increased or decreased, if such amounts shall
have been adjusted in accordance with the provisions of this clause) shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or stock dividend so as appropriately to reflect
the same. Notwithstanding the provisions of the first sentence of this
Subsection 3(f), any adjustment postponed pursuant to this Subsection 3(f) shall
be made no later than the earlier of (i) three years from the date of the
transaction that would, but for the provisions of the first sentence of this
Section 3(f), have required such adjustment, (ii) an Exercise Date or (iii) the
Expiration Date.
(g) Adjustments to Other Shares. In the event that at any time, as a
result of an adjustment made pursuant to Subsection 3(a), the Holder shall
become entitled to receive, upon exercise of this Warrant, any shares of capital
stock of the Company other than shares of Common Stock, the number of such other
shares so receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in Subsections 3(a), (b), (c) and (d), inclusive, and the provisions
of Sections 2, 5, 6 and 7 with respect to the shares of Common Stock shall apply
on like terms to any such other shares.
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<PAGE> 10
(h) Adjustment of Number of Shares Issuable Upon Exercise. Upon each
adjustment of the Purchase Price as a result of the calculations made in
Subsections 3(a), (b), (c) or (d), this Warrant shall thereafter evidence the
right to receive, at the adjusted Purchase Price, that number of shares of
Common Stock (calculated to the nearest one-hundredth) obtained by dividing (x)
the product of the aggregate number of shares of Common Stock covered by this
Warrant immediately prior to such adjustment and the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price by (y) the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
4. Reorganization, Reclassification, Merger and Sale of Assets. If
there occurs any capital reorganization or any reclassification of the Common
Stock of the Company, the consolidation or merger of the Company with or into
another Person (other than a merger or consolidation of the Company in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of its Common Stock) or the
sale or conveyance of all or substantially all of the assets of the Company to
another Person, then the Holder will thereafter be entitled to receive, upon the
exercise of this Warrant in accordance with the terms hereof, the same kind and
amounts of securities (including shares of stock) or other assets, or both,
which were issuable or distributable to the holders of outstanding Common Stock
of the Company upon such reorganization, reclassification, consolidation,
merger, sale or conveyance, in respect of that number of shares of Common Stock
then deliverable upon the exercise of this Warrant if this Warrant had been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or conveyance; and, in any such case, appropriate
adjustments (as determined in good faith by the Board of Directors of the
Company) shall be made to assure that the provisions hereof (including
provisions with respect to changes in, and other adjustments of, the Purchase
Price) shall thereafter be applicable, as nearly as reasonably may be
practicable, in relation to any securities or other assets thereafter
deliverable upon exercise of this Warrant.
5. Certificate as to Adjustments. Whenever the Purchase Price and the
number of shares of Common Stock issuable, or the securities or other property
deliverable, upon the exercise of this Warrant shall be adjusted pursuant to the
provisions hereof, the Company shall promptly give written notice thereof to the
Holder, in accordance with Section 14, in the form of a certificate signed by
the Chairman of the Board, President or one of the Vice Presidents of the
Company, and by the Chief Financial Officer, Treasurer or one of the Assistant
Treasurers of the Company, stating the adjusted Purchase Price, the number of
shares of Common Stock issuable, or the securities or other property
deliverable, upon exercise of the Warrant calculated to the nearest cent or the
nearest one-hundredth of a share and setting forth in reasonable detail the
method of calculation and the facts requiring such adjustment and upon which
such calculation is based. Each adjustment shall remain in effect until a
subsequent adjustment is required.
6. Fractional Shares. Notwithstanding an adjustment pursuant to Section
3(h) in the number of shares of Common Stock covered by this Warrant or any
other provision of this Warrant, the Company shall not be required to issue
fractions of shares upon exercise of this Warrant or to
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<PAGE> 11
distribute certificates which evidence fractional shares. In lieu of fractional
shares, the Company may make payment to the Holder, at the time of exercise of
this Warrant as herein provided, of an amount in cash equal to such fraction
multiplied by the greater of the Current Market Price of a share of Common Stock
on the Exercise Date and the Dilution Price.
7. Notice of Proposed Actions. In case the Company shall propose at any
time or from time to time (a) to declare or pay any dividend payable in stock of
any class to the holders of Common Stock or to make any other distribution to
the holders of Common Stock (other than a regularly scheduled cash dividend),
(b) to offer to the holders of Common Stock rights or warrants to subscribe for
or to purchase any additional shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) to effect any
reclassification of its Common Stock, (d) to effect any consolidation, merger or
sale, transfer or other disposition of all or substantially all of the property,
assets or business of the Company which would, if consummated, adjust the
Purchase Price or the securities issuable upon exercise of the Warrants, (e) to
effect the liquidation, dissolution or winding up of the Company, or (f) to take
any other action that would require a vote of the Company's stockholders, then,
in each such case, the Company shall give to the Holder, in accordance with
Section 14, a written notice of such proposed action, which shall specify (i)
the record date for the purposes of such stock dividend, distribution of rights
or warrants or vote of the stockholders of the Company, or if a record is not to
be taken, the date as of which the holders of shares of Common Stock of record
to be entitled to such dividend, distribution of rights or warrants, or vote is
to be determined, or (ii) the date on which such reclassification,
consolidation, merger, sale, transfer, disposition, liquidation, dissolution or
winding up is expected to become effective, and such notice shall be so given as
promptly as possible but in any event at least ten (10) Business Days prior to
the applicable record, determination or effective date specified in such notice.
8. No Dilution or Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on the exercise of this Warrant above the amount payable therefor on
such exercise, (b) will at all times reserve and keep available the maximum
number of its authorized shares of Common Stock, free from all preemptive rights
therein, which will be sufficient to permit the full exercise of this Warrant,
and (c) will take all such action as may be necessary or appropriate in order
that all shares of Common Stock as may be issued pursuant to the exercise of
this Warrant will, upon issuance, be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
9. Replacement of Warrant. On receipt by the Company of an affidavit of
an authorized representative of the Holder stating the circumstances of the
loss, theft, destruction or mutilation of
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<PAGE> 12
this Warrant (and in the case of any such mutilation, on surrender and
cancellation of such Warrant), the Company at its expense will promptly execute
and deliver, in lieu thereof, a new Warrant of like tenor.
