AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EARTH AND OCEAN SPORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-3195264
(STATE OR OTHER JURISDICTION (I.R.S.
OF INCORPORATION OR EMPLOYER
ORGANIZATION) IDENTIFICATION
3949 NUMBER)
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
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70 AIRPORT ROAD
HYANNIS, MASSACHUSETTS 02601
(508) 778-5528
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JON A. GLYDON, PRESIDENT
EARTH AND OCEAN SPORTS, INC.
70 AIRPORT ROAD
HYANNIS, MASSACHUSETTS 02601
(508) 778-5528
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
EDWIN L. MILLER, JR.,ESQ. DAVID F. DIETZ, P.C.
TESTA, HURWITZ & THIBEAULT, LLP GOODWIN, PROCTER & HOAR LLP
125 HIGH STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109
(617)248-7000 (617)570-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) UNIT(2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,581,250 shares $11.00 $17,393,750 $ 5,271
Representatives' Warrants 137,500 warrants $ .01 $ 1,375 $ 1
Common Stock issuable
upon exercise of
Representatives' Warrants 137,500 shares $11.00 $ 1,512,500 $ 459
TOTAL REGISTRATION FEE $5,731
</TABLE>
(1) Includes 206,250 shares which the Underwriters have the option to purchase
from the Company to cover over allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
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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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 27, 1997
PROSPECTUS
[LOGO] 1,375,000 SHARES
EARTH AND OCEAN SPORTS, INC.
COMMON STOCK
The 1,375,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby are being issued and sold by Earth and Ocean Sports,
Inc. (the "Company" or "EOS"). Prior to the offering contemplated hereby (the
"Offering"), there has been no public market for the Common Stock of EOS. It is
currently estimated that the initial public offering price will be in the range
of $9.00 to $11.00 per share. For a discussion of the factors to be considered
in determining the initial public offering price, see "Underwriting." EOS has
applied to list the Common Stock for quotation on the Nasdaq National Market
System under the symbol "EOSI."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT(1) COMPANY (2)
Per Share $ $ $
Total $ $ $
(1) Excludes a non-accountable expense allowance equal to one percent (1.0%) of
the gross proceeds from the sale of the Common Stock payable to H.C.
Wainwright & Co., Inc. and Cruttenden Roth Incorporated, as representatives
of the Underwriters (the "Representatives"), and the value of warrants to
be issued to the Representatives to purchase a number of shares of Common
Stock equal to ten percent (10%) of the number of shares being offered
hereby at an exercise price of 150% of the initial public offering price
(the "Representatives' Warrants"). The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $635,000, including the Representatives' non-accountable expense
allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 206,250 shares of Common Stock at the Price to Public less
the Underwriting Discount shown above, solely to cover overallotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $________ ,
$_______ and $ ______ , respectively. See "Underwriting."
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The shares of Common Stock are offered severally by the Underwriters named
herein, when, as and if received and accepted by them, subject to their right to
reject orders in whole or in part and subject to other conditions. It is
expected that delivery of the certificates for the shares of Common Stock will
be made against payment therefor through the offices of H.C. Wainwright & Co.,
Inc., Boston, Massachusetts on or about_______ , 1997.
---------------------
H.C. WAINWRIGHT & CO., INC. CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
Inside Front Cover Gatefold:
- ----------------------------
[Graphics of Company Logo's: Earth and Ocean Sports, Inc. corporate logo,
photograph of globe and the following product logo's: A-Tach, B2, R-Lite, Liquid
Force, Spiral Fm Wakeboards, Flite and TracTop.]
[Five Action photographs of the Company's wakeboards in use; plus logo's of
Liquid Force wakeboards and FM wakeboards]
[Six action photographs of the Company's bodyboards in use; plus B2, A-Tach and
Trac-Top product logo's.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVERALLOTMENTS, ENTERING OF STABILIZING BIDS, EFFECTING SYNDICATE SHORT COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
---------------------
BZ, R-Lite and TracTop are registered trademarks, and A-Tach, FM, Green
Cell, High Suction, Liquid Force, Madrid, Spiral, Suction, Super Suction and
Wavemaster are trademarks of the Company. All other trademarks or tradenames
referred to in this prospectus are the property of their respective owners.
2
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including the financial
statements and the notes thereto, appearing elsewhere in this prospectus.
Investors should carefully consider the information set forth under the caption
"Risk Factors."
THE COMPANY
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
In the United States, the Company sells its products primarily through a network
of over 100 independent sales representatives working with the Company's
internal sales and technical specialists, and internationally through a network
of over 30 distributors. The Company's domestic customers include over 1,000
specialty shops, 20 national and regional sporting goods retail chains and over
20 mass merchandisers.
An increasing number of consumers are participating in active sports, which
generally require the purchase of non-team sports products. Active sports
products include those currently marketed by the Company -- bodyboards,
wakeboards and snowboards -- as well as in-line skates, skateboards, surfboards
and similar sports products. Bodyboards are surf riding boards that are shorter,
wider, smaller, lighter, more maneuverable and easier to learn than surfboards,
and can be used in a much broader range of locations and surf conditions. A
bodyboarder rides waves primarily lying prone on the board and is able to
complete a variety of aerial maneuvers. Wakeboards are towed behind a boat or
personal watercraft and are ridden standing sideways like a surfboard.
Wakeboards are more buoyant than water skis and allow the rider to perform a
wide range of aerial jumps and acrobatic tricks.
The typical active sports enthusiast is a "dedicated consumer" who devotes
significant time, attention and disposable income to a chosen sport. Active
sports enthusiasts frequently become participants in multiple sports that are
appropriate for different seasons and spend a significant portion of their
recreational budget on active sports equipment. There has been significant
recent growth in the active sports industry. The Surf Industry Manufacturing
Association projected that an estimated 1.75 million Americans would actively
(at least four times) surf in 1996, compared to 1.1 million people in 1992. In
addition, the Company believes that wakeboarding is having the same effect on
water skiing as snowboarding has had on alpine skiing. According to the Water
Sports Industry Association, water ski participants have declined from 13.8
million in 1991 to 11.1 million in 1994, while sales of wakeboards have
increased at a compound annual growth rate of 58%. According to Snow Industries
America, snowboard unit sales have grown at an annual compound growth rate of
50% from 135,000 units in the 1992-1993 season to 456,000 in the 1995-1996
season.
The Company implements a multi-sport, multi-brand market segmentation
approach in which each product brand is sold only into its designated channel of
distribution, thereby protecting the integrity of each brand and the longevity
of its unique market position. The Company's multi-brand strategy is to
initially develop premium sports products for dedicated consumers, and to
subsequently introduce multiple brands with multiple price points and
performance characteristics. High, middle and lower range bodyboard brands are
marketed to specialty shops, sporting goods retailers and mass merchandisers,
respectively. The Company currently markets high and middle range wakeboard and
snowboard brands through specialty shops and sporting goods retailers,
respectively.
Unlike many other active sports companies that purchase products for resale,
the Company has developed broad process manufacturing expertise and is an
integrated manufacturer of all of its own bodyboards, wakeboards and snowboards.
In addition, the Company believes that it is the largest manufacturer of
bodyboards in the United States. The Company's manufacturing expertise and
integrated manufacturing operations have enabled it to be a low cost producer,
to become a leader in product innovation, to carefully maintain performance
features and quality control, and to quickly respond to market trends and
incorporate technological improvements.
3
The Company has grown through internal product development and through six
product line acquisitions since 1993. The Company's growth strategy is to become
a leading provider of active sports products in each of its target markets by
(i) identifying growth segments within the active sports industry and entering
these markets through either the introduction or acquisition of new products;
(ii) extending the Company's well-recognized brand names into new global
markets; (iii) fully utilizing the Company's extensive distribution network
through increased product penetration; and (iv) pursuing strategic acquisitions.
The Company was incorporated in Massachusetts in 1993. Its executive offices
are located at 70 Airport Road, Hyannis, Massachusetts 02601, and its telephone
number is (508) 778-5528.
THE OFFERING
Common Stock offered by
the Company............. 1,375,000 shares
Common Stock to be
outstanding after the
Offering(1)............. 3,196,457 shares
Use of proceeds........... To repay indebtedness to the Company's senior lender
and to the principal stockholder, for working
capital and other general corporate purposes, and
for possible acquisitions.
Proposed Nasdaq National
Market symbol........... EOSI
- ---------------
(1) Excludes (i) 208,214 shares issuable upon the exercise of unvested
outstanding employee stock options with a $0.66 weighted average exercise
price, (ii) 600,000 shares reserved for issuance upon exercise of options to
purchase Common Stock under the Company's employee and outside director
stock plans, of which unvested options for 60,000 shares have been granted
at an exercise price equal to the initial public offering price, (iii)
237,175 shares reserved for issuance upon exercise of warrants held by the
Company's senior lender at an exercise price equal to 90% of the initial
public offering price and (iv) 137,500 shares issuable upon exercise of the
Representatives' Warrants. See "Management," "Certain Transactions" and
"Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31,
------------------------------ ------------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 9,144 $ 11,372 $ 12,404 $ 2,029 $ 2,875
Gross profit 3,575 4,342 4,819 753 844
Income (loss) from operations 456 629 306 (204) (137)
Net income (loss) 37 58 (291) (338) (321)
Net income (loss) per common and common
equivalent share(1) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
Weighted average common and common
equivalent shares outstanding(1) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
Supplemental net income (loss)(2) $ 305 $ (150)
Supplemental net income (loss) per common
and common equivalent share(2) $ 0.11 $ (0.05)
Supplemental weighted average common and
common equivalent shares outstanding(3) 2,721,891 2,812,815
</TABLE>
4
<TABLE>
<CAPTION>
JANUARY 31, 1997
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(4)(5)
------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash ........................................................ $ 4 $ 4 $ 5,324
Working capital (deficit) ................................... (375) (375) 9,565
Total assets ................................................ 10,174 10,174 15,344
Short-term obligations ...................................... 4,267 4,267 84
Long-term obligations, less current portion ................. 345 345 33
Subordinated note payable to principal stockholder .......... 3,800 2,050 --
Stockholders' equity (deficit) .............................. (664) 1,086 13,239
</TABLE>
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(1) Computed as described in Note 2(j) of Notes to Financial Statements.
(2) Supplemental net income (loss) and net income (loss) per common and common
equivalent shares gives effect to (i) the conversion of $1.75 million of
subordinated indebtedness to the principal stockholder into 218,750 shares
of Common Stock on March 17, 1997 for the periods ended October 31, 1996
and January 31, 1997, and (ii) the use of net proceeds of the Offering to
repay $1,189,463 and $2,337,200 at October 31, 1996 and January 31, 1997,
respectively, to the principal stockholder for all remaining outstanding
subordinated indebtedness and accrued interest thereon and to repay
$4,839,689 and $4,495,500 at October 31, 1996 and January 31, 1997,
respectively, to the Company's senior lender as if these events had
occurred at the beginning of each period. Supplemental net income (loss)
consists of net income (loss) increased or decreased by the effect of
reduced interest expense associated with (i) and (ii) above. Supplemental
net income (loss) per common and common equivalent shares represents
supplemental net income (loss) divided by the supplemental weighted average
common and common equivalent shares outstanding.
(3) Supplemental weighted average common and common equivalent shares
outstanding consists of the weighted average common and common equivalent
shares outstanding plus (i) shares issued upon conversion of $1.75 million
of subordinated indebtedness to the principal stockholder into 218,750
shares of Common Stock on March 17, 1997, and (ii) the number of shares of
Common Stock issued in the Offering to generate net proceeds, at an assumed
initial public offering price of $10.00 share, necessary to repay
$2,337,200 of subordinated indebtedness and accrued interest to the
principal stockholder and $4,495,500 to the Company's bank.
(4) Presented on a pro forma basis to give effect to (i) the conversion of
$1.75 million of subordinated indebtedness to the principal stockholder
into 218,750 shares of Common Stock on March 17, 1997 and (ii) the issuance
of 109,500 shares valued at $10 per share to CR Management Associates,
L.P.(CRM) as consideration amending their Management Agreement.
(5) Adjusted to reflect the sale by the Company of 1,375,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.00
per share, the receipt of the estimated net proceeds therefrom and the
application of the net proceeds to repay $2,337,200 of subordinated
indebtedness and accrued interest thereon to the principal stockholder and
$4,495,500 to the Company's senior lender.
Except as otherwise noted or the context otherwise requires, all
information contained in this prospectus (i) assumes no exercise of the
Underwriters' overallotment option, (ii) reflects a 750-for-one stock split
effected in February 1997, (iii) reflects the conversion of $1.75 million of
subordinated indebtedness into 218,750 shares of Common Stock (the "Indebtedness
Conversion"), and (iv) reflects the filing of Amended and Restated Articles of
Organization prior to the closing of the Offering to effect a 1.684575-for-one
stock split (together with the stock split previously effected, the "Stock
Splits") of the Company's outstanding Common Stock, to increase the authorized
Common Stock, to create an undesignated class of Preferred Stock and to effect
certain other changes. See "Description of Capital Stock," "Underwriting" and
Note 11 of Notes to Financial Statements. The Company's fiscal year ends on
October 31. All references to fiscal years in this prospectus refer to the
fiscal years ending in the calendar years indicated (e.g., fiscal 1996 refers to
the fiscal year ended October 31, 1996).
5
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE
TERMS "ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES" AND SIMILAR TERMS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS.
Seasonality; Fluctuations in Quarterly Operating Results. Because the
substantial majority of the Company's net sales currently are derived from water
sports products, sales of the Company's products are generally highly seasonal
and dependent on weather conditions. This results in a disproportionately low
percentage of the Company's sales occurring in the first and fourth quarters
when sales of water sports products are typically lowest. Net sales in the first
and fourth quarters of fiscal 1996 accounted for approximately 16.5% and 14.1%,
respectively, of net sales for the full year, and the Company incurred operating
losses in both such quarters. Because much of the Company's operating expenses
are fixed in nature, a decline in net sales relative to internal expectations
would have a material adverse effect on the Company's results of operations. In
addition, the nature of the Company's business requires it to make relatively
large investments in inventory in anticipation of these products' selling
seasons, and relatively large investments in receivables during and shortly
after such seasons. Moreover, the contraction and expansion of the Company's
operations resulting from seasonal demand for the Company's products is
difficult to manage efficiently. Apart from seasonal factors and weather
conditions, demand for the Company's products fluctuates in response to consumer
buying patterns, discretionary spending habits, general economic conditions in
the United States and abroad and other factors. The Company's operating results
also fluctuate from quarter to quarter as a result of the timing of order
shipments and new product introductions. Furthermore, the Company's gross
margins will fluctuate with product mix, the timing of product price adjustments
and the mix of domestic sales and international sales (which are international
distributor-based and consequently have lower gross margins). The Company's
operating results for any interim period are not indicative of the results for
the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Industry and Product Concentration. The Company's future success depends
significantly on continued growth in the active sports industry. In general,
purchases of discretionary sporting goods tend to decline in periods of economic
uncertainty, and the popularity of particular sports tends to be cyclical.
Moreover, the market for active sports products is characterized largely by
image-conscious, brand-driven, young consumers. Consequently, the Company's
future success is highly dependent upon its ability to regularly update its
products and maintain brand images that are attractive to these consumers. Any
failure by the Company to accurately predict and target future trends or to
maintain such brand images and products could have a material adverse effect on
the Company's business. Additionally, a substantial majority of the Company's
current sales are derived from bodyboards and wakeboards. Although the Company
has also begun to sell snowboards, the Company's sales of snowboards to date
have not comprised a significant portion of the Company's total sales. The
Company's sales growth has been attributable in part to its introduction of
internally developed wakeboard products and its continuing introduction of a
number of bodyboard brands. There can be no assurance that the active sports
market will continue to grow generally or with respect to the products currently
marketed by the Company, or that the Company will be in a position to take
advantage of any future growth opportunities in the active sports market. See
"Business -- Industry Background" and "Business -- Products."
Competition and Product Innovation. The active sports industry is highly
competitive, with competition mainly centering on product innovation,
performance and styling, brand name recognition, price, marketing and delivery.
The Company's historical sales growth has been attributable in part to its
6
ability to introduce new products either through internal development or
acquisition. The Company believes that a major factor in its future success will
be its ability to continue to develop and acquire in a timely manner innovative
new products and brands in anticipation of market trends and to improve its
existing products, and there can be no assurance of its ability to do so.
Competitors in each of the Company's product lines include companies with
greater brand recognition and financial, distribution, marketing and other
resources than the Company. In addition, there are no significant capital,
technological or manufacturing barriers to entry in the sporting goods markets
currently served by the Company. Furthermore, each of these markets faces
competition from other sports and leisure activities, and sales of sports and
leisure products are affected by changes in consumer preferences, which are
difficult to predict. There can be no assurance that competitors will not emerge
or rapidly acquire market share in these markets or that these markets will not
be adversely effected by increased competition from other sports and leisure
activities. See "Business -- Competition."
Acquisition-Related Risks. The Company may, when and if the opportunity
arises, acquire other businesses or product lines that are compatible with the
Company's business. The Company may face significant competition from other
companies with greater financial resources in pursuing such acquisition
candidates. There can be no assurance that the Company will find any suitable
acquisition candidates and complete any future acquisitions, or that, with
respect to any future acquisitions that may be completed, the Company will be
successful in integrating the operations, technologies and products of the
acquired companies, in avoiding the diversion of management attention from other
business concerns or in conducting operations in markets with which the Company
has limited or no prior experience. Moreover, there can be no assurance that the
anticipated benefits of an acquisition will be realized. Future acquisitions by
the Company could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, all of which could materially
adversely affect the Company. See "Business -- Growth Strategy."
Manufacturing Risks. The Company manufactures all of its own bodyboards,
wakeboards and snowboards. As a manufacturer, the Company continually faces
risks regarding the availability and cost of raw materials and labor, the
potential need for additional capital equipment, increased maintenance costs,
plant and equipment obsolescence, quality control and excess capacity. The
Company has manufacturing facilities located in California, which are subject to
the risk of earthquakes or other natural disasters. Although the Company
maintains business interruption insurance to reduce the potential effect of any
such disaster, a disruption in the Company's manufacturing or distribution
caused by a natural disaster affecting one of its manufacturing facilities could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company may need to add production capacity in
the future, and there can be no assurance that the Company will be able to add
such capacity either on a cost effective basis or in a timely manner. See
"Business -- Manufacturing and Suppliers."
Dependence on Polyethylene Foam and other Component Suppliers. The
polyethylene foam used in the Company's products is available from only three
suppliers in the United States. The Company has developed a close working
relationship with two of these foam suppliers, and has a supply contract with
one of these suppliers that expires in June 1998. The Company's future success
may depend on its ability to maintain such relationships, concerning which there
can be no assurance. During fiscal 1996, one foam supplier experienced a
significant interruption in its production and delivery of polyethylene foam, as
well as quality problems. As a result of this interruption, the Company
sustained a substantial loss of business due to material shortages and having to
pay spot market prices. Any future interruption in the Company's ability to
obtain adequate supplies of polyethylene foam could have a material adverse
effect on the Company's business, financial condition and results of operations.
Most component materials other than polyethylene foam are available from a broad
range of suppliers in the United States. However, growth in the snowboard
industry and other factors have resulted in shortages and, in some cases, price
increases in certain raw materials necessary for the production of the Company's
products, and such shortages or price increases may recur. At times, the Company
has also experienced delays in the receipt of products from its suppliers as a
result of shortages in raw materials, including fiberglass and P-Tex. Such
shortages and delays could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Manufacturing and Suppliers."
7
Material Benefit to Principal Stockholders. SSPR, L.P. is the Company's
principal stockholder and provided the Company's initial capital, consisting of
$150,000 in equity and subordinated debt in the amount of $1.35 million. SSPR,
L.P. subsequently advanced a total of $2.6 million in subordinated debt. On
March 17, 1997, $1.75 million of the subordinated indebtedness was converted
into 218,750 shares of Common Stock. The Company will repay the remaining
principal and accrued interest on this subordinated indebtedness (which at March
26, 1997 was $2,580,342) upon completion of the Offering. See "Principal
Stockholders." Messrs. Conway and Roth, directors of the Company, are general
partners of SSPR, L.P. See "Certain Transactions."
Risks of International Business. The Company's business is subject to the
risks generally associated with doing business internationally, including
changes in demand resulting from fluctuations in exchange rates, foreign
governmental regulation and changes in economic conditions. These factors, among
others, could influence the Company's ability to sell its products in
international markets. Unanticipated changes in the value of the U.S. dollar
relative to that of certain foreign currencies could have a material adverse
effect on the Company's sales or results of operations. These factors have
resulted in recent weakness in the Company's sales in Japan, and the Company
expects that this weakness will continue. The Company has not engaged, and does
not presently intend to engage, in currency hedging activities. In addition, the
Company's business is subject to the risks associated with legislation and
regulation relating to imports, including quotas, duties or taxes and other
charges, restrictions or retaliatory actions on imports to the United States and
other countries in which the Company's products are sold or manufactured.
Product Liability. The Company's products are used in recreational settings
involving a high degree of inherent risk. In many cases, users of the Company's
products may engage in imprudent or even reckless behavior while using such
products, thereby increasing the risk of injury. Although, with one exception,
the Company has never been a party to any product liability litigation, the
Company may be subject in the future to product liability lawsuits involving
serious personal injuries or death allegedly relating to its products. Product
liability claims may include allegations of failure to warn, design defects or
defects in the manufacturing process. The Company maintains product liability,
general liability and excess liability insurance coverage. There can be no
assurance that such coverage will continue to be available at a reasonable cost
to the Company, that such coverage will be available in sufficient amounts to
cover one or more large claims, or that the Company's insurer will not disclaim
coverage as to any future claim. The successful assertion of one or more large
claims against the Company that exceed available insurance coverage or changes
in the Company's insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business -- Legal Proceedings."
Dependence on Third-Party Selling Efforts. The Company relies on third
parties to sell, and in some cases to distribute, its products to retailers. In
general, many factors, such as general economic conditions, financial
conditions, marketing considerations or governmental regulations may affect the
ability of these parties to sell the Company's products, which, in turn, may
adversely affect the Company's financial performance. In the United States, the
Company uses independent sales representatives who work under contract.
Generally, such contracts may be terminated by either party upon ninety days'
notice. Internationally, the Company uses distributors under informal
arrangements. Several of the Company's international distributors carry and
distribute competing product lines. The Company's Japanese distributor accounted
for approximately 11.5%, 15.5%, 11.4% and 22% of the Company's net sales in
fiscal 1994, 1995 and 1996 and for the three months ended January 31, 1997,
respectively. The loss of the services of the Company's Japanese distributor or
difficulties encountered with any of the Company's independent sales
representatives or distributors would have a material adverse effect on the
Company's financial condition and results of operations. See "Business -- Sales
and Distribution."
Limited Protection of Intellectual Property. There are relatively few
technological or other barriers to entry into the Company's business, and the
Company's products may be replicated by competitors. There can be no assurance
that current or future competitors will not offer competing
8
products or products substantially identical to the Company's products at lower
prices. Although the Company has patents and patent applications pending in the
United States and certain foreign countries and expects to file for patent
protection for future innovations, where available, the Company does not believe
that its existing patent portfolio affords material protection to its business.
The Company relies to a significant extent on both common law and registered
trademarks in the United States and certain foreign countries. There can be no
assurance that existing or additional trademarks will not be infringed or
asserted to be invalid.
The Company has received from time to time, and may receive in the future,
claims from third parties asserting intellectual property rights relating to the
Company's products and product features. The Company has received notice from a
competitor challenging the Company's right to register its Liquid Force
trademark for its wakeboards. The Company believes that it is entitled to such
registration. There can be no assurance, however, that the Company will be
successful in registering this trademark or that an infringement action will not
be brought by this competitor challenging the Company's right to use its Liquid
Force trademark. See "Business -- Intellectual Property" and "Business -- Legal
Proceedings."
Dependence on Key Personnel. The Company is highly dependent upon the
ability and experience of its senior executives, none of whom have employment
agreements with the Company. The loss of the services of any of the Company's
executive officers could adversely affect the Company's ability to conduct its
operations. Furthermore, the market for key personnel in the active sports
industry is highly competitive. There can be no assurance that the Company will
be able to attract and retain key personnel with the skills and expertise
necessary to manage its business in the future.
Liquidity. The Company from time-to-time has been in violation of certain
operating covenants under its credit facilities. The Company intends to repay
amounts outstanding under its existing credit facilities with a portion of the
net proceeds of the Offering. There can be no assurance, however, that in the
future the Company will be able to obtain credit on favorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Potential Adverse Impact of Environmental Regulations. The Company is
subject to federal, state and local governmental regulations relating to the
storage, use, discharge and disposal of toxic, volatile or otherwise hazardous
chemicals used in its manufacturing process. There can be no assurance that
changes in environmental regulations or in the kinds of raw materials used by
the Company will not impose the need for additional capital equipment or other
requirements. Any failure by the Company to control the use of, or adequately
restrict the discharge of, hazardous substances under present or future
regulations could subject it to substantial liability or could cause its
manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
results of operations. See "Business -- Environmental and Regulatory Matters."
No Prior Public Market; Offering Price; Possible Volatility of Stock Price.
Prior to the Offering, there has been no public market for the Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after completion of the Offering. The initial public offering price of
the shares offered hereby will be determined by negotiation among the Company
and the representatives of the Underwriters. See "Underwriting" for a
description of the factors to be considered in determining the initial public
offering price. Following the completion of the Offering, future announcements
concerning the Company or its competitors, quarterly variations in operating
results, the introduction of new products or changes in product pricing policies
by the Company or its competitors, weather patterns that may be perceived to
affect the demand for the Company's products, changes in earnings estimates by
analysts or changes in accounting policies, among other factors, could cause the
market price of the Common Stock to decline, perhaps substantially. In addition,
stock markets in general and the Nasdaq National Market in particular have
experienced extreme price and volume fluctuations, which have particularly
affected the market prices of securities of many smaller public companies for
reasons frequently unrelated to the operating performance of such companies. See
"Underwriting."
9
Effective Control by Principal Stockholders. After giving effect to the sale
of the shares of Common Stock offered hereby, SSPR, L.P., Mr. Glydon and the
other members of management of the Company will beneficially own in the
aggregate over 50% of the outstanding shares of Common Stock. As a result, these
stockholders will have the ability to control or exert significant influence
over the outcome of fundamental corporate transactions requiring stockholder
approval, including mergers and sales of assets and the election of the members
of the Company's Board of Directors. See "Certain Transactions," "Principal
Stockholders" and "Shares Eligible for Future Sale."
Potential Adverse Impact of Shares Eligible for Future Sale. Sales of
substantial amounts of Common Stock in the public market following the Offering
could adversely affect the market price of the Common Stock. In addition to the
1,375,000 shares of Common Stock offered hereby, substantially all of the shares
of Common Stock owned by current stockholders of the Company will be eligible
for sale in accordance with Rule 144 or Rule 701 beginning 90 days after the
date of this Prospectus. However, holders of all of such shares have agreed not
to offer, sell or otherwise dispose of any shares of Common Stock owned by them
for 180 days from the date of this Prospectus without the prior written consent
of H.C. Wainwright & Co., Inc. In addition, SSPR, L.P. and the Company's senior
lender, which owns a warrant to purchase shares of Common Stock, have the right
in certain circumstances to require the Company to register their shares under
the Securities Act for resale to the public. Sales of substantial amounts of the
Common Stock (including through the issuance of such shares in connection with
future acquisitions), or the availability of such shares for sale, may adversely
affect the prevailing market price for the Common Stock and could impair the
Company's ability to obtain additional capital through an offering of its equity
securities. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
Potential Adverse Impact of Issuance of Preferred Stock; Antitakeover
Effect of Charter and Bylaw Provisions and Massachusetts Law. The Company's
Board of Directors has the authority to issue up to 500,000 shares of Preferred
Stock and to fix the rights, preferences, privileges and restrictions of such
shares without any further vote or action by the Company's stockholders.
Although the Company has no current plans to issue shares of Preferred Stock,
the potential issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. In addition, certain provisions of the Company's
corporate charter and bylaws and of Massachusetts law may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain stockholders may deem
to be in their best interests). See "Description of Capital Stock."
Absence of Dividends. The Company has never declared or paid cash dividends
on the Common Stock and does not anticipate paying cash dividends in the
foreseeable future. In addition, the terms of the Company's credit facility with
its bank prohibit the payment of dividends. Furthermore, any future decision
with respect to dividends will depend on future earnings, future capital needs
and the Company's operating and financial condition, among other factors.
Dilution. The Offering involves immediate and substantial dilution to new
investors in the net tangible book value per share of their Common Stock. At the
assumed initial public offering price of $10 per share, investors in the
Offering will incur dilution of $6.18 per share. At March 31, 1997, 208,214
shares of Common Stock were subject to outstanding stock options at a $0.66
weighted average exercise price. To the extent these options and certain
outstanding warrants are exercised, further dilution may be experienced. See
"Dilution."
10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,375,000 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$10.00 per share, after deducting the estimated underwriting discount and
offering expenses) are estimated to be $12,152,500 ($14,050,000 if the
Underwriters' overallotment option is exercised in full).
The Company intends to use the net proceeds of the Offering to repay its
outstanding indebtedness to its senior lender ($6,100,000 at March 26, 1997) and
its outstanding indebtedness ($2,580,342 at March 26, 1997), including accrued
interest, to its principal stockholder, SSPR, L.P., and for working capital and
general corporate purposes. The Company's credit facilities are described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New Credit Facilities." The indebtedness to SSPR, L.P. is
represented by demand notes with interest at 10%.
In addition, the Company considers on a continuing basis potential
acquisitions of technologies, businesses or product lines complementary to the
Company's business and may use a portion of the net proceeds for such
acquisitions. The Company has no present understandings, agreements or
commitments with respect to any such acquisitions.
Pending such uses, the Company expects to invest the net proceeds in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. In addition, the Company's loan agreement with its
commercial bank prohibits the payment of cash dividends.
11
CAPITALIZATION
The following table sets forth, as of January 31, 1997, the capitalization
of the Company stated on a pro forma basis to reflect the Stock Splits, the
Indebtedness Conversion, the filing of Amended and Restated Articles of
Organization and the issuance of 109,500 shares of Common Stock to CR Management
Associates, L.P.("CRM") and stated on a pro forma as adjusted basis to reflect
the sale by the Company of the 1,375,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $10.00 per share and the
application of the net proceeds of the Offering as described in "Use of
Proceeds." The information in this table is qualified by, and should be read in
conjunction with, the financial statements and the notes thereto appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1997
----------------
PRO FORMA AS
PRO FORMA(1) ADJUSTED(2)
--------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Short-term obligations $ 4,267 $ 84
======= ========
Long-term obligations $ 345 33
Subordinated note to principal stockholder 2,050 --
Stockholders' equity:
Preferred Stock, $.01 par value, 500,000 shares authorized, no
shares issued or outstanding -- --
Common Stock, $.01 par value, 15,000,000 shares authorized;
1,821,457 shares issued and outstanding, pro forma;
3,196,457 shares issued and outstanding, pro forma as
adjusted (1),(2),(3) 18 32
Additional paid-in capital 2,979 15,118
Accumulated deficit (1,911) (1,911)
------ ------
Total stockholders' equity 1,086 13,239
----- ------
Total capitalization $ 3,481 $13,272
======= =======
</TABLE>
- ---------------
(1) Presented on a pro forma basis to give effect to (i) the conversion of
$1.75 million of subordinated indebtedness to the principal stockholder
into 218,750 shares of Common Stock on March 17, 1997 and (ii) the issuance
of 109,500 shares to CRM as consideration for amending the management
agreement upon consummation of the Offering.
(2) Adjusted to reflect the sale by the Company of 1,375,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.00
per share, and the application of the net proceeds as described in "Use of
Proceeds."
(3) Excludes (i) 208,214 shares issuable upon the exercise of unvested
outstanding employee stock options with a $0.66 weighted average exercise
price, (ii) 600,000 shares reserved for issuance upon exercise of options
to purchase Common Stock under the Company's employee and outside director
stock plans, of which unvested options for 60,000 shares have been granted
at an exercise price equal to the initial public offering price, (iii)
237,175 shares reserved for issuance upon exercise of warrants held by the
Company's senior lender at an exercise price equal to 90% of the initial
public offering price and (iv) 137,500 shares issuable upon exercise of the
Representatives' Warrants. Includes 109,500 shares to be issued to CRM upon
consummation of the Offering. See "Management," "Certain Transactions" and
"Underwriting."
12
DILUTION
The pro forma net tangible book value of the Company at January 31, 1997 was
$(93,320), or ($0.05) per share of Common Stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities after giving effect to (i) the conversion of $1.75 million of
subordinated indebtedness to principal stockholder into 218,750 shares of Common
Stock that occurred on March 17, 1997 and (ii) the issuance of 109,500 shares of
Common Stock to CRM (as described in "Certain Transactions") divided by the
total number of shares of Common Stock outstanding on a pro forma basis. After
giving effect to the sale of the 1,375,000 shares of Common Stock offered by the
Company hereby, at an assumed initial public offering price of $10.00 per share
and after deducting the estimated underwriting discount and offering expenses,
the pro forma net tangible book value of the Company at January 31, 1997 would
have been $12,209,180, or $3.82 per share of Common Stock. This represents an
immediate increase in such pro forma net tangible book value of $3.87 per share
to existing stockholders and an immediate dilution of $6.18 per share to
investors purchasing shares in the Offering. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share $10.00
Pro forma net tangible book value per share before the
Offering $ (0.05)
Increase in net tangible book value per share attributable to
new investors 3.87
----
Pro forma net tangible book value per share after the Offering 3.82
----
Dilution per share to new investors $6.18
=====
</TABLE>
The following table sets forth, as of March 26, 1997, on a pro forma basis
giving effect to the issuance of 109,500 shares of Common Stock to CRM (as
described in "Certain Transactions"), the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company, and the
average price paid per share by existing stockholders and to be paid by the
purchasers of the shares offered by the Company hereby (at an assumed initial
public offering price of $10.00 per share and before deducting the estimated
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders 1,821,457 57.0% $ 1,902,298 12.2% $ 1.04
New investors 1,375,000 43.0% 13,750,000 87.8% $10.00
--------- ---- ---------- ----
Total 3,196,457 100.0% $15,652,298 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of the Underwriters' overallotment
option. The foregoing tables exclude 208,214 shares of Common Stock issuable
upon exercise of outstanding employee stock options with a $0.66 weighted
average exercise price, and 237,175 shares issuable upon exercise of a warrant
held by the Company's senior lender with an exercise price equal to 90% of the
initial public offering price. To the extent these options and warrant are
exercised, there will be further dilution to new investors. The foregoing tables
include 109,500 shares to be issued to CRM as consideration for amending the
management agreement upon consummation of the Offering. See "Capitalization."
13
SELECTED FINANCIAL DATA
The following table sets forth for the periods indicated selected financial data
of the Company. The statement of operations data for the year ended October 31,
1996 and the balance sheet data as of October 31, 1996 have been derived from
the Company's financial statements audited by Arthur Andersen LLP, independent
public accountants, which are included elsewhere in this prospectus. The
statement of operations data for the years ended October 31, 1994 and 1995 and
the balance sheet data as of October 31, 1995 have been derived from financial
statements audited by Richard A. Eisner & Company, LLP, independent public
accountants, which are included elsewhere in this prospectus. The statement of
operations data for the period from inception (July 13, 1993) to October 31,
1993 and the balance sheet data as of October 31, 1993 and 1994 have been
derived from financial statements audited by Richard A. Eisner & Company, LLP,
not included in this prospectus. The selected financial data as of January 31,
1997 and for the three months ended January 31, 1996 and 1997 have been derived
from the Company's unaudited financial statements which have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended January 31, 1997 are not
necessarily indicative of the results to be expected for the year. This data is
qualified by the more detailed financial statements and notes thereto included
elsewhere in this prospectus and should be read in conjunction therewith and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------- -----------
PERIOD FROM
INCEPTION
(JULY 13, 1993 TO
OCTOBER 31, 1993) 1994 1995 1996 1996 1997
----------------- ---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 1,641 $ 9,144 $ 11,372 $ 12,404 $ 2,029 $ 2,875
Cost of goods sold 1,148 5,569 7,030 7,585 1,276 2,031
---------- ---------- ---------- ---------- ---------- -----------
Gross profit 493 3,575 4,342 4,819 753 844
Operating expenses:
Product development and engineering -- 188 236 338 68 153
Selling and marketing 249 1,634 1,898 2,704 534 501
General and administrative 266 797 898 938 190 285
Amortization of intangible assets 170 500 681 533 165 43
---------- ---------- ---------- ---------- ---------- -----------
Total operating expenses 685 3,119 3,713 4,513 957 981
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations (192) 456 629 306 (204) (137)
Interest expense (80) (439) (555) (597) (134) (184)
---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before provision (benefit)
for income taxes (272) 17 74 (291) (338) (321)
Provision (benefit) for income taxes -- (20) 16 -- -- --
---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) $ (272) $ 37 $ 58 $ (291) $ (338) $ (321)
========== ========== =========== =========== ========== ===========
Net income (loss) per common and common
equivalent share $ (0.13) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
========== ========== ========== ========== ========== ===========
Weighted average common and common equivalent
shares outstanding(1) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
========= ========= ========= ========= ========= =========
Supplemental net income (loss)(2) $ 305 $ (150)
========== ===========
Supplemental net income (loss) per common
and common equivalent share(2) $ 0.11 $ (0.05)
========== ===========
Supplemental weighted average common and
common equivalent shares outstanding(3) 2,721,891 2,812,815
========= =========
</TABLE>
14
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, 1997
-------------------------------- ---------------------
1993 1994 1995 1996 ACTUAL PROFORMA(4)
---- ---- ---- ---- ------ --------
(UNAUDITED)
-----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash $ 6 $ 33 $ 34 $ 8 $ 4 $ 4
Working capital (deficit) (272) (364) (496) (964) (375) (375)
Total assets 4,479 5,414 6,234 9,665 10,174 10,174
Short-term obligations 1,595 2,255 2,685 4,425 4,267 4,267
Long-term obligations, less current portion 767 556 434 539 345 345
Subordinated note payable to principal stockholder 1,775 1,775 1,775 2,700 3,800 2,050
Stockholders' equity (deficit) (149) (113) (54) (343) (664) 1,086
</TABLE>
- -----------
(1) Computed as described in Note 2(j) of Notes to Financial Statements.
(2) Supplemental net income (loss) and net income (loss) per common and common
equivalent shares gives effect to (i) the conversion of $1.75 million of
subordinated indebtedness to the principal stockholder into 218,750 shares
of Common Stock on March 17, 1997 for the periods ended October 31, 1996
and January 31, 1997 and (ii) the use of net proceeds of the Offering to
repay $1,189,463 and $2,337,200 at October 31, 1996 and January 31, 1997,
respectively, to the principal stockholder for all remaining outstanding
subordinated indebtedness and accrued interest thereon and to repay
$4,839,689 and $4,495,500 at October 31, 1996 and January 31, 1997,
respectively, to the Company's senior lender as if these events had
occurred at the beginning of each period. Supplemental net income (loss)
consists of net income (loss) decreased by the effect of reduced interest
expense associated with (i) and (ii) above. Supplemental net income (loss)
per common and common equivalent shares represents supplemental net income
(loss) divided by supplemental weighted average common and common
equivalent shares outstanding.
(3) Supplemental weighted average common and common equivalent shares
outstanding consists of the weighted average common and common equivalent
shares outstanding plus (i) shares issued upon conversion of $1.75 million
of subordinated indebtedness to the principal stockholder into 218,750
shares of Common Stock on March 17, 1997 and (ii) the number of shares of
Common Stock issued in the Offering (1,375,000 shares) to generate
$12,152,500 in net proceeds, at an assumed initial public offering price of
$10 per share, necessary to repay $2,337,200 of subordinated indebtedness
and accrued interest thereon to the principal stockholder and $4,495,500 to
the Company's senior lender.
(4) Presented on a pro forma basis to give effect to the conversion of $1.75
million of subordinated indebtedness to the principal stockholder into
218,750 shares of Common Stock upon the consummation of the Offering.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
The Company was formed in July 1993 through the acquisition of the BZ bodyboard
product line from Packaging Industries, Inc. The Company has grown through
internal product development as well as through the acquisition of additional
product lines. The Company began selling snowboards in fiscal 1994 as a
distributor of two European snowboard brands and, through the acquisition of the
Spiral brand, began manufacturing snowboards in 1996. The Company developed its
own line of wakeboards and began manufacturing and selling wakeboards in fiscal
1996. The Company markets apparel, accessories and other products which leverage
the name recognition of its core products as well as its expertise in the use of
certain materials. The Company also markets spa covers, kickboards, exercise
mats and other products which leverage its knoweledge of foam materials.
The components of the Company's net sales by product line are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- -----------
PRODUCT LINE 1994 1995 1996 1996 1997
------------ ---- ---- ---- ---- ----
(UNAUDITED)
-----------
<S> <C> <C> <C> <C> <C>
Bodyboards $7,408,000 $ 7,771,000 $ 6,809,000 $1,282,000 $ 1,071,000
Snowboards 111,000 926,000 873,000 130,000 221,000
Wakeboards(1) -- -- 1,517,000 71,000 553,000
Accessories 1,146,000 1,900,000 1,726,000 366,000 608,000
Other 479,000 775,000 1,479,000 180,000 422,000
------- ------- --------- ------- -------
$9,144,000 $11,372,000 $12,404,000 $2,029,000 $2,875,000
========== =========== =========== ========== ==========
</TABLE>
===========
(1) Includes bindings
Cost of goods sold consists of materials, labor and manufacturing overhead.
The Company manufactures bodyboards in two leased facilities in California. The
cost of bodyboards is substantially impacted by the Company's ability to receive
favorable pricing for the primary component, polyethylene foam. The Company
began manufacturing snowboards and wakeboards in its Kirkland, Washington
facility in fiscal 1996. The Company was able to convert this facility from
snowboard manufacturing to wakeboard and snowboard manufacturing. The Company's
ability to manufacture both snowboards and wakeboards at this facility enables
it to spread the fixed cost of this facility over a larger number of production
units thereby reducing its per board manufacturing costs. Prior to establishing
its manufacturing facility, the Company purchased snowboards from contract
manufacturers for resale.
Gross profit varies by brand and by channel of distribution. Accordingly,
gross margin will vary each period depending on both the sales mix by brand and
by channel of distribution.
Product development and engineering expense consists of costs incurred to
develop, design and engineer new products and product enhancements. These costs
consist primarily of salary and related costs and outside consultant costs.
The Company sells its products in the United States primarily through a
network of independent sales representatives. Internationally, the Company sells
its products through a network of independent local distributors. Selling and
marketing expense includes costs incurred by the Company to establish brand
identity and support its brands in the market. The Company also incurs expenses
to support its sales representatives and distributors. These expenses include
the cost of internal sales and marketing personnel, advertising in dedicated
consumer magazines, sponsorship and attendance at major industry trade shows and
sponsorship of professional team riders.
16
General and administrative expense consists of salaries and related costs of
finance and administrative personnel, computer and communication costs,
liability insurance and management fees to CR Management Associates, L.P.
("CRM"). CRM is an affiliate of the Company's principal stockholder, and
provides the Company with various management consulting services, including
assistance in strategic planning, sales and marketing, acquisition strategy and
implementation, and financial and treasury planning. Management believes that
the consulting fees paid to CRM are comparable to those that would be payable to
an unaffiliated third party. The Company has, from time-to-time, used the
services of up to five employees of CRM. Upon the consummation of the Company's
proposed initial public offering, the agreement with CRM will be amended to
provide for a fixed term and an annual fee cap of $300,000. CRM will receive
109,500 shares of Common Stock as compensation for this amendment. Upon
consummation of the proposed initial public offering, the Company will record a
noncash charge of $1,095,000 representing the fair market value of the
securities to be issued to CRM.
Amortization of intangible assets consists of the write-off of intangible
assets over their estimated useful lives of 3-15 years (see Note 2(g) of Notes
to Financial Statements). The intangible assets were acquired as part of the
acquisition of the Company in 1993 and from subsequent product line
acquisitions. Based upon intangible asset balances as of October 31, 1996, the
Company expects amortization expense related to these intangibles to decrease in
future periods.
The Company experiences seasonal fluctuations in its operating results. In
fiscal 1996 the Company generated approximately 70% of its net sales from water
sports products. Sales of water sports products occur principally in the second
and third fiscal quarters. Because much of the Company's operating expenses are
fixed, seasonal fluctuations in net sales have resulted in operating losses in
certain quarters. The Company has historically incurred an operating loss in the
first and fourth quarters due to lower net sales from water sports products. The
Company also experiences fluctuations in its operating results due to weather
conditions.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------- -----------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.9 61.8 61.1 62.9 70.7
---- ---- ---- ---- ----
Gross profit 39.1 38.2 38.9 37.1 29.3
Operating expenses:
Product development and engineering 2.0 2.1 2.7 3.3 5.3
Selling and marketing 17.9 16.7 21.8 26.3 17.4
General and administrative 8.7 7.9 7.6 9.4 9.9
Amortization of intangible assets 5.5 6.0 4.3 8.2 1.5
--- --- --- --- ---
Total operating expenses 34.1 32.7 36.4 47.2 34.1
---- ---- ---- ---- ----
Income loss from operations 5.0 5.5 2.5 (10.1) (4.8)
Interest expense (4.8) (4.9) (4.8) (6.6) (6.4)
--- --- ---- ----- -----
Income (loss) before provision (benefit) for
income taxes 0.2 0.6 (2.3) (16.7) (11.2)
Provision (benefit) for income taxes 0.2 0.1 -- -- --
--- --- ---- ----- -----
Net income (loss) 0.4% 0.5% (2.3)% (16.7)% (11.2)%
=== === ==== ===== =====
</TABLE>
Fiscal Quarter Ended January 31, 1997 compared to Fiscal Quarter Ended
January 31, 1996
Net sales. Net sales increased 41.7% to $2,875,000 in the first quarter of
fiscal 1997 from $2,029,000 in the first quarter of fiscal 1996. The increase of
$846,000 was primarily due to increased sales of the Company's wakeboards,
accessories and other product categories, partially offset by a 16.5% decline in
the sale of bodyboards. Bodyboard sales were negatively impacted by the
Company's decision to effect certain strategic realignments among three of its
distributors during the first quarter of fiscal 1997. Net sales for the
17
first quarter of 1997 included approximately $200,000 in sales of two
discontinued brands of snowboards which the Company had previously purchased for
resale prior to establishing its own snowboard manufacturing facility in
Kirkland, Washington.
Gross profit. Gross profit increased 12.1% to $844,000 in the first quarter
of fiscal 1997 from $753,000 in the first quarter of fiscal 1996. The increase
of $91,000 was primarily due to higher net sales for the period. Gross profit
for the first quarter of fiscal 1997 as a percentage of net sales was 29.3%
compared to 37.1% in the first quarter of fiscal 1996. The decrease in gross
profit as a percentage of net sales was partially due to the lower margins
realized on the close-out sales of imported snowboards. In addition, the decline
in bodyboard sales caused the Company to scale back levels of production at its
Madera and Oceanside, California manufacturing facilities. The lower production
rates resulted in idle manufacturing capacity and unfavorable manufacturing
variances during the first quarter of fiscal 1997.