10. Restrictions on Transfer.
(a) The term "Holder" as used herein shall also include any
transferee of this Warrant whose name has been recorded by the Company in the
Warrant Register (as hereinafter defined). Each transferee of this Warrant or
the Common Stock issuable upon the exercise thereof acknowledges that this
Warrant or the Common Stock issuable upon the exercise thereof has not been
registered under the Securities Act and may be transferred only pursuant to an
effective registration under the Securities Act or pursuant to an applicable
exemption from the registration requirements of the Securities Act, subject to
the restrictions on transfer set forth in this Section 10 and in Section 11.3 of
the Purchase Agreement.
(b) With respect to a transfer that should occur prior to the time
that the Warrant or the Common Stock issuable upon the exercise thereof is
registered under the Securities Act, such Holder shall request an opinion of
counsel (which shall be rendered by counsel reasonably acceptable to the
Company) that the proposed transfer may be effected without registration or
qualification under any Federal or state securities or blue sky law. Counsel
shall, as promptly as practicable, notify the Company and the Holder of such
opinion and of the terms and conditions, if any, to be observed in such
transfer, whereupon the Holder shall be entitled to transfer this Warrant or
such shares of Common Stock (or portion thereof), subject to any other
provisions and limitations of this Warrant. In the event this Warrant shall be
exercised as an incident to such transfer, such exercise shall relate back and
for all purposes of this Warrant be deemed to have occurred as of the date of
such notice regardless of delays incurred by reason of the provisions of this
Section 10 which may result in the actual exercise on any later date.
(c) The Company shall maintain a register (the "Warrant Register")
in its principal office for the purpose of registering the Warrant and any
transfer thereof, which register shall reflect and identify, at all times, the
ownership of any interest in the Warrant. Upon the issuance of this Warrant, the
Company shall record the name of the initial purchaser of this Warrant in the
Warrant Register as the first Holder. Upon surrender for registration of
transfer or exchange of this Warrant together with a properly executed Form of
Assignment attached hereto as Exhibit B at the principal office of the Company,
the Company shall, at its expense, execute and deliver one or more new Warrants
of like tenor which shall be exercisable for a like aggregate number of shares
of Common Stock, registered in the name of the Holder or a transferee or
transferees.
11. No Rights or Liability as a Stockholder. This Warrant does not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provisions hereof, in the absence of affirmative action by
the Holder hereof to purchase Common Stock, and no
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<PAGE> 13
enumeration herein of the rights or privileges of the Holder shall give rise to
any liability of such Holder as a stockholder of the Company.
12. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder hereof for any issue or transfer tax, or other incidental expense, in
respect of the issuance or delivery of such certificates or the securities
represented thereby, all of which taxes and expenses shall be paid by the
Company.
13. Amendment or Waiver. This Warrant and any term hereof may be
amended, waived, discharged or terminated only by and with the written consent
of the Company and the Holder.
14. Notices. Any notice or other communication (or delivery) required
or permitted hereunder shall be made in writing and shall be by registered mail,
return receipt requested, telecopier, courier service or personal delivery to
the Company at its principal office as specified in Section 11.2 of the Purchase
Agreement and to the Holder at its address as it appears in the Warrant
Register. All such notices and communications (and deliveries) shall be deemed
to have been duly given: when delivered by hand, if personally delivered; when
delivered by courier, if delivered by commercial overnight courier service; five
Business Days after being deposited in the mail, postage prepaid, if mailed; and
when receipt is acknowledged, if telecopied.
15. Certain Remedies. The Holder shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Warrant and to enforce
specifically the terms and provisions of this Warrant in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which such Holder may be entitled at law or in equity.
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<PAGE> 14
16. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the state of New York, without regard to the
principles of conflicts of law of such State.
17. Headings. The headings in this Warrant are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
FULCRUM DIRECT, INC.
By: ______________________________
Name:Scott A. Budoff
Title:President & COO
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<PAGE> 15
Exhibit A to Common
Stock Purchase Warrant
[FORM OF]
ELECTION TO PURCHASE SHARES
The undersigned hereby irrevocably elects to exercise the
Warrant to purchase _____ shares of Common Stock, par value $____ per share
("Common Stock"), of FULCRUM DIRECT, INC. (the "Company") and hereby [makes
payment of $_______ therefor] [or] [makes payment therefor by assignment to the
Company pursuant to Section 2(b)(ii) of the Warrant of $_____________ aggregate
principal amount of Notes (as defined in the Warrant)] [or] [makes payment
therefore by surrendering pursuant to Section 2(b)(iii) _____ shares of Common
Stock of the Company] [or] [makes payment therefor by cancellation pursuant to
Section 2(b)(iv) of a portion of the Warrant with respect to _________ shares of
Common Stock]. The undersigned hereby requests that certificates for such shares
be issued and delivered as follows:
ISSUE TO: ______________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)
DELIVER TO: ____________________________________________________________________
(NAME)
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
If the number of shares of Common Stock purchased hereby is
less than the number of shares of Common Stock covered by the Warrant, the
undersigned requests that a new Warrant representing the number of shares of
Common Stock not purchased be issued and delivered as follows:
ISSUE TO: ______________________________________________________________________
(NAME OF HOLDER(1))
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
DELIVER TO: ____________________________________________________________________
(NAME OF HOLDER(1))
________________________________________________________________________________
(ADDRESS, INCLUDING ZIP CODE)
Dated: ________________________ [NAME OF HOLDER(1)]
By: ___________________________
Name:
Title:
___________
(1) Name of Holder must conform in all respects to name of Holder as
specified on the face of the Warrant.
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<PAGE> 16
Exhibit B to Common
Stock Purchase Warrant
[FORM OF] ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned to
purchase Common Stock, par value $___ per share ("Common Stock"), of FULCRUM
DIRECT, INC. represented by the Warrant, with respect to the number of shares of
Common Stock set forth below:
Name of Assignee Address No. of Shares
and does hereby irrevocably constitute and appoint ____________________________
Attorney to make such transfer on the books of FULCRUM DIRECT, INC. maintained
for that purpose, with full power of substitution in the premises.
Dated: __________________________ [NAME OF HOLDER(1)]
By: _____________________________
Name:
Title:
_________
(1) Name of Holder must conform in all respects to name of Holder as
specified on the face of the Warrant.
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<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of June 27, 1997, between Fulcrum Direct,
Inc., a Delaware corporation (the "Company"), and Estelle DeMuesy ("Executive").
WHEREAS, the Company and the Executive desire to enter into an
agreement to provide for the employment of Executive as Vice President, Brand
Management - San Francisco of the Company, upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Executive hereby agree as
follows:
Employment. The Company hereby agrees to employ Executive, and
Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on the date
hereof and ending as provided in Section 4(a) (the "Employment Period").
Position and Duties. Commencing on the date hereof and
continuing during the Employment Period, Executive shall serve in such positions
and with such responsibility as shall be specified by the Company's Chairman and
Chief Executive Officer.
Salary, Bonus, Options and Benefits.
(a) During the Employment Period, Executive's base salary (the
"Base Salary") shall be $175,000 which salary shall be payable in regular
installments in accordance with the Company's general payroll practices and
subject to required withholding taxes.
(b) In addition to the Base Salary, the Executive shall be
eligible to receive, upon approval of the Company's Board of Directors, a bonus
(payable either in cash or through the grant of stock options of the Company, or
both, as determined by the Company's Board of Directors) following the end of
each fiscal year during the Employment Period based upon the Company's operating
results and Executive's performance during such year. The maximum amount of the
bonus for which the Executive is eligible, shall be determined on the same basis
as other senior managers of the Company.
(c) In addition to the consideration set forth in Sections
3(a) and 3(b) above, on or prior to July 14, 1997 the Company shall place 86,000
shares of the Company's Common Stock, par value $.01 per share (the "Trust
Shares") into a trust that is established for the Executive's benefit and has
terms identical to the trust agreement attached hereto as Exhibit A (the "Rabbi
Trust"). The Trust, and upon termination of the Trust, the Executive shall
become a party to the Stockholders Agreement (the "Stockholders Agreement"),
dated October 21, 1996, between the Company and certain of its stockholders
(which agreement is attached hereto as Exhibit B) and the Trust Shares shall be
<PAGE> 2
entitled to all rights and subject to all obligations and conditions set forth
in such agreement. Any Trust Shares eligible to be sold pursuant to the terms of
Section 3 of the Stockholders Agreement or registered pursuant to the terms of
Section 7 of the Stockholders Agreement shall be so sold or registered and any
Trust Shares so registered shall be sold at prevailing market prices
(d) In addition to the consideration set forth in Sections
3(a), 3(b) and 3(c) above within 7 days of the date hereof, the Company shall
cause Fulcrum Capital Partners, L.P. ("FCP") to grant Executive an option to
acquire a limited partnership interest in FCP, in the form attached hereto as
Exhibit C.
(e) In addition to the Base Salary, and any bonuses payable to
the Executive pursuant to Section 3(b) above, Executive shall be entitled during
the Employment Period, to health and dental benefits and such other benefits as
are provided to the Company's other senior managers.
(f) Subject to the Company's reimbursement policy, the Company
shall reimburse Executive (or cause Executive to be reimbursed) for all
reasonable out-of-pocket expenses incurred by him or her in the course of
performing his or her duties under this Agreement upon completion of an expense
report in accordance with the Company's reimbursement, reporting and
documentation policies in effect from time to time with respect to travel,
entertainment and other business expenses.
Term.
(a) Executive shall be considered an employee "at will." It is
expressly understood that either the Executive or the Company may terminate this
Agreement upon giving 30 days notice to the other party. This Agreement may be
terminated with or without cause in the absolute discretion of Executive or the
Company as the case may be.
(b) In the event of Executive's voluntary resignation, this
Agreement shall terminate and all compensation and other benefits shall cease to
accrue upon termination. Upon termination for any other reason, Executive shall
be entitled to receive the Base Salary for a period of four months thereafter in
accordance with the Company's normal payroll procedures.
<PAGE> 3
(c) The Rabbi Trust shall terminate and the Trust Shares shall
be distributed to the Executive upon the earlier of (i) July 1, 1999, or (ii)
termination of Executive's employment with the Company for any reason; provided,
however, that the distribution date described in clause (i) may be extended by
Executive's delivering written notice to the Company and the trustee of the
Rabbi Trust (the "Trustee") not later than December 1st of the calendar year
preceding the calendar year in which such distribution would otherwise be made
(e.g., an election to defer the distribution beyond July 1, 1999 must be filed
on or before December 1, 1998), and provided, further, that in order to
facilitate a distribution under clause (ii), Executive (or his or her estate)
and the Company shall give the Trustee prompt notice of the termination of
Executive's employment. Upon request of the Executive, following termination of
employment, and provided that the Executive has attempted in good faith to sell
the Trust Shares to a third party for an amount per share at least equal to 20
months Base Salary divided by the number of Trust Shares, the Company shall pay
to Executive an amount equal to 20 months Base Salary in exchange for all of the
Trust Shares.
Nondisclosure and Nonuse of Confidential Information.
(a) Executive shall not disclose or use at any time, either
during employment with the Company or thereafter, any Confidential Information
(as defined below) of which Executive is or becomes aware, whether or not such
information is developed by the Executive, except to the extent that such
disclosure or use is directly related to and required by Executive's performance
of duties assigned to Executive by the Company. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) products or services, (ii) fees,
costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings,
photographs and reports, (vi) computer software, including operating systems,
applications and program listings, (vii) flow charts, manuals and documentation,
(viii) data bases, (ix) accounting and business methods, (x) inventions,
devices, new developments, methods and processes, whether patentable or
unpatentable and whether or not reduced to practice, (xi) customers and clients
and customer or client lists, (xii) copyrightable works, (xiii) all information
relating to Storybook Heirlooms, Inc., (xiv) all technology and trade secrets,
and (xv) all similar and related information in whatever form. Confidential
Information shall not include any information that has been published in a form
generally available to the public prior to the date Executive proposes to
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material features comprising such
information have been published in combination.