Product development and engineering. Product development and engineering
expense increased 125% to $153,000 in the first quarter of fiscal 1997 from
$68,000 in the first quarter of fiscal 1996. The increase of $85,000 was
primarily due to design costs for new wakeboard products and start-up expense
for the Company's new multi-product manufacturing facility in Orlando, Florida.
Selling and marketing. Selling and marketing expenses were $501,000 in the
first quarter of fiscal 1997 as compared to $534,000 in the first quarter of
fiscal 1996. As a percentage of net sales, selling and marketing expenses
decreased to 17.4% in the first quarter of fiscal 1997 as compared to 26.3% in
the first quarter of fiscal 1996. The decrease in selling and marketing expenses
as a percentage of net sales was primarily the result of higher net sales for
the first quarter of fiscal 1997.
General and administrative. General and administrative expenses increased
50.0% to $285,000 in the first quarter of fiscal 1997 from $190,000 in the first
quarter of fiscal 1996. The $95,000 increase in general and administrative
expense was primarily due to increases in payroll and related benefits as the
Company continued to expand its administrative capabilities to manage the growth
of the business.
Amortization of intangible assets. Amortization of intangible assets in the
first quarter of fiscal 1997 was $43,000, a decrease of $122,000 from $165,000
of amortization expense for the first quarter of fiscal 1996. The decrease was
primarily due to certain intangible assets which were acquired in July 1993
becoming fully amortized during fiscal 1996.
Interest expense. Interest expense increased 37.3% to $184,000 in the first
quarter of fiscal 1997 from $134,000 in the first quarter of fiscal 1996. The
increase of $50,000 was primarily due to higher average debt borrowings in the
first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996.
Fiscal Year Ended October 31, 1996 compared to Fiscal Year Ended October
31, 1995
Net sales. Net sales increased 9.1% to $12,404,000 in fiscal 1996 from
$11,372,000 in fiscal 1995. The increase of $1,032,000 in fiscal 1996 was
primarily the result of wakeboard product sales which began in 1996. Sales of
bodyboard products decreased in fiscal 1996 from fiscal 1995 primarily due to
the Company's inability to fill certain orders as a result of delays in
receiving raw material from its principal foam supplier. This supplier
experienced problems in manufacturing commencing in March 1996. This delay
prevented the Company from meeting shipment targets and resulted in the
cancellation of a significant number of customer orders. The Company has
submittted a claim to its business interruption insurance carrier with respect
to losses incurred as a result of this delay, although there can be no assurance
that the Company will succeed in recovering such losses under this claim.
Bodyboard and snowboard sales in 1996 were also negatively impacted by the
increased strength of the U.S. Dollar against the Japanese Yen and French Franc.
Product sales to the Company's Japanese and French distributors are denominated
in U.S. Dollars. Sales of other products increased in fiscal 1996 from fiscal
1995 primarily due to an increase of approximately $430,000 in sales of camp and
exercise mats and the receipt of $250,000 of royalties from the license of the
Company's trademark for use in certain merchandise.
Gross profit. Gross profit increased 11% to $4,819,000 in fiscal 1996 from
$4,342,000 in fiscal 1995. The increase of $477,000 in fiscal 1996 was primarily
due to an increase in net sales. Gross profit as a percentage of net sales was
38.9% in fiscal 1996 as compared to 38.2% in fiscal 1995. The increase in gross
profit as a percentage of net sales was primarily due to an increase, as a
percentage of total net sales, in higher margin wakeboard and other product
sales and the $250,000 license fee discussed above.
18
Product development and engineering. Product development and engineering
expense increased 43.2% to $338,000 in fiscal 1996 from $236,000 in fiscal 1995.
The increase of $102,000 was primarily due to the development of wakeboard
products that were first introduced in the second quarter of fiscal 1996.
Selling and marketing. Selling and marketing expense increased 42.4% to
$2,704,000 in fiscal 1996 from $1,899,000 in fiscal 1995. The increase of
$805,000 was primarily due to selling and marketing expense related to the
introduction of wakeboard products in fiscal 1996. In addition, snowboard
selling and marketing expense increased in fiscal 1996 from fiscal 1995 due
primarily to the introduction of team rider sponsorships. Selling and marketing
expense increased to 21.8% of net sales in fiscal 1996 from 16.7% of net sales
in fiscal 1995.
General and administrative. General and administrative expense was $938,000
in fiscal 1996 and $898,000 in fiscal 1995. The Company has made a concerted
effort to control general and administrative expense despite the growth in
sales. The increase of $40,000 was due primarily to an increase in payroll and
related costs and professional fees. General and administrative expense
decreased to 7.6% of net sales in fiscal 1996 from 7.9% of net sales in fiscal
1995.
Amortization of intangible assets. Amortization of intangible assets
decreased 21.9% to $532,000 in fiscal 1996 from $681,000 in fiscal 1995, a
decrease of $149,000. The decrease in amortization expense resulted primarily
from a non-compete agreement becoming fully amortized during 1996.
Interest expense. Interest expense increased 7.6% to $597,000 in fiscal 1996
from $555,000 in fiscal 1995. The increase of $42,000 is primarily due to an
increase in average borrowings in 1996 from 1995.
Income tax expense. The Company had no federal or state income tax expense
in fiscal 1996 as it generated a net loss. In fiscal 1995, the Company had a
state income tax provision but had no federal tax liability due to the use of
net operating loss carryforwards.
Fiscal year Ended October 31, 1995 Compared To Fiscal Year Ended October
31, 1994
Net sales. Net sales increased 24.4% to $11,372,000 in fiscal 1995 from
$9,144,000 in fiscal 1994. The increase of $2,228,000 in fiscal 1995 was
primarily the result of snowboard product sales which began in 1995 through the
acquisition of the Spiral brand. Sales of accessories, and other products also
increased in fiscal 1995 from fiscal 1994 principally due to a full year's sales
of TracTop accessories.
Gross profit. Gross profit increased 21.5% to $4,342,000 in fiscal 1995 from
$3,575,000 in fiscal 1994. The increase of $767,000 in fiscal 1995 was primarily
due to an increase in net sales. Gross profit as a percentage of net sales was
38.2% in fiscal 1995 as compared to 39.1% in fiscal 1994. The decrease in gross
profit percentage in fiscal 1995 was due primarily to the introduction of
snowboards in 1995 which generated a lower gross margin percentage than
bodyboards.
Product development and engineering. Product development and engineering
expense increased 25.5% to $236,000 in fiscal 1995 from $188,000 in fiscal 1994.
The increase of $48,000 was primarily due to the hiring of bodyboard team riders
in fiscal 1995 who expend a certain percentage of their efforts in product
development.
Selling and marketing. Selling and marketing expense increased 16.2% to
$1,899,000 in fiscal 1995 from $1,634,000 in fiscal 1994. The increase of
$265,000 was primarily due to selling and marketing expense related to snowboard
products first introduced in fiscal 1995 as well as an increase in bodyboard
selling and marketing expense. Selling and marketing expense decreased to 16.7%
of net sales in fiscal 1995 from 17.9% of net sales in fiscal 1994 primarily due
to an increase in net sales.
General and administrative. General and administrative expense increased
10.4% to $898,000 in fiscal 1995 from $797,000 in fiscal 1994. The increase of
$101,000 in general and administrative expenses was primarily due to general
increases in expenses associated with growth as well as an increase in bad debt
expense in 1995. General and administrative expenses decreased to 7.9% of net
sales in fiscal 1995 from 8.7% of net sales in fiscal 1994 primarily due to an
increase in net sales.
Amortization of intangible assets. Amortization of intangible assets
increased 36.2% to $681,000 in fiscal 1995 from $500,000 in fiscal 1994. The
increase of $181,000 in amortization expense primarily relates to a full year of
amortization of intangible assets acquired in 1994 and amortization of
intangibles assets acquired in 1995.
19
Interest expense. Interest expense increased 26.4% to $555,000 in fiscal
1995 from $439,000 in fiscal 1994. The increase of $116,000 is primarily due to
an increase in average borrowings in 1995 from 1994.
Income tax expense. The Company had no federal income tax provision in 1995
and 1994 due to operating loss carryforwards. In fiscal 1995, the Company had a
state income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations in fiscal 1996 and the first quarter of
fiscal 1997 primarily through borrowings from various sources including its
principal stockholder and its bank. During the first quarter of fiscal 1997, the
Company borrowed $1,100,000 under a subordinated note to its principal
stockholder. The Company utilized cash in the first quarter of 1997 to fund
operating activities of $721,000, for the repayment of debt of $351,000 and for
purchases of property and equipment of $50,000. Cash used for operating
activities in the first quarter of fiscal 1997 consisted primarily of an
increase in accounts receivable. During fiscal 1996, net borrowings under the
revolving line of credit with a bank, the subordinated note payable to its
principal stockholder and capital leases were $1,600,000, $925,000 and $65,386,
respectively. The Company utilized the proceeds from these financings in fiscal
1996 to fund operating activities of $806,000, product line acquisitions of
$607,000 and capital equipment purchases of $986,000. Cash used for operating
activities in 1996 consisted primarily of increases in accounts receivable and
inventory of $736,000 and $1,380,000, respectively, partially offset by an
increase in accounts payable of $975,000. These increases reflect the impact of
the acquisitions of the Flite brand and QPI products in 1996 and the
introduction of wakeboard products in 1996. Capital expenditures in 1996 were
primarily attributable to the expansion of manufacturing capacity for wakeboards
and snowboards.
In fiscal 1995, the Company financed its operations primarily through cash
generated from operating activities of $487,000 and from financing activities of
$315,000. Cash was used for acquisitions of product lines and capital equipment
purchases of $168,000 and $633,000, respectively. Cash generated from operations
consisted primarily of the cash earnings of the Company partially offset by an
increase in accounts receivable.
The Company had a $3,800,000 subordinated note payable to its principal
stockholder at January 31, 1997 which is payable upon demand and which bears
interest at 10%. The Company has accrued $287,000 of interest payable on this
note as of January 31, 1997. The note is subordinated to bank borrowings and its
repayment is subject to repayment of outstanding bank debt. On March 17, 1997,
outstanding indebtedness of $1,750,000 to the principal stockholder was
converted into 218,750 shares of Common Stock. The Company intends to utilize
the proceeds of the Offering to repay the remaining balance of approximately
$2,200,000 in principal and $380,000 in interest outstanding on the subordinated
note.
At January 31, 1997, the Company had a revolving line of credit and term
loan agreement with a bank. The Company has entered into new credit facilities.
See "New Credit Facilities" below.
The Company has entered into various capital lease arrangements to finance
the purchase of capital equipment. These capital lease agreements require
monthly payments of approximately $16,000 including interest at rates ranging
from 9.0% to 16.7%.
The Company is a party to a management consulting agreement with CRM. The
fee payable under this agreement is $15,000 per month plus 1% of consolidated
net sales in excess of $12 million. During fiscal 1994, 1995 and 1996, the
Company paid CRM $180,000 per year. This agreement has been amended to provide
for different terms effective upon the consummation of the Offering. See
"Certain Transactions."
The Company requires capital to finance the growth of its operations,
including working capital, for capital expenditures and for the acquisition of
additional product lines. The Company estimates that cash required for capital
expenditures over the next twelve months is approximately $550,000. In addition,
the Company acquired a product line subsequent to January 31, 1997 which
required cash payments of $100,000. The Company believes that its current cash
flow from operations, its new credit
20
facilities and the anticipated net proceeds of the offering will be adequate to
meet its anticipated cash requirements, excluding cash expended for additional
product lines for at least the next 12 months although the Company's cash
requirements may change due to acquisitions or if its working capital
requirements are greater than expected. There can be no assurance that the
Company will be able to raise additional capital on terms acceptable to the
Company or on a timely basis if such need should occur.
The Company does not believe that inflation has had or is likely to have a
material impact on its results of operations or liquidity, although it is
difficult to accurately anticipate the effects of inflation.
NEW CREDIT FACILITIES
On March 26, 1997, the Company entered into new credit facilities with
Jackson National Life Insurance Company consisting of a $7 million revolving
credit facility, a $3.45 million term loan and a $30 million discretionary
acquisition facility (together, the "Credit Facilities"). The Credit Facilities
are secured by first priority liens on all of the assets of the Company and its
subsidiaries, if any. Furthermore, two of the Company's stockholders have
pledged their Common Stock as additional security for the loans.
The revolving credit facility provides for borrowings of up to a maximum of
$7 million. The interest rate payable on the revolving credit facility is a
floating rate equal to 30-day LIBOR plus 3.0%, as well as a 0.5% per annum
charge on the unused line. Borrowings under the revolving credit facility may be
used for general corporate purposes, including working capital requirements. The
Company may prepay borrowings under the revolving credit facility (subject to
certain conditions), and may reborrow (up to the maximum limit then in effect)
any amounts that are repaid or prepaid. The revolving credit facility terminates
on March 31, 2005, or earlier upon a change of control of the Company (as
defined), at which time all borrowings become due and payable.
The term loan is a $3.45 million eight-year loan due March 31, 2005, or
earlier upon a change of control of the Company (as defined). This loan will be
repaid from the proceeds of the Offering, and the Company will not be able to
re-borrow under this portion of the Credit Facilities.
The acquisition facility provides for up to $30 million to be advanced to
the Company to finance future acquisitions. Advances are subject to credit
approval by the lender. Therefore, no assurance can be given that any such
advances will be available to the Company. The acquisition facility terminates
on March 31, 2005, or earlier upon a change of control of the Company (as
defined).
The Credit Facilities also provide for certain fees to be paid to the
lender. In addition, at the closing of the Credit Facilities, the lender was
issued a warrant to purchase up to 187,175 shares of the Company's Common Stock
at a price to be fixed at 90% of the initial public offering price of the
Offering. Upon the consummation of the Offering, the senior lender will be
issued warrants to purchase an additional 50,000 shares of the Company's Common
Stock at 90% of the initial public offering price. The Company will amortize the
value of the warrants (estimated to be $887,000) over the eight-year term of the
credit facilities.
The Credit Facilities contain restrictions upon the Company's ability to
incur indebtedness, grant liens, make capital expenditures, enter into
acquisitions, mergers or consolidations; and dispose of assets; make dividend
payments, other restricted payments or investments. In addition, the Credit
Facilities require the Company to meet certain financial covenants, including
maintenance of minimum cash flow levels and of fixed charge coverage, interest
expense coverage and total indebtedness to cash flow ratios.
21
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for the nine fiscal quarters ended January 31, 1997. In the opinion
of the Company's management, this information has been prepared on the same
basis as the audited financial statements appearing elsewhere in this prospectus
and includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the unaudited quarterly results set forth herein.
The Company's quarterly results may fluctuate significantly in the future. See
"Risk Factors -- Seasonality; Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
QUARTER
ENDED
FISCAL YEAR ENDED OCTOBER 31, 1995 FISCAL YEAR ENDED OCTOBER 31, 1996 JANUARY 31,
---------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997
-- -- -- -- -- -- -- -- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $1,933 $3,835 $3,417 $2,187 $2,029 $4,684 $3,929 $1,762 $2,875
Cost of goods sold 1,163 2,285 2,162 1,420 1,276 2,899 2,370 1,040 2,031
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit 770 1,550 1,255 767 753 1,785 1,559 722 844
Operating expenses:
Product development and
engineering 53 60 70 54 68 86 95 89 153
Selling and marketing 346 579 557 417 534 750 802 618 500
General and administrative 160 194 295 248 190 236 214 299 285
Amortization of intangible
assets 164 165 165 186 165 160 144 63 43
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 723 998 1,087 905 957 1,232 1,255 1,069 981
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations 47 552 168 (138) (204) 553 304 (347) (137)
Interest expense (127) (149) (142) (137) (134) (119) (203) (141) (184)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes (80) 403 26 (275) (338) 434 101 (488) (321)
Provision (benefit) for
income taxes -- -- -- 16 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $ (80) $ 403 $ 26 $ (291) $ (338) $ 434 $ 101 $ (488) $ (321)
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the quarterly financial data for the periods
indicated as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER
ENDED
FISCAL YEAR ENDED OCTOBER 31, 1995 FISCAL YEAR ENDED OCTOBER 31, 1996 JANUARY 31,
---------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997
-- -- -- -- -- -- -- -- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.2 59.6 63.3 64.9 62.9 61.9 60.3 59.0 70.6
---- ---- ---- ---- ---- ---- ---- ---- ----
Gross profit 39.8 40.4 36.7 35.1 37.1 38.1 39.7 41.0 29.4
Operating Expenses:
Product development and
engineering 2.7 1.6 2.0 2.5 3.4 1.8 2.4 5.0 5.3
Selling and marketing 17.9 15.1 16.3 19.1 26.3 16.0 20.4 35.1 17.4
General and administrative 8.3 5.1 8.6 11.3 9.4 5.0 5.4 17.0 9.9
Amortization of intangible
assets 8.5 4.3 4.8 8.5 8.1 3.4 3.7 3.6 1.5
---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 37.4 26.1 31.7 41.4 47.2 26.2 31.9 60.7 34.1
Income (loss) from operations 2.4 14.3 5.0 (6.3) (10.1) 11.9 7.8 (19.7) (4.7)
Interest expense (6.6) (3.9) (4.2) (6.3) (6.6) (2.5) (5.2) (8.0) (6.4)
Income (loss) before provision
(benefit) for income taxes (4.2) 10.4 0.8 (12.6) (16.7) 9.4 2.6 (27.7) (11.1)
Provision (benefit) for
income taxes 0.0 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0
---- ---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) (4.1)% 10.4% 0.8% (13.3)% (16.7)% 9.4% 2.6% (27.7)% (11.1)%
==== ==== === ===== ===== === === ===== =====
</TABLE>
The Company's net sales and operating results are subject to quarterly and
seasonal fluctuations. As discussed previously, the Company has experienced
lower net sales and operating losses in the first and fourth fiscal quarters due
to the seasonality of water sports products. In addition, the Company is
22
susceptible to quarterly fluctuations due to material shortages, problems at key
suppliers, weather conditions and the impact of foreign currency exchange rates.
The Company's expense levels are based, in part, on its expectation of future
net sales. Therefore, if net sales levels are below expectations, the Company's
operating results are likely to be adversely affected. In addition, a high
percentage of the Company's expenses are fixed in the short-term and significant
fluctuations in revenue could adversely impact operating results from quarter to
quarter.
Net sales for the fourth quarter of fiscal 1996 were $1,762,000, a decrease
of 19.4% from net sales for the comparable quarter in fiscal 1995. This decline
in net sales in comparable fourth quarters in 1996 and 1995 is due to a decrease
in sales of bodyboards and snowboards partially offset by wakeboard sales which
began in fiscal 1996. The decrease in bodyboard sales was primarily due to the
impact of the strengthening U.S. Dollar against the Japanese Yen and French
Franc on Japanese and French sales as well as the timing of certain shipments.
The decrease in snowboard sales was primarily due to the impact of the
strengthening U.S. Dollar against the Japanese Yen and French Franc on Japanese
and French sales, the lack of snow in Southern California and the impact of an
oversupply of snowboards on demand for the Company's products.
See "Overview" for a description of a non-cash charge to be recorded upon
consummation of the Offering.
Impact of Inflation
Increases in the inflation rate are not expected to materially impact the
Company's operating expenses.
23
BUSINESS
INTRODUCTION
The Company is a designer, manufacturer and marketer of branded active
sports products. The Company currently offers five brands and over 40 models of
bodyboards, two brands and nine models of wakeboards and two brands and over 20
models of snowboards, as well as complementary sports apparel and accessories.
In the United States, the Company sells its products primarily through a network
of over 100 independent sales representatives working with the Company's
internal sales and technical specialists, and internationally through a network
of over 30 distributors. The Company's domestic customers include over 1,000
specialty shops, 20 national and regional sporting goods retail chains and over
20 mass merchandisers. The Company's growth strategy is based in part upon
offering additional products and brands through its existing distribution
channels.
The Company implements a multi-sport, multi-brand market segmentation
approach in which each product brand is sold only into its designated channel of
distribution, thereby protecting the integrity of each brand and the longevity
of its unique market position. The Company's multi-brand strategy is to
initially develop premium sports products for dedicated consumers, and to
subsequently introduce multiple brands with multiple price points and
performance characteristics. High, middle and lower range bodyboard brands are
marketed to specialty shops, sporting goods retailers and mass merchandisers,
respectively. The Company currently markets high and middle range wakeboard and
snowboard brands through specialty shops and sporting goods retailers,
respectively.
Unlike many other active sports companies that purchase products for resale,
the Company has developed broad process manufacturing expertise and is an
integrated manufacturer of all of its own bodyboards, wakeboards and snowboards.
In addition, the Company believes that it is the largest manufacturer of
bodyboards in the United States. The Company's manufacturing expertise and
integrated manufacturing operations have enabled it to be a low cost producer,
to become a leader in product innovation, to carefully maintain performance
features and quality control, and to quickly respond to market trends and
incorporate technological improvements.
INDUSTRY BACKGROUND
An increasing number of consumers are participating in active sports, which
generally require the purchase of non-team sports products. Active sports
products include those currently marketed by the Company -- bodyboards,
wakeboards and snowboards -- as well as in-line skates, skateboards, surfboards
and similar sports products. Bodyboards are surf riding boards that are shorter,
wider, smaller, lighter, more maneuverable and easier to learn than surfboards,
and can be used in a much broader range of locations and surf conditions. A
bodyboarder rides waves primarily lying prone on the board and is able to
complete a variety of aerial maneuvers. Wakeboards are towed behind a boat or
personal watercraft and are ridden standing sideways like a surfboard.
Wakeboards are more buoyant than water skis and allow the rider to perform a
wide range of aerial jumps and acrobatic tricks.
There has been significant recent growth in the active sports industry. The
Surf Industry Manufacturing Association projected that an estimated 1.75 million
Americans would actively (at least four times) surf in 1996, compared to 1.1
million people in 1992. Although these statistics reflect growth in the overall
surf industry, the Company believes that growth rates in the bodyboard segment
are similar to those of the broader surf industry. In addition, the Company
believes that wakeboarding is having the same effect on water skiing as
snowboarding has had on alpine skiing. According to the Water Sports Industry
Association, water ski participants have declined from 13.8 million in 1991 to
11.1 million in 1994, while sales of wakeboards have grown at a compound annual
rate of 58%. According to Snow Industries America, snowboard unit sales have
grown at an annual compound growth rate of 50% from 135,000 units in the
1992-1993 season to 456,000 in the 1995-1996 season.
The typical active sports enthusiast is a "dedicated consumer" who devotes
significant time, attention and disposable income to a chosen sport. Active
sports enthusiasts frequently become participants in multiple sports that are
appropriate for different seasons and spend a significant portion of their
recreational budget on active sports equipment. Participants in active sports
are principally in the 10 to 24 year old age
24
bracket, which numbers approximately 55 million people in the United States and
is expected to grow over the next ten years to 62 million people, representing a
growth rate of twice the rest of the population. The Company believes that
international participation in active sports also is growing rapidly.
The active sports industry is highly fragmented, and consists of many
sporting goods companies that market multiple brands in one or more active
sports markets. There are also multiple channels of distribution in this market,
principally consisting of specialty shops, which market high-performance product
lines, sporting goods retailers which market middle- and high-performance
product lines, and mass merchandisers, such as nationwide chain stores and
membership clubs, which market lower-cost, lower-performance product lines.
BUSINESS STRATEGY
The Company's business strategy is to focus on active sports products and
markets where the Company believes it can establish itself as a market leader or
significant participant at multiple price points. The following are the key
components of this business strategy:
Multi-Brand Approach to Market Segmentation. The Company has implemented
a multi-brand product approach pursuant to which, as a market matures, the
Company increases its market penetration by offering not only premium
products but also a broad range of products with multiple price points and
performance characteristics. For example, high, middle and lower range
bodyboard brands are marketed to specialty shops, sporting goods retailers
and mass merchandisers, respectively. The Company markets wakeboard and
snowboard brands through specialty shops and sporting goods retailers. This
multi-brand approach preserves the integrity of each brand within its
designated distribution channel and promotes retailer loyalty by protecting
against brand erosion from other distribution channels.
Multi-Sport Approach. Active sports are subject to consumer trends and
seasonal factors. To mitigate the impact of such factors, the Company has
diversified its product lines from bodyboards to wakeboards and snowboards.
For example, the Company introduced snowboards to provide revenue during the
winter season. The Company has grown, and intends to continue to grow,
through a combination of brand acquisitions and development in these and
other growing active sports markets.
Integrated Low-Cost Manufacturing. Unlike many other companies that
purchase active sports products for resale, the Company is an integrated
manufacturer of all of its own bodyboards, wakeboards and snowboards, as
well as all principal subassemblies. The Company is the largest manufacturer
of bodyboards in the United States, and has developed broad process
technology expertise, with particular expertise in foam-based and
compression molded plastics manufacturing and other materials technologies.
The Company manufactures multiple products in the same plant and is able to
conduct year-round research and development at its facilities. This
manufacturing expertise and integrated manufacturing operations have enabled
the Company to be a low cost producer, to become a leader in product
innovation, to carefully maintain performance features and quality control,
and to quickly respond to market trends and incorporate technological
improvements.
Product Innovation. The Company believes that innovative product design
and styling are important to the Company's ability to meet changing consumer
needs. The Company believes it is a leader in innovation in the products
that it offers, and many of its products have been designed with distinctive
features for consumers who demand high performance and advanced
capabilities. For example, in 1996 the Company introduced Green Cell foam
for its bodyboards which, due to its cell structure, provides enhanced
performance and appearance. The Company also introduced the first
skateboard-shaped wakeboard and invented a lightweight boot binding system
with half the weight of some competitive bindings.
Worldwide Distribution Network. The Company has established distribution
networks for its products both in the U.S. and internationally. Products are
sold through a combination of over 100 independent sales representatives,
twelve Company sales personnel and over 30 distributors. Each product is
carefully matched to a particular distribution channel. The Company believes
that the strength of its distribution network, combined with the Company's
well-recognized brand names and reputation for developing innovative
products, have allowed it to quickly introduce new products. The Company's
new product and branding strategies are based in part upon offering
additional products through its existing distribution channels.
25
GROWTH STRATEGY
The Company has grown through internal product development and through six
product line acquisitions since 1993. The Company's growth strategy is to become
a leading provider of active sports products in each of its target markets by
(i) identifying growth segments within the active sports industry and entering
these markets through either the introduction or acquisition of new products;
(ii) extending the Company's well recognized brand names into new global
markets; (iii) fully utilizing the Company's extensive distribution network
through increased product penetration; and (iv) pursuing strategic acquisitions.
Internal Growth. The Company believes that its established distribution
network and reputation for developing and introducing high quality innovative
products has enabled and will continue to enable the Company to introduce new
products to its established customer base. The Company's strategy of initially
developing premium products for dedicated consumers, and subsequently
introducing multiple brands with multiple price points, has enabled the Company
to grow while preserving the reputation of its premium brands. The Company is
constantly researching and evaluating new global markets into which its brands
can be introduced.
Strategic Acquisitions. The Company has made a number of strategic product
line and brand acquisitions which have expanded its range of active sports
products and increased the number of markets in which the Company operates. The
acquisitions consist of the following:
Madrid. This bodyboard company was acquired in 1993 to provide a branded
bodyboard product line to warehouse price clubs. Since the acquisition,
sales of this line have increased over 300%.
TracTop. This surf accessory company was acquired in 1994 to leverage the
Company's knowledge and skills in the surf products industry while adding a
new product category. The Company has successfully expanded this product
line to include surfboard and bodyboard bags and other related accessories.
Spiral. This snowboard brand was acquired in 1995 to provide the Company
with a snowboard brand for the sporting goods retailer market. Spiral has
been a recognized snowboard brand for almost seven years, and its snowboards
are known for their lightweight design.
QPI. This product line consists of bodyboards, kickboards and camp mats
and was acquired in 1996 to leverage the manufacturing expertise of the
Company and its distribution network.
Flite. This snowboard brand was acquired in 1996 to give the Company a
snowboard brand for the specialty shop market. The Flite brand, which has
been in existence for over 20 years, also increased the Company's molding
capabilities and added another snowboard manufacturing technology.
FM. This wakeboard brand was acquired in 1997 to provide the Company with
an established, well-recognized brand for the sporting goods retailer
market.
Consistent with its growth strategy, the Company continuously evaluates
acquisition opportunities where the Company has a strategic advantage. Ideal
acquisition candidates include companies, product lines or brands that: (i) are
supported by a dedicated consumer base served by dedicated consumer
publications; (ii) have a reputation for quality and performance; (iii) have
potential for growth; or (iv) can be manufactured at the Company's facilities or
utilize raw materials or technology that is within the Company's special
expertise. The Company frequently becomes aware of acquisition opportunities
because it is an established active sports marketer and has successfully
integrated into its business several acquired product lines and employees of
acquired businesses.
26
TECHNOLOGY AND DESIGN
The Company has developed particular expertise in foam-based and compression
molded plastics manufacturing and other materials technologies. The Company
believes it is a leader in product innovation, and many of its products have
been designed with distinctive features for consumers who demand high
performance and advanced capabilities. The key components of the Company's
technology expertise and innovative designs include:
Extrusion Technology. The Company acts as its own source of
extrusion-coated materials and manufactures its own extruded products. The
Company has developed unique blends of copolymer materials with multiple
density resins and high molecular strength for the bottoms and rails of its
bodyboards. This technology creates superior flex characteristics that allow
the rider to pull up on the nose of the board trapping air between the board
and the water, which increases the speed and maneuverability of the board.
Foam and Other Materials Expertise. The Company's materials expertise has
enabled it to develop proprietary materials not available to competitors.
The Company often works with foam manufacturers to create unique materials.
This expertise has allowed the Company to achieve a higher standard of
performance in its boards.
Proprietary Lamination Technology. The Company has created its own method
for laminating foam and has successfully eliminated the use of glue to bond
different foams together. Machinery developed by the Company laminates
multiple densities of materials together, which changes a lightweight foam
core into a high performance product.
Proprietary Compression Molding Techniques. Using proprietary compression
molding techniques, the Company has created lightweight,
improved-performance wakeboards and snowboards. Its most recent innovation
involves using high pressure to produce hermetically sealed pinch lines on
the infinitely variable surfaces of a complex curve. This technique
increases the life of the board and creates a more consistent flex pattern
that improves performance.
The following diagrams depict certain elements of the technologies used
in the Company's products.
BODYBOARD WRAP-UP RAIL CONSTRUCTION SPIRAL SNOWBOARD AND
WAKEBOARD CAP CONSTRUCTION
SEAM/TOP DECK TOPSHEET
MEETS BOTTOM STAINLESS STEEL INSERT
GRAPHIC FIBERGLASS
HIGH-DENSITY FOAM POLYMATRIX CORE
TOP DECK
FOAM CORE
HIGH-DENSITY INNER FOAM LAYER FIBERGLASS
PRINTED FILM/ STEEL EDGE
BOTTOM GRAPHIC LOW FRICTION BASE
BODYBOARD EXTRUDED SLICK-SKIN FLITE SNOWBOARD
BOTTOM CONSTRUCTION SANDWICH CONSTRUCTION
HIGH-DENSITY FOAM TOPSHEET
TOP DECK STAINLESS STEEL INSERT
FIBERGLASS
HIGH-DENSITY ABS
FOAM TAIL PIECE VERTICALLY LAMINATED
ASPEN WOOD CORE
HIGH-DENSITY FIBERGLASS
FOAM CORE STEEL EDGE
LOW FRICTION BASE
HIGH-DENSITY
FOAM INNER DECK
SLICK BOTTOM
HIGH-DENSITY
FOAM RAIL
27
PRODUCTS
The Company designs, manufactures and markets a full line of bodyboards,
wakeboards, snowboards and accessories for the active sports industry. The
following chart shows the suggested retail price range and the primary
distribution channel for each of the Company's product lines.
<TABLE>
<CAPTION>
SPORTING SUGGESTED
SPECIALTY GOODS MASS RETAIL
BRANDS SHOPS RETAILERS MERCHANDISERS PRICE($)
<S> <C> <C> <C> <C>
BODYBOARDS
BZ X 75-300
R-Lite X 90-175
A-Tach X 40-200
Madrid X 30-60
Wave Master X 10-30
WAKEBOARDS
Liquid Force X 250-600
FM X 200-400
SNOWBOARDS
Flite X 350-550
Spiral X 250-350
ACCESSORIES AND APPAREL X X 10-100
OTHER PRODUCTS X X X 10-100
</TABLE>
BODYBOARDS
Bodyboards are surf riding boards that are shorter, wider, smaller, lighter,
more maneuverable and easier to learn than surfboards, and can be used in a much
broader range of locations and surf conditions. A bodyboarder rides waves
primarily lying prone on the board and is able to complete a variety of aerial
maneuvers. Bodyboards range in price from approximately $10 to $300, versus $600
to $800 for a surfboard. The Company's experience has been that many bodyboard
enthusiasts purchase up to three or four bodyboards per year. Bodyboards vary
widely in complexity of design and construction and resulting performance and
endurance characteristics, and range from a simple piece of exposed foam, to
boards with a foam core plus a "top deck" or skin, to a foam core with a top and
bottom deck with an extra bottom layer or "slick skin." The extra layers prolong
the life of the board, enhance performance and give a faster and more
controllable ride. The Company extrusion coats the bottoms of its high-end
boards and uses no glue in their assembly, which results in enhanced performance
and durability.
The Company designs and manufactures a full line of bodyboards with a
variety of performance characteristics and prices. The Company has five brands
and over 40 models of bodyboards. The Company has been selected by an Hawaiian
lifeguard association to exclusively develop and market specialized rescue
boards. The Company also works with lifeguard associations around the world to
develop specialized boards for their rescue needs.
BZ ProBoards. BZ ProBoards are the Company's highest performance
bodyboards and incorporate the industry's most advanced technology. Every
board is hand shaped and finished in the Company's plant in Oceanside,
California using proprietary technology to produce a multi- density extruded
slick skin that provides the rider with a board of superior stiffness with
low weight and a controlled performance ride. The 33 models of BZ ProBoards
are sold exclusively through more than 1,000 surf shops in 20 countries.
28
R-Lite. The Company created the R-Lite brand in 1990 to fill a need for
extremely lightweight, high-end performance boards. These boards are less
durable than BZ ProBoards. Like BZ ProBoards, they are sold exclusively
through specialty shops.
A-Tach. A-Tach bodyboards are the Company's mid-range bodyboards in price
and performance. Using patent pending, co-extrusion film-to-foam technology,
and made from many of the same premium materials as BZ ProBoards, A-Tach
boards are known for their light weight and high flex characteristics, which
makes them attractive to the intermediate level rider. A-Tach bodyboards are
sold to sporting goods stores. Among A-Tach's largest customers are Sports
Chalet, Sports Authority, SportMart and Oshmans.
Madrid/Wave Master. The Company acquired the Madrid line to gain an
additional export brand of bodyboard and to provide a line suitable for
warehouse clubs. The Wave Master brand is sold to chain stores and mass
merchandisers.
Net sales of bodyboards in fiscal 1996 accounted for approximately 55% of
the Company's total net sales.
WAKEBOARDS
Wakeboards are towed behind a boat or personal watercraft and are ridden
standing sideways like a surfboard. Wakeboards are more buoyant than water skis
and allow the rider to perform a wide range of aerial jumps and acrobatic
tricks. Wakeboards can also be towed behind a relatively low power boat or a
personal water craft (such as a Jet Ski(R)) allowing them to be used by a
broader range of consumers. Wakeboards range in price from approximately $130 to
$800, versus $90 to $700 for water skis. High performance wakeboards require
precision engineering and precise tolerances. The Company believes that these
manufacturing requirements can serve as a barrier to companies seeking entry to
the high performance segment of the wakeboard market.
The Company designs and manufactures wakeboards under its Liquid Force and
FM brands.
Liquid Force. The Company developed this brand internally through the
combined efforts of its research and development and marketing departments.
Liquid Force uses advanced materials and unique construction techniques
providing competitive performance characteristics, including multi-concave
venturi hulls and low profile rails. These boards were used by three of the
top ten riders in the 1996 World Championships. In addition, the Company has
recently introduced the first wakeboard designed specifically for women, a
specialty board designed for competition and tricks, and a full line of
performance clothing. The Company's seven models of Liquid Force wakeboards
are sold domestically primarily through over 200 specialty shops, including
snow and surf, water ski and skate stores, and internationally through
distributors in more than 20 countries.
FM. The Company acquired the FM brand to expand its distribution of high
quality wakeboards into sporting good retailers and to marine and ski board
catalogues. The Company plans to expand its selection of boards available
under the FM brand as well as the brand's international distribution.
The Company also has introduced high performance wakeboard bindings under
the trademarks Suction, High Suction and Super Suction, which are extremely
lightweight. These bindings use durable thermoplastics rather than rubber,
which permit the use of vivid graphics. These bindings range in price from
$130 to $260. The Company offers both brands of bindings on its Liquid Force
and FM boards.
Net sales of wakeboards and bindings in fiscal 1996 accounted for
approximately 12% of the Company's total net sales.
29
SNOWBOARDS
In 1994, the Company entered the snowboard market with distribution
agreements with two Austrian snowboard manufacturers, F2 and Duotone. The
Company acquired its Spiral brand and its compression molding technology in 1995
and the Flite brand in 1996. These brands are targeted at the mid-range and
premium markets, respectively. The Company currently sells more than 20 models
of snowboards.
Performance characteristics in snowboards vary widely and are dependent on
the materials used in their construction, shape and weight. The Company has
developed two specific technologies, one for full cap construction and one for
laminated (or sandwich) construction. The Company believes that its snowboard
manufacturing technologies are among the most advanced in the world and that its
snowboards are among the lightest in the industry. In recent East Coast
competitions, the Company's amateur and professional teams placed first through
third in multiple competition categories.
The Company's snowboard brands are as follows:
Flite. Flite snowboards, introduced by the Company in 1997 for the
1997/1998 season, incorporate advanced technology and are positioned at the
high performance, free-style segment of the snowboard market. The Company
manufactures its Flite snowboards utilizing a vertically laminated wood core
with triaxially braided fiberglass resulting in outstanding torsion control
(flex) characteristics. The line of ten boards includes two new professional
rider endorsed boards.
Spiral. The Company manufactures and markets the Spiral brand to
mainstream riders who require a quality board at a competitive price.
Because of their performance characteristics, these snowboards are also
suitable for advanced snowboarders. Spiral's hermetically sealed cap
construction boards feature a matrix core which extends the life of the
board, have low distortion ratios, and are extremely lightweight. The Spiral
line features seven models of boards.
BZ. In 1995 the Company introduced BZ snowboards into Japan, successfully
leveraging the brand loyalty of its high quality bodyboards. BZ snowboards
are designed to be lightweight, facilitating use by lighter riders. This
line consists of five models and are marketed exclusively in Japan.
Net sales of snowboards in fiscal 1996 accounted for approximately 7% of
the Company's total net sales.
ACCESSORIES AND APPAREL
The Company designs, manufactures and markets related accessories for its
bodyboard, wakeboard and snowboard products. Such accessories include carrying
and storage bags which protect boards from dents, scrapes and high temperatures
during transport; TracTop traction enhancing pressure-sensitive stick-ons and
coatings which increase a rider's stability; surf fins for bodyboarders; leashes
used by riders to maintain contact with their boards; and other products used in
the maintenance and care of surfboards.
The Company has designed and markets performance-related clothing under its
BZ, A-Tach and Liquid Force brands. The Company sells its apparel through the
Company's existing channels of distribution for display alongside its existing
hardgoods products in retail outlets. The Company's objective for its apparel
line is to capitalize on the strong personal association that the core group of
enthusiasts have for their chosen sport and brand. Management believes that the
dollar volume of softgoods in the bodyboard, wakeboard and snowboard markets is
at least 50% of total sales while it represented less than 1% of the Company's
1996 revenues. In 1996, the Company entered into a licensing agreement with a
Japanese company that markets high-end apparel under the BZ name to Japanese
department stores.
Net sales of accessories and apparel in fiscal 1996 accounted for
approximately 14% of the Company's total net sales.
30
OTHER PRODUCTS
The Company also manufactures and sells a series of products which
capitalize on its expertise in foam technology and manufacturing or which
leverage its existing relationships with distributors and retailers. These
products accounted for approximately 12% of the Company's total net sales in
fiscal 1996.
SALES AND DISTRIBUTION
Each of the Company's brands is developed for a specific target market and
distribution channel with appropriate price points, features and performance
characteristics. The Company uses this marketing and distribution strategy to
protect the integrity of its brands. The Company believes that its track record
in protecting its brands and distribution channels is an important competitive
advantage. The Company's new product and branding strategies are based in part
upon offering additional products through its existing distribution channels.
The three main retail channels of distribution for the Company's products in the
United States are as follows:
Specialty Shops. These retailers, which include snow and surf, water ski
and skate stores, sell the Company's premium bodyboard, snowboard and
wakeboard brands, including BZ ProBoards and R-Lite bodyboards, Liquid Force
wakeboards and Flite snowboards. The Company's products are sold through
more than 1,000 specialty shops. Specialty shops cater to dedicated
consumers looking for performance products, sports enthusiasts and more
experienced riders.
Sporting Goods Retailers. These stores sell the Company's A-Tach
bodyboards, FM wakeboards and Spiral snowboards. Sporting goods retailers
target mainstream consumers looking for value and performance. Sporting
goods retailers that sell the Company's products include Big Five, Oshmans,
SportMart, Sports Authority and Sports
Chalet.
Mass Merchandisers. These retailers, which include large chain stores and
membership clubs, offer the Company's entry-level brands, such as Wavemaster
and Madrid bodyboards. These retailers sell primarily to consumers motivated
by price rather than design and performance. Mass merchandisers that sell
the Company's products include BJ's Wholesale Club, Costco, Kmart, Sam's
Club and Walmart.
In the United States, the Company sells its brands primarily through a
network of over 100 independent sales representatives chosen for their expertise
in specific retail channels. The sales representatives collaborate with the
Company's internal team of sales and technical specialists. Internationally, the
Company sells its products through a network of over 30 distributors in 33
countries. The Company works closely with its international distributors to help
ensure that its policies of limited distribution and market segmentation are
followed worldwide.
MARKETING
The Company markets by extensive advertising in "consumer enthusiast"
magazines. The Company has made a significant investment in professional team
riders in all sports for all advertised brands. The Company has endorsement
relationships with well-known riding professionals who compete around the world
using products within each product category. Brands are featured at all major
trade shows. The Company conducts numerous special event marketing activities in
all global markets, including on-snow demonstrations, water sports clinics and
demonstrations featuring team riders and local enthusiasts.
PRODUCT DEVELOPMENT
The Company's goal is for 25% of its sales to come from products that are
less than four years old. The Company strives to be a technological leader in
each of its product lines by drawing on the expertise of its internal product
development team. In addition, the Company has integrated its professional team
31
riders into its product development process, allowing regular testing of both
prototypes and finished products. The Company's integrated manufacturing
facilities allow it to rapidly produce, test and bring to market production
models incorporating new designs. In fiscal 1994, 1995 and 1996, the Company
spent approximately $188,000, $236,000 and $338,000, respectively, on research
and development.
MANUFACTURING AND SUPPLIERS
The Company manufactures virtually all of its products and their principal
subassemblies. Bodyboards are manufactured at its California and Florida
manufacturing facilities, and wakeboards and snowboards are manufactured at the
Company's Washington State manufacturing facility. By manufacturing both
wakeboards and snowboards in the same plant, the Company is able to leverage its
proprietary process technology and manufacturing techniques to enhance the
performance characteristics of its product lines. The Company believes that its
internal manufacturing capabilities provide it with a competitive advantage over
companies that outsource their products. The Company believes that its cost of
these goods is generally 20%-30% less than most of its competitors and that its
ability to work year round on research and development allows the Company to be
a leader in innovation. By using its manufacturing facilities to make products
in more than one sports season and by selling in both hemispheres, plant
utilization is maintained throughout most of the year. Continuous capital
investment in tools and equipment, as well as manufacturing expertise, have
allowed the Company to increase levels of production and improve manufacturing
efficiencies. Capital expenditures for the 1996 fiscal year were approximately
$1.6 million.
Each of the Company's products undergoes quality assurance testing
throughout the manufacturing process. The Company is able to produce uniform
products as a result of its integrated manufacturing process and a continuous
quality assurance program.
The Company purchases component materials from third parties. Most component
materials, other than polyethylene foam, are available from a broad range of
suppliers in the United States. The polyethylene foam used in the Company's
bodyboards is available from only three suppliers in the United States. Because
it is one of the largest users of polyethylene foam in the United States, the
Company believes that it receives favorable pricing for the foam it purchases.
The Company has developed a close working relationship with two foam suppliers,
and has a supply contract with one of these suppliers that expires in June 1998.
During 1996 one vendor had a significant interruption to its manufacturing, as
well as quality problems. This caused the Company to sustain a loss of business
due to the consequential material shortages. The Company has submitted a claim
to its business interruption insurance carrier with respect to this loss
although there can be no assurance that the Company will succeed in recovering
under this claim. Any future interruption in the Company's ability to obtain
adequate supplies of polyethylene foam could have a material adverse effect on
its business. See "Risk Factors -- Manufacturing Risks" and "Risk Factors --
Dependence on Polyethylene Foam and Other Component Suppliers."
CUSTOMERS
In fiscal 1996, the Company's customers included over 1,000 specialty shops,
over 20 national and regional sporting goods retailers and over 20 mass
merchandisers. Tasker, Ltd., the Company's exclusive distributor in Japan,
accounted for approximately 11.5%, 15.5% and 11.4% of the Company's net sales in
fiscal 1994, 1995 and 1996, respectively. Costco, Inc. accounted for
approximately 10% of the Company's net sales for fiscal year 1994. No other
customer accounted for more than 10% of sales in 1994, 1995 or 1996.
COMPETITION
The active sports industry is highly competitive, with competition mainly
centering on product innovation, performance and styling, brand name
recognition, price, marketing and delivery. Competitors in each of the Company's
product lines include companies with a greater market share and companies with
greater brand recognition and financial, distribution, marketing and other
resources than the Company. In bodyboards, the Company competes principally
against Mattel, Inc. (Morey), and a number of small competitors. In wakeboards,
the Company competes principally against HO, Inc. (Hyperlite). In snowboards,
the dominant competitor is Burton Industries, Inc. There are several other
companies with significant market shares including K2, Inc. (K2), Morrow
Snowboards, Inc. and Ride,
32
Inc., and numerous other competitors. There are no technological or
manufacturing barriers to entry that would preclude a large ski or sporting
goods company or any other well-financed competitor from entering the Company's
markets. Each of these markets faces competition from other sports and leisure
activities, and sales of sports and other leisure products typically are
affected by changes in consumer preferences. See "Risk Factors -- Competition
and Product Innovation."
INTELLECTUAL PROPERTY
In the course of its business, the Company employs various trademarks, trade
names and service marks, including its logos, in the packaging and advertising
of its products. The Company is the owner of 20 registered trademarks, as well
as numerous foreign trademark registrations and unregistered trademarks. The
Company believes the strength of its service marks, trademarks and trade names
are of considerable value and importance to its business and intends to continue
to protect and promote them as appropriate. There can be no assurance, however,
that any of the Company's trademarks are enforceable or are otherwise capable of
protecting the goodwill associated with them. The loss of any significant mark
could have a material adverse effect on the Company.
The Company currently holds 12 United States patents and has filed four
patent applications, as well as various foreign counterparts. Included among
these patents are the Company's Rainbow Plank patent covering coloration
technology used to decorate its boards and its Slick Skins patent covering the
use of slick skins on the top deck of bodyboards. Although the Company believes
that such patents have some utility in maintaining the Company's competitive
position, it does not consider its patents to be material to its business. It is
the practice of the Company to require its employees involved in research and
product development activities to execute confidentiality and invention
assignment agreements.
The Company does not believe that it is infringing any intellectual
property rights of third parties, and except as described under "Legal
Proceedings," is not engaged in any intellectual property disputes. See "Risk
Factors -- Limited Protection of Intellectual Property."
EMPLOYEES
As of March 1, 1997, the Company employed 75 full-time employees and 235
part-time and seasonal employees, including five full-time employees in general
and administrative, 20 in sales, marketing and customer service, ten in product
engineering, research and development and 40 in manufacturing. The Company's
employees are not subject to a collective bargaining agreement, and the Company
considers its employee relations to be good. In addition, the Company engages
the services of over 100 professional team riders, most of whom are independent
contractors.
FACILITIES
The Company's headquarters are located in Hyannis, Massachusetts and consist
of approximately 10,000 square feet of office and general warehouse space. This
facility is used by corporate management and the customer service, accounting
and finance staff. The Company's Oceanside, California and Madeira, California
facilities consist of approximately 35,000 square feet and 42,000 square feet,
respectively, of leased plant, warehousing and office space, and are used by
corporate marketing, and sales management, manufacturing and research staff. The
Company manufactures bodyboards at its California facilities. The Company's
Kirkland, Washington State facility consists of approximately 18,000 square feet
of leased plant, warehousing and office space, and is used by corporate
marketing, sales management and manufacturing staff. The Company's wakeboards
and snowboards are manufactured at its Washington State facility. The Company
also leases approximately 15,000 square feet of plant and warehousing space in
Lakeland, Florida. The Company manufactures bodyboards and accessories at this
facility. The Company rents its headquarters office and warehouse space in
Hyannis as a tenant-at-will. The Company's other leases expire at various dates
through July 1999 with certain renewal options. The Company believes that if any
of its leases were not to be renewed, adequate alternative space would be
available. The Company believes that its existing facilities are adequate for at
least its current and near-term future needs.
33
ENVIRONMENTAL AND REGULATORY MATTERS
The Company's operations are subject to Federal, state and local laws and
regulations relating to the environment, consumer products, health and safety,
and other regulatory matters. The Company believes that it has obtained all
material permits and that its operations are in substantial compliance with all
material applicable laws and regulations. See "Risk Factors -- Potential Adverse
Impact of Environmental Regulations."
LEGAL PROCEEDINGS
The Company is not a party to any litigation except as set forth below and
except for non-material litigation incidental to its business.
One of the Company's competitors challenged the Company's trademark
application for the Company's Liquid Force trademark for its wakeboards. See
"Risk Factors -- Limited Protection of Intellectual Property."
In August 1996, the Company was one of several named defendants in a product
liability action for an unspecified amount of damages arising out of the death
of one of the plaintiffs. The Company believes that such claim is without merit.
The Company has asserted that it never owned the product line involved in the
accident and expects to be dismissed from the case. With this exception, the
Company has never been a party to any product liability litigation. The Company
may in the future, due to the nature of its products, become a defendant in a
product liability lawsuit for serious personal injuries or death allegedly
relating to its products. Product liability claims may include allegations of
failure to warn, design defects or defects in the manufacturing process. The
Company believes, however, that injuries resulting from the use of bodyboards,
wakeboards and snowboards, unlike certain other sports such as skiing, virtually
always arise from the inherent dangers of the sport itself, rather than from
product defects. The Company believes that it has adequate liability insurance
for the risks arising in the normal course of its business, including product
liability insurance for all of its products. No assurance can be given, however,
that the Company will not be the subject of claims in excess of its coverage
limits, or that insurance will continue to be available on commercially
reasonable terms, or at all. See "Risk Factors -- Product Liability" and "Risk
Factors -- Limited Protection of Intellectual Property."
34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of March
1, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jon A. Glydon 49 President, Chief Executive Officer and Director
Brooks R. Herrick 59 Senior Vice President, Chief Financial Officer and
Treasurer
Eric S. George 36 Senior Vice President of Engineering
Steven J. Roth 48 Chairman of the Board
Gustav A. Christensen(1)(2) 49 Director
Thomas H. Conway 57 Director
Dr. James L. McKenney (1)(2) 67 Director
</TABLE>
- ---------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JON A. GLYDON has been the President, Chief Executive Officer and a
director of the Company since its organization in 1993. Prior to that, Mr.
Glydon was President of PI, Inc., a foam manufacturing and consumer products
company, for more than two years. The Company purchased its bodyboard business
from PI, Inc. in 1993. Mr. Glydon has more than twenty years of marketing and
manufacturing experience in the consumer products industry.
BROOKS R. HERRICK joined the Company in March 1997 as Senior Vice President,
Chief Financial Officer and Treasurer. From 1993 to 1996, Mr. Herrick was Vice
President -- Finance and Corporate Controller of Amtrol, Inc., a manufacturer
and marketer of flow and expansion control technology. From 1989 to 1993, he was
the Director of Internal Audit of Damon Corporation, which operates clinical
laboratories.
ERIC S. GEORGE joined the Company in 1995 as Vice President of Engineering
and in March 1997 was promoted to Senior Vice President of Engineering. From
1994 to 1995, he was Vice President of Operations of Next Generation Films, a
manufacturer of coextruded polyethylene films. From 1989 to 1994, Mr. George was
a manufacturing manager for Beresford Packaging, a polyethylene film bag
manufacturing company. Mr. George has 15 years of experience in manufacturing
management.
STEVEN J. ROTH has been a director of the Company since its organization.
Mr. Roth has been a general partner of CR Management Associates, L.P., a private
equity investment firm and the Company's founding stockholder, for more than
five years. Mr. Roth has been involved in the venture capital industry for more
than 13 years.
GUSTAV A. CHRISTENSEN joined the Board of Directors of the Company in
February 1997. Mr. Christensen has been Chairman of the Board of Alpha-Beta
Technologies, Inc., a biotechnology firm, since August 1991.
35
THOMAS H. CONWAY has been a director of the Company since its organization.
Mr. Conway has been a general partner of CR Management Associates, L.P., a
private equity investment firm and the Company's founding stockholder, for more
than five years. For more than 15 years, Mr. Conway has been involved in
corporate turnaround activities, including as President, Chief Executive Officer
and a director of Xyvision, Inc., a text processing software company, from
August 1991 to October 1996.
DR. JAMES L. MCKENNEY joined the Board of Directors of the Company in
February 1997. Dr. McKenney is the John G. McLean Professor of Business
Administration (Emeritus) at the Harvard Business School, and has been a faculty
member of the Harvard Business School since 1960. He is also a director of
Xyvision, Inc.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
Upon the closing of the Offering, the Company's Board of Directors will be
divided into three classes, with the members of each class of directors serving
for staggered three-year terms. Mr. Christensen and Dr. McKenney will serve in
the class the term of which expires in 1998; Mr. Glydon will serve in the class
the term of which expires in 1999; and Messrs. Conway and Roth will serve in the
class the term of which expires in 2000. Upon the expiration of the term of each
class of directors, directors comprising such class of directors will be elected
for a three-year term at the next succeeding annual meeting of stockholders.
COMPENSATION COMMITTEE -- INTERLOCKS AND INSIDER PARTICIPATION
Prior to February 1997, the Company did not have a Compensation Committee of
the Board of Directors. In February 1997, the Board of Directors established a
Compensation Committee which consists of Mr. Christensen and Dr. McKenney, both
of whom are non-employee directors.
DIRECTOR COMMITTEES AND COMPENSATION
Committees. The Audit Committee consists of Mr. Christensen and Dr.
McKenney. The Audit Committee will review with the Company's independent
auditors the scope and timing of their audit services and any other services
they are asked to perform, the auditor's report on the Company's financial
statements following completion of their audit and the Company's policies and
procedures with respect to internal accounting and financial controls. In
addition, the Audit Committee will make annual recommendations to the Board of
Directors for the appointment of independent auditors for the ensuing year.
The Compensation Committee consists of Mr. Christensen and Dr. McKenney.
The Compensation Committee will review and evaluate the compensation and
benefits of all officers of the Company, review general policy matters relating
to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also will administer the Company's 1997 Equity Incentive
Plan. See " -- Equity Plans."
Director Compensation. Directors who are not employees of the Company (also
referred to as "outside directors"), who currently consist of Messrs.
Christensen, Conway, McKenney and Roth, receive an annual retainer of $2,000 and
fees of $500 per day for attending regular meetings of the Board of Directors
and $250 per day for participating in meetings of the Board of Directors held by
means of conference telephone and for participating in certain meetings of
committees of the Board of Directors. Payment of director fees is made
quarterly. Directors are also reimbursed for reasonable out-of-pocket expenses
incurred in attending such meetings.
The Company is a party to a management consulting agreement (the
"Consulting Agreement") with CR Management Associates, L.P. ("CRM"). Messrs.
Conway and Roth, directors of the Company, are principals of CRM. During fiscal
1996, the Company paid CRM an aggregate of $180,000 pursuant to the Consulting
Agreement. See "Certain Transactions."
36
1997 Non-Employee Directors Stock Option Plan. The Company has adopted a
directors stock option plan (the "Directors Plan") providing for the annual
grant of stock options to purchase shares of Common Stock to outside directors.
A total of 150,000 shares of Common Stock have been reserved for issuance under
the Directors Plan.
Under the Directors Plan, each eligible director has been or will be granted
an option to purchase 15,000 shares of Common Stock upon the later of the
adoption of the plan or the director's first appointment or election to the
Board of Directors. Each such option granted prior to the date of the final
prospectus for the Offering will be deemed to be granted simultaneously with the
execution of the underwriting agreement for the Offering at an exercise price
equal to the initial public offering price. When and if the initial option is
fully vested after a five-year vesting period, options to purchase 3,000 shares
of Common Stock will be granted on the date of the Company's next annual meeting
of stockholders following the final vesting date of the initial option, provided
that such director's service as a director will continue after such meeting.
The exercise price of options granted under the Directors Plan will be 100%
of the fair market value per share of the Common Stock on the date the option is
granted. Options initially granted to each director under the Directors Plan
will become exercisable at the rate of 20% of the shares subject to the option
on the first through fifth anniversaries of the date of grant of the initial
option. Options granted after the initial five-year vesting period will be fully
vested upon grant. The options will expire on the tenth anniversary of the grant
date. If an optionee ceases to be a director of the Company after his or her
option becomes exercisable, the option will remain exercisable in accordance
with its terms. If an optionee ceases to be a director of the Company for any
reason prior to the time his or her option becomes fully exercisable, the option
will terminate with respect to the shares as to which the option is not then
exercisable.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the compensation earned
by the Company's Chief Executive Officer for services rendered in all capacities
to the Company in fiscal 1996. No other executive officer of the Company
received salary and bonus of $100,000 or more for fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION(1)
------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(2) COMPENSATION($)
--------------------------- --------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Jon A. Glydon ........................ $125,000 $10,000 104,444 0
President, Chief Executive Officer
and Director
</TABLE>
- ----------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life
insurance or other benefits which are available to all salaried employees
of the Company, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996 to its executive officers. Subsequent to October 31, 1996, Mr. Glydon,
in connection with a Management Equity Reorganization Plan dated as of
October 31, 1996, was permitted to purchase 156,666 shares of Common Stock
at a nominal purchase price, and was granted an option to purchase 104,444
shares of Common Stock at a nominal exercise price per share. The option is
shown in the table for clarity of presentation.
(3) Mr. Herrick, who joined the Company in March 1997, would be among the four
most highly compensated individuals had he been with the Company during
fiscal 1996. Mr. Herrick's base salary is $125,000.
37
Option Grants. The following table provides information concerning grants of
stock options made during fiscal 1996 by the Company to the Company's Chief
Executive Officer:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK
SECURITIES GRANTED TO EXERCISE OR PRICE APPRECIATION
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM(2)
NAME OPTIONS GRANTED FISCAL YEAR $/SHARE(1) DATE 5%($) 10%($)
---- --------------- ----------- ------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
JON A. GLYDON 104,444 55% $.01 1/31/02 $289 $638
</TABLE>
- ----------
(1) All options were granted at not less than fair market value as determined
by the Board of Directors of the Company as of the date of grant.
Subsequent to October 31, 1996, Mr. Glydon, in connection with a Management
Equity Reorganization Plan dated as of October 31, 1996, was permitted to
purchase 156,666 shares of Common Stock at a nominal purchase price, and
was granted an option to purchase 104,444 shares of Common Stock at a
nominal exercise price per share. The options are shown in the table for
clarity of presentation.
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the time of such exercise and the future
performance of the Company's Common Stock.
(3) Mr. Herrick, who joined the Company in March 1997, was granted an option to
purchase 16,846 shares of Common Stock at an exercise price per share of
$8.00.
Option Exercises and Unexercised Option Holdings. The following table
provides information regarding unexercised stock options held as of October 31,
1996 by the Company's Chief Executive Officer. Such person did not exercise any
stock options in fiscal 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END(1) OPTIONS AT YEAR-END(2)
---------------------- -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C>
JON A. GLYDON -- 104,444 -- 1,042,352
</TABLE>
- -------------
(1) Subsequent To October 31, 1996, Mr. Glydon, In Connection With A Management
Equity Reorganization Plan Dated As Of October 31, 1996, Was Permitted To
Purchase 156,666 Shares Of Common Stock At A Nominal Purchase Price, And
Was Granted An Option To Purchase 104,444 Shares Of Common Stock At A
Nominal Exercise Price Per Share. The Options Are Shown In The Table For
Clarity Of Presentation.
(2) There Was No Public Trading Market For The Common Stock As Of October 31,
1996. Accordingly, These Values Have Been Calculated On The Basis Of An
Assumed Initial Public Offering Price Of $10.00 Per Share, Less The
Applicable Exercise Price.
38
EQUITY PLANS
Management Incentive Program. The Company Management Incentive Program was
established in 1993 for the benefit of employees designated to participate in
the program. The program was terminated as of October 31, 1996, as described
below.
Under the cash incentive portion of this program, an aggregate of 25% of the
Company's net income was distributable to employee participants in the program.
Under a "phantom stock" portion of this program, upon the sale of the business
of the Company to an unaffiliated third party, the employee participants were
entitled to receive an aggregate of up to 25% of the net proceeds of sale that
are available for distribution to the stockholders of the Company after
deducting a return to all stockholders of their invested capital (debt and
equity) plus a 10% compounded return thereon. A total of 25 points was allocable
under the phantom stock portion of the program. Upon the adoption of the program
in 1993, an aggregate of 5.0 phantom stock points were allocated to six employee
participants for each year of service with the Company, including 4.0 points per
year allocated to Mr. Glydon. Additional point allocations were made to a total
of 18 employee participants after the initial point allocation. As of October
31, 1996, a total of 25 points had been allocated pursuant to the program. The
program provided that in the event of an initial public offering of the
Company's Common Stock, the Board of Directors was entitled to terminate the
program and substitute an equity program on terms deemed equitable by the Board
of Directors. As of October 31, 1996, pursuant to a Management Equity
Reorganization Plan, the program was terminated, and each participant was
permitted to purchase, at a nominal price, shares of Common Stock corresponding
to the participant's vested phantom equity percentage in the Company, and each
participant received a stock option, at a nominal exercise price per share,
corresponding to the participant's unvested phantom equity percentage. Mr.
Glydon purchased 156,666 shares, and 11 other employee participants purchased an
aggregate of 73,110 shares. In addition, Mr. Glydon was granted an option to
purchase 104,444 shares of Common Stock, and 18 other employee participants were
granted stock options to purchase an aggregate of 86,924 shares. The options
vest in accordance with the vesting schedule of the 1993 Management Incentive
Program.
1997 Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"1997 Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in February 1997. The 1997 Plan provides for the issuance of a
maximum of 450,000 shares of Common Stock pursuant to the grant to employees of
"incentive stock options" within the meaning of the Internal Revenue Code and
the grant of non-qualified stock options, stock awards or opportunities to make
direct purchases of stock in the Company to employees, consultants, directors
and officers of the Company.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
An option is not transferable by the optionholder except by will or by the laws
of descent and distribution. Generally, no incentive stock option plan may be
exercised more than 90 days following termination of employment. However, in the
event that termination is due to death or disibility, the option is exercisable
for a maximum of 180 days after such termination.
No options have been granted to date under the 1997 Plan.
401(K) PLAN
The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company who have worked at the Company for more than one
year and are over 21 years old are eligible to participate in the 401(k) Plan.
The 401(k) Plan provides that each participant may contribute a portion of his
or her pre-tax compensation (up to 15% and to a statutorily prescribed annual
limit) to the 401(k) Plan. The percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed to the 401(k)
Plan by employee participants and earnings on these contributions are fully
vested at all times. The Company, at its discretion, may contribute to the
401(k) Plan. Such Company contributions become fully vested upon a participant's
completion of six years of service. The Company has never made a discretionary
contribution.
39
CERTAIN TRANSACTIONS
Consulting Agreement with CR Management Associates, L.P. The Company is a
party to a Consulting Agreement, dated July 19, 1993, with CR Management
Associates, L.P. ("CRM"), a management consulting firm. CRM is an affiliate of
SSPR, L.P., the Company's principal stockholder, and Messrs. Conway and Roth,
directors of the Company, are principals of CRM. Pursuant to the terms of the
Consulting Agreement, CRM has provided, and continues to provide the Company
with, various management consulting services. During 1996, CRM provided
assistance in strategic planning; sales and marketing; new product development;
acquisition strategy, prospect evaluation and implementation; financial planning
and budgeting; and sourcing new credit facilities. CRM has advised the Company
that it estimates that it provided more than two person-years of assistance
during 1996. The fee payable by the Company to CRM under the Consulting
Agreement is $15,000 per month plus 1% of consolidated net sales in excess of
$12,000,000 per year. Following the closing of the Offering, the Consulting
Agreement provides that the annual fee shall be capped at $300,000 with a
five-year term. The Consulting Agreement may be amended or modified, or extended
at the end of its term, only with the approval of a majority of the outside
directors of the Company who are not affiliated with CRM. In exchange for this
amendment, the Company will issue 109,500 shares of Common Stock to CRM at the
closing of the Offering.
Indebtedness to SSPR, L.P. SSPR, L.P. is the Company's principal
stockholder and provided the Company's initial capital, consisting of $150,000
in equity and subordinated debt in the amount of $1.35 million. SSPR, L.P.
subsequently advanced an aggregate of $2.6 million in subordinated debt. The
subordinated notes are payable on demand, with interest at 10% per year, and are
subordinated to senior debt, as defined. In March 1997, SSPR, L.P. converted
$1.75 million principal amount into 218,750 shares of Common Stock. The
remaining principal and interest owing under the subordinated notes will be
repaid from the proceeds of the Offering.
Equity Issuances to Management and Certain Directors. Subsequent to the end
of its 1996 fiscal year, the Company issued shares of Common Stock and options
to purchase Common Stock to Mr. Glydon pursuant to the Company's Management
Equity Reorganization Plan, and to Messrs. Conway and Roth pursuant to the
Company's 1997 Non-Employee Directors Stock Option Plan. See "Management --
Director Committees and Compensation" and "Management -- Equity Plans."
40
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1997 (i) by each person
or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director of the Company, (iii)
by the Company's chief executive officer and (iv) by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, to the
knowledge of the Company, each person or entity listed below has sole voting and
investment power over the shares of Common Stock shown as beneficially owned,
except to the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED(1)
---------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
---------------- ------------------ -------- --------
<S> <C> <C>
SSPR, L.P. 1,482,181 86.6% 46.4%
c/o CR Management Associates, L.P.
92 Hayden Avenue
Lexington, Massachusetts 02173
Jackson National Life Insurance Company(2) 187,175 9.9 6.9
c/o PPM America, Inc.
225 W. Wacker Drive
Chicago, Illinois 60606
Jon A. Glydon (3) 156,666 9.2 4.9
Gustav A. Christensen (4) -- -- --
Thomas H. Conway (4)(5) 1,482,181 86.6 49.8
Dr. James J. McKenney (4) -- -- --
Steven J. Roth (4)(6) 1,482,181 86.6 49.8
All executive officers and directors as a group (7 persons) (7) 1,638,847 95.7 54.7
</TABLE>
(1) The number of shares of Common Stock deemed outstanding prior to the
Offering consists of 1,711,957 shares of Common Stock outstanding as of
March 31, 1997. The number of shares of Common Stock deemed outstanding
after the Offering includes an additional 1,375,000 shares of Common Stock
which are being offered for sale by the Company in the Offering and 109,500
shares which are being issued to CR Management Associates, L.P. ("CRM"), an
affiliate of SSPR, L.P., in connection with a reduction of the consulting
fee currently being charged to the Company by CRM, or a total of 3,196,457
shares. The number of shares deemed outstanding after the Offering does not
include any employee or director stock options or the Representatives'
Warrants, none of which are exercisable within 60 days of March 31, 1997.
The number of shares deemed outstanding does not include the 187,175 shares
issuable upon exercise of warrants held by Jackson National Life Insurance
Company ("JNL") or the 50,000 shares issuable upon exercise of a warrant to
be issued to JNL upon the closing of the Offering, except as noted in note
below.
(2) Shares used to calculate the percentage of the Company's Common Stock
beneficially owned by JNL include 187,185 shares of Common Stock issuable
upon exercise of a warrant held by JNL, and, after the Offering, also
include 50,000 shares issuable upon exercise of a warrant being issued to
JNL upon the closing of the Offering.
(3) Does not include 104,444 shares issuable upon exercise of an unvested stock
option.
(4) Does not include shares subject to an unvested option granted under the
1997 Non-Employee Directors Stock Option Plan.
(5) Consists, prior to the Offering, solely of the shares held by SSPR, L.P.,
of which Mr. Conway is a general partner and may be deemed to share voting
and investment power. Mr. Conway disclaims beneficial ownership of such
shares. Shares used to calculate the percentage of the Company's Common
Stock beneficially owned after the Offering include 109,500 shares being
issued to CRM upon the closing of the Offering; Mr. Conway is a general
partner of CRM and may be deemed to share voting and investment power with
respect to such shares. Mr. Conway disclaims beneficial ownership of such
shares.
(6) Consists, prior to the Offering, solely of the shares held by SSPR, L.P.,
of which Mr. Roth is a general partner and may be deemed to share voting
and investment power. Mr. Roth disclaims beneficial ownership of such
shares. Shares used to calculate the percentage of the Company's Common
Stock beneficially owned after the Offering include 109,500 shares being
issued to CRM upon the closing of the Offering; Mr. Roth is a general
partner of CRM and may be deemed to share voting and investment power with
respect to such shares. Mr. Roth disclaims beneficial ownership of such
shares.
(7) See preceding footnotes.
41
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of the Offering and the filing of Restated
Articles of Organization (the "Restated Articles"), the authorized capital stock
of the Company will consist of 15,000,000 shares of Common Stock, $.01 par value
per share, and 500,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock").
COMMON STOCK
As of March 31, 1997, there were 1,711,957 shares of Common Stock
outstanding (giving effect to the Stock Splits), held of record by 13
stockholders. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of the 1,375,000 shares of Common Stock offered
hereby and the 109,500 shares to be issued to CRM (see "Certain Transactions"),
there will be 3,196,457 shares of Common Stock outstanding upon the closing of
the Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. There are no shares of Preferred Stock
outstanding.
PREFERRED STOCK
Upon the closing of the Offering, the Board of Directors will be authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, to issue from time to time up to an aggregate of 500,000 shares of
Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
WARRANTS
In connection with the Offering, the Company will issue to the
Representatives warrants to purchase a number of shares of Common Stock equal to
ten percent (10%) of the number of shares being offered hereby at an exercise
price of 150% of the initial offering price. In addition, the Company's senior
lender, Jackson National Life Insurance Company ("JNL"), is the holder of a
warrant to purchase 187,175 shares of Common Stock, and at the closing of the
Offering will be issued a warrant to purchase an additional 50,000 shares of
Common Stock, each with an exercise price equal to 90% of the initial public
offering price.
REGISTRATION RIGHTS
The Company, SSPR, L.P. ("SSPR"), CRM, Mr. Glydon and JNL (the "Rights
Holders") are parties to a Registration Rights Agreement, pursuant to which,
upon the request of the Rights Holders, the Company will use its best efforts to
effect the registration under the applicable federal and state
42
securities laws of any of the shares of Common Stock held by them for sale in
accordance with their intended method of disposition thereof, and will take such
other actions as may be necessary to permit the sale thereof in other
jurisdictions, subject to certain limitations specified in the Registration
Rights Agreement. The Rights Holders will also have the right, which they may
exercise at any time and from time-to-time, to include the shares of Common
Stock held by it in certain other registrations of common equity securities of
the Company initiated by the Company on its own behalf or on behalf of its other
stockholders. The Company will agree to pay all out-of-pocket costs and expenses
(other than underwriters' discounts and commissions and transfer taxes) in
connection with each such registration. The Registration Rights Agreement will
contain indemnification and contribution provisions: (i) by the Rights Holders
for the benefit of the Company and related persons; and (ii) by the Company for
the benefit of the Rights Holders and the other persons entitled to effect
registrations of Common Stock pursuant to its terms and related persons.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND BY-LAWS
Following the Offering, the Company expects that it will have more than 200
stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
publicly-held Massachusetts 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 becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder, or (iii) the business combination
is approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 5% or more of the outstanding voting stock of the corporation. A
"business combination" includes a merger, a stock or asset sale, and certain
other transactions resulting in a financial benefit to the interested
stockholder.
Massachusetts General Laws Chapter 156B, Section 50A generally requires that
publicly-held Massachusetts corporations have a classified board of directors
consisting of three classes as nearly equal in size as possible, unless the
corporation elects to opt out of the statute's coverage. The Company's Restated
By-Laws, as amended (the "Restated By-Laws"), contain provisions which give
effect to Section 50A. See "Management -- Executive Officers and Directors."
The Company's Restated By-Laws include a provision excluding the Company
from the applicability of Massachusetts General Laws Chapter 110D, entitled
"Regulation of Control Share Acquisitions." In general, this statute provides
that any stockholder of a corporation subject to this statute who acquires 20%
or more of the outstanding voting stock of a corporation may not vote such stock
unless the stockholders of the corporation so authorize. The Board of Directors
may amend the Company's Restated By-Laws at any time to subject the Company to
this statute prospectively.
The Restated By-Laws require that nominations for the Board of Directors
made by a stockholder comply with certain notice procedures. A notice by a
stockholder of a planned nomination must be given not less than 60 and not more
than 90 days prior to a scheduled meeting, provided that if less than 70 days'
notice is given of the date of the meeting, a stockholder will have ten days
within which to give such notice. The stockholder's notice of nomination must
include particular information about the stockholder, the nominee and any
beneficial owner on whose behalf the nomination is made. The Company may require
any proposed nominee to provide such additional information as is reasonably
required to determine the eligibility of the proposed nominee.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company not
less than 60 and not more than 90 days prior to the scheduled meeting, provided
in certain circumstances that a ten-day notice rule applies. The notice from the
stockholder must describe the proposed business to be brought before the meeting
and
43
include information about the stockholder making the proposal, any beneficial
owner on whose behalf the proposal is made, and any other stockholder known to
be supporting the proposal. The Restated By-Laws require the Company to call a
special stockholders meeting at the request of stockholders holding at least 75%
of the voting power of the Company.
The Restated Bylaws provide that the directors and officers of the Company
shall be indemnified by the Company to the fullest extent authorized by
Massachusetts law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. In addition, the Restated Articles provide that the
directors of the Company will not be personally liable for monetary damages to
the Company for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to the Company or its stockholders, acted in bad
faith, knowingly or intentionally violated the law, authorized illegal dividends
or redemptions or derived an improper personal benefit from their action as
directors.
The Restated Articles provide that any amendment to the Restated Articles,
the sale, lease or exchange of all or substantially all of the Company's
property and assets, or the merger or consolidation of the Company into or with
any other corporation may be authorized by the approval of the holders of a
majority of the shares of each class of stock entitled to vote thereon, rather
than by two-thirds as otherwise provided by statute, provided that the
transactions have been authorized by a majority of the members of the Board of
Directors and the requirements of any other applicable provisions of the
Restated Articles have been met.
In addition, the Restated Articles provide that shares of the Company's
Preferred Stock may be issued in the future without stockholder approval and
upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. See "Description of
Capital Stock -- Preferred Stock".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
44
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 3,196,457 shares of
Common Stock outstanding. Of these shares, the 1,375,000 shares sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 1,821,457 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. All of the Restricted Shares will become eligible for
sale in the public market in accordance with Rule 144 or Rule 701 under the
Securities Act beginning 90 days after the date hereof; all of these shares are
subject to Lock-up Agreements. In addition, SSPR has the right to have its
Restricted Shares registered by the Company under the Securities Act as
described below.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
31,965 shares immediately after the Offering) or (ii) the average weekly trading
volume in the Common Stock in the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate.
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of currently outstanding options may be resold by
persons, other than Affiliates, beginning 90 days after the date of this
prospectus, subject only to the manner of sale provisions of Rule 144, and by
Affiliates, beginning 90 days after the date of this prospectus, subject to all
of the provisions of Rule 144 other than the minimum holding period.
OPTIONS AND WARRANTS
As of the closing of the Offering, options to purchase a total of 268,214
shares of Common Stock will be outstanding and held by employees and directors
of the Company. In addition, as of such date, JNL will hold warrants to purchase
237,175 shares of Common Stock. All of the shares issuable pursuant to such
options and warrants are subject to Lock-up Agreements.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding employee stock options and Common Stock issuable pursuant to the
Company's stock option plans that do not qualify for an exemption under Rule 701
from the registration requirements of the Securities Act. The Company expects to
file these registration statements shortly following the closing of the
Offering, and such registration statements are expected to become effective upon
filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements.
LOCK-UP AGREEMENTS
All of the Company's stockholders, optionholders and warrantholders have
agreed, pursuant to the Lock-up Agreements, that they will not, directly or
indirectly, offer, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise sell or dispose of (or announce any offer, sale, offer of
sale, contract of sale, grant of any option to purchase or any other sale or
disposition) any shares of Common
45
Stock or other capital stock of the Company or any securities convertible into,
or exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this prospectus
without the prior written consent of H.C. Wainwright & Co., Inc.
REGISTRATION RIGHTS
SSPR, CRM, JNL and Mr. Glydon are parties to a registration rights
agreement with the Company pursuant to which they will be entitled to require
the Company to register under the Securities Act all or any portion of the
outstanding Common Stock then owned by them. See "Description of Capital Stock
- -- Registration Rights."
46
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), for whom H.C. Wainwright & Co.,
Inc. and Cruttenden Roth Incorporated are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company the respective number of shares of Common Stock set
forth opposite its name below at the initial public offering price less the
underwriting discount set forth on the cover page of this prospectus. The
Underwriting Agreement provides that subject to the terms and conditions set
forth therein, the Underwriters are obligated to purchase all of the shares of
Common Stock being sold pursuant to the Underwriting Agreement if any of the
shares of Common Stock are purchased. Under certain circumstances, under the
Underwriting Agreement, the commitments of non-defaulting Underwriters may be
increased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ------
<S> <C>
H.C. Wainwright & Co., Inc.
Cruttenden Roth Incorporated
---------
Total 1,375,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company has granted the Underwriters an option to purchase up to an
additional 206,250 shares of Common Stock at the initial public offering price
set forth on the cover page of this prospectus, less the underwriting discount.
Such option, which will expire 30 days after the date of this prospectus, may be
exercised solely to cover overallotments, if any, made in connection with the
sale of shares of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
initially by that Underwriter bears to the total number of shares of Common
Stock to be purchased initially by the Underwriters. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,375,000 shares of Common Stock are being offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including overallotments, entering stabilizing bids, effecting syndicate short
covering transactions and penalty bids. An overallotment means the confirming of
sales of Common Stock in excess of the number of shares of Common Stock offered
hereby. 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 short 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 Representatives 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
47
purchased in syndicate covering transactions. Such transactions may stabilize
the market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
On the closing of the Offering, the Company will sell to the
Representatives, individually and not as representatives of the Underwriters,
for nominal consideration, the Representatives' Warrants entitling the
Representatives to purchase an aggregate of 137,500 shares of Common Stock at an
initial exercise price per share equal to 150% of the initial public offering
price hereunder. The Representatives' Warrants will be exercisable for a period
of four years commencing one year after the date of this prospectus and will
contain certain demand and incidental registration rights relating to the
underlying Common Stock. The Representatives' Warrants cannot be transferred,
assigned or hypothecated, in whole or in part, for a period of twelve months
from the date of their issuance, except that they may be assigned to any officer
or partner of the Representatives.
For the life of the Representatives' Warrants, their holders have the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the Representatives' Warrants
remain unexercised, the terms under which the Company could obtain additional
capital may be adversely affected. Moreover, the holders of the Representatives'
Warrants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of its
securities on terms more favorable than those provided by the Representatives'
Warrants. Additionally, if the Representatives should exercise their
registration rights to effect a distribution of the underlying shares of Common
Stock, the Representatives, prior to and during such distribution, would be
unable to make a market in the Common Stock. If the Representatives must cease
making a market, the market and market price for the Common Stock may be
adversely affected and holders of the Common Stock may be unable to sell the
Common Stock.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of one percent (1.0%) of the gross proceeds of the Offering, which
will include proceeds from the overallotment option, if exercised. The
Representatives' expenses in excess of the non-accountable expense allowance,
including their legal expenses, will be borne by the Representatives.
The Company has granted H.C. Wainwright & Co., Inc. the right to act as the
Company's managing underwriter and financial advisor on an exclusive basis until
December 16, 1998 with respect to any sales of equity securities by the Company,
any sale or disposition of the Company or any of its assets or the acquisition
by the Company of any securities or assets of any other business entity.
The Underwriters do not intend to sell any of the Company's securities to
accounts for which they exercise discretionary authority.
The Company and the holders of all of the Common Stock and options and
warrants to purchase Common Stock outstanding prior to the Offering have agreed
that they will not offer, contract, sell or otherwise dispose of directly or
indirectly any shares of Common Stock for a period of 180 days following the
date of this prospectus, without the prior written consent of the
Representatives except, in the case of the Company, for the shares of Common
Stock offered hereby, the issuance of shares of Common Stock upon the exercise
of outstanding stock options and any additional stock options granted under the
1997 Equity Incentive Plan and 1997 Non-Employee Director Stock Option Plan, and
the issuance of shares of Common Stock as consideration for the acquisition of
one or more businesses provided the recipients thereof agree in writing to be
bound by the same restrictions, and, in the case of the stockholders, for gifts
of the Common Stock provided the donee agrees in writing to be bound by the same
restrictions.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations among the Company and the Underwriters. Among the factors to be
considered in such negotiations, in addition to prevailing market conditions,
will be certain financial information of the Company, an assessment of the
Company's management, estimates of the business potential and earnings prospects
of the Company, the present state of the Company's development and operations,
the present
48
state of the Company's industry in general and other factors deemed relevant.
The initial public offering price set forth on the cover page of this prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offering at or above the initial public offering price.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933, as
amended, or contribute to payments the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company as of and for the fiscal year ended
October 31, 1996 included in this prospectus and elsewhere in this 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
report. The financial statements of the Company as of October 31, 1995 and for
the fiscal years ended October 31, 1994 and 1995 included in this prospectus
have been so included in reliance on the report of Richard A. Eisner & Company,
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Richard A. Eisner & Company, LLP was the Company's independent accountant
for the periods prior to October 31, 1995. The change in the independent
accountant from Richard A. Eisner & Company, LLP to Arthur Andersen LLP was
approved by the Board of Directors. During the period of Richard A. Eisner &
Company, LLP's engagement by the Company, there were no disagreements between
Richard A. Eisner & Company, LLP and the Company on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure and no reportable events relating to the relationship between the
Company and Richard A. Eisner & Company, LLP.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the Commission, this prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. In
addition, the Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the Commission which can be accessed
at http://www.sec.gov.
The Company intends to furnish holders of its Common Stock offered hereby
with annual reports containing financial statements audited by an independent
accounting firm and with quarterly reports containing unaudited summary
financial statements for each of the first three quarters of each fiscal year.
49
EARTH AND OCEAN SPORTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ............................................................... F-2
Report of Independent Public Accountants ............................................................... F-3
Balance Sheets As of October 31, 1995 and 1996 and January 31, 1997 (Unaudited) and Pro Forma
Balance Sheet as of January 31, 1997 (Unaudited) ..................................................... F-4
Statements of Operations for the Years Ended October 31, 1994, 1995 and 1996 and
the Three Months Ended January 31, 1996 and 1997 (Unaudited) ......................................... F-5
Statements of Stockholders' Equity (Deficit) for the Years Ended October 31, 1994,
1995 and 1996 and the Three Months Ended January 31, 1997
(Unaudited) and Pro Forma Statement of Stockholders' Equity
(Deficit) for the Three Months Ended January 31, 1997 (Unaudited) .................................... F-6
Statements of Cash Flows for the Years Ended October 31, 1994, 1995 and 1996 and
the Three Months Ended January 31, 1996 and 1997 (Unaudited) ......................................... F-7
Notes to Financial Statements .......................................................................... F-8
</TABLE>
F-1
After the 1.684575-for-1 stock split discussed in Note 11 (a) to the Company's
financial statements is effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Earth and Ocean Sports, Inc.:
We have audited the accompanying balance sheet of Earth and Ocean Sports,
Inc. ( a Massachusetts Corporation) as of October 31, 1996, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Earth and Ocean Sports, Inc.
as of October 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 13, 1997
(except with respect to Note (6),
as to which the date is March 27, 1997)
F-2
After the 1.684575-for-1 stock split discussed in Note 11 (a) to the Company's
financial statements is effected, we expect to be in a position to render the
following audit report.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
March 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EARTH AND OCEAN SPORTS, INC.:
We have audited the accompanying balance sheet of Earth and Ocean Sports,
Inc. (a Massachusetts Corporation) as of October 31, 1995, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the two years in the period ended October 31, 1995. 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, the financial statements enumerated above present fairly, in
all material respects, the financial position of Earth and Ocean Sports, Inc. at
October 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 1995, in conformity with
generally accepted accounting principles.
Cambridge, Massachusetts
December 29, 1995
F-3
EARTH AND OCEAN SPORTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- PRO FORMA
JANUARY 31, JANUARY 31,
1995 1996 1997 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 33,800 $ 8,055 $ 4,115 $ 4,115
Accounts receivable, net of allowance for doubtful accounts
of $38,000, $152,000 and $162,000 in 1995, 1996 and 1997,
respectively 1,431,200 2,167,653 2,767,074 2,767,074
Inventories 1,813,600 3,220,612 3,133,588 3,133,588
Prepaid expenses and other current assets 305,000 408,630 413,194 413,194
------- ------- ------- -------
Total current assets 3,583,600 5,804,950 6,317,971 6,317,971
PROPERTY AND EQUIPMENT, NET 1,570,700 2,779,770 2,676,625 2,676,625
INTANGIBLE ASSETS, NET 1,079,900 1,080,104 1,179,618 1,179,618
--------- --------- --------- ---------
$ 6,234,200 $ 9,664,824 $ 10,174,214 $ 10,174,214
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit $ 2,365,500 $ 3,964,697 $ 3,739,992 $ 3,739,992
Current portion of long-term debt obligations 319,700 460,034 527,446 527,446
Accounts payable 710,700 1,593,533 1,961,647 1,961,647
Accrued expenses 370,800 510,937 176,481 176,481
Interest payable to principal stockholder 312,600 239,463 287,255 287,255
------- ------- ------- -------
Total current liabilities 4,079,300 6,768,664 6,692,821 6,692,821
--------- --------- --------- ---------
LONG-TERM DEBT OBLIGATIONS, LESS CURRENT PORTION 434,200 538,836 345,095 345,095
------- ------- ------- -------
SUBORDINATED NOTE PAYABLE TO PRINCIPAL STOCKHOLDER 1,775,000 2,700,000 3,800,000 2,050,000
--------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock -- $.01 par value --
Authorized -- 500,000 shares
Issued and outstanding -- none -- -- -- --
Common stock -- $.01 par value --
Authorized -- 15,000,000 shares
Issued and outstanding -- 1,263,431 shares in 1995, 1,493,207
shares in 1996 and 1997 and 1,821,457 shares pro forma 12,634 14,932 14,932 18,214
Additional paid-in capital 137,366 137,366 137,366 2,979,084
Accumulated deficit (204,300) (494,974) (816,000) (1,911,000)
-------- -------- -------- ----------
Total stockholders' equity (deficit) (54,300) (342,676) (663,702) 1,086,298
------- -------- -------- ---------
$ 6,234,200 $ 9,664,824 $ 10,174,214 $ 10,174,214
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
------------------------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES $ 9,143,800 $ 11,371,900 $ 12,404,051 $ 2,028,900 $ 2,874,662
COST OF GOODS SOLD 5,568,900 7,029,600 7,585,115 1,275,900 2,030,589
--------- --------- --------- --------- ---------
Gross profit 3,574,900 4,342,300 4,818,936 753,000 844,073
--------- --------- --------- ------- -------
OPERATING EXPENSES:
Product development and engineering 188,400 236,300 338,300 67,500 152,900
Selling and marketing 1,633,600 1,898,600 2,704,179 533,700 500,669
General and administrative 797,100 897,600 938,055 190,100 284,632
Amortization of intangible assets 499,600 680,700 532,424 165,500 43,289
------- ------- ------- ------- ------
Total operating expenses 3,118,700 3,713,200 4,512,958 956,800 981,490
--------- --------- --------- ------- -------
Income (loss) from operations 456,200 629,100 305,978 (203,800) (137,417)
INTEREST EXPENSE (439,400) (554,700) (596,652) (133,700) (183,609)
-------- -------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes 16,800 74,400 (290,674) (337,500) (321,026)
PROVISION (BENEFIT) FOR INCOME TAXES (19,900) 16,000 -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 36,700 $ 58,400 $ (290,674) $ (337,500) $ (321,026)
========== =========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE (Note 2) $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
========== =========== =========== ========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 2) 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
========= ========= ========= ========= =========
SUPPLEMENTAL NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 2) $ 0.11 $ (0.05)
=========== ===========
SUPPLEMENTAL WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2) 2,721,891 2,812,815
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------
TOTAL
ADDITIONAL STOCKHOLDERS'
$.01 PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIT)
------ ----- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993 1,263,431 $12,634 $ 137,366 $ (299,400) $ (149,400)
Net income -- -- -- 36,700 36,700
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1994 1,263,431 12,634 137,366 (262,700) (112,700)
Net income -- -- -- 58,400 58,400
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1995 1,263,431 12,634 137,366 (204,300) (54,300)
Issuance of common stock under management incentive
plan 229,776 2,298 -- -- 2,298
Net loss -- -- -- (290,674) (290,674)
------- ----- --------- ---------- ---------
BALANCE, OCTOBER 31, 1996 1,493,207 14,932 137,366 (494,974) (342,676)
Net loss (Unaudited) -- -- -- (321,026) (321,026)
------- ----- --------- ---------- ---------
BALANCE, JANUARY 31, 1997 (Unaudited) 1,493,207 14,932 137,366 (816,000) (663,702)
========= ======= ========== =========== ============
Issuance of common stock to CRM (Unaudited) 109,500 1,095 1,093,905 (1,095,000) --
------- ----- --------- ---------- ---------
Conversion of subordinated note payable to principal
stockholder (Unaudited) 218,750 2,187 1,747,813 -- 1,750,000
------- ----- --------- ---------- ---------
PRO FORMA BALANCE, JANUARY 31, 1997 (Unaudited) $1,821,457 $18,214 $2,979,084 $(1,911,000) $1,086,298
========= ====== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
EARTH AND OCEAN SPORTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 36,700 $ 58,400 $ (290,674) $ (337,500) $ (321,026)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Depreciation and amortization 801,800 843,500 1,012,404 236,400 210,665
Changes in current assets and liabilities, net
of acquisition of product lines --
Accounts receivable (124,900) (566,800) (736,453) (526,100) (599,421)
Inventories (780,200) 117,000 (1,380,258) (666,400) 87,024
Prepaid expenses and other current
assets (32,500) (238,700) (103,629) 254,500 (4,565)
Accounts payable 287,700 123,300 975,214 539,800 368,114
Accrued expenses (85,000) 41,100 (209,863) (298,600) (509,456)
Interest payable to principal stockholder 162,900 109,000 (73,137) (22,000) 47,792
------- ------- ------- ------- ------
Net cash provided by (used in)
operating activities 266,500 486,800 (806,396) (819,900) (720,873)
------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of product lines (see below) (143,400) (168,000) (607,342) -- --
Increase (decrease) in intangible assets -- -- (93,657) (28,900) 17,858
Purchases of property and equipment (283,300) (632,600) (986,276) (112,200) (49,890)
-------- -------- -------- -------- -------
Net cash used in investing activities (426,700) (800,600) (1,687,275) (141,100) (32,032)
-------- -------- ---------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line
of credit 1,129,600 541,500 1,599,197 666,300 (224,705)
Proceeds from long-term debt obligations 400,000 3,224,800 925,000 400,000 1,100,000
Payments on long-term debt obligations (1,318,900) (3,435,900) (232,526) (108,300) (77,776)
Proceeds under capital leases -- -- 239,343 -- --
Payments under capital leases (24,100) (15,500) (65,386) (18,300) (48,554)
Proceeds from issuance of stock under management
incentive plan -- -- 2,298 -- --
-------- -------- ---------- -------- -------
Net cash provided by financing
activities 186,600 314,900 2,467,926 939,700 748,965
-------- -------- ---------- -------- -------
NET INCREASE (DECREASE) IN CASH 26,400 1,100 (25,745) (21,300) (3,940)
CASH, BEGINNING OF PERIOD 6,300 32,700 33,800 33,800 8,055
-------- -------- ---------- -------- -------
CASH, END OF PERIOD $ 32,700 $ 33,800 $ 8,055 $ 12,500 $ 4,115
=========== ============ ============ ========== ===========
ACQUISITION OF PRODUCT LINES:
Working capital $ 5,400 $ (61,700) $ (119,136) $ -- $ --
Property and equipment (275,300) (92,400) (354,014) -- --
Patents and trademarks (86,700) (150,000) (407,692) -- --
Goodwill (15,000) (43,900) (76,500) -- --
Liabilities assumed -- 180,000 350,000 -- --
Note payable issued 228,200 -- -- -- --
-------- -------- ---------- -------- -------
Net cash used to acquire product
lines $ (143,400) $ (168,000) $ (607,342) $ -- $ --
=========== ============ ============ ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for --
Interest $ 274,000 $ 444,000 $ 669,818 $ 155,700 $ 135,817
=========== ============ ============ ========= ==========
Income taxes $ 18,500 $ 800 $ 1,256 $ -- $ --
=========== ============ ============ ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases $ -- $ 23,047 $ 303,539 $ -- $ --
=========== ============ ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS
Earth and Ocean Sports, Inc. (the Company) is a manufacturer, distributor
and marketer of premium name brand surf, water and snow sports products for
recreational markets. The Company's products include bodyboards, wakeboards,
snowboards and related accessories. The Company was incorporated in
Massachusetts on July 13, 1993.