<PAGE> 4
Delivery of Materials Upon Termination of Employment. As
requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall promptly
deliver to the Company all equipment provided to the Executive by the Company
and copies and embodiments, in whatever form, of all Confidential Information in
Executive's possession or within his control (including, but not limited to,
written records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information) irrespective of the location
or form of such material and, if requested by the Company, shall provide the
Company with written confirmation that all such equipment and materials have
been delivered to the Company.
Noncompetition. Executive acknowledges and agrees with the
Company that Executive's services to the Company are unique in nature and that
the Company would be irreparably damaged if Executive were to provide similar
services to any person or entity competing with the Company or engaged in a
similar business. Executive accordingly covenants and agrees with the Company in
consideration of the compensation provided herein that during the period
commencing with the date of this Agreement and ending on the second anniversary
following the date of the termination of Executive's employment with the Company
(the "Noncompetition Period"), Executive shall not, directly or indirectly,
either for himself or herself or for any other individual, corporation,
partnership, joint venture or other entity, participate in any business
(including, without limitation, any division, group or franchise of a larger
organization) which engages or which proposes to engage in the United States or
Japan, in the promotion, development, sale, distribution or production of
children's and teen apparel, shoes or accessories (such activities being
referred to as the "Restricted Activities"). For purposes of this Agreement, the
term "participate in" shall include, without limitation, having any direct or
indirect interest in excess of 4.9% in any corporation, partnership, joint
venture or other entity, whether as a sole proprietor, owner, stockholder,
partner, joint venturer, creditor or otherwise, or rendering any direct or
indirect service or assistance to any individual, corporation, partnership,
joint venture and other business entity (whether as a director, officer,
manager, supervisor, employee, agent, consultant or otherwise); provided, that
Executive may be employed by any person or entity which engages in Restricted
Activities if (i) less than 25% of such person's or entity's revenues are
generated from such Restricted Activities and (ii) Executive's responsibilities
are clearly and specifically segregated from any such person's or entity's
Restricted Activities, such that Executive in no way participates in the
Restricted Activities, including, without limitation, by providing management
oversight, direction, merchandising, design or creative input relating to the
Restricted Activities.
Nonsolicitation. During the Noncompetition Period, Executive
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way
<PAGE> 5
interfere with or alter the relationship between the Company and any employee
thereof, (ii) hire directly or through another entity any person who was an
employee or independent contractor of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with or alter the
relationship between any such independent contractor, customer, supplier,
licensee or business relation and the Company (including, without limitation,
making any negative statements or communications concerning the Company or any
subsidiary or employee of the Company).
Notices. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company: Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, NM 87124
Attn.: Scott A. Budoff
Telecopy: 505-867-7107
With copies to: Kirkland & Ellis
153 East 53rd Street
New York, NY 10021
Attn.: Frederick Tanne, Esq.
Telecopy: 212-446-2900
To Executive: _________________________
_________________________
_________________________
Attn.:___________________
Telecopy:________________
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
General Provisions.
(a) Company Subsidiaries. For purposes of Sections 4(c), 5, 6
and 7 of this Agreement, the term "Company" shall include all subsidiaries and
affiliates of the Company.
(b) Limitations. Executive and the Company acknowledge and
agree that this Agreement is not intended and should not be construed to grant
Executive any right to continued employment with the Company or to otherwise
define the terms of Executive's employment with the Company.
<PAGE> 6
(c) Absence of Conflicting Agreements. Executive hereby
warrants and covenants that (i) employment by the Company and execution,
delivery and performance of this Agreement do not and shall not result in a
breach of the terms, conditions or provisions of any agreement, instrument,
order, judgment or decree to which Executive is subject, (ii) Executive is not a
party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms.
(d) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, and this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein. The parties
agree that a court of competent jurisdiction making a determination of the
invalidity or unenforceability of any term or provision of Sections 5, 7 and 8
of this Agreement shall have the power to reduce the scope, duration or area of
any such term or provision, to delete specific words or phrases or to replace
any invalid or unenforceable term or provision in Sections 5, 7 and 8 with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified.
(e) Complete Agreement. This Agreement, the documents attached
hereto as exhibits, the documents expressly referred to herein, and the other
documents executed in connection with the Company's purchase of all the
outstanding capital stock of Storybook Heirlooms, Inc. embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(f) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(g) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Company and its respective successors and assigns. The rights and
obligations of Executive under this Agreement may not be assigned or delegated
except that the Executive's right to unpaid compensation shall pass to his or
her estate and beneficiaries according to his or her will or the laws of descent
and distribution.
<PAGE> 7
(h) Choice of Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits
hereto shall be governed by the internal law, and not the law of conflicts, of
the State of Delaware.
(i) Remedies. Each of the parties to this Agreement shall be
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including reasonable attorneys fees) caused by any breach of
any provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that Executive's breach of any
term or provision of this Agreement shall materially and irreparably harm the
Company, that money damages shall accordingly not be an adequate remedy for any
breach of the provisions of this Agreement by Executive and that the Company in
its sole discretion and in addition to any other remedies it may have at law or
in equity may apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(j) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company and
Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
FULCRUM DIRECT, INC.
By____________________________
Its___________________________
______________________________
Estelle DeMuesy
<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of June 27, 1997, between Fulcrum Direct,
Inc., a Delaware corporation (the "Company"), and Jonathan Bruml ("Executive").
WHEREAS, the Company and the Executive desire to enter into an
agreement to provide for the employment of Executive as Vice President,
Merchandise - San Francisco of the Company, upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Executive hereby agree as
follows:
Employment. The Company hereby agrees to employ Executive, and
Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on the date
hereof and ending as provided in Section 4(a) (the "Employment Period").
Position and Duties. Commencing on the date hereof and
continuing during the Employment Period, Executive shall serve in such positions
and with such responsibility as shall be specified by the Company's Chairman and
Chief Executive Officer.
Salary, Bonus, Options and Benefits.
(a) During the Employment Period, Executive's base salary (the
"Base Salary") shall be $165,000 which salary shall be payable in regular
installments in accordance with the Company's general payroll practices and
subject to required withholding taxes.