The Company is subject to a number of risks which include the ability to
finance future operations. The Company has historically financed its operations
with borowings from its principal stockholder and its bank. On March 26, 1997,
the Company entered into a new credit facility (see Note 6).
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies described below and elsewhere in the accompanying notes to
financial statements.
(a) Pro Forma Information
The pro forma balance sheet and statement of stockholders' equity (deficit)
as of January 31, 1997 gives effect to the conversion of $1,750,000 of
subordinated indebtedness to the principal stockholder into 218,750 shares of
common stock on March 17, 1997 and the issuance of 109,500 shares valued at $10
per share to CR Management Associates, L.P. (CRM) as consideration for amending
the management agreement effective upon consummation of the Company's proposed
initial public offering (see Note 9). The Company will record a charge to
operations for the value of such shares upon the consummation of the Company's
proposed initial public offering.
(b) Interim Financial Statements
The accompanying balance sheet as of January 31, 1997, and the statements of
operations and cash flows for the three months ended January 31, 1996 and
January 31, 1997, and the statement of stockholders' equity (deficit) for the
three months ended January 31, 1997 are unaudited, but in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. The results of operations for the three months ended January 31, 1997
are not necessarily indicative of the results to be expected for the entire
fiscal year.
(c) 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.
(d) Cash Equivalents
The Company considers all highly liquid investments with original purchase
maturities of three months or less to be cash equivalents. There were no cash
equivalents at October 31, 1995 and 1996 and January 31, 1997.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
OCTOBER 31,
---------------------- JANUARY 31,
1995 1996 1997
--------- --------- ---------
Raw materials ................... $ 642,200 $ 1,380,743 $ 1,457,804
Work-in-process ................. 7,300 -- 101,929
Finished goods .................. 1,164,100 1,839,869 1,573,855
--------- --------- ---------
$ 1,813,600 $ 3,220,612 $ 3,133,588
=========== =========== ===========
Work-in-process and finished goods inventories consist of material, labor
and manufacturing overhead.
F-8
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(f) Depreciation and Amortization
Property and equipment are stated at cost. The Company provides for
depreciation and amortization on property and equipment using the straight-line
method by charges to operations that allocate the cost of assets over their
estimated useful lives. The cost of property and equipment and their estimated
useful lives are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
ESTIMATED ---------------------- JANUARY 31,
ASSET CLASSIFICATION USEFUL LIFE 1995 1996 1997
- -------------------- ----------- ---- ---- ----
<S> <C> <C> <C> <C>
Machinery and equipment ..................... 7 Years $1,263,835 $ 1,598,330 $ 1,607,007
Equipment under capital leases .............. Life of lease 95,565 636,714 636,714
Plates, dies and molds ...................... 5 Years 555,600 1,256,248 1,297,406
Construction in progress .................... -- 98,700 9,165 26,213
Leasehold improvements ...................... Life of lease 9,000 166,072 149,079
----- ------- -------
2,022,700 3,666,529 3,716,419
Less -- Accumulated depreciation and
amortization .............................. 452,000 886,759 1,039,794
------- ------- ---------
$1,570,700 $ 2,779,770 $ 2,676,625
========== =========== ============
</TABLE>
(g) Intangible Assets
Patents, trademarks and goodwill are being amortized on a straight-line
basis over their estimated useful lives. Noncompete, consulting and supply
agreements are amortized on a straight-line basis over the lives of the
agreements.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
ESTIMATED ---------------------- JANUARY 31,
ASSET CLASSIFICATION USEFUL LIFE 1995 1996 1997
- -------------------- ----------- ---- ---- ----
<S> <C> <C> <C> <C>
Noncompete agreement ....................... 3 Years $1,318,000 $ 1,318,000 $ 1,318,000
Supply agreement ........................... 5 Years 500,000 500,000 500,000
Goodwill ................................... 15 Years 93,700 173,920 175,200
Patents .................................... 7-15 Years 208,000 253,727 254,112
Trademarks ................................. 15 Years 150,000 566,949 570,427
Other ...................................... 3 Years 115,900 141,053 143,053
Deferred financing costs ................... 3 Years 68,100 77,900 227,899
------ ------ -------
2,453,700 3,031,549 3,188,691
Less -- Accumulated amortization ........... 1,373,800 1,951,445 2,009,073
--------- --------- ---------
$1,079,900 $ 1,080,104 $ 1,179,618
========== =========== ============
</TABLE>
F-9
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(h) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance-sheet concentration of credit risk such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company's accounts receivable credit risk is not concentrated
within any geographic area and no customer represented a significant credit risk
to the Company. One customer accounted for approximately 11.5%, 15.5%, 11.4%,
10.4% and 21.7% of net sales for the years ended October 31, 1994, 1995 and 1996
and the three months ended January 31, 1996 and 1997, respectively.
(i) Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which include
cash, accounts receivable, revolving line of credit, accounts payable and notes
payable, approximate their fair value.
(j) Net Income (Loss) Per Common and Common Equivalent Share
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding during the
periods, computed in accordance with the treasury stock method. Net loss per
common and common equivalent share is based upon the weighted average number of
common shares outstanding. The weighted average number of common and common
equivalent shares outstanding used in computing net income (loss) assumes that
common stock issued and common stock options and warrants granted in the twelve
months preceding the Company's proposed initial public offering have been
outstanding for all periods presented, computed in accordance with the treasury
stock method.
(k) Supplemental Net Income (Loss) Per Common and Common Equivalent Share
Supplemental net income (loss) per common and common equivalent share gives
effect to the (i) the conversion of $1,750,000 of subordinated indebtedness to
principal stockholder into 218,750 shares of common stock and (ii) the use of
net proceeds of the proposed initial public offering to repay $1,189,463 and
$2,337,200 at October 31, 1996 and January 31, 1997, respectively, to principal
stockholder and $4,839,689 and $4,495,500 at October 31, 1996 and January 31,
1997, respectively, to the Company's bank as if these events had occurred at the
beginning of each period.
Supplemental net income (loss) consists of net income (loss) increased or
decreased by the effect of reduced interest expense associated with (i) and (ii)
above. Supplemental net income (loss) per common and common equivalent share
represents supplemental net income (loss) divided by the supplemental weighted
average common and common equivalent shares outstanding.
(l) Postretirement Benefits
The Company has no obligations for postretirement benefits under SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions, or
postemployment benefits under SFAS No. 112, Employers' Accounting for
Postemployment Benefits, as it does not currently offer such benefits.
F-10
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(m) Asset Carrying Values
The Company applies SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. SFAS No. 121
requires the Company to continually evaluate whether events and circumstances
have occurred that indicate that the estimated remaining useful life of
long-lived assets and certain identifiable intangibles and goodwill may warrant
revision or that the carrying value of these assets may be impaired. To compute
whether assets have been impaired, the estimated gross cash flows for the
estimated remaining useful life of the asset are compared to the carrying value.
To the extent that the gross cash flows are less than the carrying value, the
assets are written down to the estimated fair value of the asset. The
application of this standard did not have a material effect on the Company's
financial position or results of operations.
(n) Accounting for Stock-based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The Company has determined that it
will continue to account for stock-based compensation for employees under
Accounting Principles Board (APB) Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company is required to disclose the pro
forma net income or loss and per share amounts in the notes to the financial
statements using the fair-value-based method. The Company has computed the pro
forma disclosures required under SFAS No. 123 for all options granted for the
year ended October 31, 1996 and the three months ended January 31, 1997 using
the Black-Scholes option pricing model prescribed by SFAS No. 123. The effect of
SFAS No. 123 on pro forma net loss was not material for the year ended October
31, 1996 or the three months ended January 31, 1997. The Company has not
computed the pro forma effect for the year ended October 31, 1995 or the three
months ended January 31, 1996, as there were no options granted or outstanding
during those periods.
(o) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified in order to conform with the current year's presentation.
(3) ACQUISITIONS
On July 13, 1993, in connection with the Company's formation, pursuant to an
asset purchase and sale agreement with a corporation, the Company acquired
certain assets and assumed certain liabilities of a division of a business for
consideration consisting of $2,525,000 in cash and $1,100,000 of deferred
payments, which were recorded at their discounted value of $929,700 to reflect
imputed interest. The purchase price was allocated to the assets acquired and
liabilities assumed as follows:
Inventory ........................................ $ 919,600
Property and equipment ........................... 714,700
Covenant not to compete .......................... 1,300,000
Supply agreement ................................. 500,000
Goodwill and other assets ........................ 209,300
Assumed liabilities .............................. (188,900)
--------
Total ..................................... 3,454,700
=========
F-11
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(3) ACQUISITIONS -- (CONTINUED)
In March 1994, pursuant to an asset purchase agreement with a corporation,
the Company acquired certain assets and assumed certain liabilities for
consideration consisting of $143,400 in cash, including acquisition costs, and a
$253,300 note payable, which was recorded at this discounted value of $228,200
to reflect imputed interest. The purchase price was allocated to the assets
acquired and liabilities assumed as follows:
Accounts receivable ....................... $ 53,700
Inventory ................................. 62,900
Property and equipment .................... 275,300
Patents ................................... 86,700
Goodwill .................................. 15,000
Assumed liabilities ....................... (122,000)
--------
Total ............................... $ 371,600
=========
In September 1995, the Company acquired certain assets and assumed certain
liabilities of a snowboard manufacturer, for consideration of approximately
$168,000 in cash, including acquisition costs. The purchase price was allocated
to the assets acquired and liabilities assumed as follows:
Inventory ................................. $ 61,700
Property and equipment .................... 92,400
Trademark ................................. 150,000
Goodwill .................................. 43,900
Assumed liabilities ....................... (180,000)
--------
Total ............................... $ 168,000
=========
In addition, the previous owners will receive certain royalties on future
sales of the corporation's products, as defined.
In July 1996, pursuant to an asset purchase agreement with a corporation,
the Company acquired certain assets for consideration of $476,500 in cash,
including acquisition costs. The purchase price was allocated to the assets
acquired as follows:
Inventory ................................ $ 77,336
Property and equipment ................... 222,664
Trademark ................................ 100,000
Goodwill ................................. 76,500
------
Total .............................. $ 476,500
=========
In July 1996, the Company purchased from a bank certain assets and assumed
certain liabilities of a bankrupt snowboard manufacturer for consideration of
approximately $131,000 in cash, including acquisition costs. The purchase price
was allocated to assets acquired and liabilities assumed as follows:
Inventory ................................ $ 41,800
Property and equipment ................... 131,350
Trademarks ............................... 307,692
Assumed liabilities ...................... (350,000)
--------
Total .............................. $ 130,842
=========
In February 1997, pursuant to an asset purchase agreement, the Company
acquired certain assets of a wakeboard manufacturer for consideration of
$100,000 in cash.
F-12
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JANUARY 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Assumed liabilities from acquisitions ......... $ 180,000 $ 353,440 $ 45,916
Deferred tax liability ........................ 128,000 -- --
Accrued payroll ............................... -- 59,949 63,989
Other ......................................... 62,800 97,553 66,576
------ ------ ------
$ 370,800 $510,937 $ 176,481
========= ======== =========
</TABLE>
(5) REVOLVING LINE OF CREDIT
In April 1995, the Company entered into a secured revolving line-of-credit
agreement with a bank, that expires on March 31, 1997, pursuant to which the
Company may borrow a maximum of $4,000,000 based on a borrowing formula related
to inventory and accounts receivable levels, as defined. Subsequent to year-end,
the borrowing maximum was increased from $4,000,000 to $4,400,000. The line of
credit bears interest at the bank's base rate (8.25% at January 31, 1997) plus
1%. At October 31, 1995 and 1996 and January 31, 1997, borrowings under the
revolving line of credit were $2,365,500, $3,964,697 and $3,739,992,
respectively. The bank has a first priority perfected interest in all assets of
the Company. The revolving line-of-credit agreement contains certain restrictive
covenants, including, but not limited to, maintenance of certain levels of
working capital and debt ratios. At October 31, 1996, the Company was in default
with certain of these ratios. The covenants in default have been waived by the
bank through March 31, 1997, at which time the revolving loan is scheduled for
renewal. Amounts outstanding under this line of credit agreement were repaid
from the proceeds of the Credit Facility on March 26, 1997 as discussed in Note
6 below.
(6) CREDIT FACILITY
The Company entered into new credit facilities with Jackson National Life
Insurance Company on March 26, 1997 consisting of a $7,000,000 revolving credit
facility, a $3,450,000 term loan and a $30,000,000 discretionary acquisition
facility (together, the "Credit Facilities"). The Credit Facilities are secured
by first priority liens on all of the assets of the Company and its
subsidiaries, if any. In addition, two of the Company's stockholders have
pledged their common stock of the Company as additional security for the loans.
The revolving credit facility provides for borrowings of up to a maximum of
$7,000,000 based upon 85% of eligible receivables and 50% of inventory, as
defined. The interest rate on the revolving credit facility is a floating rate
equal to 30-day LIBOR plus 3%, as well as a 0.5% per annum charge on the unused
portion of the line. Borrowings under the revolving credit facility may be used
for general corporate purposes, including working capital requirements. The
Company may prepay borrowings under the revolving credit facility, subject to
certain conditions, and may reborrow, up to the maximum limit then in effect,
any amounts that are repaid or prepaid. The revolving credit facility terminates
on March 31, 2005 or earlier upon a change of control of the Company, as
defined, at which time all borrowings become due and payable.
The term loan is a $3,450,000 eight year loan due March 31, 2005, or earlier
upon a change of control of the Company, as defined. The interest rate on the
term loan is a floating rate equal to 30-day LIBOR plus 3.25%. Annual
prepayments are required equal to 50% of free cash flow and 100% of net cash
proceeds, as defined, of certain financing transactions, sales of property and
other events. Such prepayments will be applied first to the term loans and then
to the revolving credit facility.
F-13
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) CREDIT FACILITY -- (CONTINUED)
The acquisition facility provides for up to $30,000,000 to be advanced to
the Company to finance future acquisitions. Advances are subject to credit
approval by the lender. Therefore, no assurance can be given that any such
advances will be available to the Company. The acquisition facility terminates
on March 31, 2005, or if earlier upon a change of control of the Company, as
defined.
The Credit Facilities also provide for certain fees to be paid to the
lender. In addition, the lender was issued a warrant to purchase up to 187,175
shares of the Company's common stock at a price to be fixed at 90% of the
initial public offering price of the Company's proposed initial public offering.
Upon the consummation of the proposed initial public offering, the senior lender
will be issued warrants to purchase an additional 50,000 shares of the Company's
common stock at 90% of the initial public offering price. The Company has
estimated the value of the Warrants to be $887,000 using the Black-Scholes
option pricing model. The Company will amortize the value of the warrants over
the eight-year term of the credit facilities.
The Credit Facilities contain restrictions upon the Company's ability to
incur indebtedness, grant liens, make capital expenditures, enter into
acquisitions, mergers or consolidations, dispose of assets, make dividend
payments, make other restricted payments or investments. In addition, the Credit
Facilities require the Company to meet certain financial covenants, including
maintenance of minimum cash flow levels and of fixed charge coverage, interest
expense coverage and total indebtedness to cash flow ratios.
(7) LONG-TERM DEBT OBLIGATIONS
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------- JANUARY 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Capital lease obligations ..................... $ 39,700 $ 517,196 $ 468,643
Term note payable to bank, due in monthly
payments of $19,444 through June 1998,
interest at the bank's base rate plus 1.25%
(8.25% at October 31, 1996 and January 31,
1997) ....................................... 622,200 408,340 330,564
Deferred payments to subcontractor, net of
debt discount of $11,900 and $3,500 in 1995
and 1996, respectively, payable at $6,111
per month through March 31, 1997 ............ 92,000 73,334 73,334
------ ------ ------
753,900 998,870 872,541
Less -- Current portion ....................... 319,700 460,034 527,446
------- ------- -------
$ 434,200 $ 538,836 $345,095
========= ========= ========
</TABLE>
The term note payable to bank was repaid from the proceeds of the Credit
Facility on March 26, 1997 as discussed in Note 6.
The Company leases manufacturing and other equipment under several lease
agreements that require monthly payments totaling approximately $16,000,
including interest at rates ranging from 9.0% to 16.7%, and expire at various
dates through October 2000.
F-14
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) LONG-TERM DEBT OBLIGATIONS -- (CONTINUED)
Future minimum lease payments under capital lease obligations at October
31, 1996 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1997 ................................................................ $ 182,632
1998 ................................................................ 161,350
1999 ................................................................ 155,077
2000 ................................................................ 100,121
-------
Total minimum lease payments ...................................... 599,180
Less -- Amount representing interest ................................ 81,984
------
Obligations under capital leases .................................. 517,196
Less -- Current portion of capital lease obligations ................ 149,461
-------
$ 367,735
=========
</TABLE>
(8) SUBORDINATED NOTE PAYABLE TO PRINCIPAL STOCKHOLDER
The Company has a subordinated note payable to its principal stockholder,
which bears interest at 10%. The note is due upon demand but no sooner than the
date of full payment of amounts outstanding from the bank (see Note 5). The
balances outstanding under this note were $1,775,000, $2,7000,000 and $3,800,000
at October 31, 1995 and 1996 and January 31, 1997, respectively. On March 17,
1997, the principal stockholder converted $1,750,000 of indebtedness under this
note into 218,750 shares of common stock.
(9) COMMITMENTS AND CONTINGENCIES
(a) Facility Leases
The Company rents its corporate headquarters office and warehouse space in
Massachusetts as a tenant at will and leases its California, Washington and
Florida manufacturing facilities under operating lease arrangements. The leases
expire at various dates, through July, 1999 with certain renewal options. Rent
expense for the years ended October 31, 1994, 1995 and 1996 amounted to
approximately $270,000, $270,000 and $362,000, respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL
----------- -----
<S> <C>
1997 ...................................... $ 251,000
1998 ...................................... 133,000
1999 ...................................... 62,000
------
Total ................................... $ 446,000
=========
</TABLE>
(b) Consulting Agreement with Related Party
The Company has an agreement with CRM to provide services to the Company for
payments of $15,000 monthly plus 1% of annual revenues over $12,000,000. This
agreement continues until terminated by mutual consent. The general partner of
the limited partnership that owns the majority of the common stock of the
Company and that made the subordinated loan to the Company described in Note 8
is also the
F-15
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) COMMITMENTS AND CONTINGENCIES -- (Continued)
(b) Consulting Agreement with Related Party -- (Continued)
Chairman of the consulting firm. Management fees amounted to $180,000 for
each of the years ended October 31, 1994, 1995 and 1996 and are included in
general and administrative expenses in the accompanying statements of
operations. Upon the consummation of the Company's proposed initial public
offering, the management agreement with CRM will be amended to provide for a
fixed annual fee of $300,000. CRM will receive 109,500 shares of common stock as
consideration for this amendment. Upon consummation of the proposed initial
public offering, the Company will record a noncash charge of $1,095,000
representing the fair market value of the securities to be issued to CRM.
(c) Litigation
In the ordinary course of business, the Company is party to various types of
litigation. The Company believes it has meritorious defenses to all claims, and,
in its opinion, all litigation currently pending or threatened will not have a
material effect on the Company's financial position or results of operations.
(10) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the provisions of SFAS No. 109, deferred tax
assets or liabilities are computed based on the differences between the
financial statement and income tax bases of assets and liabilities using
currently enacted tax rates. Deferred income tax expenses or credits are based
on changes in the assets or liabilities from period to period.
Through October 31, 1996, the Company had generated net operating loss
carryforwards for federal and state income tax purposes of approximately
$1,031,000, which expire through 2011. Net operating loss carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of certain cumulative changes in ownership interests
of significant stockholders over a three-year period in excess of 50%, as
defined. In the event of a public offering, the Company may experience a change
in ownership in excess of 50%. The Company does not believe that these changes
in ownership will significantly impact the Company's ability to utilize its net
operating loss carryforwards.
At October 31, 1995 and 1996, the Company had no current tax liability. The
Company's deferred tax assets and liabilities consist of the following :
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards ..................... $ 116,800 $ 413,000
Allowance for doubtful accounts ...................... 9,000 47,000
Other temporary differences .......................... 4,800 36,000
Depreciation ......................................... (96,800) (307,000)
Amortization and depreciation ........................ (25,300) (34,000)
Employment and promotion agreement ................... (5,900) --
--------- --------
2,600 155,000
Less -- Valuation allowance .......................... -- (155,000)
--------- --------
$ 2,600 $ --
========= ==========
</TABLE>
F-16
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) INCOME TAXES -- (Continued)
Under SFAS No. 109, the Company cannot recognize a deferred tax asset unless
it concludes that it is "more likely than not" that the deferred tax asset would
be realized. Due to the net loss in the fiscal year ended October 31, 1996, the
Company has recorded a full valuation allowance against its otherwise
recognizable deferred tax asset.
Current income tax expense (benefit), amounting to $(19,900) and $16,000 for
the years ended October 31, 1994 and 1995, respectively, included in the
accompanying statements of operations, represents state income tax expense
(benefit). The Company had no current federal income tax expense in 1994 and
1995 due to utilization of net operating loss carryforwards. The principal
permanent adjustments to book taxable income relate to the nondeductibility of
meals and entertainment expenses and goodwill amortization.
(11) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Increase in Authorized Shares and Stock Split
The accompanying financial statements have been retroactively restated for
an increase in authorized capital stock to 500,000 shares of $.01 par value
preferred stock and 15,000,000 shares of $.01 par value common stock and to
reflect a 1.684575-for-1 split of the common stock. These changes will be
effective upon the consummation of the Company's proposed initial public
offering of common stock.
(b) Recapitalization
In February 1997, the Company amended its Articles of Incorporation
increasing the number of authorized shares of the Company's common stock to
1,500,000 shares and declared a 750-for-1 stock split, to be effective prior to
the closing of the Company's proposed initial public offering of common stock
contemplated herein. Accordingly, all share and per share amounts of common
stock have been retroactively restated for all periods presented to reflect the
stock split.
(c) Management Incentive and Stock Option Plans
The Company had a Management Incentive Plan (the Incentive Plan) that
provided for the distribution to certain key employees of 25% of net income. The
Incentive Plan was to terminate when, and if, an initial public offering occurs.
The Company charged a total of $37,800 and $55,000 to expense under the
Incentive Plan for the years ended October 31, 1994 and 1995, respectively.
The Company terminated the Incentive Plan in 1996 and issued 229,776 shares
of common stock for $.01 per share and granted options to purchase 191,368
shares of common stock for $.01 per share to the key employees who participated
in the Incentive Plan. The employees purchased the shares and the options were
granted at the fair market value on October 31, 1996 as determined by an
independent appraisal. These options vest ratably over a period of up to five
years, depending upon the employee's length of service with the Company. In
March 1997, the Company granted 16,846 options to a senior executive at an
exercise price of $8.00 per share, which is 80% of the assumed initial public
offering price.
(d) Option Plans
In February 1997, the Company's 1997 Equity Incentive Plan (the "1997 Plan")
was adopted by the Board of Directors and approved by the Company's
stockholders. The 1997 Plan provides for the issuance of a maximum of 450,000
shares of Common Stock pursuant to the grant to employees of "incentive stock
options" within the meaning of the Internal Revenue Code and the grant of
non-qualified stock options, stock awards or opportunities to make direct
purchases of stock in the Company to employees, consultants, directors and
officers of the Company.
F-17
EARTH AND OCEAN SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(11) STOCKHOLDERS' EQUITY (DEFICIT) -- (Continued)
(d) Option Plans -- (Continued)
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1997 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
No options have been granted to date under the 1997 Plan.
In January 1997, the 1997 Stock Option Plan for Nonemployee Directors (the
Directors Plan) was adopted by the Company's Board of Directors and will become
effective upon the closing of the Company's proposed initial public offering.
Under the terms of the Directors Plan, an aggregate of 150,000 options may be
granted and individuals who become members of the board prior to January 1, 1998
shall automatically receive 15,000 options. In addition, each non-employee
director will receive annually options to purchase 3,000 shares on the date of
each annual meeting of the Company's stockholders held after the closing of
initial public offering. The options will vest ratably over five years on each
yearly anniversary of the date such options were granted and expire ten years
from the date of grant.
(12) TRADEMARK LICENSE
In August 1996, the Company entered into a License Agreement under which the
licensee has the right to sell merchandise bearing certain of the Company's
trademark names. The Company received and recorded as revenue in fiscal 1996 the
initial license fee of $250,000. The Company is entitled to additional license
fees of $300,000 for the period January 1, 1998 to December 31, 1998 and
$350,000 for the period January 1, 1999 to December 31, 1999. The Company is
also entitled to a royalty on sales of merchandise bearing the licensed
trademark names in excess of certain minimum amounts. The license agreement
expires on December 31, 1999, unless extended by both parties.
(13) 401(K) PLAN
In January 1995, the Company established the Earth and Ocean Sports, Inc.
Employee Pension Plan (the Plan), which is a deferred contribution plan under
Section 401(k) of the Internal Revenue Code. The Plan allows all full-time
employees over 21 years of age who have completed one year of service with the
Company to make pretax deferred contributions to the Plan of up to 15% of annual
compensation or the maximum annual limitations, as defined. Contributions by the
Company to the Plan are discretionary and determined by the Board of Directors.
There were no discretionary contributions to the Plan for the years ended
October 31, 1995 and 1996.
(14) NEW ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128, establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997 and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ended October
31, 1998 and does not believe that the effect of the adoption of this standard
would be materially different from the amounts presented in the accompanying
statements of operations.
F-18
INSIDE BACK COVER:
- ------------------
[Four action photographs of the Company's snowboards in use; plus Spiral and
Flite product logo's]
================================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE
PROSPECTUS.
--------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 11
Dividend Policy 11
Capitalization 12
Dilution 13
Selected Financial Data 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 16
Business 24
Management 35
Certain Transactions 40
Principal Stockholders 41
Description of Capital Stock 42
Shares Eligible for Future Sale 45
Underwriting 47
Legal Matters 49
Experts 49
Change in Independent Public Accountants 49
Additional Information 49
Index to Financial Statements F-1
----------------------
UNTIL _____ , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, 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.
================================================================================
================================================================================
1,375,000 SHARES
[LOGO]
EARTH AND OCEAN
SPORTS, INC.
COMMON STOCK
----------
PROSPECTUS
----------
H.C. WAINWRIGHT & CO., INC.
CRUTTENDEN ROTH
INCORPORATED
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discount) payable in connection
with the sale of the Common Stock offered hereby are as follows:
SEC registration fee .............................................. $ 5,731
NASD filing fee ................................................... 2,391
Nasdaq National Market listing fee ................................ 27,900
Representatives' non-accountable expense allowance ................ 137,500
Printing and engraving expenses ................................... 75,000
Legal fees and expenses ........................................... 200,000
Accounting fees and expenses ...................................... 100,000
Blue Sky fees and expenses (including legal fees) ................. 10,000
Transfer agent and registrar fees and expenses .................... 10,000
Miscellaneous ..................................................... 66,478
------
Total ........................................................... $635,000
========
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Massachusetts Business Corporation Law provides for indemnification of
the Company's directors and officers for liabilities and expenses that they may
incur in such capacities, except with respect to any matter that the indemnified
person shall have been adjudicated in any proceeding not to have acted in good
faith in the reasonable belief that his or her action was in the best interest
of the Company. Reference is made to the Company's amended and restated
corporate charter and by-laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company expects to obtain a directors and officers liability insurance
for the benefit of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities except upon its
incorporation and except as follows. The Company issued unregistered securities
to an aggregate of 19 employees in connection with a reorganization of
management's equity interest in the Company pursuant to a Management Equity
Reorganization Plan, dated as of October 31, 1996. Pursuant to the Management
Equity Reorganization Plan, the Company's "phantom stock" plan was terminated
and the participating employees were issued an aggregate of 136,400 shares of
Common Stock at a nominal purchase price and options to purchase an aggregate of
113,600 shares of Common Stock in consideration thereof. The Company's chief
financial officer, who joined the Company in March 1997, was granted an option
to purchase 16,846 shares of Common Stock at an exercise price per share of
$8.00. In addition, the Company's senior lender has been or will be issued
warrants to purchase an aggregate of 237,175 shares of Common Stock at an
exercise price to be equal to 90% of the initial public offering price. No
underwriters were involved in the foregoing sales of securities. Such sales were
made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative to sales by an issuer
not involving any public offering or the rules and regulations thereunder, or,
in the case of options to purchase Common Stock, Rule 701 under the Securities
Act. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
1.1 -- Form of Underwriting Agreement.
1.2* -- Form of Warrant Agreement between the Registrant and the Representatives.
3.1 -- Current form of Articles of Organization of the Company, as amended.
3.2 -- Form of Amended and Restated Articles of Organization of the Company, to be effective
upon completion of the Offering.
3.3 -- Current form of By-laws of the Company.
3.4 -- Form of Amended and Restated By-laws of the Company, to be effective upon completion
of the Offering.
4.1* -- Specimen certificate representing the Common Stock.
5.1* -- Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 -- Management Equity Reorganization Plan.
10.2 -- 1997 Equity Incentive Plan.
10.3 -- 1997 Non-Employee Director Stock Option Plan.
10.4* -- Registration Rights Agreement among the Company, SSPR, L.P. CR Management Associates,
L.P. ("CRM"), Jon A. Glydon and Jackson National Life ("JNL").
10.5 -- Consulting Agreement between the Company and CRM dated July 13, 1993, as amended.
10.6 -- Lease between the Company and Oceanside Associates dated March 30, 1992 as amended.
10.7 -- Lease between the Company and Allied Venture Number 1 dated December 13, 1995.
10.8 -- Lease between the Company and Joe P. Ruthven Investments dated July 9, 1996.
10.9* -- Loan Agreement among the Registrant, SSPR, L.P. and Jackson National Life dated March 26, 1997.
11.1 -- Calculation of earnings per share.
16.1* -- Letter re Change in Certifying Accountant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Richard A. Eisner & Company, LLP.
23.3 -- Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-4).
27.1 -- Financial Data Schedule.
</TABLE>
- -----------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES:
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
II-2
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities 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 Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act , the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the 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; and (3) that for the purpose of determining any liability
under the Securities Act, 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 offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
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 HYANNIS, MASSACHUSETTS ON MARCH 26,
1997.
EARTH AND OCEAN SPORTS, INC.
By: /s/ JON A. GLYDON
---------------------------------
JON A. GLYDON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Earth and Ocean Sports, Inc.,
hereby severally constitute and appoint Jon A. Glydon, Brooks R. Herrick and
Edwin L. Miller Jr., and each of them singly, our true and lawful attorneys,
with full power to them and each of them singly, to sign for us in our names in
the capacities indicated below, any registration statement related to the
Offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 (a "462(b) Registration Statement"), any and all
amendments and exhibits to this registration statement or any 462(b)
Registration Statement, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of the securities covered hereby or thereby, and generally to do all things in
our names and on our behalf in such capacities to enable Earth and Ocean Sports,
Inc. to comply with the provisions of the Securities Act of 1933 and all
requirements of the Securities and Exchange Commission.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ JON A. GLYDON PRESIDENT, CHIEF EXECUTIVE OFFICER AND MARCH 26, 1997
---------------------------------- DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
JON A. GLYDON
/s/ BROOKS R. HERRICK SENIOR VICE PRESIDENT, CHIEF FINANCIAL MARCH 26, 1997
---------------------------------- OFFICER AND TREASURER (PRINCIPAL
BROOKS R. HERRICK FINANCIAL AND ACCOUNTING OFFICER)
/s/ GUSTAV A. CHRISTENSEN DIRECTOR MARCH 26, 1997
----------------------------------
GUSTAV A. CHRISTENSEN
/s/ THOMAS H. CONWAY DIRECTOR MARCH 26, 1997
----------------------------------
THOMAS H. CONWAY
/s/ DR. JAMES L. MCKENNEY DIRECTOR MARCH 26, 1997
----------------------------------
DR. JAMES L. MCKENNEY
/s/ STEVEN J. ROTH DIRECTOR MARCH 26, 1997
----------------------------------
STEVEN J. ROTH
</TABLE>
II-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Earth and Ocean Sports, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Earth and Ocean Sports, Inc. included in this
registration statement and have issued our report thereon dated February 13,
1997 (except with respect to Note (6), as to which the date is March 27, 1997).
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 16(b) above is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 13, 1997
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Earth and Ocean Sports, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Earth and Ocean Sports, Inc. included in this
registration statement and have issued our report thereon dated December 29,
1995. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) above
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
December 29, 1995
S-2
EARTH AND OCEAN SPORTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING OF END OF
PERIOD INCREASES(1) DEDUCTIONS PERIOD
------ --------- ---------- ------
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE RESERVE:
October 31, 1995 ....................... $ 36,900 $240,501 $(239,801) $ 37,600
======== ======== ========= =========
October 31, 1996 ....................... $ 37,600 $245,857 $(131,557) $ 151,900
======== ======== ========= =========
January 31, 1997 ....................... $151,900 $ 27,638 $ (18,038) $ 161,500
======== ======== ========= =========
(1) Includes allowances for doubtful accounts and sales returns.
</TABLE>
S-3
EXHIBIT 1.1
[_____________] Shares1
EARTH AND OCEAN SPORTS, INC.
Common Stock
FORM OF UNDERWRITING AGREEMENT
___________, 1997
H.C. Wainwright & Co., Inc.
Cruttenden Roth Incorporated
As Representatives of the several Underwriters
c/o H.C. Wainwright & Co., Inc.
One Boston Place
Boston, Massachusetts 02108
Dear Sirs and Madams:
Earth and Ocean Sports, Inc., a Massachusetts corporation (the
"Company"), proposes to issue and sell [__________] shares (the "Firm Shares")
of its authorized but unissued Common Stock. In addition, the Company proposes
to grant to the Underwriters (as defined below) an option to purchase up to
[_________] additional shares of Common Stock (the "Optional Shares" and, with
the Firm Shares, collectively, the "Shares"). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term shall
also include any underwriter purchasing Common Stock pursuant to Section 2(b)
hereof). You represent and warrant that you have been authorized by each of the
other Underwriters to enter into this Underwriting Agreement (the "Agreement")
on its behalf and to act for it in the manner herein provided.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-_____), including
the related preliminary prospectus, for the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the Shares. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.
- ----------------
1 Plus an option to purchase from the Company up to [______] additional
shares to cover over-allotments.
1
The term Registration Statement as used in this Agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is required, as included in the Registration Statement)
and, in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, business prospects,
properties, condition (financial or otherwise) or results of operations of the
Company. The Company does not own or control, directly or indirectly, any
corporation, association or other entity.
Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change in the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the Company, whether or not
arising from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such dates,
except in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement and the
Prospectus.
The Registration Statement and the Prospectus comply and on the Closing
Date (as hereinafter defined) and any later date on which Optional Shares are to
be purchased, the Prospectus will comply, in all material respects, with the
provisions of the Securities Act and the rules and regulations of the Commission
thereunder; on the Effective Date, the Registration Statement did not contain
any untrue statement of a material fact and did not omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date the Prospectus did not and,
on the Closing Date and any later date on which Optional Shares are to be
purchased, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
2
paragraph shall apply to statements in, or omissions from, the Registration
Statement or the Prospectus made in reliance upon and in conformity with
information herein or otherwise furnished in writing to the Company by or on
behalf of the Underwriters for use in the Registration Statement or the
Prospectus.
The Company has authorized and outstanding capital stock and
outstanding long term-debt as set forth under the heading "Capitalization" in
the Prospectus. The issued and outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities. Except as disclosed in or contemplated by
the Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, the Company does not have any outstanding
options to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required by the
Securities Act and the rules and regulations promulgated thereunder ("Rules and
Regulations") to be shown with respect to such plans, arrangements, options and
rights.
The Shares are duly authorized, will be (when issued and sold to the
Underwriters as provided herein) validly issued, fully paid and nonassessable
and conform to the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company will be
required for the issuance and sale of the Shares to be sold by the Company as
contemplated herein.
The Warrants (as defined in Section 5 below) will conform to the
description thereof in the Prospectus and, when sold to and paid for by the
Representatives in accordance with the Warrant Agreement (as defined in Section
5 below), will be duly authorized and validly issued and will be valid and
binding obligations of the Company entitled to all the benefits of the Warrant
Agreement. The Warrant Shares (as defined in Section 5 below) will be duly
authorized and reserved for issuance upon exercise of the Warrants and, when
issued upon such exercise in accordance with the terms of the Warrants and the
Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and will conform to the description
thereof in the Prospectus.
PRIOR TO THE CLOSING DATE, (I) THE SHARES TO BE ISSUED AND SOLD BY THE
COMPANY AND (II) THE WARRANT SHARES, WILL BE AUTHORIZED FOR LISTING ON THE
NASDAQ NATIONAL MARKET UPON OFFICIAL NOTICE OF ISSUANCE.
The Shares to be sold by the Company will be sold free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest, and
will conform to the description thereof contained in the Prospectus. No
preemptive right, co-sale right, registration right, right of first refusal or
other similar right to subscribe for or purchase securities of the Company
exists with respect to the issuance and sale of the Shares by the Company
pursuant to this Agreement. No person or entity has any right which has not been
waived, or complied with, to require the Company to register the sale of any
shares of Common Stock under the Securities Act in the public offering
contemplated by this Agreement and, except as described in the Prospectus, no
person or entity holds a right to require the Company to register the sale of
any shares of Common Stock at any other time.
3
The Company has full corporate power and authority to enter into this
Agreement and perform the transactions contemplated hereby and thereby. This
Agreement and the Warrant Agreement have been duly authorized, executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable in accordance with their terms, except as enforceability may
be limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium laws affecting creditors' rights generally and except
as to those provisions relating to indemnity or contribution for liabilities
arising under federal and state securities laws. The making and performance of
this Agreement and the Warrant Agreement by the Company and the consummation of
the transactions contemplated hereby and thereby (i) will not violate any
provisions of the Articles of Organization, Bylaws or other organizational
documents of the Company, and (ii) will not conflict with, result in a material
breach or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a material default under (A) any agreement, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which the Company is a party or by which the Company or any of its properties
may be bound or affected, or (B) any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its properties. No consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body that
has not already been obtained is required for the execution and delivery of this
Agreement and the Warrant Agreement or the consummation of the transactions
contemplated by this Agreement and the Warrant Agreement, except for compliance
with the Securities Act, the Blue Sky laws applicable to the public offering of
the Shares by the several Underwriters and the clearance of such offering with
the National Association of Securities Dealers, Inc. (the "NASD").
The consolidated financial statements and schedules of the Company and
the related notes thereto included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the results of
operations and cash flows of the Company for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods specified, as certified by the independent
accountants named in subsection 8(f). No other financial statements or schedules
are required to be included in the Registration Statement. The selected
financial data set forth in the Prospectus under the captions "Capitalization"
and "Selected Consolidated Financial Information" fairly present the information
set forth therein on the basis stated in the Registration Statement.
The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to its independent public accountants for the purpose of supporting the
letters referred to in Sections 8(f) and (g) are true and correct.
The Company is not (i) in violation or default of any provision of its
Articles of Organization, Bylaws or other organizational documents, or (ii) in
material breach of, or default with respect to, any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it or
any of its properties are
4
bound; and there does not exist any state of facts which, with notice or lapse
of time or both, would constitute such a breach or default on the part of the
Company.
There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof.
Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which the
Company is or is threatened to be made a party or of which property owned or
leased by the Company is or has been threatened to be made the subject, which
actions, suits or proceedings could, individually or in the aggregate, prevent
or adversely affect the transactions contemplated by this Agreement or the
Warrant Agreement or result in a material adverse change in the business,
business prospects, properties, condition (financial or otherwise), or results
of operations of the Company; there are no outstanding claims, asserted or
otherwise, against the Company, or any of its officers or directors, for
violations of any federal or state securities laws, or any other applicable
laws, relating to any purchase, sale, or redemption of, or other transaction
with respect to, the Common Stock; and no labor disturbance by the employees of
the Company exists or is imminent which could materially adversely affect the
business, business prospects, properties, condition (financial or otherwise), or
results of operations of the Company. The Company is not a party or subject to
the provisions of any material injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body. Except
as disclosed in the Prospectus, there are no material legal or governmental
actions, suits or proceedings pending or, to the Company's knowledge, threatened
against any executive officers or directors of the Company.
The Company has good and marketable title to all the properties and
assets reflected as owned in the financial statements hereinabove described (or
elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except (i) those, if any, reflected in such financial
statements (or elsewhere in the Prospectus), or (ii) those which are not
material in amount to the Company, and do not adversely affect the use made and
proposed to be made of such property by the Company. The Company holds its
leased properties under valid and binding leases. Except as described in the
Prospectus, the Company owns or leases all such properties as are necessary to
its operations as now conducted or as proposed to be conducted.
Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company has not (A)
incurred any liabilities or obligations, indirect, direct or contingent, or (B)
entered into any oral or written agreement or other transaction, which in the
case of (A) or (B) is not in the ordinary course of business; (ii) the Company
has not sustained any material loss or interference with its businesses or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and the
Company is not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock of the Company (other than upon the sale of the Shares hereunder or upon
the exercise of any options or warrants disclosed in the Prospectus); (v) there
has not been any material increase in the short- or long-term debt of the
Company; and (vi) there has not been any material adverse change or any
development involving or which may reasonably be expected to involve a
prospective material adverse change, in the business, business prospects,
condition (financial or otherwise), properties, or results of operations of the
Company.
5
The Company is conducting business in compliance with all applicable
laws, rules and regulations of the jurisdictions in which it is conducting
business, except where the failure to be so in compliance would not have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company.
The Company has filed all necessary federal, state and foreign income
and franchise tax returns, and all such tax returns are complete and correct in
all material respects, and the Company has not failed to pay any taxes which
were payable pursuant to said returns or any assessments with respect thereto.
The Company has no knowledge of any tax deficiency which has been or is likely
to be threatened or asserted against the Company.
The Company has not distributed, and will not distribute prior to the
later to occur of (i) completion of the distribution of the Shares, or (ii) the
expiration of any time period within which a dealer is required under the
Securities Act to deliver a prospectus relating to the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Prospectus, the Registration Statement and any other materials permitted by the
Securities Act and consented to by the Underwriters.
The Company maintains insurance of the types and in the amounts
generally deemed adequate for their business, including, but not limited to,
directors' and officers' insurance, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has not been refused any
insurance coverage sought or applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
adversely affect the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the Company.
The Company nor, to the best of the Company's knowledge, any of its
employees or agents has at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
foreign, federal or state governmental officer or official or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
The Company has caused (i) each of its executive officers and directors
as set forth in the Prospectus and (ii) the holders of all of the outstanding
Common Stock, options therefor, warrants or other security of the Company to
furnish to the Underwriters an agreement in form and substance satisfactory to
H.C. Wainwright & Co., Inc. pursuant to which each such party has agreed that
during the period of one hundred eighty (180) days after the date the
Registration Statement becomes effective, without the prior written consent of
H.C. Wainwright & Co., such party will not, directly or indirectly, offer, sell,
pledge, contract to sell, grant any option to purchase or otherwise dispose of
any shares of Common Stock beneficially owned or otherwise held by such party
(including, without limitation, shares of Common Stock which may be deemed to be
beneficially owned by such party in accordance
6
with the rules and regulations of the Securities and Exchange Commission and
shares of Common Stock which may be issued upon exercise of a stock option or
warrant) or any securities convertible into, derivative of or exercisable or
exchangeable for such Common Stock; provided, however, that if such party is an
individual, he or she may transfer any or all of the Common Stock held by such
party either during his or her lifetime or on death, by gift, will or intestacy,
to his or her immediate family or to a trust the beneficiaries of which are
exclusively such party and/or a member or members of his or her immediate
family; provided, that in any such case the transferee executes a lock-up
agreement in substantially the same form covering the remainder of the lock-up
period.
Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.
Except as specifically disclosed in the Prospectus, the Company has
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals and governmental authorizations to conduct their businesses as now
conducted; the expiration of any trademarks, trade names, patent rights,
copyrights, licenses, approvals or governmental authorizations would not have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company; the
Company does not have any knowledge of any infringement by the Company of
trademark, trade name rights, patent rights, copyrights, licenses, trade secret
or other similar rights of others; and no claims have been made or are
threatened against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations or prospects of the
Company, nor, to the best of the Company's knowledge, is there any basis
therefore.
Except as disclosed in the Prospectus, (i) the Company is in compliance
in all material respects with all rules, laws and regulation relating to the
use, treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") which are applicable to its
business, (ii) the Company has not received any notice from any governmental
authority or third party of an asserted claim under Environmental Laws, (iii) no
facts currently exist that will require the Company to make future material
capital expenditures to comply with Environmental Laws, and (iv) to the
knowledge of the Company, no property which is or has been owned, leased or
occupied by the Company has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as a contaminated
site under applicable state or local law.
The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 2. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the [_________] Firm Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective aggregate number
of Firm Shares set forth opposite its name in Schedule I. The price at which
such Firm Shares shall be sold by the Company and purchased by the several
Underwriters shall be $___ per share. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of Firm Shares which
represents the same proportion of the total number of Firm Shares to be sold by
the Company pursuant to this Agreement as the number of Firm Shares set
7
forth opposite the name of such Underwriter in Schedule I hereto represents of
the total number of Firm Shares to be purchased by all Underwriters pursuant to
this Agreement, as adjusted by you in such manner as you deem advisable to avoid
fractional shares. In making this Agreement, each Underwriter is contracting
severally and not jointly; except as provided in paragraphs (b) and (c) of this
Section 2, the agreement of each Underwriter is to purchase only the respective
number of shares of the Firm Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such shares and portion, the number
of Shares which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase; provided, however, that the
non-defaulting Underwriters shall not be obligated to purchase the portion which
the defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such Shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 4 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to Section 4 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all of the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly up to [________] Optional Shares from the Company at
the same price per share as the Underwriters shall pay for the Firm Shares. Said
option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any time
on or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
Optional Shares as to which the several Underwriters are exercising the option.
Delivery of certificates for the Optional Shares, and payment therefor, shall be
made as provided in Section 4 hereof. The number of Optional Shares to be
purchased by each Underwriter shall be the same
8
percentage of the total number of Optional Shares to be purchased by the several
Underwriters as such Underwriter is purchasing of the Firm Shares, as adjusted
by you in such manner as you deem advisable to avoid fractional shares.
SECTION 3. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Shares constitutes the only information furnished by
the Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
SECTION 4. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares, the Optional Shares
(if the option granted by Section 2(c) hereof shall have been exercised not
later than 10:00 A.M., Boston time, on the date two business days preceding the
Closing Date), and the Warrant Shares, and payment therefor, shall be made at
the office of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
at 10:00 a.m., Boston time, on the fourth business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such fourth business day, as shall be agreed upon in writing by the
Company and you. The date and hour of such delivery and payment (which may be
postponed as provided in Section 2(b) hereof) are herein called the "Closing
Date".
(b) If the option granted by Section 2(c) hereof shall be exercised
after 10:00 a.m., Boston time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Optional Shares, and
payment therefor, shall be made at the office of Goodwin, Procter & Hoar LLP,
Exchange Place, Boston, Massachusetts at 10:00 a.m., Boston time, on the third
business day after the exercise of such option.