(b) In addition to the Base Salary, the Executive shall be
eligible to receive, upon approval of the Company's Board of Directors, a bonus
(payable either in cash or through the grant of stock options of the Company, or
both, as determined by the Company's Board of Directors) following the end of
each fiscal year during the Employment Period based upon the Company's operating
results and Executive's performance during such year. The maximum amount of the
bonus for which the Executive is eligible, shall be determined on the same basis
as other senior managers of the Company.
(c) In addition to the consideration set forth in Sections
3(a) and 3(b) above, on or prior to July 14, 1997 the Company shall place 65,000
shares of the Company's Common Stock, par value $.01 per share (the "Trust
Shares") into a trust that is established for the Executive's benefit and has
terms identical to the trust agreement attached hereto as Exhibit A (the "Rabbi
Trust. The Trust, and upon termination of the Trust, the Executive shall become
a party to the Stockholders Agreement (the "Stockholders Agreement"), dated
October 21, 1996, between the Company and certain of its stockholders (which
agreement is attached hereto as Exhibit B) and the Trust Shares shall be
entitled to all rights and
<PAGE> 2
subject to all obligations and conditions set forth in such agreement. Any Trust
Shares eligible to be sold pursuant to the terms of Section 3 of the
Stockholders Agreement or registered pursuant to the terms of Section 7 of the
Stockholders Agreement shall be so sold or registered and any Trust Shares so
registered shall be sold at prevailing market prices
(d) In addition to the consideration set forth in Sections
3(a), 3(b) and 3(c) above within 7 days of the date hereof, the Company shall
cause Fulcrum Capital Partners, L.P. ("FCP") to grant Executive an option to
acquire a limited partnership interest in FCP, in the form attached hereto as
Exhibit C.
(e) In addition to the Base Salary, and any bonuses payable to
the Executive pursuant to Section 3(b) above, Executive shall be entitled during
the Employment Period, to health and dental benefits and such other benefits as
are provided to the Company's other senior managers.
(f) Subject to the Company's reimbursement policy, the Company
shall reimburse Executive (or cause Executive to be reimbursed) for all
reasonable out-of-pocket expenses incurred by him or her in the course of
performing his or her duties under this Agreement upon completion of an expense
report in accordance with the Company's reimbursement, reporting and
documentation policies in effect from time to time with respect to travel,
entertainment and other business expenses.
Term.
(a) Executive shall be considered an employee "at will." It is
expressly understood that either the Executive or the Company may terminate this
Agreement upon giving 30 days notice to the other party. This Agreement may be
terminated with or without cause in the absolute discretion of Executive or the
Company as the case may be.
(b) In the event of Executive's voluntary resignation, this
Agreement shall terminate and all compensation and other benefits shall cease to
accrue upon termination. Upon termination for any other reason, Executive shall
be entitled to receive the Base Salary for a period of four months thereafter in
accordance with the Company's normal payroll procedures.
<PAGE> 3
(c) The Rabbi Trust shall terminate and the Trust Shares shall
be distributed to the Executive upon the earlier of (i) July 1, 1999, or (ii)
termination of Executive's employment with the Company for any reason; provided,
however, that the distribution date described in clause (i) may be extended by
Executive's delivering written notice to the Company and the Trustee of the
Rabbi Trust (the "Trustee") not later than December 1st of the calendar year
preceding the calendar year in which such distribution would otherwise be made
(e.g., an election to defer the distribution beyond July 1, 1999 must be filed
on or before December 1, 1998), and provided, further, that in order to
facilitate a distribution under clause (ii), Executive (or his or her estate)
and the Company shall give the Trustee prompt notice of the termination of
Executive's employment. Upon request of the Executive, following termination of
employment, and provided that the Executive has attempted in good faith to sell
the Trust Shares to a third party for an amount per share at least equal to 20
months Base Salary divided by the number of Trust Shares, the Company shall pay
to Executive an amount equal to 20 months Base Salary in exchange for all of the
Trust Shares.
Nondisclosure and Nonuse of Confidential Information.
(a) Executive shall not disclose or use at any time, either
during employment with the Company or thereafter, any Confidential Information
(as defined below) of which Executive is or becomes aware, whether or not such
information is developed by the Executive, except to the extent that such
disclosure or use is directly related to and required by Executive's performance
of duties assigned to Executive by the Company. Executive shall take all
appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft.
(b) As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the Company in connection with its
business, including but not limited to (i) products or services, (ii) fees,
costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings,
photographs and reports, (vi) computer software, including operating systems,
applications and program listings, (vii) flow charts, manuals and documentation,
(viii) data bases, (ix) accounting and business methods, (x) inventions,
devices, new developments, methods and processes, whether patentable or
unpatentable and whether or not reduced to practice, (xi) customers and clients
and customer or client lists, (xii) copyrightable works, (xiii) all information
relating to Storybook Heirlooms, Inc., (xiv) all technology and trade secrets,
and (xv) all similar and related information in whatever form. Confidential
Information shall not include any information that has been published in a form
generally available to the public prior to the date Executive proposes to
disclose or use such information. Information shall not be deemed to have been
published merely because individual portions of the information have been
separately published, but only if all material features comprising such
information have been published in combination.
<PAGE> 4
Delivery of Materials Upon Termination of Employment. As
requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall promptly
deliver to the Company all equipment provided to the Executive by the Company
and copies and embodiments, in whatever form, of all Confidential Information in
Executive's possession or within his control (including, but not limited to,
written records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information) irrespective of the location
or form of such material and, if requested by the Company, shall provide the
Company with written confirmation that all such equipment and materials have
been delivered to the Company.