(c) Payment for the Shares and the Warrants purchased from the Company
shall be made to the Company or its order by (i) certified or official bank
check in next day funds (and the Company agrees not to deposit any such check in
the bank on which drawn until the day following the date of its delivery to the
Company) or (ii) federal funds wire transfer. Such payment shall be made upon
delivery of certificates for the Shares and the Warrants to you for your account
and the respective accounts of the several Underwriters (including without
limitation by "full-fast" electronic transfer by Depository Trust Company)
against receipt therefor signed by you. Certificates for the Shares and the
Warrants to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Firm Shares and the Warrants, and at
least one business day prior to the purchase thereof, in the case of the
Optional Shares. Such certificates will be made available to the Underwriters
for inspection, checking and packaging at the offices of H.C. Wainwright & Co.,
Inc.'s clearing agent, __________________________, on the business day prior to
the Closing Date or, in the case of the Optional Shares, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
9
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional Shares
are purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Shares,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial
10
public offering of the Shares by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Shares may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Shares in accordance with the
applicable provisions of the Securities Act and the Rules and Regulations
thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing
11
and filing with the Commission and the NASD of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters and, if applicable, the persons designated by them of copies of any
Preliminary Prospectus and of the several documents required by paragraph (c) of
this Section 5 to be so furnished, (iii) the printing of this Agreement and
related documents delivered to the Underwriters, (iv) the preparation, printing
and filing of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 5, (v) the furnishing to you and the Underwriters
of the reports and information referred to in paragraph (g) of this Section 5
and (vi) the printing and issuance of stock certificates, including the transfer
agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
shares under state securities or blue sky laws and in the review of the offering
by the NASD.
(k) The Company hereby agrees that, without the prior written consent
of H.C. Wainwright & Co., Inc., the Company will not, for a period of 180 days
following the date the Registration Statement becomes effective, directly or
indirectly, offer, sell, pledge, contract to sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock owned beneficially or
otherwise (including, without limitation, shares of Common Stock which may be
deemed to be beneficially owned in accordance with the rules and regulations of
the Securities and Exchange Commission and shares of Common Stock which may be
issued upon exercise of a stock option or warrant) or any securities convertible
into, derivative of or exercisable or exchangeable for such Common Stock, except
for the issuance of shares of Common Stock upon the exercise of options to
purchase Common Stock which are outstanding on the date hereof.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(n) The Company agrees to maintain directors' and officers' insurance
customary for the size and nature of the Company's business for a period of two
years from the date of this Agreement.
(o) At the Closing Date, the Company will further issue and sell to the
Representatives or, at their direction, to their bona fide officers or partners,
as described below, for a total purchase price of $_____, warrants (the
"Warrants") entitling the holders thereof to purchase up to an aggregate of
__________ shares of Common Stock (subject to adjustment) (the "Warrant Shares")
for a period of four (4) years, such period to commence one year after the
effective date of the Registration Statement (except as otherwise set forth in
the Warrant Agreement referred to below). Said Warrants shall contain terms and
provisions set forth in the Warrant Agreement of even date among the Company and
the Representatives (the "Warrant Agreement"). As provided in the Warrant
Agreement, the Representatives may designate that some of all of the Warrants be
issued in varying amounts directly to their bona fide officers or partners and
not to the Representatives. Such designation will be made by the Representatives
only if they determine that such issuances would not violate the rules and
interpretations of the Board of Governors of the NASD relating to the review of
corporate financing arrangements and subject to applicable federal and state
securities laws. As further provided, no transfer, assignment or hypothecation
of the Warrants shall be made by the Representatives for a period of 12 months
from the issuance of the Warrants, except to their bona fide officers or
partners and subject to applicable federal and state securities laws.
12
SECTION 6. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 6, the
Company agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Securities Act from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the
common law or otherwise, and the Company agrees to reimburse each such
Underwriter and controlling person for any legal or other expenses (including,
except as otherwise hereinafter provided, reasonable fees and disbursements of
counsel) incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which may
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreement of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission describe in
clauses (i) or (ii) was made in reliance upon and in conformity with information
furnished as herein stated in writing to the Company by or on behalf of any
Underwriter for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto, and (2)
the indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Shares which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with subparagraphs (ii) and (iii) of paragraph (c) of Section 5
hereof. The indemnity agreement of the Company contained in this paragraph (a)
and the representations and warranties of the Company contained in Section 1
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
13
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission described in clauses (i) and (ii) was made in reliance upon and in
conformity with information furnished as herein stated in writing to the Company
by or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 6 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense of
the indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party or parties;
provided, however, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties in conducting the
defense of such action, suit, investigation, inquiry or proceeding or that there
may be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled to have counsel chosen
by such indemnified party or parties participate in, but not conduct, the
defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice
14
of Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 6 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear the legal and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 6, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the shares received by the Company and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the shares. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may
15
be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 6).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
SECTION 7. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 6 of this Agreement, the Company hereby agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 5 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 6 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
SECTION 8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company in
accordance with Section 9, or if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States or the
Company's industry sector would, in the Underwriters' reasonable judgment, make
the offering or delivery of the shares impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination, the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 5 hereof.
16
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Shares shall be subject to
the performance by the Company of all its obligations to be performed hereunder
at or prior to the Closing Date or any later date on which Optional Shares are
to be purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares hereunder
and the validity and form of the certificates representing the Shares, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Goodwin, Procter & Hoar LLP, counsel for the Underwriters.
(c) You shall have received from Testa, Hurwitz & Thibeault, LLP,
counsel for the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A hereto, and if Optional
Shares are purchased at any date after the Closing Date, additional opinions
from such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinion
remains valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct, and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment; (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein;
(iv) the Commission has not issued any order preventing or suspending the use of
the Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) the Company does not have
any material contingent obligations which are not disclosed in the Registration
Statement and the Prospectus; (vi) there are not any pending or known threatened
legal proceedings to which the Company is a party or of which property of the
Company is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus; (vii) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required; and (vii)
the representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which Optional
Shares are to be purchased, as the case may be.
17
(e) You shall have received on the Closing Date and on any later date
on which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Arthur Andersen LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (the "Original Letter"), but
carried out to a date not more than three business days prior to the Closing
Date or such later date on which Optional Shares are purchased (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date, as the
case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Shares or
the purchase of the Optional Shares as contemplated by the Prospectus.
(g) You shall have received from Arthur Andersen LLP, a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as at [October 31, 1996], did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 4 hereof.
(i) Prior to the Closing Date, the Shares and the Warrant Shares shall
have been duly authorized for listing by the Nasdaq National Market upon
official notice of issuance.
(j) The Warrant Agreement and the Warrants shall have been executed and
delivered to the Representatives on behalf of the Company.
(k) On or prior to the Closing Date, you shall have received agreements
from all executive officers and directors as set forth in the Prospectus and the
holders of all shares of outstanding Common Stock or options therefor, warrants
or other security of the Company, in form reasonably satisfactory to H.C.
Wainwright & Co., Inc., stating that without the prior written consent of H. C.
Wainwright & Co., Inc., such person or entity will not, for a period of 180 days
following the date the Registration Statement became effective, directly or
indirectly, offer, sell, pledge, contract to sell, grant any option to purchase
or otherwise dispose of any shares of Common Stock beneficially owned or
otherwise held by such person or entity (including, without limitation, shares
of Common Stock
18
which may be deemed to be beneficially owned by such person or entity in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock which may be issued upon exercise of a
stock option or warrant) or any securities convertible into, derivative of or
exercisable or exchangeable for such Common Stock; provided, however, that, in
the case of any such person, he or she may transfer any or all of the Common
Stock held by such person either during his or her lifetime or on death, by
gift, will or intestacy, to his or her immediate family or to a trust the
beneficiaries of which are exclusively such person and/or a member or members of
his or her immediate family; provided, that in any such case the transferee
executes a lock-up agreement in substantially the same form covering the
remainder of the lock-up period.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Goodwin, Procter & Hoar LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 5 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
SECTION 10. CONDITIONS OF THE COMPANY'S OBLIGATION. The obligation of
the Company to deliver the Shares shall be subject to the conditions that (a)
the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 5 hereof.
SECTION 11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 6 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 6, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the shares from any of the several Underwriters.
19
SECTION 12. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to H.C. Wainwright &
Co., Inc., One Boston Place, Boston, Massachusetts 02108, Attention:
___________; and if to the Company, shall be mailed, telegraphed or delivered to
it at its office, 70 Airport Road, Hyannis, Massachusetts 02601, Attention: Jon
Anthony Glydon. All notices given by telegraph shall be promptly confirmed by
letter.
SECTION 13. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or its directors or officers, and (c) delivery and payment
for the Shares under this Agreement; provided, however, that if this Agreement
is terminated prior to the Closing Date, the provisions of paragraphs (k), (l)
and (m) of Section 5 hereof shall be of no further force or effect.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of The Commonwealth of Massachusetts.
SECTION 17. GENERAL. This Agreement and the Warrant Agreement
constitute the entire agreement of the parties to this Agreement and the Warrant
Agreement and supersede all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof and thereof. This Agreement may be executed in several counterparts, each
one of which shall be an original, and all of which shall constitute one and the
same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
20
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
EARTH AND OCEAN SPORTS, INC.
By:
-------------------------------------
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
by us in Boston, Massachusetts as of
the date first above written.
H.C. WAINWRIGHT & CO., INC.
CRUTTENDEN ROTH INCORPORATED
By: H.C. Wainright & Co., Inc.
By:
------------------------------------
Principal
Acting for ourselves and on behalf of the
several Underwriters named in the attached
Schedule A
21
SCHEDULE I
UNDERWRITERS
Number of Firm
Underwriters Shares to be Purchased
H.C. Wainwright & Co., Inc....................................................
Cruttenden Roth Incorporated..................................................
Total ..............................................................
I-1
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF TESTA, HURWITZ & THIBEAULT, LLP
COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in each state of the United States of America in which the nature of its
business or its ownership or leasing of property requires such qualification
(except where the failure to be so qualified would not have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company) and has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement;
(ii) the authorized capital stock of the Company consists of
[_________] shares of Preferred Stock, $.01 par value, none of which are
outstanding, and [_________] shares of Common Stock, $.01 par value, of which
there are outstanding [_________] shares; all of the outstanding shares of such
capital stock (including the Firm Shares and the Optional Shares issued, if any)
have been duly authorized and validly issued and are fully paid and
nonassessable; any Optional Shares purchased after the Closing Date have been
duly authorized and, when issued and delivered to, and paid for by, the
Underwriters as provided in the Underwriting Agreement, will be validly issued
and fully paid and nonassessable; and no preemptive rights of, or rights of
refusal in favor of, stockholders exist with respect to the Shares, or the issue
and sale thereof, pursuant to the Articles of Organization or Bylaws of the
Company or any other instrument and, to the knowledge of such counsel, there are
no contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the issuance and sale
of the Shares by the Company;
(iii) the Registration Statement has become effective under the
Securities Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, and with the
rules and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such counsel
need not express any opinion or belief) as of its date or at the Closing Date
(or any later date on which Optional Shares are purchased), contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is, to such counsel's knowledge,
I-2
accurately and adequately set forth therein in all material respects or no
response is required with respect to such Items, and the description of the
Company's stock option plan and the options granted and which may be granted
thereunder in the Prospectus accurately and fairly presents the information
required to be shown with respect to said plan and options to the extent
required by the Securities Act and the rules and regulations of the Commission
thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) there are no outstanding claims, asserted or otherwise, against
the Company or any of its officers or directors, for violations of any federal
or state securities laws, or any other applicable laws, relating to any
purchase, sale, or redemption of, or other transaction with respect to, the
Common Stock;
(ix) the Underwriting Agreement and the Warrant Agreement have been
duly authorized, executed and delivered by the Company;
(x) the Company has full corporate power and authority to enter into
the Underwriting Agreement and the Warrant Agreement and to sell and deliver the
Shares and the Warrants to be sold by it to the several Underwriters;
(xi) the issue and sale by the Company of the Shares and the Warrants
sold by the Company as contemplated by the Underwriting Agreement and the
Warrant Agreement will not conflict with, or result in a breach of, or
constitute a default under the Articles of Organization or Bylaws of the Company
or any agreement or instrument known to such counsel to which the Company is a
party or by which any of its properties may be bound or any applicable law or
regulation, or so far as is known to such counsel, any order, writ, injunction
or decree, of any jurisdiction, court or governmental instrumentality;
(xii) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xiii) good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims;
(xiv) good and marketable title to the Warrants under the Warrant
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Representative who has
purchased such Warrants under the Warrant Agreement, assuming for the purpose of
this opinion that the Representative purchased the same in good faith without
notice of any adverse claims;
I-3
(xv) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Shares by
the Underwriters and the clearance of the offering with the NASD;
(xvi) the Shares issued and sold by the Company and the WARRANT SHARES
will be duly authorized for listing by the Nasdaq National Market upon official
notice of issuance.
(xvi) The Warrants conform to the description thereof in the Prospectus
(it being understood that with respect to the fair presentation of such
description and whether it is an accurate summary such counsel's opinion is
limited to that set forth in clause (vi) above) and have been duly authorized
and validly issued and are valid and binding obligations of the Company entitled
to all the benefits of the Warrant Agreement and are enforceable against the
Company, (except (1) as such enforcement may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium, fraudulent transfer, or
other similar laws now or hereinafter in effect relating to or affecting
creditors' rights generally and by general principles of equity, (2) that the
remedies of specific performance and injunctive and other forms of relief are
subject to general equitable principles, whether such enforcement is sought at
law or in equity, and such enforcement may be subject to the discretion of the
court before which any proceedings therefor may be brought and (3) as rights to
indemnity and contribution may be limited by state or federal laws or by
policies underlying such laws). The Warrant Shares have been duly authorized and
reserved for issuance upon exercise of the Warrants and, when issued upon such
exercise in accordance with the terms of Warrants and the Warrant Agreement,
will be duly and validly issued, fully paid and nonassessable, free of
preemptive rights and will conform to the description thereof in the Prospectus.
------------------------------------
I-4
EXHIBIT 3.1
THE COMMONWEALTH OF MASSACHUSETTS
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL J. CONNOLLY, SECRETARY
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF ORGANIZATION
(UNDER G.L. CHAPTER 156B)
ARTICLE I
The name of the corporation is:
Earth and Ocean Sports, Inc.
ARTICLE II
The purpose of the corporation is to
engage in the following business activities:
To engage directly or indirectly in the acquisition of rights to and
the manufacturing and/or distribution of and otherwise engaging in the business
of bodyboards, surfboards, rescue boards and related products and accessories;
to engage in any activities related to the foregoing, and otherwise to do any
and all acts and things permitted to be done by business corporations under the
provisions of Chapter 156B, as amended, of the General Laws of the Commonwealth
of Massachusetts.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper with a left margin of at least 1 inch. Additions to more than one article
may be made on a single sheet so long as each article requiring each addition is
clearly indicated.
ARTICLE III
The type and classes of stock and the total number of shares and par value, if
any, of each type and class of stock which the corporation is authorized to
issue is as follows:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------- ----------------------------- ------------------ ----------------------------- ------------------
COMMON: None COMMON: 100,000 $0.01
- -------------------- ----------------------------- ------------------ ----------------------------- ------------------
PREFERRED: None PREFERRED: None
- -------------------- ----------------------------- ------------------ ----------------------------- ------------------
</TABLE>
ARTICLE IV
If more than one type, class or series is authorized, a description of each
with, if any, the preferences, voting powers, qualifications, special or
relative rights or privileges as to each type and class thereof and any series
now established.
Not Applicable
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are as follows:
None
ARTICLE VI
Other lawful provisions, if any, for the conduct and regulation of the business
and affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, or regulating the powers of the corporation, or of its directors or
stockholders, or of any class of stockholders: (If there are no provisions state
"None.")
See Continuation Sheet 1
Note: The preceding six (6) articles are considered to be permanent and may ONLY
be changed by filing appropriate Articles Amendment.
ARTICLE VII
The effective date of the organization of the corporation shall be the date
approved and filed by the Secretary of the Commonwealth. If a later effective
date is desired, specify such date which shall not be more than thirty days
after the date of filing.
The information contained in ARTICLE VIII is NOT a PERMANENT part of the
Articles of Organization and may be changed ONLY by filing the appropriate form
provided therefor.
ARTICLE VIII
a. The street address of the corporation IN MASSACHUSETTS is: (post
office boxes are not acceptable) 192 E. Emerson Road, Lexington, MA
02173
b. The name, residence and post office address (if different) of the directors
and officers of the corporation are as follows:
<TABLE>
<CAPTION>
NAME RESIDENCE POST OFFICE ADDRESS
<S> <C> <C> <C>
President: Jon Anthony Glydon 100 Alderbrook Lane Same
West Barnstable, MA 02668
Treasurer: Jon Anthon Glydon (see above)
Clerk: Edwin L. Miller, Jr. 82 Sudbury Road Same
Weston, MA 02193
Directors: Thomas H. Conway 138 Baker Avenue Same
Concord, MA 01742
Steven J. Roth 192 E. Emerson Road Same
Lexington, MA 02173
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of:
December
d. The name and BUSINESS address of the RESIDENT AGENT, of the corporation, if
any, is:
Edwin L. Miller, Jr., Esq.
Testa, Hurwitz & Thibeault
53 State Street
Boston, MA 02109
ARTICLE IX
By-laws of the corporation have been duly adopted and the president, treasurer,
clerk and directors whose names are set forth above, have been duly elected.
IN WITNESS WHEREOF and under the pains and penalties of perjury, I/WE, whose
signature(s) appear below as incorporator(s) and whose names and business or
residential address(es) ARE CLEARLY TYPED OR PRINTED beneath each signature do
hereby associated with the intention of forming this corporation under the
provisions of General Laws Chapter 156B and do hereby sign these Articles of
Organization as incorporator(s) this 24th day of June, 1993
Testa, Hurwitz & Thibeault, 125 High Street, High Street Tower, Boston, MA 02110
- --------------------------------------------------------------------------------
Note: If an already-existing corporation is acting as incorporator, type in the
exact name of the corporation, the state or other jurisdiction where it
was incorporated, the name of the person signing on behalf of said
corporation and the title he/she holds or other authority by which such
action is taken.
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 12
-------------------------------------------
I hereby certify that, upon an examination of these
articles of organization, duly submitted to me, it appears
that the provisions of the General Laws relative to the
organization of corporations have been complied with, and I
hereby approve said articles; and the filing fee in the
amount of $200.00 having been paid, said articles are
deemed to have been filed with me this 24th day of June,
1993
Effective Date: June 24, 1993
-------------------------------------------
MICHAEL J. CONNOLLY
Secretary of State
FILING FEE: 1/10 of 1% of the total amount of the
authorized capital stock, but not less than $200.00. For
the purpose of filing, shares of stock with a par value
less than one dollar or no par stock shall be deemed to
have a par value of one dollar per share
PHOTOCOPY OF ARTICLES OF ORGANIZATION TO BE SENT
--------------------------------------
--------------------------------------
--------------------------------------
Telephone:
----------------------------
CONTINUATION SHEET 1
ARTICLE VI. Other lawful provisions, if any, for the conduct and regulation of
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
The corporation eliminates the personal liability of each director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such liability;
provided, however, that, to the extent provided by applicable law, this
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omission not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 61 or 62 or
successor provisions of the Massachusetts Business Corporation Law, or (iv) for
any transaction from which the direct derived an improper personal benefit. This
provision shall not eliminate or limit the liability of a director of the
corporation for any act or omission occurring prior to the date on which this
provision becomes effective. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
Meetings of the stockholders of the corporation may be held anywhere in
the United States.
The directors of the corporation may make, amend or repeal the by-laws
in whole or in part, except with respect to any provision thereof which by law
or the by-laws requires action by the stockholders.
The whole or any part of the authorized but unissued shares of capital
stock of the corporation may be issued at any time or from time to time by the
Board of Directors without further action by the stockholders.
The corporation may become a partner in any business.
FEDERAL IDENTIFICATION
NO. 04-3136105
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
We, Jon Anthony Glydon , *President
---------------------------------------------
and Edwin L. Miller, Jr. , *Assistant Clerk,
---------------------------------------------
of Earth and Ocean Sports, Inc. ,
-------------------------------------------------------
(Exact name of corporation)
located at 70 Airport Road, Hyannis, MA 02601 ,
-------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
Article 3
--------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted by unanimous written consent
dated January 31, 1997, by vote of:
1,000 shares of Common Stock, $.01 par value of 1,000 shares outstanding,
- ------------ ----------------------------- -----
(type, class & series, if any)
shares of of shares outstanding,
------------ ---------------------------- -----
(type, class & series, if any)
and
shares of of shares outstanding.
- ------------ ---------------------------- -----
(type, class & series, if any)
1** being at least two-thirds of each type, class or series outstanding and
entitled to vote thereon and each type, class or series of stock whose rights
are adversely affected thereby:
*Delete the inapplicable words. **Delete the inapplicable clause.
1 For amendments adopted pursuant to Chapter 156B, Section 70.
2 For amendments adopted pursuant to Chapter 156B, Section 71.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of separate 8 1/2 x
11 sheets of paper with a left margin of at least 1 inch. Additions to more than
one article may be made on a single sheet as long as each article requiring each
addition is clearly indicated.
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
- ------------------------------------------------ ----------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
Common: None Common: 100,000 $.01
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
Preferred: None Preferred: None
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
Change the total authorized to:
- ------------------------------------------------ ----------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
Common: None Common: 1,500,000 $.01
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
Preferred: None Preferred: None
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
- ------------------ ----------------------------- ------------- ------------------------------ -------------------
</TABLE>
VOTED: That Article III of the Articles of Organization of the
Corporation is hereby amended such that the total number of
shares and par value of the Common Stock which the Corporation
is authorized to issue is as follows:
1,500,000 shares, par value $0.01 per share.
VOTED: That each of the 1,000 shares of Common Stock, par value $.01
per share, of the Corporation issued and outstanding at the
close of business on February 12, 1997 are automatically split
and converted into 750 shares of Common Stock, par value $0.01
per share.
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:
----------------------
SIGNED UNDER THE PENALTIES OF PERJURY, this 13th day of February, 1997,
/s/ Jon Anthony Glydon , *President,
- ------------------------------------------------------------
/s/ Edwin L. Miller, Jr. , *Assistant Clerk
- ------------------------------------------------------------
*Delete the inapplicable words.
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
==================================================
I hereby approve the within Articles of Amendment, and
the filing fee in the amount of $____having been paid,
said article is deemed to have been filed with me this
____ day of _________________ 19______.
Effective date:
----------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Edwin L. Miller, Jr., Esq.
-------------------------------------
Testa, Hurwitz & Thibeault, LLP
-------------------------------------
125 High Street, High Street Tower
Boston, MA 02110
-------------------------------------
EXHIBIT 3.2
FEDERAL IDENTIFICATION
No. 04-3195264
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
We, Jon A. Glydon, President, and Edwin L. Miller, Jr., Clerk,
of Earth and Ocean Sports, Inc.
(Exact name of corporation)
located at 70 Airport Road, Hyannis, Massachusetts 02601
(Street address of corporation Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization
was duly adopted by unanimous written consent of the directors and stockholders
of the Corporation dated _________________:
_____________ shares of ______________ of _____________ shares outstanding
being at least two-thirds of each type, class or series outstanding and entitled
to vote thereon and of each type, class or series of stock whose rights are
adversely affected thereby:
ARTICLE I
THE NAME OF THE CORPORATION IS:
EARTH AND OCEAN SPORTS, INC.
ARTICLE II
The purpose of the corporation is to engage in the following business
activities:
To engage, directly or indirectly, in the business of developing,
acquiring, manufacturing and distributing sports products and related products
and accessories; to engage in all activities related to the foregoing; and
otherwise to do any and all acts and things permitted to be done by business
corporations under the provisions of Chapter 156B, as amended, of the General
Laws of the Commonwealth of Massachusetts.
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue
<TABLE>
<CAPTION>
- ------------------------------------------------- --------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- ------------------- ----------------------------- ---------------- ------------------------------- -------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------- ----------------------------- ---------------- ------------------------------- -------------------
<S> <C> <C> <C> <C>
Common: None Common 15,000,000 $0.01
- ------------------- ----------------------------- ---------------- ------------------------------- -------------------
Preferred: None Preferred: 500,000 $0.01
- ------------------- ----------------------------- ---------------- ------------------------------- -------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Continuation Pages 4-1 through 4-2.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are: None.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Continuation Page 6-1.
**If there are no provisions state "None".
NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY
BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT.
ARTICLE VII
The effective date of the restated Articles of Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE
ARTICLES OF ORGANIZATION.
a. The street address (post office boxes are not acceptable) of the principal
office of the Corporation in Massachusetts is:
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C> <C>
President: Jon A. Glydon 100 Alderbrook Lane 70 Airport Road
West Barnstable, MA 02668 Hyannis, Massachusetts 02601
Treasurer: Brooks R. Herrick 30 Larkspor Road 70 Airport Road
E. Greenwich, RI 02818 Hyannis, Massachusetts 02601
Clerk: Edwin L. Miller, Jr. 82 Sudbury Road c/o Testa, Hurwitz & Thibeault, LLP
Weston, MA 02193 125 High Street
Boston, MA 02109
Directors: Jon A. Glydon 100 Alderbrook Lane 70 Airport Road
West Barnstable, MA 02668 Hyannis, Massachusetts 02601
Steven J. Roth 192 East Emerson Road 92 Hayden Avenue
Lexington, MA 02173 Lexington, MA 02173
Thomas H. Conway 138 Barker Avenue 92 Hayden Avenue
Concord, MA 01742 Lexington, MA 02173
Dr. James J. McKenney 5 Winthrop Street 5 Winthrop Street
Lexington, MA 02173 Lexington, MA 02173
Gustav A. Christensen 3 Idlewild Drive 3 Idlewild Drive
Lexington, MA 02173 Lexington, MA 02173
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month of: October.
d. The name and business address of the resident agent, if any, of the
corporation is:
Edwin L. Miller, Jr.
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02109
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
Article II -- Amend purpose clause.
Article III -- Authorize class of preferred stock and additional shares of
common stock.
Article IV -- State the rights of the authorized classes of stock.
Article VI -- State other corporate governance provisions.
SIGNED UNDER THE PENALTIES OF PERJURY, this ____ day of ___________________,
1997.
______________________________________________________________, President
________________________________________________________________, Clerk/
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 156B, SECTION 74)
-------------------------------------------
I hereby approve the within Restated Articles of
Organization and, the filing fee in the amount of
$___________ having been paid, said articles are deemed to
have been filed with me this ____ day of
_____________________, 1997.
Effective Date:____________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
Edwin L. Miller, Jr., Esq.
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02109
Telephone: 617-248-7516
EARTH AND OCEAN SPORTS, INC.
Restated Articles of Organization
ARTICLE 4
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 15,500,000 shares, consisting of
the following classes of stock: (A) 15,000,000 shares of Common Stock, $.01 par
value per share (the "Common Stock"), and (B) 500,000 shares of Preferred Stock,
$.01 par value per share (the "Preferred Stock").
The designations, powers, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations and
restrictions thereof in respect of each class of authorized capital stock of the
Corporation are as follows:
A. COMMON STOCK
1. After the requirements with respect to preferential dividends on the
Preferred Stock shall have been met and after the Corporation shall have
complied with all the requirements, if any, with respect to the setting aside of
sums as sinking funds or redemption or purchase accounts, then and not otherwise
the holders of Common Stock shall be entitled to receive such dividends as may
be declared from time to time by the Board of Directors.
2. After distribution in full of the preferential amount to be
distributed to the holders of Preferred Stock in the event of voluntary or
involuntary liquidation, distribution or sale of assets, dissolution or winding
up of the Corporation, the holders of the Common Stock shall be entitled to
receive all the remaining assets of the Corporation, tangible or intangible, of
whatever kind available for distribution to the stockholders ratably in
proportion to the number of shares of Common Stock held by them respectively.
3. Except as may otherwise be required by law or the provisions of
these Restated Articles, or by the Board of Directors pursuant to authority
granted in these Restated Articles, each holder of Common Stock shall have one
vote in respect of each share of stock held by him in all matters voted upon by
the stockholders.
B. UNDESIGNATED PREFERRED STOCK
Up to 500,000 shares of Preferred Stock may be issued in one or more
series at such time or times and for such consideration or considerations as the
Board of Directors may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as to the relative preferences, powers, qualifications, rights and
privileges referred to below, in respect of any or all of which there may be
variations between different series, all shares of Preferred Stock shall be
identical. Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized, subject to the
limitations prescribed by law and the provisions of these Restated Articles of
Organization, to provide by adopting a vote or votes, a certificate of which
shall be filed in accordance with the Business Corporation Law of the
Commonwealth of Massachusetts, for the issuance of the Preferred Stock in one or
more series, each
Continuation Page 4-1
with such designations, preferences, voting powers, qualifications, special or
relative rights and privileges as shall be stated in the vote or votes creating
such series. The authority of the Board of Directors with respect to each such
series shall include without limitation of the foregoing the right to determine
and fix:
(1) The distinctive designation of such series and the number of shares
to constitute such series;
(2) The rate at which dividends on the shares of such series shall be
declared and paid, or set aside for payment, whether dividends at the rate so
determined shall be cumulative, and whether the shares of such series shall be
entitled to any participating or other dividends in addition to dividends at the
rate so determined, and if so on what terms;
(3) The right, if any, of the Corporation to redeem shares of the
particular series and, if redeemable, the price, terms and manner of such
redemption;
(4) The special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such series shall be entitled
to receive upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(5) The terms and conditions, if any, upon which shares of such series
shall be convertible into, or exchangeable for, shares of stock of any other
class or classes, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
(6) The obligation, if any, of the Corporation to retire or purchase
shares of such series pursuant to a sinking fund or fund of a similar nature or
otherwise, and the terms and conditions of such obligation;
(7) Voting rights, if any;
(8) Limitations, if any, on the issuance of additional shares of such
series or any shares of any other series of Preferred Stock; and
(9) Such other preferences, powers, qualifications, special or relative
rights and privileges thereof as the Board of Directors may deem advisable and
are not inconsistent with law and the provisions of these Restated Articles.
Continuation Page 4-2
EARTH AND OCEAN SPORTS, INC.
Restated Articles of Organization
ARTICLE 6
1. The Corporation eliminates the personal liability of each director
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director notwithstanding any provision of law imposing such
liability; provided, however, that, to the extent provided by applicable law,
this provision shall not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or
62 or successor provisions of the Massachusetts Business Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision shall not eliminate or limit the liability of a director
of the Corporation for any act or omission occurring prior to the date on which
this provision becomes effective. No amendment to or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
2. Meetings of the stockholders of the Corporation may be held anywhere
in the United States.
3. The directors of the Corporation may make, amend or repeal the
by-laws in whole or in part, except with respect to any provision thereof which
by law or the by-laws requires action by the stockholders.
4. The whole or any part of the authorized but unissued shares of
capital stock of the Corporation may be issued at any time or from time to time
by the Board of Directors without further action by the stockholders.
5. The Corporation may become a partner in any business.
6. The Corporation, by vote of a majority of the stock outstanding and
entitled to vote thereon (or if there are two or more classes of stock entitled
to vote as separate classes, then by vote of a majority of each such class of
stock outstanding) may (i) authorize any amendment to its Restated Articles of
Organization, (ii) authorize the sale, lease or exchange of all or substantially
all of the Corporation's property and assets, including its goodwill and (iii)
approve a merger or consolidation of the Corporation with or into any other
corporation, provided that such amendment, sale, lease, exchange, merger or
consolidation shall have been approved by the Board of Directors.
Continuation Page 6-1
EXHIBIT 3.3
DOCUMENT MANAGEMENT SOLUTIONS, INC.
****************
BY-LAWS
****************
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
the second Tuesday of May in each year (or if that be a legal holiday in the
place where the meeting is to be held, on the next succeeding full business day)
at 10:00 A.M. unless a different hour is fixed by the Directors or the President
and stated in the notice of the meeting. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the Articles
of Organization or by these By-laws, may be specified by the Directors or the
President. In the event an annual meeting has not been held on the date fixed in
these By-laws, a special meeting in lieu of the annual meeting may be held with
all the force and effect of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by
the President or by the Directors. Upon written application of one or more
stockholders who hold at least 10% in interest of the capital stock entitled to
vote at a meeting, a special meeting shall be called by the Clerk, or in the
case of the death, absence, incapacity or refusal of the Clerk, by another
officer.
3. Place of Meetings. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
4. Notice of Meetings. A written notice of the place, date and hour of
all meetings of stockholders stating the purpose of the meeting shall be given
by the Clerk or an Assistant
-2-
Clerk or by the person calling the meeting at least seven days before the
meeting or such longer period as is required by law to each stockholder entitled
to vote thereat and to each stockholder who under the law, under the Articles of
Organization or under these By-laws, is entitled to such notice, by leaving such
notice with him or at his residence or usual place of business, or by mailing
it, postage prepaid, and addressed to such stockholder at his address as it
appears in the records of the corporation. Whenever notice of a meeting is
required to be given a stockholder under any provision of the Massachusetts
Business Corporation Law or of the Articles of Organization or these By-laws, a
written waiver thereof, executed before or after the meeting by such stockholder
or his attorney thereunto authorized and filed with the records of the meeting,
shall be deemed equivalent to such notice.
5. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that, if two or more classes of stock are outstanding and entitled to
vote as separate classes, then in the case of each such class, a quorum shall
consist of the holders of a majority in interest of the stock of that class
issued, outstanding and entitled to vote.
6. Voting and Proxies. Each stockholder shall have one vote for each
share of stock entitled to vote owned by him and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization in
the case that the corporation has two or more classes or series of stock.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy. Proxies shall be filed with the clerk of the meeting, or of
any adjournment thereof, before being voted. No proxy dated more than six months
before the date named therein shall be valid and no proxy shall be valid after
the final adjournment of such meeting. Notwithstanding the provisions of the
preceding sentence, a proxy coupled with an interest sufficient in law to
support an irrevocable power, including, without limitation, an interest in
shares or in the corporation generally, may be
-3-
made irrevocable if it so provides, need not specify the meeting to which it
relates, and shall be valid and enforceable until the interest terminates, or
for such shorter period as may be specified in the proxy. Except as otherwise
limited therein, proxies shall entitle the persons named therein to vote at any
adjournment of such meeting but shall not be valid after final adjournment of
such meeting. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by any one of them unless at or prior to
exercise of the proxy the corporation receives a specific written notice to the
contrary from any one of them. A proxy purporting to be executed by or on behalf
of a stockholder shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the challenger.
7. Action at Meeting. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter (or if there
are two or more classes of stock entitled to vote as separate classes, then in
the case of each such class, the holders of a majority of the stock of that
class present or represented and voting on a matter), except where a larger vote
is required by law, the Articles of Organization or these By-laws, shall decide
any matter to be voted on by the stockholders. Any election of directors or
officers by the stockholders shall be determined by a plurality of the votes
cast by stockholders entitled to vote at the election. Any such elections shall
be by ballot if so requested by any stockholder entitled to vote thereon. The
corporation shall not directly or indirectly vote any share of its own stock.
8. Action without Meeting. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at a meeting.
-4-
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board
of Directors who may exercise all the powers of the corporation except as
otherwise provided by law, by the Articles of Organization or by these By-laws.
In the event of vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.
2. Election. A Board of Directors shall be elected by the stockholders
at the annual meeting. The number of directors shall be fixed by the
stockholders (except as that number may be enlarged by the Board of Directors
acting pursuant to Section 4 of this Article), but shall be not less than three,
except that whenever there shall be only two stockholders the number of
directors shall be not less than two and whenever there shall be only one
stockholder or prior to the issuance of any stock, there shall be at least one
director, and shall be not more than nine.
3. Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from the enlargement of the Board, may be filled
by the stockholders or, in the absence of stockholder action, by the Directors.
4. Enlargement of the Board. The Board of Directors may be enlarged by
the stockholders at any meeting or by vote of a majority of the Directors then
in office.
5. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, Directors shall hold office until the next
annual meeting of stockholders and until their successors are chosen and
qualified. Any Director may resign by delivering his written resignation to the
corporation at its principal office or to the President, Clerk or Secretary.
Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
-5-
6. Removal. A Director may be removed from office (a) with or without
cause by the vote of the holders of a majority of the shares entitled to vote in
the election of Directors, provided that the Directors of a class elected by a
particular class of stockholders may be removed only by the vote of the holders
of a majority of the shares of the particular class of stockholders entitled to
vote for the election of such Directors; or (b) for cause by vote of a majority
of the Directors then in office. A Director may be removed for cause only after
a reasonable notice and opportunity to be heard before the body proposing to
remove him.
7. Meetings. Regular meetings of the Directors may be held without call
or notice at such places and at such times as the Directors may from time to
time determine, provided that any Director who is absent when such determination
is made shall be given notice of the determination. A regular meeting of the
Directors may be held without a call or notice at the same place as the annual
meeting of stockholders.
Special meetings of the Directors may be held at any time and place
designated in a call by the President or two or more Directors.
8. Telephone Conference Meetings. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
9. Notice of Meetings. Notice of all special meetings of the Directors
shall be given to each Director by the Secretary, or Assistant Secretary, or if
there be no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk,
or in case of the death, absence, incapacity or refusal of such persons, by the
officer or one of the Directors calling the meeting. Notice shall be given to
each Director in person or by telephone or by telegram sent to his business or
home address at least twenty-four hours in advance of the meeting, or by written
notice mailed to his business or home address at least forty-eight hours in
advance of the meeting. Notice of a meeting need not be given to any Director if
a written waiver of notice, executed by him before or after the
-6-
meeting, is filed with the records of the meeting, or to any Director who
attends the meeting without protesting prior thereto or at its commencement the
lack of notice to him. A notice or waiver of notice of a Directors' meeting need
not specify the purposes of the meeting.
10. Quorum. At any meeting of the Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time without further notice.
11. Action at Meeting. At any meeting of the Directors at which a
quorum is present, a majority of the Directors present may take any action on
behalf of the Board except to the extent that a larger number is required by law
or the Articles of Organization or these By-laws.
12. Action by Consent. Any action required or permitted to be taken at
any meeting of the Directors may be taken without a meeting, if all the
Directors consent to the action in writing and the written consents are filed
with the records of the meetings of Directors. Such consents shall be treated
for all purposes as a vote at a meeting.
13. Committees. The Directors may, by vote of a majority of the
Directors then in office, elect from their number an executive or other
committees and may by like vote delegate thereto some or all of their powers
except those which by law, the Articles of Organization or these By-laws they
are prohibited from delegating to such committee. Except as the Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but unless otherwise provided by the Directors or in such rules, its
business shall be conducted as nearly as may be in the same manner as is
provided by these By-laws for the Directors.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one
-7-
or more Vice-Presidents, Assistant Treasurers, Assistant Clerks, Secretary and
Assistant Secretaries as the Directors may determine.
2. Election. The President, Treasurer and Clerk shall be elected
annually by the Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Directors at such meeting or
at any other meeting.
3. Qualification. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person, provided that the President and Clerk shall not be the same person. The
Clerk shall be a resident of Massachusetts unless the corporation has a resident
agent appointed for the purpose of service of process. Any officer may be
required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his written resignation to
the corporation at its principal office or to the President, Clerk or Secretary,
and such resignation shall be effective upon receipt unless it is specified to
be effective at some other time or upon the happening of some other event.
5. Removal. The Directors may remove any officer with or without cause
by vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. President, Chairman of the Board, and Vice-President. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
have general supervision and control of its business. Unless otherwise provided
by the Directors he shall preside, when present, at all meetings of
-8-
stockholders and, unless a Chairman of the Board has been elected and is
present, of the Directors.
If a Chairman of the Board of Directors is elected he shall preside at
all meetings of the Board of Directors at which he is present. The Chairman
shall have such other powers as the Directors may from time to time designate.
Any Vice-President shall have such powers as the Directors may from
time to time designate.
7. Treasurer and Assistant Treasurer. The Treasurer shall, subject to
the direction of the Directors, have general charge of the financial affairs of
the corporation and shall cause accurate books of account to be kept. He shall
have custody of all funds, securities, and valuable documents of the
corporation, except as the Directors may otherwise provide.
Any Assistant Treasurer shall have such powers as the Directors may
from time to time designate.
8. Clerk and Assistant Clerks. The Clerk shall record all proceedings
of the stockholders in a book to be kept therefor. Unless a transfer agent is
appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the
principal office of the corporation or at his office, the stock and transfer
records of the corporation, in which are contained the names of all stockholders
and the record address and the amount of stock held by each.
In case a Secretary is not elected, the Clerk shall record all
proceedings of the Directors in a book to be kept therefor.
In the absence of the Clerk from any meeting of the stockholders, an
Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by
the person presiding at the meeting, shall perform the duties of the Clerk. Any
Assistant Clerk shall have such additional powers as the Directors may from time
to time designate.
9. Secretary and Assistant Secretaries. If a Secretary is elected, he
shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be
-9-
elected, otherwise a Temporary Secretary designated by the person presiding at
the meeting, shall keep a record of the meetings of the Directors.
Any Assistant Secretary shall have such additional powers as the
Directors may from time to time designate.
10. Other Powers and Duties. Each officer shall, subject to these
By-laws, have in addition to the duties and powers specifically set forth in
these By-laws, such duties and powers as are customarily incident to his office,
and such duties and powers as the Directors may from time to time designate.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-President,
and by the Treasurer or an Assistant Treasurer; provided, however, such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares
are subject to any restriction on transfer pursuant to the Articles of
Organization, these By-laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction and a statement
that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without
-10-
charge. Every stock certificate issued by the corporation at a time when it is
authorized to issue more than one class or series of stock shall set forth upon
the face or back of the certificate either the full text of the preferences,
voting powers, qualifications and special and relative rights of the shares of
each class and series, if any, authorized to be issued, as set forth in the
Articles of Organization, or a statement of the existence of such preferences,
powers, qualifications, and rights, and a statement that the corporation will
furnish a copy thereof to the holder of such certificate upon written request
and without charge.
2. Stockholder Open Accounts. The corporation may maintain or caused to
be maintained stockholder open accounts in which may be recorded all
stockholders' ownership of stock and all changes therein. Certificates need not
be issued for shares so recorded in a stockholder open account unless requested
by the stockholder.
3. Transfers. Subject to the restrictions, if any, stated or noted on
the stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
-11-
4. Record Date. The Directors may fix in advance a time which shall be
not more than sixty (60) days before the date of any meeting of stockholders or
the date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution or the
right to give such consent or dissent. In such case only stockholders of record
on such record date shall have such right, notwithstanding any transfer of stock
on the books of the corporation after the record date. Without fixing such
record date the Directors may for any of such purposes close the transfer books
for all or any part of such period.
If no record date is fixed and the transfer books are not closed, the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss, mutilation
or destruction of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms and conditions as the Directors may prescribe.
6. Issue of Capital Stock. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. Reacquisition of Stock. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization.
-12-
ARTICLE V
Provisions Relative to Directors,
Officers, Stockholders and Employees
1. Certain Contracts and Transactions. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the meeting of the Directors (or any authorized committee
thereof) or stockholders at which such contract or transaction was authorized
and/or that the vote of such Director or stockholder was necessary for the
adoption of such contract or transaction, provided that if said interest was
material, it shall have been known or disclosed to the Directors or stockholders
voting at said meeting on said contract or transaction. A general notice to any
person voting on said contract or transaction that an officer, Director,
stockholder or employee has a material interest in any corporation, organization
or other concern shall be sufficient disclosure as to such officer, Director,
stockholder or employee with respect to all contracts and transactions with such
corporation, organization or other concern. This section shall be subject to
amendment or repeal only by action of the stockholders.
2. Indemnification. Each Director and officer of the corporation, and
any person who, at the request of the corporation, serves as a director or
officer of another organization shall
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be indemnified by the corporation against any cost, expense (including
attorneys' fees), judgment, liability and/or amount paid in settlement
reasonably incurred by or imposed upon him in connection with any action, suit
or proceeding (including any proceeding before any administrative or legislative
body or agency), to which he may be made a party or otherwise involved or with
which he shall be threatened, by reason of his being, or related to his status
as, a Director or officer of the corporation or of any other organization, which
other organization he serves or has served as director or officer at the request
of the corporation (whether or not he continues to be an officer or Director of
the corporation or such other organization at the time such action, suit or
proceeding is brought or threatened), unless such indemnification is prohibited
by the Business Corporation Law of the Commonwealth of Massachusetts. The
foregoing right of indemnification shall be in addition to any rights to which
any such person may otherwise be entitled and shall inure to the benefit of the
executors or administrators of each such person. The corporation may pay the
expenses incurred by any such person in defending a civil or criminal action,
suit or proceeding in advance of the final disposition of such action, suit, or
proceeding, upon receipt of an undertaking by such person to repay such payment
if it is determined that such person is not entitled to indemnification
hereunder. This section shall not affect any rights to indemnification to which
corporate personnel other than Directors and officers may be entitled by
contract or otherwise under law. This section shall be subject to amendment or
repeal only by action of the stockholders.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall be the twelve (12) months
ending the last day of December. Following any change in the fiscal year
previously adopted, a certificate of such
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change, signed under the penalties of perjury by the Clerk or an Assistant
Clerk, shall be filed forthwith with the state secretary.
2. Seal. The seal of this corporation shall, subject to alteration by
the Directors, bear its name, the word "Massachusetts", and the year of its
incorporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Directors may generally or in particular cases otherwise
determine.
4. Voting of Securities. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney in fact for this corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
the corporation.
5. Corporate Records. The original, or attested copies, of the Articles
of Organization, By-laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation or at
an office of its transfer agent or of the Clerk or of its resident agent. Said
copies and records need not all be kept in the same office. They shall be
available at all reasonable times to the inspection of any stockholder for any
proper purpose but not to secure a list of stockholders or other information for
the purpose of selling said list or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
6. Articles of Organization. All references in these By-laws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
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7. Amendments. These By-laws, to the extent provided in these By-laws,
may be amended or repealed, in whole or in part, and new By-laws adopted either
(a) by the stockholders at any meeting of the stockholders by the affirmative
vote of the holders of at least a majority in interest of the capital stock
present and entitled to vote, provided that notice of the proposed amendment or
repeal or of the proposed making of new By-laws shall have been given in the
notice of such meeting, or (b) if so authorized by the Articles of Organization,
by the Board of Directors at any meeting of the Board by the affirmative vote of
a majority of the Directors then in office, but no amendment or repeal of a
By-law shall be voted by the Board of Directors and no new By-law shall be made
by the Board of Directors which alters the provisions of these By-laws with
respect to removal of Directors, or the election of committees by Directors and
the delegation of powers thereto, nor shall the Board of Directors make, amend
or repeal any provision of the By-laws which by law, the Articles of
Organization or the By-laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending, or repealing by the Directors of any By-law, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the By-laws. Any By-law or amendment of a By-law made the
Board of Directors may be amended or repealed by the stockholders by affirmative
vote as above provided in this Section 7.
EXHIBIT 3.4
EARTH AND OCEAN SPORTS, INC.
RESTATED BY-LAWS
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on
the date and at the time fixed, from time to time, by the directors, provided
that the date so fixed is within six months of the end of the fiscal year of the
corporation. If the day fixed for the annual meeting shall fall on a legal
holiday, the meeting shall be held on the next succeeding day not a legal
holiday. The purposes for which the annual meeting is to be held, in addition to
those prescribed by law, by the Articles of Organization or by these By-laws,
may be specified by the Directors or the President. In the event an annual
meeting has not been held on the date fixed in these By-laws, a special meeting
in lieu of the annual meeting may be held with all the force and effect of an
annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by
the President or by the Directors. Upon written application of one or more
stockholders who hold at least 10% of the capital stock entitled to vote at a
meeting, a special meeting shall be called by the Clerk, or in case of the
death, absence, incapacity or refusal of the Clerk, by any other officer.
Notwithstanding the immediately preceding sentence, if the corporation has a
class of voting stock registered under the Securities Exchange Act of 1934, as
amended, upon written application of one or more stockholders who hold at least
75% in interest of the capital stock entitled to vote at a meeting, a special
meeting shall be called by the Clerk, or in case of the death, absence,
incapacity or refusal of the Clerk, by any other officer.
3. Place of Meetings. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
4. Notice of Meetings. A written notice of the place, date and hour of
all meetings of stockholders stating the purpose of the meeting shall be given
by the Clerk or an Assistant Clerk or by
the person calling the meeting at least seven days before the meeting to each
stockholder entitled to vote thereat and to each stockholder who under the law,
under the Articles of Organization or under these By-laws, is entitled to such
notice, by leaving such notice with him or at his residence or usual place of
business, or by mailing it, postage prepaid, and addressed to such stockholder
at his address as it appears in the records of the corporation. Whenever notice
of a meeting is required to be given a stockholder under any provision of the
Massachusetts Business Corporation Law or of the Articles of Organization or
these By-laws, a written waiver thereof, executed before or after the meeting by
such stockholder or his attorney thereunto authorized and filed with the records
of the meeting, shall be deemed equivalent to such notice.
5. Notice of Stockholder Business. The following provisions of this
Section 5 shall apply to the conduct of business at any meeting of the
stockholders. (As used in this Section 5, the term annual meeting shall include
a special meeting in lieu of annual meeting.)
(a) At any meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) pursuant to
the corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in paragraph (b) of this
Section 5, who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in paragraph (b) of this Section 5.
(b) For business to be properly brought before any meeting of
the stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of
this By-law, the stockholder must have given timely notice thereof in writing to
the Clerk 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 (i) in the case of any annual meeting, not less than sixty days nor
more than ninety days prior to the date specified in Section 1 above for such
annual meeting, regardless of any postponements, deferrals or adjournments of
that meeting to a later date; provided, however, that if a special meeting in
lieu of annual meeting of stockholders is to be held on a date prior to the date
specified in Section 1 above, and if less than seventy days' notice or prior
public disclosure of the date of such special meeting in lieu of annual meeting
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 date on which notice of the date of such special meeting in lieu
of annual meeting was mailed or the day on which public disclosure was made of
the date of such special meeting in lieu of annual meeting; and (ii) in the case
of a special meeting (other than a special meeting in lieu of an annual
meeting), not later than the tenth day following the earlier of the day on which
notice of the date of the scheduled meeting was mailed or the day on which
public disclosure was made of the date of the scheduled meeting. A stockholder's
notice to the Clerk shall set forth as to each matter the stockholder proposes
to bring before the meeting, (i) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting, (ii) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business, the name and address of the
beneficial owner, if any, on whose behalf the proposal is made, and the name and
address of any other stockholders or beneficial owners known by such stockholder
to be supporting such proposal, (iii) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder of
record, by the beneficial owner, if any, on whose behalf the proposal is made
and by any other stockholders or beneficial owners known by such stockholder of
record and/or of the beneficial owner, if any, on whose behalf the proposal is
made, in such proposed business and any material interest of any other
stockholders or beneficial owners known by such stockholder to be supporting
such proposal in such proposed business, to the extent known by such
stockholder.
(c) Notwithstanding anything in these By-laws to the contrary,
no business shall be conducted at a meeting except in accordance with the
procedures set forth in these By-laws. The person presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting and in accordance with the procedures prescribed by these
By-laws, and if he should so determine, he shall so declare at the meeting and
any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended
(or any successor provision), and the rules and regulations thereunder with
respect to the matters set forth in this By-law.
(d) This provision shall not prevent the consideration and
approval or disapproval at the meeting of reports of officers, Directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such meeting unless properly brought before
the meeting as herein provided.
6. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that, if two or more classes of stock are outstanding and entitled to
vote as separate classes, then in the case of each such class, a quorum shall
consist of the holders of a majority in interest of the stock of that class
issued, outstanding and entitled to vote.
7. Voting and Proxies. Each stockholder shall have one vote for each
share of stock entitled to vote owned by him and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization in
the case that the corporation has two or more classes or series of stock.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy dated not more than six months before the meeting named
therein. Proxies shall be filed with the clerk of the meeting, or of any
adjournment thereof, before being voted. Except as otherwise limited therein,
proxies shall entitle the persons named therein to vote at any adjournment of
such meeting but shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger.
8. Action at Meeting. When a quorum is present, the holders of a
majority of the stock present or represented and voting on a matter (or if there
are two or more classes of stock entitled to vote
as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on a
matter), except where a larger vote is required by law, the Articles of
Organization or these By-laws, shall decide any matter to be voted on by the
stockholders. Any election of directors or officers by the stockholders shall be
determined by a plurality of the votes cast by stockholders entitled to vote at
the election. Any such elections shall be by ballot if so requested by any
stockholder entitled to vote thereon. The corporation shall not directly or
indirectly vote any share of its own stock.
9. Action Without Meeting. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at a meeting.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board
of Directors who may exercise all the powers of the corporation except as
otherwise provided by law, by the Articles of Organization or by these By-laws.
In the event of vacancy in the Board of Directors, the remaining Directors,
except as otherwise provided by law, may exercise the powers of the full Board
until the vacancy is filled.
2. Election. A Board of Directors shall be elected by the stockholders
at the annual meeting. The number of directors shall be fixed by the
stockholders (except as that number may be enlarged by the Board of Directors
acting pursuant to Section 4 of this Article), but shall be not less than three,
except that whenever there shall be only two stockholders the number of
directors shall be not less than two and whenever there shall be only one
stockholder or prior to the issuance of any stock, there shall be at least one
director, and shall be not more than nine. Notwithstanding the foregoing
provisions, if the corporation is a "registered corporation" within the meaning
of Section 50A of the Massachusetts Business Corporation Law and has not
elected, pursuant to paragraph (b) of such Section 50A, to be exempt from the
provisions of paragraph (a) of such Section 50A, then:
(i) In accordance with paragraph (d), clause (iv) of such
Section 50A, the number of Directors shall be fixed only by vote of the Board of
Directors.
(ii) In accordance with paragraph (a) of such Section 50A, the
Directors of the corporation shall be classified with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible; the term of office of those of the first class ("Class I
Directors") to continue until the first annual meeting following the date the
corporation becomes subject to such paragraph (a) and until their successors are
duly elected and qualified; the term of office of those of the second class
("Class II Directors") to continue until the second annual meeting following the
date the corporation becomes subject to such paragraph (a) and until their
successors are duly elected and qualified; and the term of office of those of
the third class ("Class III Directors") to continue until the third annual
meeting following the date the corporation becomes subject to such paragraph (a)
and until their successors are duly elected and qualified. At each annual
meeting of the corporation, the successors to the class of directors whose term
expires at that meeting shall be elected to hold office for a term continuing
until the annual meeting held in the third year following the year of their
election and until successors are duly elected and qualified.
3. Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from the enlargement of the Board, may be filled
by the stockholders or, in the absence of stockholder action, by the Directors.
Each such successor shall hold office for the unexpired term of his or her
predecessor and until his or her successor is chosen and qualified or until his
or her earlier death, resignation or removal. Notwithstanding the foregoing
provisions, if the Directors of the corporation are classified with respect to
the time for which they severally hold office pursuant to paragraph (a) of
Section 50A of the Massachusetts Business Corporation Law, as it may be amended
from time to time, any vacancy in the Board of Directors, however occurring,
shall be filled in accordance with the provisions of paragraph (d) of such
Section 50A.
4. Enlargement of the Board. The Board of Directors may be enlarged by
the stockholders at any meeting or by vote of a majority of the Directors then
in office. Notwithstanding the foregoing provisions, if the Directors of the
corporation are classified with respect to the time for which they
severally hold office pursuant to paragraph (a) of Section 50A of the
Massachusetts Business Corporation Law, as it may be amended from time to time,
the Board of Directors may be enlarged only in accordance with the provisions of
paragraph (d) of such Section 50A.
5. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, Directors shall hold office until the next
annual meeting of stockholders and until their successors are chosen and
qualified. Any Director may resign by delivering his written resignation to the
corporation at its principal office or to the President, Clerk or Secretary.
Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
6. Removal. A Director may be removed from office (a) with or without
cause by the vote of the holders of a majority of the shares entitled to vote in
the election of Directors, provided that the Directors of a class elected by a
particular class of stockholders may be removed only by the vote of the holders
of a majority of the shares of the particular class of stockholders entitled to
vote for the election of such Directors; or (b) for cause by vote of a majority
of the Directors then in office. A Director may be removed for cause only after
a reasonable notice and opportunity to be heard before the body proposing to
remove him. Notwithstanding the foregoing provisions, if the Directors of the
corporation are classified with respect to the time for which they severally
hold office pursuant to paragraph (a) of Section 50A of the Massachusetts
Corporation Law, as it may be amended from time to time, the removal of
Directors shall be governed by the provisions of paragraph (c) of such Section
50A.
7. Meetings. Regular meetings of the Directors may be held without call
or notice at such places and at such times as the Directors may from time to
time determine, provided that any Director who is absent when such determination
is made shall be given notice of the determination. A regular meeting of the
Directors may be held without a call or notice at the same place as the annual
meeting of stockholders.
Special meetings of the Directors may be held at any time and place
designated in a call by the President or two or more Directors.
8. Telephone Conference Meetings. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
9. Notice of Meetings. Notice of all special meetings of the Directors
shall be given to each Director by the Secretary, or Assistant Secretary, or if
there be no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk,
or in case of the death, absence, incapacity or refusal of such persons, by the
officer or one of the Directors calling the meeting. Notice shall be given to
each Director in person or by telephone or by telegram sent to his business or
home address at least twenty-four hours in advance of the meeting, or by written
notice mailed to his business or home address at least forty-eight hours in
advance of the meeting. Notice of a meeting need not be given to any Director if
a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Director who attends the
meeting without protesting prior thereto or at its commencement the lack of
notice to him. A notice or waiver of notice of a Directors' meeting need not
specify the purposes of the meeting.
10. Quorum. At any meeting of the Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time without further notice.
l1. Action at Meeting. At any meeting of the Directors at which a
quorum is present, a majority of the Directors present may take any action on
behalf of the Board except to the extent that a larger number is required by law
or the Articles of Organization or these By-laws.
12. Action by Consent. Any action required or permitted to be taken at
any meeting of the Directors may be taken without a meeting, if all the
Directors consent to the action in writing and the written consents are filed
with the records of the meetings of Directors. Such consents shall be treated
for all purposes as a vote at a meeting.
13. Committees. The Directors may, by vote of a majority of the
Directors then in office, elect from their number an executive or other
committees and may by like vote delegate thereto some or
all of their powers except those which by law, the Articles of Organization or
these By-laws they are prohibited from delegating to such committee. Except as
the Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Directors or in
such rules, its business shall be conducted as nearly as may be in the same
manner as is provided by these By-laws for the Directors.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one or more Vice Presidents, Assistant Treasurers,
Assistant Clerks, Secretary and Assistant Secretaries as the Directors may
determine.
2. Election. The President, Treasurer and Clerk shall be elected
annually by the Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Directors at such meeting or
at any other meeting.
3. Qualification. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person, provided that the President and Clerk shall not be the same person. The
Clerk shall be a resident of Massachusetts unless the corporation has a resident
agent appointed for the purpose of service of process. Any officer may be
required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his written resignation to
the corporation at its principal office or to the President, Clerk or Secretary,
and such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
5. Removal. The Directors may remove any officer with or without cause
by vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. President, Chairman of the Board, and Vice-President. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
have general supervision and control of its business. Unless otherwise provided
by the Directors he shall preside, when present, at all meetings of stockholders
and, unless a Chairman of the Board has been elected and is present, of the
Directors.
If a Chairman of the Board of Directors is elected he shall preside at
all meetings of the Board of Directors at which he is present. The Chairman
shall have such other powers as the Directors may from time to time designate.
Any Vice-President shall have such powers as the Directors may from
time to time designate.
7. Treasurer and Assistant Treasurer. The Treasurer shall, subject to
the direction of the Directors, have general charge of the financial affairs of
the corporation and shall cause accurate books of account to be kept. He shall
have custody of all funds, securities, and valuable documents of the
corporation, except as the Directors may otherwise provide.
Any assistant treasurer shall have such powers as the Directors may
from time to time designate.
8. Clerk and Assistant Clerks. The Clerk shall record all proceedings
of the stockholders in a book to be kept therefor. Unless a transfer agent is
appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the
principal office of the corporation or at his office, the stock and transfer
records of the corporation, in which are contained the names of all stockholders
and the record address and the amount of stock held by each.
In case a Secretary is not elected, the Clerk shall record all
proceedings of the Directors in a book to be kept therefor.
In the absence of the Clerk from any meeting of the stockholders, an
Assistant Clerk, if one be elected, otherwise a Temporary Clerk designated by
the person presiding at the meeting, shall perform the duties of the Clerk. Any
Assistant Clerk shall have such additional powers as the Directors may from time
to time designate.
9. Secretary and Assistant Secretaries. If a Secretary is elected, he
shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be elected, otherwise a Temporary Secretary
designated by the person presiding at the meeting, shall keep a record of the
meetings of the Directors.
Any Assistant Secretary shall have such additional powers as the
Directors may from time to time designate.
10. Other Powers and Duties. Each officer shall, subject to these
By-laws, have in addition to the duties and powers specifically set forth in
these By-laws, such duties and powers as are customarily incident to his office,
and such duties and powers as the Directors may from time to time designate.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-President,
and by the Treasurer or an Assistant Treasurer; provided, however, such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares
are subject to any restriction on transfer pursuant to the Articles of
Organization, these By-laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction and a statement
that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge. Every stock certificate
issued by the corporation at a time when it is authorized to issue more than one
class or series of stock shall set forth upon the face or back of the
certificate either the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series, if any, authorized to be issued, as set forth in the Articles of
Organization, or a statement of the existence of such preferences, powers,
qualifications, and rights, and a statement that the corporation will furnish a
copy thereof to the holder of such certificate upon written request and without
charge.
2. Stockholder Open Accounts. The corporation may maintain or cause to
be maintained stockholder open accounts in which may be recorded all
stockholders' ownership of stock and all changes therein. Certificates need not
be issued for shares so recorded in a stockholder open account unless requested
by the stockholder.
3. Transfers. Subject to the restrictions, if any, stated or noted on
the stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of
his post office address.
4. Record Date. The Directors may fix in advance a time which shall be
not more than sixty (60) days before the date of any meeting of stockholders or
the date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution or the
right to give such consent or dissent. In such case only stockholders of record
on such record date shall have such right, notwithstanding any transfer of stock
on the books of the corporation after the record date. Without fixing such
record date the Directors may for any of such purposes close the transfer books
for all or any part of such period.
If no record date is fixed and the transfer books are not closed, the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss, mutilation
or destruction of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms and conditions as the Directors may prescribe.
6. Issue of Capital Stock. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. Reacquisition of Stock. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization. Within sixty (60) days after the meeting at which such
vote is taken there shall be submitted to the state secretary a certificate of
restoration of reacquired shares. The certificate of restoration shall be signed
under penalties of perjury by the President or a Vice-President and by the Clerk
or an Assistant Clerk and shall set forth (i) the number of reacquired shares so
restored to the status of authorized but unissued shares, itemized by
classes and series, and the par value, if any, (ii) after giving effect to such
restoration, the aggregate number of authorized and of issued and outstanding
shares, itemized by classes and series and the par value, if any, (iii) the date
of adoption of such vote, and (iv) a certification that such vote was duly
adopted by the Directors.
ARTICLE V
Provisions Relative to Directors,
Officers, Stockholders and Employees
1. Certain Contracts and Transactions. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation, or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the meeting of the Directors (or any authorized committee
thereof) or stockholders at which such contract or transaction was authorized
and/or that the vote of such Director or stockholder was necessary for the
adoption of such contract or transaction, provided that if said interest was
material, it shall have been known or disclosed to the Directors or stockholders
voting at said meeting on said contract or transaction. A general notice to any
person voting on said contract or transaction that an officer, Director,
stockholder or employee has a material interest in any corporation, organization
or other concern shall be sufficient disclosure as to such officer, Director,
stockholder or employee with respect to all contracts and transactions with such
corporation, organization or other concern. This section shall be subject to
amendment or repeal only by action of the stockholders.
2. Indemnification. Each Director, officer, employee and other agent of
the corporation, and any person who, at the request of the corporation, serves
as a director, officer, employee or other agent of another organization in which
the corporation directly or indirectly owns shares or of which it is a creditor
shall be indemnified by the corporation against any cost, expense (including
attorneys' fees), judgment, liability and/or amount paid in settlement
reasonably incurred by or imposed upon him in connection with any action, suit
or proceeding (including any proceeding before any administrative or legislative
body or agency), to which he may be made a party or otherwise involved or with
which he shall be threatened, by reason of his being, or related to his status
as a director, officer, employee or other agent of the corporation or of any
other organization in which the corporation directly or indirectly owns shares
or of which the corporation is a creditor, which other organization he serves or
has served as director, officer, employee or other agent at the request of the
corporation (whether or not he continues to be an officer, Director, employee or
other agent of the corporation or such other organization at the time such
action, suit or proceeding is brought or threatened), unless such
indemnification is prohibited by the Business Corporation Law of the
Commonwealth of Massachusetts. The foregoing right of indemnification shall be
in addition to any rights to which any such person may otherwise be entitled and
shall inure to the benefit of the executors or administrators of each such
person. The corporation may pay the expenses incurred by any such person in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit, or proceeding, upon receipt of an undertaking
by such person to repay such payment if it is determined that such person is not
entitled to indemnification hereunder. This section shall be subject to
amendment or repeal only by action of the stockholders.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall end on the last day of
October in each year. Following any change in
the fiscal year previously adopted, a certificate of such change, signed under
the penalties of perjury by the Clerk or an Assistant Clerk, shall be filed
forthwith with the state secretary.
2. Seal. The seal of this corporation shall, subject to alteration by
the Directors, bear its name, the word "Massachusetts," and the year of its
incorporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Directors may generally or in particular cases otherwise
determine.
4. Voting of Securities. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney-in-fact for this corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
this corporation.
5. Corporate Records. The original, or attested copies, of the Articles
of Organization, By-laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation or at
an office of its transfer agent or of the Clerk or of its resident agent. Said
copies and records need not all be kept in the same office. They shall be
available at all reasonable times to the inspection of any stockholder for any
proper purpose but not to secure a list of stockholders or other information for
the purpose of selling said list or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
6. Articles of Organization. All references in these By-laws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
7. Amendments. These By-laws, to the extent provided in these By-laws,
may be amended or repealed, in whole or in part, and new By-laws adopted either
(a) by the stockholders at any meeting of the stockholders by the affirmative
vote of the holders of at least a majority in interest of the capital
stock present and entitled to vote, provided that notice of the proposed
amendment or repeal or of the proposed making of new By-laws shall have been
given in the notice of such meeting, or (b) if so authorized by the Articles of
Organization, by the Board of Directors at any meeting of the Board by the
affirmative vote of a majority of the Directors then in office, but no amendment
or repeal of a By-law shall be voted by the Board of Directors and no new By-law
shall be made by the Board of Directors which alters the provisions of these
By-laws with respect to removal of Directors, or the election of committees by
Directors and the delegation of powers thereto, nor shall the Board of Directors
make, amend or repeal any provision of the By-laws which by law, the Articles of
Organization or the By-laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending, or repealing by the Directors of any By-law, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the By-laws. Any By-law or amendment of a By-law made by the
Board of Directors may be amended or repealed by the stockholders by affirmative
vote as above provided in this Section 7.
8. 1987 Massachusetts Control Share Acquisition Act. The 1987
Massachusetts Control Share Acquisition Act, Chapter 110D of the Massachusetts
General Laws, as it may be amended from time to time, shall not apply to the
corporation.
Exhibit 10.1
EARTH AND OCEAN SPORTS, INC.
MANAGEMENT EQUITY REORGANIZATION PLAN
Earth and Ocean Sports, Inc. (the "Company") previously adopted its
Management Incentive Program (the "Plan"). The Company now desires to terminate
the Plan, and to substitute for the interests in the Plan direct equity
interests in the Company in an aggregate amount equal to the total number of
shares of Common Stock listed below. The method of implementing the foregoing
shall be to permit each participant in the Plan (i) to purchase shares of the
Company's Common Stock at the fair market value thereof as of October 31, 1996,
equivalent to the indirect equity interest held in the Company by such
participant that is vested, and (ii) to grant to each participant an option to
purchase shares of the Company's Common Stock equivalent to the indirect equity
interest held in the Company by such participant that is unvested, such option
to vest in accordance with the existing vesting schedule of the Plan. All
purchases of shares of Common Stock and options therefor are to be pursuant to
agreements in such form as the Board of Directors shall determine.
In accordance with the foregoing, the Plan is hereby terminated, and
the following Plan participants shall be permitted to purchase the number of
shares of Common Stock indicated below and shall receive the options to purchase
Common Stock indicated below. An investment banking firm retained by the Company
has determined that the fair market value of the Company's outstanding Common
Stock is nominal. The purchase price of the Common Stock purchased pursuant to
this reorganization plan, and the exercise price of the options to purchase
Common Stock issued pursuant to this reorganization plan, shall therefore be
$0.01 per share. The number of shares of Common Stock shown below gives effect
the 750-for-1 stock split effected or to be effected pursuant to resolutions of
the Board of Directors dated January 31, 1997, and no adjustment shall be made
herein with respect to such stock split.
<TABLE>
<CAPTION>
Name of Participant No. of Shares to be Purchased Shares Subject to Options
- ------------------- ----------------------------- -------------------------
<S> <C> <C>
Jon A. Glydon 93,000 62,000
Robert F. Szabad, Jr. 6,000 4,000
Charles Flathers, Jr. 6,000 4,000
Rita F. Kerr 6,000 4,000
Scott D. Burke 6,000 4,000
Patrick T. Dugan 6,000 4,000
Meredith M. Glydon 6,000 4,000
Tony Finn 2,000 8,000
Eric S. George 2,000 8,000
Alexander E. McAra 2,000 3,000
Susan C. Masure 1,200 800
Gregory L. Szabad 200 800
Michael Petersen _____ 1,000
James J. Redmon _____ 1,000
Name of Participant No. of Shares to be Purchased Shares Subject to Options
- ------------------- ----------------------------- -------------------------
Gregg Vukclic _____ 1,000
Timothy Hollobon _____ 1,000
James E. Roman _____ 1,000
Charles Mehrmann _____ 1,000
J. Mark Kelly _____ 1,000
136,400 113,600
======= =======
</TABLE>
Dated: January 31, 1997, but effective
as of October 31, 1996 EARTH AND OCEAN SPORTS, INC.
By: /s/ Jon A. Glydon
-------------------------
Title:
EXHIBIT 10.2
EARTH AND OCEAN SPORTS, INC.
1997 EQUITY INCENTIVE PLAN
1. Purpose
The purpose of this 1997 Equity Incentive Plan (the "Plan") is to
secure for Earth and Ocean Sports, Inc. (the "Company") and its stockholders the
benefits arising from capital stock ownership by employees, officers and
directors of, and consultants to, the Company and its subsidiaries or other
persons who are expected to make significant contributions to the future growth
and success of the Company and its subsidiaries. The Plan is intended to
accomplish these goals by enabling the Company to offer such persons
equity-based interests, equity-based incentives or performance-based stock
incentives in the Company, or any combination thereof ("Awards").
2. Administration
The Plan will be administered by the Board of Directors of the Company
(the "Board"). The Board shall have full power to interpret and administer the
Plan, to prescribe, amend and rescind rules and regulations relating to the Plan
and Awards, and full authority to select the persons to whom Awards will be
granted ("Participants"), determine the type and amount of Awards to be granted
to Participants (including any combination of Awards), determine the terms and
conditions of Awards granted under the Plan (including terms and conditions
relating to events of merger, consolidation, dissolution and liquidation, change
of control, vesting, forfeiture, restrictions, dividends and interest, if any,
on deferred amounts), waive compliance by a participant with any obligation to
be performed by him or her under an Award, waive any term or condition of an
Award, cancel an existing Award in whole or in part with the consent of a
Participant, grant replacement Awards, accelerate the vesting or lapse of any
restrictions of any Award and adopt the form of instruments evidencing Awards
under the Plan and change such forms from time to time. Any interpretation by
the Board of the terms and provisions of the Plan or any Award thereunder and
the administration thereof, and all action taken by the Board, shall be final,
binding and conclusive on all parties and any person claiming under or through
any party. No director shall be liable for any action or determination made in
good faith. The Board may, to the full extent permitted by law, delegate any or
all of its responsibilities under the Plan to a committee (the "Committee")
appointed by the Board and consisting of two or more members of the Board.
3. Effective Date
The Plan shall be effective as of the date first approved by the Board
of Directors, subject to the approval of the Plan by the Company's stockholders.
Grants of Awards under the Plan made prior to such approval shall be effective
when made (unless otherwise specified by the Board at the
time of grant), but shall be conditioned on and subject to such approval of the
Plan by the Company's stockholders.
4. Shares Subject to the Plan
Subject to adjustment as provided in Section 9.6, the total number of
shares of the Common Stock, $.01 par value per share, of the Company (the
"Common Stock"), reserved and available for distribution under the Plan shall be
450,000 shares. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
If any Award of shares of Common Stock requiring exercise by the
Participant for delivery of such shares terminates without having been exercised
in full, is forfeited or is otherwise terminated without a payment being made to
the Participant in the form of Common Stock, or if any shares of Common Stock
subject to restrictions are repurchased by the Company pursuant to the terms of
any Award or are otherwise reacquired by the Company to satisfy obligations
arising by virtue of any Award, such shares shall be available for distribution
in connection with future Awards under the Plan.
5. Eligibility
Employees, officers and directors of, and consultants to, the Company
and its subsidiaries, or other persons who are expected to make significant
contributions to the future growth and success of the Company and its
subsidiaries shall be eligible to receive Awards under the Plan. The Board, or
other appropriate committee or person to the extent permitted pursuant to the
last sentence of Section 2, shall from time to time select from among such
eligible persons those who will receive Awards under the Plan.
6. Types of Awards
The Board may offer Awards under the Plan in any form of equity-based
interest, equity-based incentive or performance-based stock incentive in Common
Stock of the Company or any combination thereof. The type, terms and conditions
and restrictions of an Award shall be determined by the Board at the time such
Award is made to a Participant; provided, however, that no Participant may be
granted Awards, in the aggregate, for more than 25% of the shares of Common
Stock then subject to the Plan during any fiscal year of the Company. If any
option granted under the Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason to be exercisable in
whole or in part or shall be repurchased by the Company, the shares subject to
such option shall be included in the determination of the aggregate number of
shares of Common Stock deemed to have been granted to such employee under the
Plan.
An Award shall be made at the time specified by the Board and shall be
subject to such conditions or restrictions as may be imposed by the Board and
shall conform to the general rules applicable under the Plan as well as any
special rules then applicable under federal tax laws or regulations or the
federal securities laws relating to the type of Award granted.
2
Without limiting the foregoing, Awards may take the following forms and
shall be subject to the following rules and conditions:
6.1 Options
An option is an Award that entitles the holder on exercise thereof to
purchase Common Stock at a specified exercise price. Options granted under the
Plan may be either incentive stock options ("incentive stock options") that meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options that are not intended to meet the requirements of
Section 422 ("non-statutory stock options").
6.1.1 Option Price. The price at which Common Stock may be purchased
upon exercise of an option shall be determined by the Board, provided however,
the exercise price shall not be less than the par value per share of Common
Stock.
6.1.2 Option Grants. The granting of an option shall take place at the
time specified by the Board. Options shall be evidenced by option agreements.
Such agreements shall conform to the requirements of the Plan, and may contain
such other provisions (including but not limited to vesting and forfeiture
provisions, acceleration, change of control, protection in the event of merger,
consolidations, dissolutions and liquidations) as the Board shall deem
advisable. Option agreements shall expressly state whether an option grant is
intended to qualify as an incentive stock option or non-statutory stock option.
6.1.3 Option Period. An option will become exercisable at such time or
times (which may be immediately or in such installments as the Board shall
determine) and on such terms and conditions as the Board shall specify. The
option agreements shall specify the terms and conditions applicable in the event
of an option holder's termination of employment during the option's term.
Any exercise of an option must be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (1) any additional
documents required by the Board and (2) payment in full in accordance with
Section 6.1.4 for the number of shares for which the option is exercised.
6.1.4 Payment of Exercise Price. Stock purchased on exercise of an
option shall be paid for as follows: (1) in cash or by check (subject to such
guidelines as the Company may establish for this purpose), bank draft or money
order payable to the order of the Company or (2) if so permitted by the
instrument evidencing the option (or in the case of a non-statutory stock
option, by the Board at or after grant of the option), (i) through the delivery
of shares of Common Stock that have a fair market value (determined in
accordance with procedures prescribed by the Board) equal to the exercise price,
(ii) at the discretion of the Committee and consistent with applicable law,
through the delivery of an assignment to the Company of a sufficient amount of
the proceeds from the sale of the Common Stock acquired upon exercise of the
option and an authorization to the broker or selling agent to pay that amount to
the Company, which sale shall be at the
3
Participant's direction at the time of exercise, or (iii) by any combination of
the permissible forms of payment.
6.1.5 Buyout Provision. The Board may at any time offer to buy out for
a payment in cash, shares of Common Stock, deferred stock or restricted stock,
an option previously granted, based on such terms and conditions as the Board
shall establish and communicate to the option holder at the time that such offer
is made.
6.1.6 Special Rules for Incentive Stock Options. Each provision of the
Plan and each option agreement evidencing an incentive stock option shall be
construed so that each incentive stock option shall be an incentive stock option
as defined in Section 422 of the Code or any statutory provision that may
replace such Section, and any provisions thereof that cannot be so construed
shall be disregarded. Instruments evidencing incentive stock options must
contain such provisions as are required under applicable provisions of the Code.
Incentive stock options may be granted only to employees of the Company and its
subsidiaries. The exercise price of an incentive stock option shall not be less
than 100% (110% in the case of an incentive stock option granted to a more than
ten percent stockholder of the Company) of the fair market value of the Common
Stock on the date of grant, as determined pursuant to Section 6.1.7 hereof. An
incentive stock option may not be granted after the tenth anniversary of the
date on which the Plan was adopted by the Board and the latest date on which an
incentive stock option may be exercised shall be the tenth anniversary (fifth
anniversary, in the case of any incentive stock option granted to a more than
ten percent stockholder of the Company) of the date of grant, as determined by
the Board. Each Participant may be granted options treated as incentive stock
options only to the extent that, in the aggregate under this Plan and all
incentive stock option plans of the Company and any present or future parent or
subsidiary (as those terms are used in Section 424 of the Code), incentive stock
options do not become exercisable for the first time by such employee during any
calendar year with respect to stock having a fair market value (determined at
the time the incentive stock options were granted) in excess of $100,000. The
Company intends to designate any options granted in excess of such limitation as
non-statutory stock options, and the Company shall issue separate certificates
to the optionee with respect to options that are non-statutory stock options and
options that are incentive stock options.
6.1.7 Determination of Fair Market Value. If, at the time an option is
granted under the Plan, the Common Stock is publicly traded, "fair market value"
shall be determined as of the date of grant or, if the prices or quotes
discussed in this sentence are unavailable for such date, the last business day
for which such prices or quotes are available prior to the date of grant and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market. If the Common Stock is not publicly traded at the time an
option is granted under the Plan, "fair market value" shall mean the fair value
of the Common Stock as determined by the Committee after taking into
consideration all factors which it
4
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arms' length.
6.2 Restricted and Unrestricted Stock
An Award of restricted stock entitles the recipient thereof to acquire
shares of Common Stock upon payment of the purchase price subject to
restrictions specified in the instrument evidencing the Award.
6.2.1 Restricted Stock Awards. Awards of restricted stock shall be
evidenced by restricted stock agreements. Such agreements shall conform to the
requirements of the Plan, and may contain such other provisions (including
restriction and forfeiture provisions, change of control, protection in the
event of mergers, consolidations, dissolutions and liquidations) as the Board
shall deem advisable.
6.2.2 Restrictions. Until the restrictions specified in a restricted
stock agreement shall lapse, restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of, and upon certain
conditions specified in the restricted stock agreement, must be resold to the
Company for the price, if any, specified in such agreement. The restrictions
shall lapse at such time or times, and on such conditions, as the Board may
specify. The Board may at any time accelerate the time at which the restrictions
on all or any part of the shares shall lapse.
6.2.3 Rights as a Stockholder. A Participant who acquires shares of
restricted stock will have all of the rights of a stockholder with respect to
such shares including the right to receive dividends and to vote such shares.
Unless the Board otherwise determines, certificates evidencing shares of
restricted stock will remain in the possession of the Company until such shares
are free of all restrictions under the Plan.
6.2.4 Purchase Price. The purchase price of shares of restricted stock
shall be determined by the Board, in its sole discretion, but such price may not
be less than the par value of such shares.
6.2.5 Other Awards Settled With Restricted Stock. The Board may provide
that any or all the Common Stock delivered pursuant to an Award will be
restricted stock.
6.2.6 Unrestricted Stock. The Board may, in its sole discretion, sell
to any Participant shares of Common Stock free of restrictions under the Plan
for a price determined by the Board, but which may not be less than the par
value per share of the Common Stock.
6.3 Deferred Stock
6.3.1 Deferred Stock Award. A deferred stock Award entitles the
recipient to receive shares of deferred stock which is Common Stock to be
delivered in the future. Delivery of the Common Stock will take place at such
time or times, and on such conditions, as the Board may
5
specify. The Board may at any time accelerate the time at which delivery of all
or any part of the Common Stock will take place.
6.3.2 Other Awards Settled with Deferred Stock. The Board may, at the
time any Award described in this Section 6 is granted, provide that, at the time
Common Stock would otherwise be delivered pursuant to the Award, the Participant
will instead receive an instrument evidencing the right to future delivery of
deferred stock.
6.4 Performance Awards
6.4.1 Performance Awards. A performance Award entitles the recipient to
receive, without payment, an amount, in cash or Common Stock or a combination
thereof (such form to be determined by the Board), following the attainment of
performance goals. Performance goals may be related to personal performance,
corporate performance, departmental performance or any other category of
performance deemed by the Board to be important to the success of the Company.
The Board will determine the performance goals, the period or periods during
which performance is to be measured and all other terms and conditions
applicable to the Award.
6.4.2 Other Awards Subject to Performance Conditions. The Board may, at
the time any Award described in this Section 6 is granted, impose the condition
(in addition to any conditions specified or authorized in this Section 6 of the
Plan) that performance goals be met prior to the Participant's realization of
any payment or benefit under the Award.
7. Purchase Price and Payment
Except as otherwise provided in the Plan, the purchase price of Common
Stock to be acquired pursuant to an Award shall be the price determined by the
Board, provided that such price shall not be less than the par value of the
Common Stock. Except as otherwise provided in the Plan, the Board may determine
the method of payment of the exercise price or purchase price of an Award
granted under the Plan and the form of payment. The Board may determine that all
or any part of the purchase price of Common Stock pursuant to an Award has been
satisfied by past services rendered by the Participant. The Board may agree at
any time, upon request of the Participant, to defer the date on which any
payment under an Award will be made.
8. Change in Control
8.1 Impact of Event
In the event of a "Change in Control" as defined in Section 8.2, the
following provisions shall apply, unless the agreement evidencing the Award
otherwise provides:
(a) Any stock options or other stock-based Awards awarded under the
Plan that were not previously exercisable and vested shall become fully
exercisable and vested.
6
(b) Awards of restricted stock and other stock-based Awards subject to
restrictions and to the extent not fully vested, shall become fully vested and
all such restrictions shall lapse so that shares issued pursuant to such Awards
shall be free of restrictions.
(c) Deferral limitations and conditions that relate solely to the
passage of time, continued employment or affiliation, will be waived and removed
as to deferred stock Awards and performance Awards. Performance of other
conditions (other than conditions relating solely to the passage of time,
continued employment or affiliation) will continue to apply unless otherwise
provided in the agreement evidencing the Awards or in any other agreement
between the Participant and the Company or unless otherwise agreed by the Board.
8.2 Definition of "Change in Control"
"Change in Control" means any one of the following events: (i) when any
Person (other than SSPR, L.P. and its partners and affiliates) is or becomes the
beneficial owner (as defined in Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder), together with all Affiliates and Associates (as such terms are used
in Rule 12b-2 under the Exchange Act) of such Person, directly or indirectly, of
50% or more (by voting power) of the outstanding common stock of the Company,
without the prior approval of the Prior Directors of the Company, as the case
may be, (ii) the failure of the Prior Directors to constitute a majority of the
Board of Directors of the Company, as the case may be, at any time within two
years following any Electoral Event, or (iii) any other event that the Prior
Directors shall determine constitutes an effective change in the control of the
Company. As used in the preceding sentence, the following capitalized terms
shall have the respective meanings set forth below:
(a) "Person" shall include any natural person, any entity, any
"affiliate" of any such natural person or entity as such term is defined in Rule
405 under the Securities Act of 1933, as amended, and any "group" (within the
meaning of such term in Rule 13d-5 under the Exchange Act);
(b) "Prior Directors" shall mean the persons sitting on the Company's
Board of Directors, as the case may be, immediately prior to any Electoral Event
(or, if there has been no Electoral Event, those persons sitting on the Board of
Directors on the date of completion of the Company's initial underwritten public
offering) and any future director of the Company who has been nominated or
elected by a majority of the Prior Directors who are then members of the Board
of Directors of the Company; and
(c) "Electoral Event" shall mean any contested election of Directors,
or any tender or exchange offer for the Company's Common Stock, not approved by
the Prior Directors, by any Person other than the Company.
9. General Provisions
9.1 Documentation of Awards
7
Awards will be evidenced by written instruments, which may differ among
Participants, prescribed by the Board from time to time. Such instruments may be
in the form of agreements to be executed by both the Participant and the Company
or certificates, letters or similar instruments which need not be executed by
the participant but acceptance of which will evidence agreement to the terms
thereof. Such instruments shall conform to the requirements of the Plan and may
contain such other provisions (including provisions relating to events of
merger, consolidation, dissolution and liquidations, change of control and
restrictions affecting either the agreement or the Common Stock issued
thereunder), as the Board deems advisable.
9.2 Rights as a Stockholder
Except as specifically provided by the Plan or the instrument
evidencing the Award, the receipt of an Award will not give a Participant rights
as a stockholder with respect to any shares covered by an Award until the date
of issue of a stock certificate to the participant for such shares.
9.3 Conditions on Delivery of Stock
The Company will not be obligated to deliver any shares of Common Stock
pursuant to the Plan or to remove any restriction from shares previously
delivered under the Plan (a) until all conditions of the Award have been
satisfied or removed, (b) until, in the opinion of the Company's counsel, all
applicable federal and state laws and regulations have been complied with, (c)
if the outstanding Common Stock is at the time listed on any stock exchange or
trading system, until the shares have been listed or authorized to be listed on
such exchange or trading system upon official notice of issuance, and (d) until
all other legal matters in connection with the issuance and delivery of such
shares have been approved by the Company's counsel. If the sale of Common Stock
has not been registered under the Securities Act of 1933, as amended, the
Company may require, as a condition to exercise of the Award, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such act and may require that the certificates
evidencing such Common Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the participant's legal representative, the
Company will be under no obligation to deliver Common Stock pursuant to such
exercise until the Company is satisfied as to the authority of such
representative.
9.4 Tax Withholding
The Company will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local withholding
tax requirements (the "withholding requirements").
In the case of an Award pursuant to which Common Stock may be
delivered, the Board will have the right to require that the participant or
other appropriate person remit to the Company an amount sufficient to satisfy
the withholding requirements, or make other arrangements satisfactory to the
Board with regard to such requirements, prior to the delivery of any Common
8
Stock. If and to the extent that such withholding is required, the Board may
permit the participant or such other person to elect at such time and in such
manner as the Board provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Common Stock having a value calculated
to satisfy the withholding requirement.
9.5 Nontransferability of Awards
Except as otherwise specifically provided by the Board, no Award (other
than an Award in the form of an outright transfer of cash or Common Stock not
subject to any restrictions) may be transferred other than by the laws of
descent and distribution, except pursuant to the terms of a qualified domestic
relations order as defined in the Code, and during a Participant's lifetime an
Award requiring exercise may be exercised only by him or her (or in the event of
incapacity, the person or persons properly appointed to act on his or her
behalf).
9.6 Adjustments in the Event of Certain Transactions
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization, reclassification or other change in the Company's
capitalization, or other distribution with respect to common stockholders other
than normal cash dividends, the Board will make (i) appropriate adjustments to
the maximum number of shares that may be delivered under the Plan under Section
4 above, and (ii) appropriate adjustments to the number and kind of shares of
stock or securities subject to Awards then outstanding or subsequently granted,
any exercise prices relating to Awards and any other provisions of Awards
affected by such change. The foregoing shall not apply to any stock split
effected after the date of adoption of the Plan but on or prior to the effective
date of the Company's initial underwritten public offering under the Securities
Act of 1933.
(b) The Board may also make appropriate adjustments to take into
account material changes in law or in accounting practices or principles,
mergers, consolidations, acquisitions, dispositions, repurchases or similar
corporate transactions, or any other event, if it is determined by the Board
that adjustments are appropriate to avoid distortion in the operation of the
Plan, but no such adjustments other than those required by law may adversely
affect the rights of any Participant (without the Participant's consent) under
any Award previously granted.
9.7 Employment Rights
Neither the adoption of the Plan nor the grant of Awards will confer
upon any person any right to continued employment with the Company or any
subsidiary or interfere in any way with the right of the Company or subsidiary
to terminate any employment relationship at any time or to increase or decrease
the compensation of such person. Except as specifically provided by the Board in
any particular case, the loss of existing or potential profit in Awards granted
under the Plan will not constitute an element of damages in the event of
termination of an employment relationship even if the termination is in
violation of an obligation of the Company to the employee.
9
Whether an authorized leave of absence, or absence in military or
government service, shall constitute termination of employment shall be
determined by the Board at the time. For purposes of this Plan, transfer of
employment between the Company and its subsidiaries shall not be deemed
termination of employment.
9.8 Other Employee Benefits
The value of an Award granted to a Participant who is an employee, and
the amount of any compensation deemed to be received by an employee as a result
of any exercise or purchase of Common Stock pursuant to an Award or sale of
shares received under the Plan, will not constitute "earnings" or "compensation"
with respect to which any other employee benefits of such employee are
determined, including without limitation benefits under any pension, stock
ownership, stock purchase, life insurance, medical, health, disability or salary
continuation plan.
9.9 Legal Holidays
If any day on or before which action under the Plan must be taken falls
on a Saturday, Sunday or legal holiday, such action may be taken on the next
succeeding day not a Saturday, Sunday or legal holiday.
9.10 Foreign Nationals
Without amending the Plan, Awards may be granted to persons who are
foreign nationals or employed outside the United States or both, on such terms
and conditions different from those specified in the Plan, as may, in the
judgment of the Board, be necessary or desirable to further the purpose of the
Plan.
10. Termination and Amendment
The Plan shall remain in full force and effect until terminated by the
Board. Subject to the last sentence of this Section 10, the Board may at any
time or times amend the Plan or any outstanding Award for any purpose that may
at the time be permitted by law, or may at any time terminate the Plan as to any
further grants of Awards. No amendment, unless approved by the stockholders,
shall be effective if it would cause the Plan to fail to satisfy the
requirements of the federal tax law or regulation relating to incentive stock
options or the requirements of Rule 16b-3 (or any successor rule) under the
Exchange Act. No amendment of the Plan or any agreement evidencing Awards under
the Plan may adversely affect the rights of any participant under any Award
previously granted without such participant's consent.
10
EXHIBIT 10.3
EARTH AND OCEAN SPORTS, INC.
1997 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
SECTION 1 -- PURPOSE
The purpose of the 1997 Stock Option Plan for Nonemployee Directors
(the "Plan") is to increase the proprietary interest of nonemployee members of
the Board of Directors in the continued success of Earth and Ocean Sports, Inc.
(the "Company") and to provide them with an incentive to continue to serve as
directors.
SECTION 2 -- ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee"), or any successor committee
thereto. The Committee shall have responsibility finally and conclusively to
interpret the provisions of the Plan and to decide all questions of fact arising
in its application. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan.
SECTION 3 -- TYPE OF OPTIONS
Options granted pursuant to the Plan shall be nonstatutory options
which are not intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
SECTION 4 -- ELIGIBILITY
Directors of the Company who are not employees of the Company or any
subsidiary or affiliate thereof ("Nonemployee Directors") shall be eligible to
participate in the Plan. Each Nonemployee Director to whom options are granted
hereunder shall be a participant ("Participant") under the Plan.
SECTION 5 -- STOCK AVAILABLE UNDER THE PLAN
Subject to adjustment as provided in Section 9 below, an aggregate of
150,000 shares of the Company's Common Stock shall be available for issuance
pursuant to the provisions of the Plan. Such shares may be authorized and
unissued shares or may be shares issued and thereafter acquired by the Company.
If an option granted under the Plan shall expire or terminate for any reason
without having been exercised in whole or in part, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan.
-2-
SECTION 6 -- AUTOMATIC GRANT OF OPTIONS
(a) Each Participant who becomes a member of the Board of Directors
prior to January 1, 1998, shall receive automatically and without further action
by the Board of Directors or the Committee, on the later of such Participant's
election to the Board of Directors and the adoption of this Plan by the Board of
Directors and the stockholders of the Company, 15,000 shares of Common Stock in
accordance with the provisions of Section 7, and subject to adjustment as
provided in Section 9. If a Participant becomes a member of the Board of
Directors prior to the Company's initial underwritten public offering of Common
Stock, then such option shall be deemed granted simultaneously with the
execution of the underwriting agreement with respect to such offering at an
exercise price equal to the price to the public of such underwritten public
offering.
(b) Each year, beginning on the date of the Company's first Annual
Meeting of Stockholders that follows by more than 30 days the last vesting date
of the option granted pursuant to clause (a) above, but only if the Company's
Common Stock is then publicly traded, each Participant who continues in office
after said Annual Meeting, shall receive automatically and without further
action by the Board of Directors or the Committee, a grant of an option to
purchase 3,000 shares of Common Stock in accordance with the provisions of
Section 7, and subject to adjustment as provided in Section 9.
SECTION 7 -- TERMS AND CONDITIONS OF OPTIONS
7.1 EXERCISE OF OPTIONS.
(a) Each option granted under the Plan shall become exercisable (or
"vest") at the rate of 20% of the number of shares subject to the option on each
yearly anniversary of the date such option was granted, subject to the
provisions of Section 8 hereof.
(b) In the event that the Participant ceases to be a director of the
Company for any reason whatsoever prior to the time a Participant's option
becomes fully exercisable, the option will terminate with respect to the shares
as to which the option is not then exercisable and all rights of the Participant
to such unvested shares shall terminate without further obligation on the part
of the Company.