Noncompetition. Executive acknowledges and agrees with the
Company that Executive's services to the Company are unique in nature and that
the Company would be irreparably damaged if Executive were to provide similar
services to any person or entity competing with the Company or engaged in a
similar business. Executive accordingly covenants and agrees with the Company in
consideration of the compensation provided herein that during the period
commencing with the date of this Agreement and ending on the second anniversary
following the date of the termination of Executive's employment with the Company
(the "Noncompetition Period"), Executive shall not, directly or indirectly,
either for himself or herself or for any other individual, corporation,
partnership, joint venture or other entity, participate in any business
(including, without limitation, any division, group or franchise of a larger
organization) which engages or which proposes to engage in the United States or
Japan, in the promotion, development, sale, distribution or production of
children's and teen apparel, shoes or accessories (such activities being
referred to as the "Restricted Activities"). For purposes of this Agreement, the
term "participate in" shall include, without limitation, having any direct or
indirect interest in excess of 4.9% in any corporation, partnership, joint
venture or other entity, whether as a sole proprietor, owner, stockholder,
partner, joint venturer, creditor or otherwise, or rendering any direct or
indirect service or assistance to any individual, corporation, partnership,
joint venture and other business entity (whether as a director, officer,
manager, supervisor, employee, agent, consultant or otherwise); provided, that
Executive may be employed by any person or entity which engages in Restricted
Activities if (i) less than 25% of such person's or entity's revenues are
generated from such Restricted Activities and (ii) Executive's responsibilities
are clearly and specifically segregated from any such person's or entity's
Restricted Activities, such that Executive in no way participates in the
Restricted Activities, including, without limitation, by providing management
oversight, direction, merchandising, design or creative input relating to the
Restricted Activities.
Nonsolicitation. During the Noncompetition Period, Executive
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way
<PAGE> 5
interfere with or alter the relationship between the Company and any employee
thereof, (ii) hire directly or through another entity any person who was an
employee or independent contractor of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with or alter the
relationship between any such independent contractor, customer, supplier,
licensee or business relation and the Company (including, without limitation,
making any negative statements or communications concerning the Company or any
subsidiary or employee of the Company).
Notices. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company: Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, NM 87124
Attn.: Scott A. Budoff
Telecopy: 505-867-7107
With copies to: Kirkland & Ellis
153 East 53rd Street
New York, NY 10021
Attn.: Frederick Tanne, Esq.
Telecopy: 212-446-2900
To Executive: _________________________
_________________________
_________________________
Attn.:___________________
Telecopy:________________
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S.
mail.
General Provisions.
(a) Company Subsidiaries. For purposes of Sections 4(c), 5, 6
and 7 of this Agreement, the term "Company" shall include all subsidiaries and
affiliates of the Company.
(b) Limitations. Executive and the Company acknowledge and
agree that this Agreement is not intended and should not be construed to grant
Executive any right to continued employment with the Company or to otherwise
define the terms of Executive's employment with the Company.
<PAGE> 6
(c) Absence of Conflicting Agreements. Executive hereby
warrants and covenants that (i) employment by the Company and execution,
delivery and performance of this Agreement do not and shall not result in a
breach of the terms, conditions or provisions of any agreement, instrument,
order, judgment or decree to which Executive is subject, (ii) Executive is not a
party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms.
(d) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, and this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein. The parties
agree that a court of competent jurisdiction making a determination of the
invalidity or unenforceability of any term or provision of Sections 5, 7 and 8
of this Agreement shall have the power to reduce the scope, duration or area of
any such term or provision, to delete specific words or phrases or to replace
any invalid or unenforceable term or provision in Sections 5, 7 and 8 with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified.
(e) Complete Agreement. This Agreement, the documents attached
hereto as exhibits, the documents expressly referred to herein, and the other
documents executed in connection with the Company's purchase of all the
outstanding capital stock of Storybook Heirlooms, Inc. embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(f) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(g) Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Company and its respective successors and assigns. The rights and
obligations of Executive under this Agreement may not be assigned or delegated
except that the Executive's right to unpaid compensation shall pass to his or
her estate and beneficiaries according to his or her will or the laws of descent
and distribution.
<PAGE> 7
(h) Choice of Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the exhibits
hereto shall be governed by the internal law, and not the law of conflicts, of
the State of Delaware.
(i) Remedies. Each of the parties to this Agreement shall be
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including reasonable attorneys fees) caused by any breach of
any provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that Executive's breach of any
term or provision of this Agreement shall materially and irreparably harm the
Company, that money damages shall accordingly not be an adequate remedy for any
breach of the provisions of this Agreement by Executive and that the Company in
its sole discretion and in addition to any other remedies it may have at law or
in equity may apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(j) Amendment and Waiver. The provisions of this Agreement may
be amended and waived only with the prior written consent of the Company and
Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
FULCRUM DIRECT, INC.
By____________________________
Its___________________________
______________________________
Jonathan Bruml
<PAGE> 1
EXHIBIT 10.28
FULCRUM DIRECT, INC.
SEVERANCE, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is entered into as of June 27, 1997, by and
between Jerry H. Machado ("Machado") and Fulcrum Direct, Inc., a Delaware
corporation (together with its subsidiaries, the "Company"). The Company and
Machado are sometimes collectively referred to herein as the "Parties" and
individually as a "Party".
WHEREAS, Machado has been an employee, officer, director and
stockholder of Storybook Heirlooms, Inc. ("Storybook"), and as such, possesses
special knowledge, abilities and experience regarding the business of Storybook.
The Company, Storybook and its shareholders, are parties to a Securities
Purchase Agreement, of even date herewith (the "Purchase Agreement"), pursuant
to which the Company is purchasing all of the outstanding capital stock of
Storybook.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the Parties agree as follows:
1. The Payments. In consideration of the termination of
Machado's employment and the covenants set forth in paragraphs 2 and 3 below,
the Company shall pay to Machado $900,000 as severance and $100,000 for the
covenants set forth in paragraphs 2 and 3 below, in a single cash payment at the
Closing (as defined in the Purchase Agreement) (the "Payment"). Except to the
extent of any compensation and/or expenses owed Machado by Storybook prior to
the Closing and not then paid, Machado shall not seek or request any other
benefits or perquisites from the Company or any other entity, including benefits
under COBRA or unemployment insurance.