(c) In the event that the Participant ceases to be a director of the
Company after his or her option has become exercisable in whole or in part, such
option shall remain exercisable in whole or in part, as the case may be, in
accordance with the terms hereof.
(d) Options granted under the Plan shall expire ten years from the date
on which the option is granted, unless terminated earlier in accordance with the
Plan.
7.2 EXERCISE PRICE.
The exercise price of an option shall be 100% of the fair market value
per share of Common Stock of the Company on the date the option is granted.
"Fair market value" shall be
-3-
determined as of the date of grant or, if the prices or quotes discussed in this
sentence are unavailable for such date, the last business day for which such
prices or quotes are available prior to the date of grant and shall mean (i) the
average (on that date) of the high and low prices of the Common Stock on the
principal national securities exchange on which the Common Stock is traded, if
the Common Stock is then traded on a national securities exchange; or (ii) the
last reported sale price (on that date) of the Common Stock on the Nasdaq
National Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market.
7.3 PAYMENT OF EXERCISE PRICE.
(a) Subject to the terms and conditions of the Plan and the
documentation of the options pursuant to Section 7.5 hereof, an option granted
hereunder shall, to the extent then exercisable, be exercisable in whole or in
part by giving written notice to the Company stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares; provided, however, that there shall be no such exercise at any
one time as to fewer than one hundred (100) shares or all of the remaining
shares then purchasable by the person or persons exercising the option, if fewer
than one hundred (100) shares.
(b) Options granted under the Plan may be paid for by (i) delivery of
cash, bank draft, money order or a check to the order of the Company in an
amount equal to the exercise price of such options, (ii) by delivery to the
Company of shares of Common Stock of the Company already owned by the
Participant having a fair market value equal in amount to the exercise price of
the option being exercised, provided that such method is consistent with
applicable tax laws, (iii) if permitted by applicable law, through the delivery
of an assignment to the Company of a sufficient amount of the proceeds from the
sale of Common Stock of the Company acquired upon exercise to pay for all of the
Common Stock so acquired and an authorization to the broker or selling agent to
pay that to the Company, or (iv) by any combination of such methods of payment.
7.4 RIGHTS AS A STOCKHOLDER.
Except as specifically provided by the Plan, the grant of an option
will not give a Participant rights as a stockholder; the Participant will obtain
such rights, subject to any limitations imposed by the Plan, upon actual receipt
of Common Stock of the Company.
7.5 DOCUMENTATION OF OPTION GRANTS.
Option grants shall be evidenced by written instruments prescribed by
the Committee from time to time. The instruments may be in the form of
agreements to be executed by both the Participant and the Company or
certificates, letters of similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms of the
grant.
-4-
7.6 NONTRANSFERABILITY OF OPTIONS.
No option granted under the Plan shall be assignable or transferable by
the Participant to whom it is granted, either voluntarily or by operation of
law, except by will or the laws of descent and distribution. During the life of
the Participant, the option shall be exercisable only by such person (or in the
event of incapacity, by the person or persons properly appointed to act on his
or her behalf).
7.7 APPROVALS.
The effectiveness of the Plan and of the grant of all options is
subject to the approval of the Plan by the affirmative vote of a majority of the
shares of the Company's capital stock present in person or by proxy and entitled
to vote at a meeting of the stockholders at which the Plan is presented for
approval. Notwithstanding anything to the contrary in the Plan, no options
granted hereunder shall become exercisable until such approval has been
received.
The Company's obligation to sell and deliver shares of stock under the
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of the stock.
SECTION 8 -- REGULATORY COMPLIANCE AND LISTING
(a) The issuance or delivery of any shares of stock subject to
exercisable options hereunder may be postponed by the Committee for such period
as may be required to comply with any applicable requirements under the Federal
securities laws, any applicable listing requirements of any national securities
exchange or any requirements under any law or regulation applicable to the
issuance or delivery of such shares. The Company shall not be obligated to issue
or deliver any such shares if the issuance or delivery thereof would constitute
a violation of any provision of any law or of any regulation of any governmental
authority or any national securities exchange.
(b) Should any provision of this Plan require modification or be
unnecessary to comply with the requirements of Section 16 of and Rule 16b-3
under the Securities Exchange Act of 1934, as amended ("1934 Act"), the
Committee may waive such provision and/or amend this Plan to add to or modify
the provisions hereof accordingly.
(c) It is the Company's intent that the Plan comply in all respects
with Rule 16b-3 of the 1934 Act (or any successor or amended provisions thereof)
and any applicable Securities and Exchange Commission interpretations thereof.
If any provision of this Plan is deemed not to be in compliance with Rule 16b-3,
the provision shall be null and void.
SECTION 9 -- ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a stock dividend, stock split or combination of shares,
recapitalization or other change in the Company's capitalization, or other
distribution with respect to holders of the Company's Common Stock other than
normal cash dividends, automatic adjustment shall be
-5-
made in the number and kind of shares as to which outstanding options or
portions thereof then unexercised shall be exercisable and in the available
shares set forth in Section 5 hereof, to the end that the proportionate interest
of the option holder shall be maintained as before the occurrence of such event.
Such adjustment in outstanding options shall be made without change in the total
price applicable to the unexercised portion of such options and with a
corresponding adjustment in the option price per share. Automatic adjustment
shall also be made in the number and kind of shares subject to options
subsequently granted under the Plan. For purposes of the foregoing provisions,
the Plan shall be deemed to be adopted on the effective date of the Company's
initial underwritten public offering of its Common Stock.
SECTION 10 -- NO RIGHT TO REELECTION
Nothing in the Plan shall be deemed to create any obligation on the
part of the Board of Directors or standing Committee thereof to nominate any
Nonemployee Director for reelection by the Company's stockholders, nor confer
upon any Nonemployee Director the right to remain a member of the Board of
Directors for any period of time, or at any particular rate of compensation.
SECTION 11 -- AMENDMENT AND TERMINATION
(a) The Board of Directors shall have the right to amend, modify or
terminate the Plan at any time and from time to time; provided, however, that
unless required by law, no such amendment or modification shall (a) affect any
right or obligation with respect to any grant theretofore made; or (b) unless
previously approved by the stockholders, increase the number of shares of Common
Stock available for grants as provided in Section 5 hereof (as adjusted pursuant
to Section 9 hereof). In addition, no such amendment shall, unless previously
approved by the stockholders (where such approval is necessary to satisfy then
applicable requirements of federal securities laws, the Code or rules of any
stock exchange on which the Company's Common Stock is listed), (i) in any manner
affect the eligibility requirements set forth in Section 4 hereof, (ii) except
to the extent provided for in Section 9 hereof, increase the number of shares of
Common Stock subject to any option, (iii) except to the extent provided for in
Section 9 hereof, change the purchase price of the shares of Common Stock
subject to any option, (iv) extend the period during which options may be.
granted under the Plan, (v) materially increase the benefits to Participants
under the Plan, or (vi) in any manner cause Rule 16b-3 under the 1934 Act (or
any successor provision thereof) to become inapplicable to this Plan.
(b) Unless earlier terminated by the Board of Directors, the Plan shall
terminate on December 31, 2005; provided, however, that options which are
granted on or before this date shall remain exercisable in accordance with their
respective terms after the termination of the Plan.
SECTION 12 -- GOVERNING LAW
The Plan shall be governed by and construed in accordance with the laws
of the Commonwealth of Massachusetts.
-6-
EXHIBIT 10.5
AMENDED AND RESTATED CONSULTING AGREEMENT
This Agreement is made as of the 26th day of March, 1997 by and between
Earth and Ocean Sports, Inc., a Massachusetts corporation (the "Company"), and
CR Management Associates, Inc., a Massachusetts corporation (the "Consultant").
In consideration of the terms and conditions set forth in this
Agreement, the parties agree as follows:
1. Provision of Services.
(a) The Consultant agrees, to the extent reasonably required
in the conduct of the business of the Company, to place at the disposal of the
Company its judgment and experience and to provide business development services
to the Company, including the following:
(i) advise with regard to sales and marketing activities and
acquisition strategy;
(ii) evaluate financial and treasury requirements and assist
in financing arrangements and the structuring of financial and
acquisition transactions, including, without limitation, review of
banking and leasing relationships, financial projections and
investments of the Company;
(iii) advise the Company on matters of strategic planning;
(iv) make available at least one professional to serve on the
Board of Directors of the Company at the Company's request; and
(v) provide other general advice to management of the
Company.
All such services shall at all times be subject to the direction and control of
the management of the Company.
(b) The Consultant shall at all times maintain an adequate organization
of competent personnel for the performance of its obligations under this
Agreement.
2. Compensation. The Company agrees to compensate the Consultant in
consideration of the services set forth in Paragraph 1 above, including without
limitation the services provided in respect of membership on the Board of
Directors of the Company, at the rate of $15,000 per month plus 1% of the
Company's annual consolidated revenues in excess of $12,000,000. The first such
payment shall be made on the date hereof (pro rated for a partial month).
Subsequent payments shall be made on the first business day of each month in
advance.
-2-
Beginning January 2, 1994, payments shall be made on the first business day of
each month in the amount of $15,000 plus (i) in the month of each fiscal year
when actual year-to-year net sales through the end of the preceding month first
exceed $12,000,000, 1% of such excess over $12,000,000 and (ii) thereafter
through the end of the fiscal year, 1% of the preceding month's net sales. In
addition to such compensation, the Company agrees to reimburse the Consultant
for all out-of-pocket expenses incurred by the Consultant and its personnel in
rendering the services to be provided hereunder.
3. Liability of the Consultant. In furnishing the Company with
management advice and other services as herein provided, neither the Consultant
nor any employee, officer, director, shareholder or agent thereof shall be
liable to the Company or its creditors for errors of judgment or for anything
except willful misconduct or fraud in the performance of their duties.
It is further understood and agreed that the Consultant may rely upon
information furnished to it reasonably believed to be accurate and reliable and
that, except as herein provided, the Consultant shall not be accountable for any
loss suffered by the Company by reason of the Company's action or non-action on
the basis of any advice, recommendation or approval of the Consultant, its
employees, officers, directors or agents.
4. Status of the Consultant. The Consultant shall be deemed to be an
independent contractor and, except as expressly provided or authorized in this
Agreement, shall have no authority to act or represent the Company.
5. Other Activities of the Consultant. The Company recognizes that the
Consultant may render management and other services to other companies that may
or may not have policies and conduct activities similar to those of the Company.
The Consultant shall be free to render such advice and other services, and the
Company hereby consents thereto. The Consultant shall not be required to devote
its full time and attention to the performance of its duties under this
Agreement, but shall devote only so much of its time and attention as it deems
reasonable or necessary for such purposes.
6. Control. Nothing contained herein shall be deemed to require the
Company to take any action contrary to its charter or by-laws or any applicable
statute or regulation, or to relieve or deprive management of the Company of its
responsibility for and control of the conduct or the affairs of the Company.
7. Term. The term of this Agreement shall begin on the date first set
forth above and shall continue in effect until terminated by mutual written
consent of the parties.
8. Amendment Upon Public Offering. Effective upon closing of an
underwritten initial public offering (the "IPO") of the Company under the
Securities Act of 1933, as amended, this Agreement shall be amended such that
the term of this Agreement shall be five years from the closing date of such IPO
and the fee payable hereunder shall be a fixed annual rate of $300,000.
-3-
After the closing of such IPO, this Agreement may be amended by the parties only
with the approval of a majority of the directors of the Company who are neither
employees of the Company nor affiliated with the Consultant.
9. Miscellaneous. This Agreement may not be amended, transferred,
assigned, sold or in any manner hypothecated or pledged without the affirmative
written consent of the parties hereto; and any proposed assignment without such
consent shall be null and void. This Agreement sets forth the entire agreement
and understanding between the parties and supersedes all prior discussions,
agreements and understandings of every and any nature between them. This
Agreement shall be deemed to be a sealed instrument and shall be construed and
interpreted according to the laws of the Commonwealth of Massachusetts. This
Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which shall be deemed one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers duly authorized as of the day and year first
written above.
EARTH AND OCEAN SPORTS, INC.
By:/s/ Jon A Glydon
----------------------------
Jon A Glydon, President
CR MANAGEMENT ASSOCIATES, INC.
By: /s/ Steve J. Roth
----------------------------
Steven J. Roth, Chairman
Exhibit 10.6
STANDARD INDUSTRIAL LEASE -- NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Parties. This Lease, dated, for reference purposes only, March 30, 1992, is
made by and between Oceanside Associates (herein called "Lessor" and Packaging
Industrial Group, Inc. (herein called "Lessee").
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Sand Diego State of California
commonly known as 572 and 576 Airport Road, Oceanside and described as two (2)
industrial building of approximately 29, 996 square feet combined area.
Said real property including the land and all Improvements therein, is
herein called "the Premises".
3. Term.
3.1 Term. The term of this Lease shall be for three (3) years
commencing on April 1, 1992 and ending on March 31, 1995 unless sooner
terminated pursuant to any provision hereof.
3.2 Delay In Possession. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises Lessee on said date,
Lessee shall not be subject to any liability therefor, nor shall such failure
affect the validity of this Lease or the obligations Lessee hereunder or extend
the term hereof, but in such case, lessee shall not be obligated to pay rent
until possession of the Premises is tendered to Lessee; provided, however, that
if Lessor shall not have delivered possession of the Premises within sixty (60)
days from said commencement date, Lessee may, at Lessee's option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this Lease, in which
event the parties shall be discharged from all obligations hereunder; provided
further, however, that if such written notice of Lessee is not received by
Lessor within said ten (10) day period, Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect.
3.3 Early Possession. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provision hereof, such
occupancy shall not advance the termination date, and Lessee shall pay rent for
such period at the initial monthly rates set forth below.
4. Rent. Lessee shall pay to Lessor as rent for the premises, monthly payments
of see Addendum, in advance, on the 1st day of each month of the term hereof.
Lessee shall pay Lessor upon the execution hereof $ -0- as rent for ___________.
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment.
Rent shall be payable in lawful money of the United States to Lessor at the
address stated herein or to such other persons or at such other places as Lessor
may designate in writing.
5. Security Deposit. Lessee has on deposit with Lessor upon execution hereof
$12,322.72 as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default or if the payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies
all or any portion of said deposit, Lessee shall within ten (10) days after
written demand therefor deposit cash with Lessor in an amount sufficient to
restore said deposit to the full amount hereinabove stated and Lessee's failure
to do so shall be a material breach of this Lease. If the monthly rent shall,
from time to time, increase during the term of this Lessee shall thereupon
deposit with Lessor additional security deposit so that the amount of security
deposit held by Lessor shall at all times bear the same proportion to current
rent as the original security deposit so that the amount of security deposit
held by Lessor shall at all times bear the same proportion to current rent as
the original security deposit bears to the original monthly rent set forth in
paragraph 4 hereof, lessor shall not be required to keep said deposit separate
from its general accounts. If Lessee performs all of Lessee's obligations
hereunder, said deposit, or so much thereof as has not theretofore been applied
by Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, Lessor's option, to the last assignee, if any, of
Lessee's Interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. NO trust relationship is created herein between
Lessor and Lessee with respect to said Security Deposit.
6. Use
6.1 Use. The premises shall be used and occupied only by BZ Pro
Boards, Inc., a related company for the manufacture and distribution of water
sport toys and equipment or any other use which is reasonably comparable and for
no other purpose.
6.2 Compliance with Law
(a) Lessor warrants to Lessee that the Premises, in its state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will use the premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation, in the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in his paragraph 6.2(a)
shall be of no force or affect if, prior to the date of this Lease, Lessee was
the owner or occupant of the premises, and, in such event, lessee shall correct
any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record and
requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises. Lessee shall not use nor permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant in the building containing
the premises, shall tend to disturb such other tenants.
6.3 Condition of Premises.
(a) Lessor shall delivery the Premises to Lessee clean and
free of debris on Lease commencement date (unless Lessee is already in
possession) and Lessor further warrants to Lessee that the plumbing, lighting,
air conditioning, heating and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the even that it is
determined that this warranty has been violated, then it shall be the obligation
of Lessor, after receipt of written notice from Lessee setting growth with
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation. Lessee's failure to give such written notice to Lessor
within thirty (30) days after the Lease commencement date shall cause the
conclusive presumption that Lessor has complied with all of Lessor's obligations
hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force
or effect if prior to the date of this Lease, Lessee was the owner or occupant
of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises in their conditions existing as of the Last commencement
date or the date that Lessee takes possession of the Premises, whichever is
earlier, subject to all applicable zoning, municipal county and state laws,
ordinances and regulations governing and regulating the use of the Premises, and
any covenants or restrictions of record and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the premises for the
conduct of Lessee's business.
7. Maintenance, Repairs and Alterations.
7.1 Lessee's Obligations. Lessee shall keep in good order, condition
and repair the Premises and every part thereof, structural and non structural,
(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises) including, without
limiting the generality of the foregoing, all plumbing, heating, air
conditioning , (Lessee shall procure and maintain at Lessee's expense, an air
conditioning system maintenance contract) ventilating, electrical, lighting
facilities and equipment within the Premises fixtures, walls, (interior and
exterior), floors, windows, doors, plate glass and skylights located within the
Premises, and all landscaping, driveways, parking lots, fences and signs located
on the Premises and sidewalks and parkways adjacent to the Premises.
7.2 Surrender. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the premises to Lessor in the same condition
as when received ordinary
wear and tear except clean and __________ shall repair any damage to the
Premises ____________ and fencing on the premises in good operating condition.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor may
at its option (but shall not be required to) enter upon the Premises after ten
(10) days' prior written Notice to Lessee (except in the case of an emergency in
which case no notice shall be required), perform such obligations on Lessee's
behalf and put the same in good order, condition and repair and the cost thereof
together with interest thereon at the maximum rate then allowable by law shall
become due and payable as additional rental to Lessor together with Lessee's
next rental installment.
7.4 Lessor's Obligations. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties thereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit of
any statute now or hereinafter in effect which would otherwise afford Lessee the
right to make repairs at Lessor's expense or to terminate this Lease because of
Lessor's failure to keep the premises in good order, condition and repair.
7.5 Alternations and Additions.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, or Utility installations, on or
about the premises, except for nonstructural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $2,500 in cumulative Cost, lessee shall make no change or alteration
to the exterior of the Premises nor the exterior of the building(s) on the
Premises without Lessor's prior written consent. As used in this Paragraph 7.5
the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee
remove any or all of said alterations, improvements, additions or Utility
installations a the expiration of the term, and restore the Premises to their
prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure, Lessor
against any liability for mechanic's and materialmen's liens and to insure
completion of the work. Should Lessee make any alterations, improvements,
additions or Utility Installations without the prior approval of Lessor, lessor
may require that Lessee remove any or all of the same.
(b) Any alternations, improvements, additions or Utility
Installations in , or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in written
form, with proposed detailed plans. If Lessor shall give its consent, the
consent shall be deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to Lessor
prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against attorneys fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.5(a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term. Notwithstanding the provisions of this Paragraph 7.5(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
shall remain the property of Lessee and may be removed by lessee subject to the
provisions of Paragraph 7.2.
8. Insurance Indemnity.
8.1 Insuring Party. As used in this Paragraph 8, the term "insuring
party" shall mean the party who has the obligation to obtain the Property
Insurance required hereunder. The insuring party shall be designated in
Paragraph 46 hereof. In the event Lessor is the insuring party, lessor shall
also maintain the liability insurance described in paragraph 8.2 hereof. In
addition, to and, not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2, but Lessor shall not be required to name Lessee
as an additional insured on such policy. Whether the insuring party is the
Lessor or the Lessee. Lessee shall, as additional rent for the premises, pay the
cost of all insurance required hereunder, except for that portion of the cost
attributable to Lessor's liability insurance coverage in excess of $1,000,000
per occurrence. If Lessor is the insuring party Lessee shall, within ten (10)
days following demand by Lessor, reimburse Lessor for the cost of the insurance
so obtained.
8.2 Liability Insurance. Lessee shall, at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single Limit,
Bodily Injury and Property Damage Insurance insuring Lessor and Lessee against
any liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,00 per occurrence. The
policy shall insure performance by Lessee of the indemnify provisions of this
Paragraph 8. The limits of said insurance shall not however, limit the liability
of Lessee hereunder.
8.3 Property Insurance.
(a) The insuring party shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or damage
to the Premises, in the amount of the full replacement value thereof, as the
same may exist from time to time, which replacement value is now $1,100,000.00,
but in no event less than the total amount required by lenders having liens on
the Premises, against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises), and special extended perils
("all risk" as such term is used in the Insurance Industry). Said Insurance
shall provide for payment of loss thereunder to Lessor or to the holders of
mortgages or deeds of trust on the Premises. The Insuring Party shall, in
addition, obtain and keep in force during the term of this Lease a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period. A stipulated value or agreed amount endorsement deleting
the coinsurance provision of the policy shall be procured with said insurance as
well as an automatic increase in insurance endorsement causing the increase in
annual property insurance coverage by 2% per quarter. If the insuring party
shall fall to procure and maintain said insurance the other party may, but shall
not be require to, procure and maintain the same, but at the expense of Lessee.
If such insurance coverage has a deductible clause, the deductible amount shall
not exceed 1,000 per occurrence, and Lessee shall be liable for such deductible
amount.
(b) If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by lessor which are adjacent to
the Premises, then Lessee shall pay for any increase in the property insurance
of such other building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not
insure Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the premises under paragraph 7, hereof. But
if Lessee is the insuring party the Lessee shall insure its fixtures, equipment
and tenant improvements.
8.4 Insurance Policies. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide." The insuring
party shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses as required by this paragraph 8. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to lessee, which amount
shall be payable by Lessee upon demand.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in Paragraph 8.3. If Lessee does nor permits to
be done anything which shall increase the cost of the insurance policies
referred to in Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand
reimburse Lessor for any additional premiums attributable to any act or omission
or operation of Lessee causing such increase in the cost of insurance. If Lessor
is the insuring party, and if the insurance policies maintained hereunder cover
other improvements in addition tot the Premises, Lessor shall delivery to Lessee
a written statement setting forth the amount of any such insurance cost increase
and showing in reasonable detail the manner in which it has been computed.
8.5 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other , and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or Invitees. lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.6 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim. Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, a material part
of the consideration to Lessor, hereby assumes all risk of damage to property or
injury to persons, in, upon or about the Premises arising from any cause and
Lessee hereby waives all claims in respect thereof against Lessor.
8.7 Exemption of Lessor from Liability. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee,
lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from fire, steam electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the premises or upon other portions of the building of which the premises are a
part or from other sources or places and regardless of whether the cause of such
damage or injury or the means of repairing the same is inaccessible to Lessee.
Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant, if any, of the
building in which the Premises are located.
9. Damage or Destruction.
9.1 Definitions.
(a) "Promises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
50% of the then replacement cost of the Premises. "Premises Building Partial
Damage" shall herein mean damage or destruction to the building of which the
Premises are a part to the extent that the cost of repair is less than 50% of
the then replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the then replacement cost of the Premises. "Premises Building Partial Damage"
shall herein mean damage or destruction to the building of which the Premises
are a part to the extent that the cost of repair is less than 50% of the then
replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction
which was caused by an event require d to be covered by the insurance described
in paragraph 8.
9.2 Partial Damage -- Insured Loss. Subject to the provisions of
paragraph s 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's expense, repair such damage, but not Lessee's fixtures, d equipment
or tenant improvements unless the same have become a part of the Premises
pursuant to Paragraph 7.5 hereof as soon as reasonably possible and this Lease
shall continue in full force and effect. Notwithstanding the above, if the
Lessee is the insuring party, and if the insurance proceeds received by Lessor
are not sufficient to effect such repair, Lessor shall give notice to Lessee of
the amount required in addition to the insurance proceeds to effect such repair.
lessee shall contribute the required amount to Lessor within ten days after
Lessee has received notice from Lessor of the shortage in the insurance. When
Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as
soon as reasonably possible and this Lease shall continue in full force and
effect. Lessee shall in no event have any right to reimbursement for any such
amounts so contributed.
9.3 Partial Damage -- Uninsured Loss. Subject to the provisions of
Paragraph 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which even
this Lease shall continue in full force and effect, or (ii) given written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such
notice of Lessor's intention to cancel and terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement form Lessor, in which even this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.4 Total Destruction. If at any time during the term of this Lease
there is damage whether or not an Insured Loss. (Add Party) Including
destruction required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.
9.5 Damage Near End of Term.
(a) If at any time during the last six months of the term of
this Lease there is damage, whether or not an Insured Loss, which falls within
the classification of Premises Partial Damage, Lessor may at Lessor's option
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to lessee of Lessor's election to do so within 30 days
after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, lessee shall exercise such option.
If it is to be exercised at all, no later than 20 days after the occurrence of
an insured Loss falling within the classification of Premises Partial Damage
during the last six months of the term of this Lease. If Lessee duly exercises
such option during said 20 day period, Lessor shall, at Lessor's expense, repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option during said 20 day
period, then Lessor may at Lessor's option terminate and cancel this lease as of
the expiration of said 20 day period by giving written notice to Lessee of
Lessor's election to do so within 10 days after the expiration of said 20 day
period, notwithstanding any term or provision in the grant of option to the
contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in paragraphs 9.2 or 9.3,
and Lessor or Lessee repairs or restores the Premises pursuant to the provisions
of this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the premises is impaired. Except for abatement
of rent, if any, lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accure ,
Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor
written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event his Lease shall
terminate as of the date of such notice.
9.7 Termination -- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the real property tax, as
defined in paragraph 10.2, applicable to the Premises during the term of the
Lease. All such payments shall be made at least ten (10) days prior to the
delinquency date of such payment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes paid by
Lessee shall cover any period of time prior to or after the expiration of the
term hereof, Lessee's share of such taxes shall be equitably prorated to cover
only the period of time within the tax fiscal year during which this Lease shall
be in effect, and Lessor shall reimburse Lessee to the extent required. If
Lessee shall fail to pay any such taxes, Lessor shall have the right to pay the
same, in which case Lessee shall repay such amount to Lessor with Lessee's next
rent installment together with interest at the maximum rate than allowable by
law.
10.2 Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real-estate tax or assessment, general ,
special, ordinary or extraordinary, and any license fee, commercial rental tax.
Improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the premises by any authority having the direct or
indirect power to tax. Including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charger (i) in substitution, partially
or totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax," or (ii) the nature of which was
hereinbefore included within the definition of "real property tax," or (iii)
which is imposed for a service or right not charged prior to June 1, 1976, or if
previously charged, has been increased since June 1, 1978, or (iv) which is
imposed as a result of a transfer, either partial or total, of Lessor's interest
in the premises or which is added to a tax or charge hereinbefore included
within the definition of real property tax by reason of such transfer, or (v)
which is imposed by reason of this transaction, any modifications or changes
hereto, or any transfers hereof.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements
included within the tax parcel assessed, such proportion to be determined by
Lessor from the respective valuations assigned in the assessor's work sheets or
such other information as may be reasonably available. Lessor's reasonable
determination thereof, in good faith, shall be conclusive.
10.4 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within 10 days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. THE acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by lessor
of any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee of Lessee or any successor of Lessee, in the performance
of any of the terms hereof, Lessor may proceed directly against Lessee without
the necessity of exhausting remedies against said assignee. Lessor may consent
to subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees ___________. In the event Lessee
shall assign or sublet the Premises or request the consent of Lessor to any
assignment or subletting or if Lessee shall request the consent of lessor for
any act Lessee proposes to do then Lessee shall pay Lessor's reasonable
attorneys fees incurred in connection therewith, such attorneys fees not to
exceed $350,000 for each such request.
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure shall
continue for a period of 30 days after written notice thereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 30 days are reasonably required for its cure, then Lessee shall not be
deemed to be in default if Lessee commenced such cure within said 30-day period
and thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within 60 days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 30 days.
Provided, however, in the event that any provision of this paragraph 13.1(d) is
contrary to any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given
to Lessor by Lessee; any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessees shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligations is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for
notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such
overdue amount. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event constitute
a waiver of Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of rent, then rent shall automatically
become due and payable quarterly in advance, rather than monthly,
notwithstanding paragraph 4 or any other provision of this Lease to the
contrary.
13.5 Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the building situated on the Premises. No reduction of rent shall
occur if the only area taken is that which does not have a building located
thereon. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation,
repair any damage to the Premises caused by such condemnation except to the
extent that Lessee has been reimbursed therefor by the condemning authority.
Lessee shall pay any amount in excess of such severance damages required to
complete such repair.
15. Broker's Fee.
(a) Upon execution of this Lease by both parties, Lessor shall
pay to Scher-Voit Commercial Brokerage Company, Inc. as per letter agreement
dated September 24, 1992 Licensed real estate broker(s), a fee as set forth in a
separate agreement between lessor and said broker(s), or in the event there is
no separate agreement between Lessor and said broker(s), the sum of $_______,
for brokerage services rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option
as defined in paragraph 39.1 of this Lease, which is granted to Lessee under any
rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or if Lessee remains in possession of the
Premises after the expiration of the term of this Lease after having failed to
exercise an Option, or if said broker(s) are the procuring cause of any other
lease or sale entered into between the parties pertaining to the Premises and/or
any adjacent property in which Lessor has an interest, then as to any of said
transaction, Lessor shall pay said broker(s) a fee in accordance with the
schedule of said broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor
but also on behalf of any person, corporation, association, or other entity
having an ownership interest in said real property or any part thereof, when
such fee is due hereunder. Any transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed to
have assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph 15.
16. Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days'
prior written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such
statement within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (I) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (II) that there are no
uncured defaults in Lessor's performance, and (III) that not more than one
month's
rent has been paid in advance or such failure may be considered by Lessor as a
default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessor's interest
in a ground lease of the Premises, and except as expressly provided in Paragraph
15, in the event of any transfer of such title or interest Lessor herein named
(and in case of any subsequent transfers then the grantor) shall be relieved
from and after the date of such transfer of all liability as respects Lessor's
obligations thereafter to be performed, provided that any funds in the hands of
Lessor or the then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grantee. The obligations contained in this
Lease to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
18. Severability. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of sales persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail and if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the respective parties,
as the case may be. Either party may by notice to the other specify a different
address for notice purposes except that upon Lessee's taking possession of the
Premises, the Premises shall constitute Lessee's address for notice purposes. A
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Convenants and Conditions. Each provision of this Lease preformable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of Paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to
any ground lease, mortgage, deed of trust, or any other hypothecation or
security now or hereafter placed upon the real property of which the Premises
are a part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not
be disturbed if Lessee is not in default and so long as Lessee shall pay the
rent and observe and perform all of the provisions of this Lease, unless this
Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee
or ground lessor shall elect to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and shall give written notice thereof
to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or
ground lease, whether this Lease is dated prior or subsequent to the date of
said mortgage, deed of trust or ground lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to
effectuate an attornment, a subordination or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be.
Lessee's failure to execute such documents within 10 days after written demand
shall constitute a material default by Lessee hereunder, or, at Lessor's option,
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. Attorney's Fees. If either party or the broker named herein brings an action
to enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, or trial or appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the court. The
provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. Lessor's Access. Lessor and Lessors agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same, showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises an ordinary "For Lease" signs, all without rebate
of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right without prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work, merger,
and shall, at the option of Lessor, terminate all or any existing subtenancles
or may, at the option of Lessor, operate as an assignment to Lessor of any or
all of such subtenancles.
36. Consents. Except for paragraph 33 hereof, wherever in this Lease the consent
of one party is required to an act of the other party such consent shall not be
unreasonably withheld.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executive this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to leas the Premises or the right of first
refusal to lease other property of Lessor or the right of first offer to lease
other property of Lessor; (3) the right or option to purchase the Premises, or
the right of first refusal to purchase the Premises, or the right of first offer
to purchase the Premises or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
39.2 [Illegible] _______________________________________
39.3 Multiple Options. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised unless
the prior option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (I) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(b) or 13/1(c) and continuing until the default
alleged in said notice of default is cured, or (II) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) continuing until
the obligation is paid, or (III) at any time after an event of default described
in paragraph 13.1(a), 13.1(d), or 13.1(e) (with any necessity of Lessor to give
notice of such default to Lessee), or (IV) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(b), where a late
charge has become payable under paragraph 13.4 for each of such defaults, or
paragraph 13.1(c), whether or not the defaults are cured, during the 12 month
period prior to the time that Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and time exercise of the Option, if, after such exercise and during the term
of this Lease, (I) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (II) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (III) Lessee commits a default
described in paragraph 13.1(a), 13.1(d), or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (IV) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or note the defaults are cured.
40. Multiple Tenant Building. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violations of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material breach of this Lease.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. Authority. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Insuring Party. The insuring party under this lease shall be the Lessee for
572 ($500,000)/Lessor for 576 ($600,000).
47. Addendum. Attached hereto is an addendum or addenda containing paragraphs A
through D which constitutes a part of this Lease.
48. See attached Exhibit "A" for description of premises and tenant
improvements.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE,
SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY
AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE
ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSES OF
LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF
THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
The parties hereto have executed this Lease at the place on the dates
specified immediately adjacent to their respective signatures.
Executed at OCEANSIDE ASSOCIATES
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on By /s/ Kenneth Smith
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Kenneth Smith
Address 232 West Cerritos Boulevard By
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Anaheim, California 92805
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"LESSOR" (Corporate Seal)
Executed at Hyannis, Massachusetts PACKAGING INDUSTRIES GROUP, INC.
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on April 1, 1992 By /s/ Carlton Bolton
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Carlton Bolton
Address 70 Airport Road By /s/ Jon Anthony Glydon
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Jon Anthony Glydon
Hyannis, Massachusetts 02601 "LESSEE" (Corporate Seal)
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47. A. RENTAL SCHEDULE:
April 1, 1992 through March 31, 1993: The rent shall be Ten
Thousand Four Hundred Ninety-Eight and 50/100ths Dollars
($10,498.50) per month;
April 1, 1993 through March 3,1 1994: The rent shall be Eleven
Thousand Six Hundred Ninety-Eight and 44/100ths Dollars
($11,698.44) per month;
April 1, 1994 through March 31, 1995: The rent shall be Twelve
Thousand Two Hundred Ninety-Eight and 36/100ths Dollars
($12,298.36) per month.
B. OPTION TO EXTEND THE LEASE TERM:
I. Provided that the Lease is still in full force and effect
and that Lessee is not in default in the payment of rent or
of any of the terms and conditions of the Lease, Lessor
grants to Lessee the right and option to extend the term of
this Lease for an additional two (2) year period ("Extended
Term") commencing on April 1, 1995, the date of the first
day following the expiration of the original term, and
ending on March 31, 1997; provided, that Lessee shall have
exercised this option by having given Lessor written notice
of election to extend the term of this Lease at least ninety
(90) days prior to the expiration of the original term of
this Lease. Except for the rental adjustment as hereinafter
set forth, all other terms and conditions of the Lease shall
apply to the Extended Term.
II. Lessee agrees to pay to Lessor in advance on the first day
of each and every month during the Extended Term the monthly
rent determined in the following manner:
a. The parties hereto shall attempt to agree upon the then
prevailing market rent for similar property for the
Extended Term during the ninety (90) through sixty (60)
days immediately preceding the first day of the
Extended Term. If the parties agree on the adjusted
rent within the time specified, the parties will
forthwith execute a letter agreement reflecting the
monthly rent for the Extended Term.
b. If the parties are unable to agree upon the adjusted
rent for the Extended Term within the time provided
above, then within five (5) days thereafter Lessor
shall appoint an arbitrator and immediately notify
Lessee in writing of said appointment and of the name
and address of the arbitrator so appointed, and Lessee
shall also similarly at said time appoint an arbitrator
and immediately notify Lessor in writing of aid
appointment and of the name and address of the
arbitrator so appointed. If the two arbitrators do not
within thirty (30) days after their appointment agree
on the monthly rent for the premises, then the two (2)
arbitrators shall immediately appoint a third
arbitrator, and the decision of any two of said
arbitrators shall be binding on the parties thereto.
Such decision in each respective instance shall be
rendered on or before twenty-five (25) days before the
commencement of the Extended Term. The decision of the
arbitrators shall be made in writing and signed by the
arbitrators in duplicate. One of the writings shall be
delivered to Lessor and the other to Lessee. Lessor and
Lessee shall pay the respective charges and expenses of
the arbitrator appointed by each party. the charges for
services of the third arbitrator and the other expenses
of the arbitration shall be borne by the parties hereto
in equal shares.
c. If for any of such periods the parties hereto do not
mutually agree on the monthly rent for the Extended
Term and fail to appoint an arbitrator as hereinabove
provided, or if for any of such periods said
arbitrators fail to agree, and failing to agree do not
appoint a third arbitrator as herein provided, or if
for any of such periods said arbitrator or any two of
them, as hereinabove provided, do not agree on the
monthly rent before the twenty-fifth (25th) day
preceding the commencement of the Extended Term, then
the monthly rent shall be determined by the Superior
Court of the State of California for the County of San
Diego in a declaratory relief or other action or
actions brought therein for that purpose and in any
such action or actions, each party hereto shall bear
his own attorneys' fees and costs.
d. All arbitrators shall be licensed M.A.I. appraisers.
e. In no event shall the monthly rent for any Extended
Term be less than the monthly rent in effect
immediately prior to the commencement of the Extended
Term.
C. TENANT IMPROVEMENTS: Lessor, at Lessor's cost, shall make the
following improvements to the premises beginning immediately upon
execution of this Lease:
I. Add sufficient heating, ventilating and air conditioning
(HVAC) units to service the office area currently
unserviced at 562 Airport Road, Oceanside (see Exhibit
"A");
II. Fill-in the truck well area at the rear end of 572 airport
Road, Oceanside in such a manner that it will be of the
same grade and level as the existing parking/loading area
(see Exhibit "A");
III. Install a fence and a gate enclosing the parking area on
the east side of 572 Airport Road, Oceanside (see Exhibit
"A");
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____
IV. Install a fence and a gate between the buildings at 572 and
576 Airport Road, Oceanside (see Exhibit "A");
V. Install some warehouse strip lighting at 576 Airport Road,
Oceanside;
VI. Construct an additional office of about 400 square feet to
include HVAC, drop ceiling, lights, carpet and finish paint
(See Exhibit "A");
VII. Repair existing exterior lighting system.
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____
D. RIGHT OF FIRST REFUSAL: Lessor hereby grants to Lessee the right
of first refusal to purchase the premises upon the terms and
conditions of a bona fide offer to purchase the premises
acceptable to Lessor from a third party up to and including March
31, 1993. Lessee shall have ten (10) days form receipt of notice
of such bona fide offer in which to elect to purchase the
premises. Said notice shall contain a true copy of the bona fide
offer to purchase. In the event Lessee does not timely elect to
purchase on such terms, lessor may sell the premises to said
third party upon the terms and conditions set forth in the
notice. In the event Lessor does not consummate the sale of the
premises to such third party upon the terms and conditions
contained in the notice to lessee, this right of first refusal
shall be revived in its entirety, but in no event shall this
right extend beyond March 31, 1993. Should Lessee purchase the
premises, this Lease shall terminate upon the date title vests in
Lessee, and Lessor shall remit to Lessee all unearned rent. In
addition, should Lessee purchase the premises, lessor shall pay
to Scher-Voit Commercial Brokerage Company, Inc. a commission in
accordance with its standard Schedule of Commissions.
OCEANSIDE ASSOCIATES
By: /s/ KENNETH SMITH
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KENNETH SMITH Date
PACKAGING INDUSTRIES GROUP, INC.
By: /s/ CARLTON BOLTON APRIL 1, 1992
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CARLTON BOLTON Date
By: /s/ JON ANTHONY GLYDON
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JON ANTHONY GLYDON Date
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____
ADDENDUM
DATE _____________________________
ADDENDUM TO LEASE DATED MARCH 30, 1992 BY AND BETWEEN OCEANSIDE ASSOCIATES, AS
LESSOR, AND PACKAGING INDUSTRIES GROUP, INC., AS LESSEE, FOR THE PREMISES KNOWN
AS 572 AND 576 AIRPORT ROAD, OCEANSIDE, CALIFORNIA.
- --------------------------------------------------------------------------------
47. A. RENTAL SCHEDULE:
April 1, 1992 through March 31, 1993: The rent shall be Ten
Thousand Four Hundred Ninety-Eight and 50/100ths Dollars
($10,498.50) per month;
April 1, 1993 through March 31, 1994: The rent shall be Eleven
Thousand Six Hundred Ninety-Eight and 44/100ths ($11,698.44)
per month;
April 1, 1994 through March 31, 1995: The rent shall be Twelve
Thousand Two Hundred Ninety-Eight and 36/100ths Dollars
($12,298.36) per month.
B. OPTION TO EXTEND THE LEASE TERM:
I. Provided that the Lease is still in force and effect
and that Lessee is not in default in the payment of
rent or of any of the terms and conditions of the
Lease, Lessor grants to Lessee the right and option to
extend the term of this Lease for an additional two (2)
year period ("Extended Term") commencing on April 1,
1995, the date of the first day following the
expiration of the original term, and ending on March
31, 1997; provided, that Lessee shall have exercised
this option by having given Lessor written notice of
election to extend the term of this Lease at least
ninety (90) days prior to the expiration of the
original term of this Lease. Except for the rental
adjustment as hereinafter set forth, all other terms
and conditions of the Lease shall apply to the Extended
Term.
II. Lessee agrees to pay to Lessor in advance on the first
day of each and every month during the Extended Term
the monthly rent determined in the following manner:
a. The parties hereto shall attempt to agree upon the
then prevailing market rent for similar property
for the Extended Term during the ninety (90)
through sixty (60) days immediately preceding the
first day of the Extended Term. If the parties
agree on the adjusted rent within the time
specified, the parties will forthwith execute a
letter agreement reflecting the monthly rent for
the Extended Term.
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____
b. If the parties are unable to agree upon the
adjusted rent for the Extended Term within the
time provided above, then within five (5) days
thereafter Lessor shall appoint an arbitrator and
immediately notify Lessee in writing of said
appointment and of the name and address of the
arbitrator so appointed, and Lessee shall also
similarly at said time appoint an arbitrator and
immediately notify Lessor in writing of said
appointment and of the name and address of the
arbitrator so appointed. If the two arbitrators do
not within thirty (30) days after their
appointment agree on the monthly rent for the
premises, then the two (2) arbitrators shall
immediately appoint a third arbitrator, and the
decision of any two of said arbitrators shall be
binding on the parties hereto. Such decision in
each respective instance shall be rendered on or
before twenty-five
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____
SECOND ADDENDUM TO LEASE DATED MARCH 30, 1992 BY AND BETWEEN OCEANSIDE
ASSOCIATES, AS LESSOR, AND PACKAGING INDUSTRIES GROUP, INC., AS LESSEE, FOR THE
PREMISES KNOWN AS 572 AND 576 AIRPORT ROAD, OCEANSIDE, CALIFORNIA
- --------------------------------------------------------------------------------
1. TERM: The term of the Lease shall be extended to and including March
31, 1997.
2. RENT: The rent for this extended period shall be as follows:
April 1, 1995 thru March 31, 1996: The rent shall be
$12,298.36 per month ("Base Rent");
April 1, 1996 thru March 31, 1997: The rent shall be the base
rent plus a cost of living increase as set forth below:
a) RENT - COST OF LIVING ADJUSTMENT: The monthly rent provided
for above ("Base Rent") shall be subject to adjustment in the
following manner:
At the commencement of the second (2nd) year of the extended
term ("Adjustment Date") the Consumer Price Index for Urban
Wage Earners and Clerical Workers for the Los Angeles/Long
Beach Metropolitan Area published by the Department of Labor,
Bureau of Labor Statistics, United States Government, All
Items, 1982=100, as it exists on the Adjustment Date in
question shall be compared with the Index as the same existed
on April 1, 1995 ("Base Index"). In the event the Index as of
such Adjustment Date is higher than the Base Index, the
monthly rent until the next Adjustment Date, or until the
expiration of the lease term as the cause may be, shall be
increased by multiplying the Base Rent by a fraction the
numerator of which is the Index as the same exists on such
Adjustment Date, and the denominator of which is the Base
Index. In no event shall the monthly rent at any time during
the term be less than the monthly rent payable immediately
prior to the Adjustment Date in question, and the Lessee shall
continue to pay the rent for the prior period until the index
is made public. When the Index is made public, Lessee shall
immediately pay to Lessor the deficiency in rent due to the
time lag upon Lessor's submission to Lessee of a statement
setting forth the adjusted monthly rent reflecting the
increase in the Index. Upon adjustment of the monthly rent as
herein provided, the parties will forthwith execute a letter
agreement reflecting the new monthly rent.
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____
If, in the future, the Index shall be changed so that the base
year differs from 1982=100, the Index shall be converted in
accordance with the conversion factor published by the United
States Department of Labor, Bureau of Labor Statistics. In the
event the Index is discontinued or revised during the term
hereof, such other governmental index or computation with
which it is replaced shall be used on order to obtain
substantially the same result that would be obtained if said
present Index had not been discontinued or revised. In the
event the Index is not replaced with another governmental
index or computation, Lessor and Lessee shall accept
comparable statistics on the purchasing power of the consumer
dollar as published at the time of said discontinuance by a
responsible financial periodical or recognized authority
chosen by the parties. If the parties cannot agree upon a
financial periodical as the source of comparable statistics
after attempting for twenty (20) days to reach such agreement,
the percentage increase for the ensuing period shall be
determined by arbitration according to the rules of the
American Arbitration Association and the decision of the
arbitrators shall be binding on the parties.
3. TENANT IMPROVEMENTS: Lessor, at Lessor's cost, shall make the following
improvements to the Premises:
a) Install a new roof on both buildings; by June 30, 1995
b) Repair or service (as the case prescribes) the heating,
ventilating and air conditioning (HVAC) units in both
buildings bringing the units to good working condition;
c) Trim all of the trees on the premises.
AGREED AND ACCEPTED:
LESSOR: /s/ (illegible) DATE 3/20/95
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LESSEE: /s/ JON ANTHONY GLYDON, President DATE 3/10/95
---------------------------------------- -------
Earth and ocean Sports, Inc. successor in
interest to Packaging Industries Group, Inc.
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____
THIRD ADDENDUM TO LEASE DATED MARCH 30, 1992 BY AND BETWEEN OCEANSIDE
ASSOCIATES, AS LESSOR, AND PACKAGING INDUSTRIES GROUP, INC., AS LESSEE, FOR THE
PREMISES KNOWN AS 572 AND 576 AIRPORT ROAD, OCEANSIDE, CALIFORNIA
- --------------------------------------------------------------------------------
1. TERM:
The term of the Lease shall be extended to and including March 31,
1998.
2. RENT:
The rent for the extended period shall remain the same as the rent
currently payable.
3. OPTION TO EXTEND LEASE TERM:
(a) Provided that the Lease is still in full force and effect and that
Lessee is not in default in the payment of rent or of any of the terms
and conditions of the Lease, Lessor grants to Lessee the right and
option to extend the term of this Lease for an additional two (2) year
period ("Extended Term") commencing on April 1, 1998, the date of the
first day following the expiration of the original term, and ending on
March 31, 2000; provided, that Lessee shall have exercised this option
by having given Lessor written notice of election to extend the term of
this Lease at least one hundred eighty (180) days prior to the
expiration of the original term of this Lease. Except for the rental
adjustment as hereinafter set forth, all other terms and conditions of
the Lease shall apply to the Extended Term.