2. Confidential Information. Machado acknowledges that the
information, observations and data relating to the business of Storybook which
Machado has obtained as an employee, officer, director and stockholder of
Storybook are from and after the date hereof, the property of Storybook and thus
of the Company and its subsidiaries. Machado agrees that he shall not use for
his own purposes or disclose to any third party any of such information,
observations or data without the prior written consent of the Company, unless
and to the extent that (i) the aforementioned matters become generally known to
and available for use by the public other than as a result of Machado's acts or
omissions or (ii) the aforementioned matters are required to be disclosed by a
court of competent jurisdiction, provided, that immediately upon learning of
such requirement or the reasonable likelihood thereof, Machado will notify the
Company in writing and will use all reasonable efforts, at the Company's written
request, to assist the Company in obtaining a restraining order preventing the
disclosure of the aforementioned matters. Machado has delivered to the Company
at the Closing Date, and will so deliver hereafter at any time the Company may
request, all equipment, memoranda, notes, plans, records, reports, computer
tapes, printouts and software and
<PAGE> 2
other documentation (and copies thereof) relating to the business of the Company
and its subsidiaries which Machado may then possess or have under his control.
3. Non-Competition.
(a) In consideration of the compensation paid to
Machado hereunder (subject to paragraph 4 hereof), Machado agrees that during
the period beginning on the date hereof and ending on the fourth anniversary of
the date hereof (the "Non-Competition Period"), he shall not, directly or
indirectly, either for himself or for any other person, partnership, corporation
or company, permit his name to be used by or participate in any business or
enterprise identical to or similar to any such business which is engaged in by
Storybook on the date hereof which is located in any State or foreign country in
which Storybook or the Company conducts business during the Non-Competition
Period. For purposes of this Agreement, the term "participate" includes any
direct or indirect interest in any enterprise, whether as an officer, director,
employee, partner, sole proprietor, agent, representative, independent
contractor, consultant, franchisor, franchisee, creditor, owner or otherwise;
provided that the term "participate" shall not include ownership of less than 2%
of the stock of a publicly-held corporation whose stock is traded on a national
securities exchange or in the over-the-counter market. Machado agrees that this
covenant is reasonable with respect to its duration, geographical area and
scope.
(b) During the Non-Competition Period, Machado shall
not (i) induce or attempt to induce any employee of the Company or any of its
subsidiaries to leave their employ or in any way interfere with or alter the
relationship between the Company or any of its subsidiaries, and any of their
employees, (ii) hire any person who was an employee or independent contractor of
the Company or any subsidiary at any time during the Non-Competition Period or
(iii) induce or attempt to induce any independent contractor, supplier,
licensee, licensor, franchisee or other business relation of the Company or any
of its subsidiaries to cease doing business with them or in any way interfere
with or alter the relationship between the Company or any of its subsidiaries,
and any such person or business relation (including, without limitation, making
any negative statements or communications about the Company, its subsidiaries or
its employees), provided, that, so long as Machado does not otherwise violate
his obligations under this paragraph 3, he (or entities with which he is
involved) may engage and do business with, independently, any such party, and
may act as a reference for any employee of the Company or of Storybook, as of
the Closing, who leaves such employment after the Closing which does not involve
any breach by Machado of his obligations hereunder.
(c) The Parties hereto agree that the Company would
suffer irreparable harm from a breach by Machado of any of the covenants or
agreements contained herein. In the event of an
2
<PAGE> 3
alleged or threatened breach by Machado of any of the provisions of this
paragraph 3, Storybook, the Company or their successors or assigns may, in
addition to all other rights and remedies existing in their favor, apply to any
court of competent jurisdiction for specific performance and/or injunctive or
other relief in order to enforce or prevent any violations of the provisions
hereof (including the extension of the Non-Competition Period by a period equal
to the length of the violation of this paragraph 3). In the event of an alleged
breach or violation by Machado of any of the provisions of this paragraph 3, the
Non-Competition Period described above shall be tolled until such alleged breach
or violation has been duly cured. Machado agrees that these restrictions are
reasonable.
(d) Machado agrees that the covenants made in
paragraph 3(a) shall be construed as an agreement independent of any other
provision of this Agreement and shall survive any order of a court of competent
jurisdiction terminating any other provision of this Agreement.
4. Damages. The allocation of the payments provided for in
paragraph 1 hereof is for accounting purposes only and in no event shall be used
to determine damages for breaches of the covenants set forth in this Agreement,
which damages shall be determined by actual damages caused by any such breach.
5. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of Storybook, the Company and their affiliates,
successors and assigns and shall be binding upon and inure to the benefit of
Machado and his legal representatives and assigns. The Company may assign or
transfer its rights hereunder to any of its affiliates or to a successor
corporation in the event of merger, consolidation or transfer or sale of all or
substantially all of the assets of the Company.
6. Modification or Waiver. No amendment, modification or
waiver of this Agreement shall be binding or effective for any purpose unless it
is made in a writing signed by the Party against who enforcement of such
amendment, modification or waiver is sought. No course of dealing between the
Parties to this Agreement shall be deemed to affect or to modify, amend or
discharge any provision or term of this Agreement. No delay on the part of the
Company or Machado in the exercise of any of their respective rights or remedies
shall operate as a waiver thereof, and no single or partial exercise by the
Company or Machado of any such right or remedy shall preclude other or further
exercises thereof. A waiver of right or remedy on any one occasion shall not be
construed as a bar to or waiver of any such right or remedy on any other
occasion.
7. Governing Law. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Delaware, without giving effect to any choice of
law or conflict of
3
<PAGE> 4
law rules or provisions (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Delaware.
8. Severability. Whenever possible each provision and term of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision or term of this Agreement shall be
held to be prohibited by or invalid under such applicable law, then such
provision or term shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating or affecting in any manner whatsoever the
remainder of such provision or term or the remaining provisions or terms of this
Agreement; provided that if a court having competent jurisdiction shall find
that the covenant contained in paragraph 3(a) hereof is not reasonable, such
court shall have the power to reduce the duration and/or geographic area and/or
scope of such covenant, and the covenant shall be enforceable in this reduced
form.
9. No Strict Construction. The language used in this Agreement
shall be deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
Party.
10. Machado's Representations. Machado represents and warrants
to the Company that (i) his execution, delivery and performance of this
Agreement does not and shall not conflict with, or result in the breach of or
violation of, any other agreement, instrument, order, judgment or decree to
which he is a party or by which he is bound, and (ii) upon the execution and
delivery of this Agreement by the Company, this Agreement shall be the valid and
binding obligation of his, enforceable in accordance with its terms, except as
enforcement may be limited by bankruptcy, moratorium and other creditors' rights
laws and by any limitations as to enforceability of equitable remedies as may be
observed by the relevant judicial body.
11. Complete Agreement. This Agreement, the documents
expressly referred to herein, and the other documents executed in connection
with the Company's purchase of all the outstanding capital stock of Storybook
Heirlooms, Inc. embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
12. Notice. All notices and other communications hereunder,
following the Closing Date, shall be in writing, and shall be deemed given upon
receipt if delivered personally (including delivery by courier), sent by
facsimile transmission (receipt of which is confirmed) or by certified or
registered mail, return receipt requested, or by a nationally recognized private
overnight courier to the parties at the following addresses (or at such other
address for a party as shall be specified by like
4
<PAGE> 5
notice):
If to the Company:
Fulcrum Direct, Inc.
4321 Fulcrum Way
Rio Rancho, New Mexico 87124
Attn: Scott A. Budoff
Facsimile No: (505) 867-7100
If to Machado:
Jerry H. Machado
1142 Moore Road
Woodside, California 94062-1112
Facsimile No: (415) 529-1209
13. Captions. The captions used in this Agreement are for
convenience of reference only and do not constitute a part of this Agreement and
shall not be deemed to limit, characterize or in any way affect any provision of
this Agreement, and all provisions of this Agreement shall be enforced and
construed as if no caption had been used in this Agreement.
14. Counterparts. This Agreement may be executed in
counterparts, any one of which need not contain the signatures of more than one
party, but all such signed counterparts taken together shall constitute one and
the same instrument.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
* * * *
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
FULCRUM DIRECT, INC.
By:________________________________
Its:_______________________________
___________________________________
Jerry H. Machado
[SEVERANCE, CONFIDENTIALITY AND NON-COMPETITION AGREEMENT]
6
<PAGE> 1
EXHIBIT 11.1
FULCRUM DIRECT, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF PRIMARY NET EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE FOR THE MARCH 16,
SIX SIX FOR THE FOR THE 1994
MONTHS MONTHS FISCAL FISCAL (INCEPTION)
ENDED ENDED YEAR ENDED YEAR ENDED THROUGH
JUNE 30, JUNE 30, DECEMBER 28, DECEMBER 30, DECEMBER 31,
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)............ $ (6,926) $ (280) $ 406 $ 320 $ 91
Less: Preferred Dividends.... -- (291) (583) (60) --
------ ----- ----- ----- -----
Primary and Fully Diluted net
income (loss).............. $ (6,926) $ (571) $ (177) $ 260 $ 91
====== ===== ===== ===== =====
FOR PRIMARY EARNINGS PER
SHARE
Weighted average number of
common shares outstanding
during the period.......... 6,426 5,832 6,390 3,905 3,600
Add: Common stock equivalent
shares represented by
-- FCP options............. 533 533 533 533 533
-- Management Team
options................. 154 154 154 154 154
-- WEP options............. 10 10 10 10 10
-- WSDF 1996 warrant....... 405 405 405 405 405
-- WSDF 1997 warrant....... 200 200 200 200 200
-- Other................... 566 574 574 574 574
------ ----- ----- ----- -----
Weighted average number of
common and common
equivalent shares used in
the calculation of primary
earnings per share......... 8,294 7,708 8,266 5,781 5,476
====== ===== ===== ===== =====
Primary earnings per share:
Primary income (loss) per
share................... $ (0.84) $(0.07) $(0.02) $ 0.04 $ 0.02
====== ===== ===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 21.1
FULCRUM DIRECT, INC. SUBSIDIARY LIST
<TABLE>
<CAPTION>
States where Qualify as
Subsidiaries States of Incorporation a Foreign Corporation
- ------------ ----------------------- -----------------------
<S> <C> <C>
Equipment Bond
Purchaser, Inc. New Mexico None
Storybook Heirlooms,
Inc. California None
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Fulcrum Direct, Inc.:
As independent public accountants, we hereby consent to the use of our
report dated February 28, 1997 and to all references to our Firm included in or
made a part of this registration statement.
ARTHUR ANDERSEN LLP
New York, New York
August 5, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-23021 of Fulcrum Direct, Inc. of our report dated March 28, 1997, on the
balance sheets of Storybook Heirlooms, Inc. as of December 31, 1996 and 1995
and the related statements of operations, shareholders equity and cash flows
for each of the three years in the period ended December 31, 1996, appearing in
the Prospectus, which is part of this Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Francisco, California
August 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS AMENDMENT NO. 1 TO
ITS REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH AMENDMENT.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR OTHER
<FISCAL-YEAR-END> DEC-28-1996 JAN-03-1998
<PERIOD-START> DEC-31-1995 DEC-29-1996
<PERIOD-END> DEC-28-1996 JUN-30-1997
<CASH> 140 4727
<SECURITIES> 0 0
<RECEIVABLES> 1507 1467
<ALLOWANCES> 0 0
<INVENTORY> 12532 20974
<CURRENT-ASSETS> 15822 30981
<PP&E> 4114 8794
<DEPRECIATION> 759 1212
<TOTAL-ASSETS> 25565 59874
<CURRENT-LIABILITIES> 5888 15769
<BONDS> 11754 30915
0 0
0 0
<COMMON> 64 81
<OTHER-SE> 7859 20035
<TOTAL-LIABILITY-AND-EQUITY> 25565 59874
<SALES> 36457 23111
<TOTAL-REVENUES> 36457 23111
<CGS> 15566 9450
<TOTAL-COSTS> 15566 9450
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 820 1022
<INCOME-PRETAX> 636 (5566)
<INCOME-TAX> 230 (442)
<INCOME-CONTINUING> 406 (5124)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (1802)
<NET-INCOME> 406 (6926)
<EPS-PRIMARY> (0.02) (0.62)
<EPS-DILUTED> (0.02) (0.62)
</TABLE>