(b) Lessee agrees to pay to Lessor in advance on the first day of each
and every month during the Extended Term the monthly rent determined in
the following manner:
(i) The parties hereto shall attempt to agree upon the then
prevailing market rent for the Extended Term during the one
hundred eighty (180) through the one hundred fifty (150) days
immediately preceding the first day of the applicable Extended
Term. If the parties agree on the adjusted rent within the time
specified, the parties will forthwith execute a letter agreement
reflecting the monthly rent for the applicable Extended Term.
(ii) If the parties are unable to agree upon the adjusted rent for
an applicable Extended Term within the time provided above, then
within ten (10) days thereafter Lessor shall appoint an arbitrator
and immediately notify Lessee in writing of said appointment and
of the name and address of the arbitrator so appointed, and Lessee
shall also similarly at said time appoint an arbitrator and
immediately notify Lessor in writing of said appointment and of
the name and address of the arbitrator so appointed. If the two
arbitrators do not within twenty
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____
(20) days after their appointment agree on the monthly rent for
the Premises, then the two (2) arbitrators shall immediately
appoint a third arbitrator, and the decision of any two of said
arbitrators shall be binding on the parties hereto. Such decision
in each respective instance shall be rendered on or before ninety
(90) days before the commencement of the Extended Term. The
decision of the arbitrators shall be made in writing and signed by
the arbitrators in duplicate. One of the writings shall be
delivered to Lessor and the other to Lessee. Lessor and Lessee
shall pay the respective charges and expenses of the arbitrator
appointed by each party. The charges for services of the third
arbitrator and the other expenses of the arbitration shall be
borne by the parties hereto in equal shares.
(iii) If for any of such periods the parties hereto do not
mutually agree on the monthly rent for the applicable Extended
Term and fail to appoint an arbitrator as hereinabove provided, or
if for any of such periods said arbitrators fail to agree, and
failing to agree do not appoint a third arbitrator as herein
provided, or if for any of such periods said arbitrator or any two
of them, as hereinabove provided, do not agree on the monthly rent
before the ninetieth (90th) day preceding the commencement of the
applicable Extended Term, then the monthly rent shall be
determined by the Superior Court of the State of California for
the County of Los Angeles in declaratory relief or other action or
actions brought therein for that purpose and in any such action or
actions, each party hereto shall bear his own attorneys' fees and
cost.
(iv) All arbitrators shall be licensed M.A.I. appraisers.
(v) In no event shall the monthly rent for any Extended Term be
less than the monthly rent in effect immediately prior to the
commencement of the applicable Extended Term.
4. HEATING AND AIR CONDITIONING:
Lessor agrees to adjust the heating, ventilating and air conditioning
(HVAC) in the buildings so that they function more efficiently.
However, Lessor will not be required to add any capacity or ducting to
the existing system.
AGREED AND ACCEPTED:
LESSOR: /s/ BRIAN FRANK DATE: 3/19/97
-------------------------------------------- ---------------
OCEANSIDE ASSOCIATES
LESSEE: /s/ JON ANTHONY GLYDON DATE: 2/24/97
-------------------------------------------- ---------------
EARTH AND OCEAN SPORTS, INC., SUCCESSOR IN
INTEREST TO PACKAGING INDUSTRIES GROUP, INC.
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_______
Exhibit 10.7
LEASE AGREEMENT - COMMERCIAL PREMISES
THIS LEASE made this 13th day of December, 1995, by and between (Names and
Addresses): Allied Venture Number 1, a Washington General Partnership,
(hereinafter called Lessor) and Earth and Ocean Sports, Inc., a Massachusetts
Corporation, (hereinafter called Lessee):
WITNESSETH:
1. PREMISES: Lessor does hereby lease to Lessee, those certain
premises commonly known as
The free standing building known as and having the physical address of
11425 - 120th Avenue N.E., City of Kirkland, WA containing approximately 12,000
square feet of warehouse and 1,440 square feet of office.
as shown on Exhibit B attached hereto, (hereinafter called "premises"), being
situated upon land described in Exhibit A attached hereto together with the
right to use exclusively all entrances and exists, lobbies, corridors stairways,
elevators, restrooms, sidewalks, access roads and parking areas located on the
Land described in Exhibit A.
2. TERM: The term of the Lease shall be for thirty-seven and one-half
(37 1/2) months commencing the 15th day of December, 1995, and shall terminate
on the 31st day of January, 1999.
3. RENT: Lessee covenants and agrees to pay Lessor, at the offices of
Lessor, 901 Kirkland Avenue, Kirkland, WA 98033 or to such other party or at
such other place as Lessor may hereafter designated in writing, monthly rent in
the amount of Six Thousand Six Hundred Twenty-Four Dollars ($6,624.00), in
advance, on the first day of each month of the lease term, Lessor hereby
acknowledges receipt of Six Thousand Six Hundred Twenty Four Dollars
($6,624.00), for the second month's rent. Lessor hereby acknowledges receipt of
Six Thousand Six Hundred Twenty Four Dollars ($6,624.00), for the second month's
rent. If Lessee is in possession of the premises for a portion of a month, the
monthly rent shall be prorated for the number of days of Lessee's possession
during that month. Any rental payments receipt eleven or more days after the
beginning date of each rental period will be subject to a service charge of
$331.00. Lessee has deposited the sum of Six Thousand Six Hundred Twenty Four
Dollars ($6,624.00), (the "Security Deposit") receipt of which is hereby
acknowledge, which sum is security for Lessee's full performance of the
obligations hereunder and those pursuant Chapter 59 Revised Code of Washington,
or as such may be subsequently amended.
-2-
4. UTILITIES AND FEES: Lessee agrees to pay all charges for light,
heat, water, sewer, garbage, drainage, metro and all other utilities and
services to the premises during the full term of this lease. Above items, if
any, included in the rent payment are none. All other items including all
license fees and other governmental charges levied on the operation of the
Lessee's business on the premises will be paid directly by Lessee.
5. TAXES: In addition to the rent provided in paragraph 3, Lessee
agrees to pay the real estate taxes and assessments applicable to the premises
which are due and payable during the term of the Lease or any extension hereof.
Lessee shall pay the real estate taxes on the building leased to Lessee, plus
the real estate taxes applicable to the land contained in the tax parcel
described in Exhibit A.
Lessor shall submit to Lessee a copy of the actual statements received from the
taxing authority as they become due and shall invoice Lessee according to the
provisions of this paragraph. Lessee shall pay one-twelfth (1/12) of the real
estate taxes to Lessor monthly as additional rent.
If the term of this Lease commences and terminates on dates other than January 1
and December 31, respectively, taxes payable shall be prorated in the first and
last calendar years of the term of the Lease.
Should there presently be in effect or should there be enacted during the term
of this Lease any law, statute or ordinance levying any tax (other than Federal
or State income taxes) upon rents, Lessee shall pay such tax or shall reimburse
Lessor on demand for any such taxes paid by Lessor.
6. COMMON AREAS: N/A
7. REPAIRS AND MAINTENANCE: Premises have been inspected and are
accepted by Lessee in their present condition. Lessee shall, at its own expense
and at all times, keep the premises neat, clean and in a sanitary condition, and
keep and use the premises in accordance with applicable laws ordinances, rules,
regulations and requirements of governmental authorities due to Lessee's
particular use of the Premises. Lessor represents and warrants that, to the best
of its knowledge, the premises, the building and parking areas are in compliance
with all applicable laws, ordinances, rules, regulations and requirements of
government, governmental authorities including, without limitation, the
Americans with Disabilities Act. Lessee shall permit no waste, damage or injury
to the premises; keep all drain pipes free and open; protect water heating, gas
and other pipes to prevent freezing or clogging; repair all leaks and damage
caused by leaks; replace all glass in windows and doors of the premises which
may become cracked or broken; and remove ice and snow from sidewalks adjoining
the premises. Except for the roof, exterior walls and foundations which are the
responsibility of the Lessor, Lessee shall make such repairs as necessary to
maintain the premises in as good condition as they now are, reasonable use and
wear and damage by fire and other casualty excepted.
-3-
8. SIGNS: All signs or symbols placed by Lessee in the windows and
doors of the premises, or upon any exterior part of the building, shall be
subject to Lessor's prior written approval which consent shall not be
unreasonably withheld conditioned or delayed. Lessor may demand the removal of
signs which are not so approved, and Lessee's failure to comply with said
request within forty-eight (48) hours will constitute a breach of this paragraph
and will entitle Lessor to cause the sign to be removed and the building
repaired at the sole expense of the Lessee. At the termination of this Lease,
Lessee will remove all signs placed by it upon the premises, and will repair any
damage caused by such removal. All signs must comply with sign ordinances and be
placed in accordance with required permits.
9. ALTERATIONS: After prior written consent of Lessor, which shall not
be unreasonably withheld, conditioned or delayed Lessee may make alterations,
additions and improvements in said premises, at Lessee's sole cost and expense.
In the performance of such work, Lessee agrees to comply with all laws,
ordinances, rules and regulations of any proper public authority, and to save
Lessor harmless from damage loss or expense. Upon termination of this Lease and
upon Lessor's request which will be made at the time Lessor's consent is
requested, or Lessor's approval, Lessee shall remove such improvements and
restore the premises to its original condition not later than the termination
date, at Lessee's sole cost and expense. Any improvements not so removed shall
be removed at Lessee's expense provided that Lessee shall pay for any damage
caused by such removal.
10. CONDEMNATION: In any event a substantial part of the premises is
taken or damaged by the right of eminent domain, or purchased by the condemnor,
in lieu thereof, so as to render the remaining premises economically
untenantable, then this Lease shall be cancelled as of the time of taking at the
option of either party. In the event of a partial taking which does not render
the premises economically untenantable, the rent shall be reduced in direct
proportion to the square footage of the premises taken. Lessee shall have no
claim to any portion of the compensation for the taking or damaging of the land
or building. Nothing herein contained shall prevent the Lessee from his
entitlement to negotiate for compensation for his own moving costs and his
leasehold improvements.
11. PARKING: Lessee shall be entitled to the exclusive use of all
parking areas located on the land described in Exhibit A. If portions of the
Premises are sublet, it is the obligation of the Lessee to provide parking for
the Sublessee.
12. LIENS AND INSOLVENCY: Lessee shall keep the premises free from any
liens arising out of work performed for, materials furnished to, or obligations
incurred by Lessee and shall hold Lessor harmless against the same. In the event
Lessee becomes insolvent, bankrupt, or if a receiver, assignee or other
liquidating officer is appointed for the business of Lessee, Lessor may cancel
this Lease at its option.
-4-
13. SUBLETTING OR ASSIGNMENT: Lessee shall not sublet the whole or any
part of the premises nor assign this lease without the written consent of
Lessor, which will not be unreasonably withheld, conditioned or delayed. This
Lease shall not be assignable by operation of law.
Notwithstanding the first sentence of this section, Lessee shall have
the absolute right to assign its interest in the Lease or sublet all or any
portion of the premises without prior notice to Lessor and without Lessor's
consent in connection with any of the following: any reorganization,
recomposition, merger or consolidation of Lessee with any entity or entities;
provided that such sublessor or assignee has a net worth substantially the same
to Lessee immediately prior to the transaction and such use of Premises is
substantially similar in use and does not differ from Paragraph 27 of the Lease.
14. ACCESS: Lessor shall have the right to enter the premises at all
reasonable times upon reasonable advance notice to Lessee for the purpose of
inspection or of making repairs, additions or alterations, and to show the
premises to prospective tenants for sixty (60) days prior to the expiration of
the Lease term.
15. POSSESSION: If for any reason Lessor is unable to deliver
possession of the premises at the commencement of the term of the Lease, Lessee
may give Lessor written notice of its intention to cancel this Lease if
possession is not delivered within thirty (30) days after receipt of such notice
by Lessor. Lessor shall not be liable for any damages caused by delay, and
Lessee shall not be liable for any rent until such times as Lessor delivers
possession. A delay of possession shall not extend the term or the termination
date. If Lessor offers possession of the premises prior to the commencement date
of the term of this Lease, and if Lessee accepts such early possession, then
both parties shall be bound by all of the covenants and terms contained herein,
including the payment of rent during such period of early possession.
16. DAMAGE OR DESTRUCTION: In the event the premises are rendered
substantially untenantable by fire, the elements, or other casualty, Lessor may
elect, at its option, not to restore or rebuild the premises and shall so notify
Lessee within 30 days after such casualty, in which event Lessee shall vacate
the premises and this Lease shall be terminated; or, in the alternative, Lessor
shall notify Lessee, within thirty (30) days after such casualty, that Lessor
will undertake to rebuild or restore the premises, and that such work can be
completed within one hundred eighty (180) days from date of such notice of
intent. If Lessor is unable to restore or rebuild the premises within the said
one hundred eight (180) days, then the Lease may be terminated at Lessee's
option by written ten (10) day notice to Lessor. During the period of
untenantability, rent shall abate in the same ratio as the portion of the
premises rendered untenantable bears to the whole of the premises.
17. ACCIDENTS AND LIABILITY: Lessor or its agent shall not be liable
for any injury or damage to persons or property sustained by Lessee or other, in
the
-5-
premises unless caused by Lessor's (or its agents, employees or contractors
negligence or willful misconduct). Lessee agrees to defend and hold Lessor and
its agents harmless from any claim, action and/or judgment for damages to
property or injury to persons suffered or alleged to be suffered on the premises
by any person, firm or corporation, unless caused by Lessor's (or its agents',
employees' or contractors') negligence or willful misconduct.
Lessee agrees to maintain public liability insurance on the premises in the
minimum limit of $25,000 for property damage and in the minimum of
$100,000/$300,0000 for bodily injuries and death, and shall name Lessor as an
additional insured, and that the policy may not be cancelled unless ten (10)
days prior written notice of the proposed cancellation has been given to Lessor.
18. SUBROGATION WAIVER: Lessor and Lessee each herewith and hereby
releases and relieves the other and waives its entire right of recovery against
the other for loss or damage arising out of or incident to the perils described
in standard fire insurance policies and all perils described in the "Extended
Coverage" insurance endorsement approved for use in the state where the premises
are located, which occurs in, on or about the Premises, unless due to the
negligence of either party, their agents, employees or otherwise.
19. DEFAULT AND RE-ENTRY: If Lessee shall fail to keep and perform any
of the covenants and agreement herein contained, other than the payment of rent,
and such failure continues for thirty (30) days after written notice from
Lessor, unless appropriate action has been taken by Lessee in good faith to cure
such failure, Lessor may terminate this Lease and re-enter the premises, or
Lessor may, without terminating this Lease, re-enter said premises, and sublet
the whole or any part thereof for the account of the Lessee upon as favorable
terms and conditions as the market will allow for the balance of the term of
this Lease and Lessee covenants and agrees to pay to Lessor any deficiency
arising from a reletting of the premises at a lesser amount than herein agreed
to. Lessee shall pay such deficiency each month as the amount thereof is
ascertained by Lessor. However, the ability of Lessor to re-enter and sublet
shall not impose upon Lessor the obligation to do so.
20. REMOVAL OF PROPERTY: In the event Lessor lawfully re-enters the
premises as provided herein Lessor shall have the right, but not the obligation,
to remove all the personal property located therein and to place such property
in storage at the expense and risk of Lessee.
21. COSTS AND ATTORNEY'S FEES: If, by reason of any default or breach
on the part of either party in the performance of any of the provisions of this
Lease, a legal action is instituted, the losing party agrees to pay all
reasonable costs and attorney's fees in connection therewith. It is agreed that
the venue of any action brought under the terms of this Lease may be in the
county in which the premises are situated.
-6-
22. SUBORDINATION: Lessee agrees that this Lease shall be subordinate
to any mortgages or deeds of trust, placed on the property described in Exhibit
A, provided, that in the event of foreclosure or a deed in lieu of foreclosure,
if Lessee is not then in default beyond applicable cure periods and agrees to
attorn to the mortgage or beneficiary under deed of trust, such mortgagee or
beneficiary shall recognize Lessee's right of possession for the term of this
Lease. Lessor agrees to use best efforts to provide Lessee with a written
agreement ("Non-Disturbance Agreement') within sixty (60) days from the date of
this Lease from the holder of any current mortgage or from the Lessor under any
current ground lease affecting the premises to the effect that, if such holder
forecloses such mortgage, or such ground lessor terminates such ground lease, or
either holder, or such ground lessor otherwise exercises their respective
rights, such holder or ground lessor shall recognize Lessor's rights under this
Lease and shall not disturb Lessee's occupancy of the Premises to any mortgages,
deeds of trust or ground leases on the land described in Exhibit A.
23. NO WAIVER OF COVENANTS: Any waiver by either party of any breach
hereof by the other shall not be considered a waiver of any future similar
breach. This Lease contains all the agreements between the parties; and there
shall be no modification of the agreements contained herein except by written
instrument.
24. SURRENDER OF PREMISES: Lessee agrees, upon termination of this
Lease, to peacefully quit and surrender the premises without notice, leave the
premises neat and clean and to deliver all keys to the premises to Lessor.
25. HOLDING OVER: If Lessee, with the implied or express consent of
Lessor, shall hold over after the expiration of the term of this Lease, Lessee
shall remain bound by all the covenants and agreements herein, except that the
tenancy shall be from month to month and the rent shall increase twenty-five
percent (25%).
26. BINDING ON HEIRS, SUCCESSORS AND ASSIGNS: The covenants and
agreements of this Lease shall be binding upon the heirs, executors,
administrators, successors and assigns of both parties hereto, except as
hereinabove provided.
27. USE: Lessee shall use the premises for the purposes of design,
manufacturing, assembly, sales, general office, storage, administration and
shipping of snowboards, wakeboards and related products, and for no other
purposes, without written consent of Lessor, which consent shall not be
unreasonably withheld, conditioned, or delayed except if prohibited by law. In
the event Lessee's use of the premises increases the fire and extended coverage
or liability insurance rates on the building of which the premises are a part,
Lessee agrees to pay for such increase.
28. NOTICE: Any notice required to be given by either party to the
other shall be deposited in the United States mail, postage prepaid, addressed
to the Lessor at 901 Kirkland Avenue, Kirkland, WA 98033 or to the Lessee at 70
Airport Road, Hyannis,
-7-
MA 02601 with a copy to: Joseph R. Torpy; Testa, Hurwitz & Thibeault, High
Street Tower, 125 High Street, Boston, MA 02110.
29. RIDERS: Riders, if any, attached hereto, are made a part of this
lease by reference and are described as follows:
Riders 1 - 12.
30. TIME IS OF THE ESSENCE OF THIS LEASE.
31. If Lessee is a corporation, each individual executing this Lease on
behalf of said corporation represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation in accordance with
a duly adopted resolution of the Board of Directors of said corporation or in
accordance with the By-Laws of said corporation, and that this Lease is binding
upon said corporation in accordance with its terms. If Lessee is a corporation,
Lessee shall, within thirty (30) days after execution of this Lease, deliver to
Lessor a certified copy of a resolution of the Board of Directors of said
corporation authorizing or ratifying the execution of this Lease.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals
the date first above written.
LESSOR: /s/ James G. Vaux LESSEE(S) /s/ Jon A. Glydon, President
----------------------------- -------------------------------
James G. Vaux, Partner Earth and Ocean Sports, Inc.
Allied Venture Number 1
STATE OF Washington
-----------------
COUNTY OF King } ss.(Individual Acknowledgement)
-----------------
On this day personally appeared before me James G. Vaux to me
known to be the individual described in and who executed the within and
foregoing instrument, and acknowledged that he signed the same as his free and
voluntary act and deed, for the uses and purposes therein mentioned.
GIVEN Under My Hand and Official Seal this 19th day of December , 1995.
/s/ Ray M. Dunlap
Notary Public in and for the State of Washington
residing at LaConner
My commissions expires: Oct. 18, 1997
-8-
STATE OF Massachusetts
------------------
COUNTY OF Barnstable } ss.(Corporate Acknowledgement)
-----------------
On this 15th day of December, 1995, before me personally appeared
Jon Anthony Glydon to me known to be President of the corporation that executed
the within and foregoing instrument, and acknowledged said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he is authorized to execute said
instrument and that the seal affixed, if any, is the corporate seal of said
corporation.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal the
day and year first above written.
/s/ Susan C. Masure
Notary Public in and for the State of Massachusetts
residing at 70 Airport Road, Hyannis, MA 02601
My commissions expires: 10/30/98
-9-
RIDER TO LEASE DATED DECEMBER 13, 1995, BETWEEN ALLIED VENTURE
NUMBER 1, LESSOR, AND EARTH AND OCEAN SPORTS, INC., LESSEE
The following provisions attached to this Rider are a part of the Lease:
1. Broker's Commissions
2. Recordation
3. Hazardous Substances
4. Insurance
5. Tax and Insurance Payments
6. Repairs and Maintenance
7. Lessor's Improvements
8. Lessee's Improvements
9. Renewal Option
10. Security Deposit
11. Rent Abatement
12. Quiet Enjoyment
-10-
1. BROKER'S COMMISSION
Each party represents the other that it has not had dealings with any
real estate broker, finder, or other person who would be entitled to any
commission or fee in connection with the negotiation, execution or delivery of
this lease, except Leibsohn & Company, Norris Beggs & Simpson and Hallwood
Commercial Real Estate whose fees shall be paid by Lessor in accordance with the
separate commission agreement between Leibsohn & Company and Lessor. If any
other claims for brokerage, commission, finder's fees, or like payments, arise
out of or in connection with this transaction, such claims shall be defended and
if sustained, paid by the party whose alleged actions or commitment form the
basis of such claims.
2. RECORDATION
This lease shall not be recorded, except that if either party requests
the other party to do so, the parties shall execute a memorandum of lease in
recordable form.
3. HAZARDOUS SUBSTANCES
Lessee shall not cause or permit any Hazardous Substances, as defined
below, to be brought upon, kept or used in or about the premises, the building,
or the land by Lessee, its agents, employees, contractors of invitees, unless
such Hazardous Substances are necessary for Lessee's business (and such business
is a permitted use) and will be used, kept, and stored in a manner that complies
with this Lease and all laws regulating any such Hazardous Substances, provided
that Lessee indemnifies Lessor from and against any and all liability with
respect to such Hazardous Substances. If Lessee breaches the covenants and
obligations set forth herein or, if the presence of Hazardous Substances on, in
or about the premises or any part of the building or land caused or permitted by
Lessee, its agents, employees, contractors or invitees, resulting in
contamination of the premises or any part of the building or land by Hazardous
Substances otherwise occurs for which Lessee is legally liable to Lessor, then
Lessee shall indemnify and hold Lessor harmless from and against any and all
claims, judgments, damages, penalties, fines, costs, liabilities and losses
(including, without limitation, diminution in the value of the premises, the
building or land, damages for the loss or restriction on the use of rentable or
useable space or any part of the building or land, and sums paid in settlement
of claims, reasonable attorneys' fees, consultant fees and expert fees which
arise during or after the lease term as a result of such contamination. This
indemnification by Lessee of Lessor includes without limitation any and all
reasonable and actual costs incurred in connection with any investigation of
site conditions and any cleanup, remedial, removal or restoration work required
by any federal, state or local government agency or political subdivision
because of the presence of such Hazardous Substances in, or about the premises,
the building or land or the soil or ground water on or under the building or the
surface of the land. The provisions of this section shall survive the
termination of this Lease. For purposes of this section, the term "Hazardous
Substances" shall be interpreted to include substances designated as
-11-
hazardous under the Resource Conservation and Recovery Act, 42
U.S.C. 6901, et seq., the Federal Water Pollution Control act, 33 U.S.C. 1257,
et seq., the Clean Air Act, 42 U.S.C. 2001, et seq., or the Comprehensive
Environmental Response Compensation and Liability Act or 1980, 42 U.S.C. 9601,
et seq.
4. INSURANCE
The Second paragraph of Paragraph 17 of the Lease is hereby amended as
follows:
"Lessee agrees to maintain a commercial general liability policy,
including coverage for premises/operations, independent contractors,
broad form contractual in support of the indemnity provision of this
Lease, and personal injury liability, with an insurer licensed to do
business in the State of Washington, with a minimum limit of $1,000,000
each occurrence, and shall name Lessor as an additional insured and
shall state that the insurance is primary over property insurance
carried by Lessor. Lessee shall furnish Lessor a certificate indicating
that the insurance policy is in full force and effect the Lessor has
been named as an additional insured, and that the policy may not be
canceled unless ten (10) days prior written notice of the proposed
cancellation has been given to Lessor."
Property Insurance
Landlord shall obtain and keep in force during the term of this Lease
at the expense of the Tenant, property insurance on the building and any
improvements and additions permanently affixed thereto of which the Premises are
a part, against loss by fire and other causes. Said insurance shall provide for
payment of loss thereunder to Landlord or the holder of the Existing Mortgage on
the Premises.
5. TAX AND INSURANCE PAYMENTS
In addition to the monthly rent provided in Paragraph 3 of the Lease,
Lessee shall pay to Lessor Lessee's share of taxes and insurance expenses for
each calendar year during the term of the Lease. During the month prior to the
commencement of each calendar year, or as soon thereafter as practicable, lessor
shall give Lessee notice of Lessor's estimate of the amounts payable under this
section for the ensuing calendar year. On the first day of each month during the
ensuing calendar year, Lessee shall pay to Lessor one-twelfth (1/12) of such
estimated amounts, provided that if such notice is not given prior to the
commencement of such calendar year, Lessee shall continue to pay on the basis of
the prior year's estimate until the month after such notice is given. Within 90
days after the end of each calendar year in which Lessee is obligated to pay
said expenses, Lessor shall furnish Lessee with a statement ("Lessor's Expense
Statement") setting forth in reasonable detail the expenses for such calendar
year, and Lessee's share of said expenses. If Lessee's share of the actual
expenses for such calendar year exceeds the estimated expenses paid by Lessee,
Lessee shall pay to Lessor the difference within
-12-
thirty (30) days after receipt of Lessor's Expenses Statement; and if the total
amount paid by Lessee for any such calendar year shall exceed Lessee's share of
actual expenses for such calendar year, such excess shall be credited against
the next installment of estimated expenses or other rent due from Lessee to
Lessor hereunder. If any part of the first or the last years of the term of the
Lease shall include any part of an calendar year, Lessee's obligations under
this section shall be apportioned based on a 365 day year so that Lessee shall
pay only for such parts of such calendar years as are included in the Lease
term.
For purposes of this section, the following terms shall have the
meanings hereinafter set forth:
(a) "Lessee's Share" shall be the ratio that the rentable area
of the premises bears to the total rentable area of the building (exclusive of
common area). At the date hereof, Lessee's share is 100%.
6. REPAIRS AND MAINTENANCE
Lessee's repair and maintenance obligation shall include general
maintenance and repairs, resurfacing, painting, striping, restriping, cleaning,
snow removal, sweeping and janitorial services, maintenance and repair of
sidewalks, curbs and signs, landscaping, irrigation or sprinkling systems,
planting and landscaping; lighting, water, sewer and other utilities;
directional signs and other markers and bumpers; maintenance and repair of any
fire protection systems, lighting systems, storm drainage systems and other
utility systems; all cost or expense incurred by reason of any repairs or
modification to the improvements and/or for repair or installation or equipment
required for energy or safety purposes as required by governmental statutes,
ordinances, rules or regulations in force from time to time; all costs and
expenses pertaining to a security alarm system. Lessor may cause any or all of
said services to be provided by an independent contractor or contractors if
Lessee fails, after notice from Lessor to maintain the Premises in substantially
the same condition in which they were received, wear and tear and damage by fire
or other casualty excepted.
7. LESSOR'S IMPROVEMENTS
Lessor shall repaint and recarpet all of the office area at Lessor's
sole cost. Lessor shall deliver the Premises with broom clean concrete floors,
all walls and floor coverings cleaned, and all hardware, mechanical, plumbing
and electrical systems, lighting and overhead doors in good working condition.
All of the foregoing shall be completed by January 5, 1996 by Lessor. If such
work is not complete by January 15, 1996, Base Rent shall abate until the work
is completed. Any additional improvements shall be made by Lessee at Lessee's
sole cost.
-13-
8. LESSEE'S IMPROVEMENTS
Lessee may modify the loading dock to an angled configuration in order
to better accommodate freight-handling trucks. Lessee may also demolish the
office/break area (excluding the bathroom) located in the warehouse. All costs
for modifications shall be paid by Lessee and completed in accordance with
Paragraph 9 of the Lease.
9. RENEWAL OPTION
Provided Lessee is not in default of any of the conditions and/or
provisions of this Lease, including payment of rent, Lessee shall have the
option to extend the Lease term for an additional two (2) year period commencing
February 1, 1999. In order to exercise said option to renew, Lessee must provide
Lessor with at least six (6) months prior written notice of its intention to
renew. Rental rate for the renewal period shall be at the then prevailing market
rates. If Lessor and Lessee are unable to agree on the rental rate for the
renewal period within 60 days after the exercise of the renewal option, Lessee
shall be entitled to terminate its exercise of the renewal option.
10. SECURITY DEPOSIT
The following sentence is to be added to paragraph 3 of the Lease:
The security deposit and any balance thereof shall be returned to
Lessee within ten (10) days following expiration of the lease term. In the event
of termination of Lessor's interest in this Lease, Lessor shall transfer said
deposit to Lessor's successor in interest.
11. RENT ABATEMENT
Lessee shall not be responsible for any payments of rent, taxes or
insurance until January 15, 1996. All other conditions of this Lease are in full
force and effect as of December 15, 1995.
12. QUIET ENJOYMENT
Lessor covenants and agrees that Lessee shall peaceably and quietly
have, hold and enjoy the premises throughout the term of this Lease without
hindrance or ejection.
-14-
EXHIBIT "A"
The land is legally described as follows:
That portion of the northeast quarter of the Northwest quarter of the Northwest
quarter of Section 33, Township 26 North, Range 5 East, W.M. in King Country,
Washington, lying East of the Northern Pacific Railroad tracks and West of 120th
Avenue Northeast.
Being Lot A of King County Short Plat #78-6-2-JV, as recorded under
King County Recorder's #7806061000.
-15-
EXHIBIT "B"
[THE FLOORPLAN]
Exhibit 10.8
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") is entered into on this 9th day of
July, 1996, by and between Joe P. Ruthven Investments (the "Lessor"), whose
address is P.O. Box 2187, Lakeland, Florida 33806-2187, and Earth and Ocean
Sports, Inc. (the "Lessee"), whose address is 70 Airport Road, Hyannis,
Massachusetts 02601.
In consideration of the rents herein reserved and of the covenants,
agreements, and conditions herein contained to be kept and performed by the
parties hereto, Lessor and Lessee agree as follows:
1. Lease and Description of Premises. Lessor hereby leases to Lessee,
and Lessee hereby leases from Lessor, for the term, at the rental, and upon all
of the conditions set forth herein the premises known as 3010 Reynolds Road,
Unit(s) 1-3, Lakeland, Florida, containing approximately 12,242 square feet of
warehouse space and 1383 square feet of office space (the "Premises").
2. Term. The term of this Lease shall be for Three (3) years,
commencing on August 1, 1996, and ending at midnight on July 31, 1999, (the
"lease Term"), unless sooner terminated pursuant to any provisions hereof.
Occupancy may commence on July 13, 1996, and the effective date of this Lease
for the accrual and payment of rent is September 15, 1996.
3. Rental. Lessee hereby covenants and agrees to pay Lessor as rental
for the demised Premises the following amounts, plus Florida sales tax:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
MONTHLY ANNUAL SALES
TERM RENT + SALES TAX* = TOTAL RENT + TAX* = TOTAL
- ---- --------- --------- ----- ---- ---- -----
9/15/96-9/30/96 $2187.50 $131.25 $2318.75
10/1/96-7/31/99 $4375.00 $262.50 $4,637.50
per month
</TABLE>
*Sales tax subject to change.
Receipt is hereby acknowledged of the payment of Six Thousand Five Hundred Sixty
Two Dollars and 50/100 Dollars ($6,562.50), representing the first and last
month's rent, plus Florida sales tax in the amount of Three Hundred Ninety Three
Dollars and 75/100 cents Dollars ($393.75) for a total of Six Thousand Nine
Hundred Fifty Six Dollars and 25/100 Dollars ($6,956.25), paid in advance.
4. Option to Renew. Lessor grants to Lessee, subject to the conditions
set forth below, the right and option to renew this Lease for the time and at
the monthly and annual rents as follows:
-2-
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
MONTHLY ANNUAL SALES
TERM RENT + SALES TAX* = TOTAL RENT + TAX* = TOTAL
- ---- --------- --------- ----- ---- ---- -----
8/1/99-7/31/2000 $4,593.75 + $275.63 = $4,869.38
8/1/2000-7/31/2001 $4,823.44 + $289.41 = $5,112.84
</TABLE>
This is one two year option.
SEE TAB A
* Sales Tax Subject to Change
If Lessee exercises this option, Lessee shall continue to maintain a
total of one month's rent, plus Florida sales tax, as a deposit.
Except as provided above, and otherwise subject to and on all of the
terms and conditions herein contained, all other terms and conditions of this
Lease are to be and remain in full force and effect. This option must be
exercised by the giving to Lessor, on or before ninety (90) days of the
expiration date of this Lease, written notice of the exercise thereof by Lessee;
but Lessee shall in no event be entitled to renew the term hereof, even though
such notice be timely given, unless Lessee shall have timely performed all of
its obligations hereunder, and shall not then be in default in the performance
of any terms of this Lease, on the date the option is exercised and through and
including the date of the expiration of the initial term hereof.
5. Late Charge: Any installment of rent accruing under the provisions
of this Lease that is not paid when due is subject to a late charge of the
greater of: (i) Twenty-five Dollars ($25.00) or (ii) five percent (5%) of the
monthly rent, plus Florida State sales tax. All rent is due on the first day of
each month and is late and subject to the foregoing late charge if not received
by the Lessor on or before the fifth (5th) day of each month. In the event a
check is returned by a financial institution for any reason, the Lessee shall
pay late charges as if the check had not been delivered to the Lessee.
6. Date and Place of Payment: Lessee shall pay Lessor the monthly
rental herein required to be paid in advance on the first day of each and every
month without demand and at any place that shall be designated in writing by
Lessor. Until notice is furnished to the contrary, the rental shall be mailed to
Lessor at Post Office Box 2187, Lakeland, Florida 33806-2187.
7. Use.
(a) Use. The Premises shall be used and occupied only for the
purposes of __________ and for no other purpose of manufacturing, storage and
distribution.
(b) Compliance with Law.
Lessor warrants to Lessee that the Premises, in its
existing state but without regard to the use for which Lessee will use the
Premises, does not violate any applicable building code, regulation, or
ordinance at the time this Lease is executed. In the event it is
-3-
determined that this warranty has been violated, then it shall be the obligation
of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole
cost and expense, rectify any such violation. In the event Lessee does not give
to Lessor written notice of the violation of this warranty within thirty (30)
days from the commencement of the term of this Lease, it shall be conclusively
deemed that such violation did not exist and the correction of the same shall be
the obligation of the Lessee.
Except as provided in Paragraph 7(b), Lessee hereby accepts
the Premises in their condition existing as of the date of the execution hereof,
subject to all applicable zoning, municipal, county, and state laws, ordinances,
and regulations governing and regulating the use of the Premises, and accepts
this Lease subject thereto and to all matters disclosed thereby and by any
exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's
agent has made any representation or warranty as to the suitability of the
Premises for the conduct of Lessee's business.
8. Maintenance Repairs and Alterations.
(a) Lessor's Obligations. Subject to the provisions of
Paragraphs 7(b) and 10, and except for damage caused by any negligent or
intentional act or omission of Lessee, Lessee's agents, employees, or invitees
in which event Lessee shall repair the damage, Lessor, at Lessor's expense,
shall keep in good order, condition, and repair the foundations, exterior walls,
and the exterior roof of the Premises. Lessor shall not, however, be obligated
to paint such exterior, nor shall Lessor be required to maintain the interior
surface of exterior walls, windows, doors or plate glass. Lessor shall have no
obligation to make repairs under this paragraph until a reasonable time after
receipt of written notice of the need for such repairs. Lessee expressly waives
the benefits of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Premises in good order, condition,
and repair.
(b) Lessee's Obligations.
Subject to the provisions of Paragraphs 7(b) , 8(a), and
10, Lessee, at Lessee's expense, shall keep in good order, condition, and repair
the Premises and every part thereof (whether or not the damaged portion of the
Premises or the means of repairing the same are reasonably or readily accessible
to Lessee otherwise), including, without limiting the generality of the
foregoing, all plumbing, heating, air conditioning including changing filters
monthly, ventilating, electrical and lighting and bulbs and ballasts, interior
walls and interior surface of exterior walls, ceilings, windows, interior and
exterior doors, skylights located within the premises and the septic tank. In
the event only part of the building is leased by Lessee, the cost of the
maintenance of the septic tank shall be shared by the other tenants of the
building on a pro rata basis based on the number of employees of each tenant.
Lessee expressly waives the benefit of any statute now or hereafter in effect
which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
premises in good order, condition, and repair. Lessee will be responsible for
own pest control.
-4-
If Lessee fails to perform Lessee's obligations under
this Paragraph 8(b), Lessor may, at Lessor's option, enter upon the Premises
after ten (10) days' prior written notice to Lessee, and put the same in good
order, condition, and repair, and the costs thereof, together with interest
thereon at the rate of ten percent (10%) per annum, shall be due and payable as
additional rent to Lessor, together with Lessee's next rental installment.
On the last day of the term hereof or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, broom clean, ordinary wear and tear excepted. Lessee shall repair
any damage to the Premises occasioned by the removal of its trade fixtures,
furnishings, and equipment pursuant to Paragraph 8(c), which repair shall
include the patching and filling of holes and repair of structural damage.
(c) Alterations and Additions.
Lessee shall not, without Lessor's prior written consent,
make any alternations, improvements, additions, or utility installments in , on,
or about the Premises, except upon the consent of the Lessor. As used in this
paragraph, the term "Utility Installation" shall mean ducting, power panels,
wiring fluorescent fixtures, space heaters, conduits, air conditioning, and
plumbing. Lessor may require that Lessee remove any or all of said alterations,
improvements, additions, or Utility Installations at the expiration of the term,
and restore the Premises to their prior condition. Lessor may require Lessee to
prove Lessor, at Lessee's sole cost and expense, a lien and completion bond in
an amount equal to the estimated cost of such improvements, to insure Lessor
against any liability for mechanic's and materialmen's liens and to ensure
completion of the work. Should Lessee make any alterations, improvements,
additions, or Utility Installations without the prior approval of Lessor, Lessor
may require that Lessee remove any or all of such.
Any alternations, improvements, additions, or Utility
Installations in, on, or about the Premises that Lessee shall desire to make and
which require the consent of Lessor shall be presented to Lessor in written
form, with proposed detailed plans. If Lessor shall give its consent, the
consent shall e deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to Lessor
prior to the commencement of the work, and the compliance by Lessee of all
conditions of said permit in a prompt and expeditious manner.
Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
given Lessor not less than ten (10) days' notice prior to the commencement of
any work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises. If Lessee shall, in good faith,
contest the validity of any such lien, claim, or demand, then Lessee shall, at
its sole expense, defend itself and Lessor against the same, and shall pay and
satisfy any such enforcement thereof against Lessor or the Premises, upon the
condition that if Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to
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Lessor in an amount equal to such contested lien, claim, or demand indemnifying
lessor against liability for the same and holding the Premises free from the
effect of such lien or claim. In addition, Lessor may require Lessee to pay
Lessor's attorneys' fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
Unless Lessor requires their removal, as set forth in
Paragraph 8(c), all alterations, improvements, additions, and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term of this Lease. Notwithstanding the provisions of this
paragraph, Lessee's machinery and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 8(b).
(d) No Violation of Roof. Lessee shall not do anything to
violate the warranty, if any, for the roof by piercing, cutting, or altering the
roof or place equipment, machinery, structures, or any other thing upon the roof
without the express written consent o f Lessor. Notwithstanding the written
consent of Lessor as described in this paragraph, and notwithstanding the
Lessor's obligations for repair of the roof set forth in Paragraph 8(a) of this
Lease, Lessee shall immediately be responsible for repairing (to Lessor's
reasonable satisfaction) any leak that results from any piercing, cutting or
altering of the roof or the placement of equipment, machinery, structures, or
any other thing upon the roof by Lessee, if any such leak occurs during the term
of this Lease or any time during the three (3) months immediately following the
expiration or termination of this Lease.
9. Insurance; Indemnity.
(a) Liability Insurance. Lessee shall, at Lessee's sole
expense, obtain and keep in force during the term of this Lease a policy of
combined single limit, bodily injury, and property damage insurance insuring
Lessor and Lessee against any liability arising out of the ownership, use,
occupancy, or maintenance of the Premises and all areas appurtenant thereto.
Such insurance shall be a combined single limit policy in an amount not less
than Five Hundred Thousand Dollars ($500,00.00). The policy shall contain cross
liability endorsements and shall insure performance by Lessee of the indemnity
provisions of this Paragraph 9. The limits of said insurance shall not, however,
limit the liability of Lessee hereunder. If Lessee shall fail to procure and
maintain said insurance Lessor may, but shall not be required to, procure and
maintain the same, but at the expense of Lessee. Not more frequently than each
other, if, in the reasonable opinion of the Lessor, the amount of the liability
insurance required hereunder is not adequate, Lessee shall increase said
insurance coverage as required by lessor; provided, however, that in no event
shall the amount of the liability insurance increase be more than fifty percent
(50%) greater than the amount thereof during the preceding year of the term of
this Lease. However, the failure of Lessor to require any additional insurance
coverage shall not be deemed to relieve Lessee form any obligations under this
Lease.
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(b) Property Insurance. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies covering loss or damage to
the Premises, but not Lessee's fixtures, equipment, or tenant improvements, in
the amount of the full replacement value thereof, providing protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, and special extended perils (all risk), but not
plate glass insurance.
(c) Insurance Policies. Insurance required hereunder shall be
in companies holding a "General Policyholders Rating" of A or better as set
forth in the most current issue of "Best Insurance Guide." Lessee shall deliver
to Lessor copies of policies of liability insurance required under Paragraph
9(a)) or certificates evidencing the existence and amounts of such insurance
with loss payable clauses satisfactory to Lessor. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after ten (10) days' prior written notice to Lessor. Lessee shall, within then
(10) days' prior to the expiration of such policies, furnish Lessor with
renewals or "binders" thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee upon demand.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in Paragraph 9(b).
(d) No Use that Increases Insurance Risk. In no event shall
Lessee sue the Premises in any manner that will increase risks covered by
insurance on the Premises or cause lack of coverage or cancellation of any
insurance policy covering the Premises or any portion of the Premises,
regardless of whether Lessee's use of the Premises complies with Paragraph 7 of
this Lease. Lessee shall not keep on the Premises, or permit to be kept, used,
or sold thereon, anything prohibited by the policy of fire insurance covering
the Premises. If the use of the Premises by Lessee causes an increase in the
insurance premium rate on the Premises, Lessee shall, at his own expense, pay
the additional insurance premium that is charged due to the increased hazard. If
any increased hazard insurance premium is not paid by Lessee when due, Lessor
may at Lessor's option pay the premium and such premium shall be repaid to
Lessor as an additional rent installment for the month following the date on
which such increased hazard premiums are paid.
(e) Indemnity. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the Premises,
or from the conduct of Lessee's business, or from any activity, work or things
done, permitted, or suffered by Lessee in or about the Premises or elsewhere,
and shall further indemnify and hold harmless Lessor from and against any and
all claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any negligence of the Lessee, or any of Lessee's agents,
contractors, or employees, and from and against all costs, attorneys' fees,
expenses, and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor by reason of any such claim, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons in,
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upon, or about the Premises arising from any cause, and Lessee hereby waives all
claims in respect thereof against Lessor.
(f) Exemption of Lessor from Liability. Lessee hereby agrees
that Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise, or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, agents, or contractors, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water, or
rain, or from the breakage, leakage, obstruction, or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures,
or form any other cause, whether the said damage or injury results from
conditions arising upon the Premises or upon other portions of the building of
which the Premises are a part, or from other damage or injury or the means of
repairing the same is inaccessible to Lessee.
(g) Waiver of Subrogation. Lessee and Lessor each hereby
waives any and all rights of recovery against the other, or against the
officers, employees, agents, and representatives of the other, for loss of or
damage to such waiving party or its property or the property of others under its
control, where such loss or damage is insured against under and any insurance
policy in force at the time of such loss or damage. Lessee and Lessor shall,
upon obtaining the policies of insurance required hereunder, give notice to the
insurance carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
10. Damage or Destruction.
(a) Total Destruction. If at any time during the term of this
Lease the Premises are totally destroyed from any cause, whether or not covered
by insurance required to be maintained pursuant to Paragraph 9(b) hereof
(including any total destruction required by any authorized public authority),
this Lease shall automatically terminate as of the date of such total
destruction.
(b) Damage Near End of Term. If the Premises are partially
destroyed or damaged during the last six (6) months of the term of this Lease,
Lessor may, at Lessor's option, cancel and terminate this Lease as of the date
of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage.
(c) Abatement of Rent; Lessee's Remedies.
If the Premises are partially destroyed or damaged and Lessor
or Lessee repairs or restores them pursuant to the provisions of this Paragraph
10, the rent payable hereunder for the period during which such damage, repair,
or restoration continues shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired. Except for abatement of rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair, or restoration.
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If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 10 and shall not commence such
repair or restoration within ninety (90) days after such obligations shall
accrue, Lessee may, at Lessee's option, cancel and terminate this Lease by
giving Lessor written notice of Lessee's election to do so at any time prior to
the commencement of such repair restoration. In such even this Lease shall
terminate as of the date of such notice.
(d) Termination - Advance Payments. Upon termination of this
Lease pursuant to this Paragraph 10, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security deposit
as has not theretofore been applied by Lessor.
11. Real Property Taxes. Lessor shall pay all real property taxes
assessed against the Premises prior to the time such taxes become delinquent.
12. Personal Property Taxes.
Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment, and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment, and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with
Lessor's real property, lessee shall pay Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
13. Utilities. Lessee shall pay for all electric, water, gas, heat,
light, power, telephone, sprinkler surcharges, and other utilities and services
supplied to the Premises, together with any taxes or deposits thereon. If any
such services are not separately metered to Lessee, Lessee shall pay a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other Premises.
14. Assignment and Subletting.
(a) Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, subject, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Any attempted assignment, transfer, mortgagee, encumbrance, or
subletting without such consent shall be void and shall constitute a breach of
this Lease.
(b) No Release of Lessee. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primarily liability of Lessee to
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pay the rent and to perform all other obligations to be performed by Lessee
hereunder. The acceptance of rent by Lessor from any other person shall not be
deemed to be a waiver by Lessor of any provision hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting. In the event of default by any assignee of Lessee or
any successor of Lessee, in the performance of any of the terms hereof, Lessor
may proceed directly against Lessee without the necessity of exhausting remedies
against said assignee. Lessor may consent to assignments or subletting of this
Lease or amendments of modifications to this Lease with assignees of Lessee,
without notifying lessee, or any successor of Lessee, and without obtaining its
or their consent thereto, and such action shall not relieve Lessee of liability
under this Lease.
(c) Attorneys' Fees. In the event Lessee shall assign or sublet
the Premises or request the consent of Lessor to any assignment or subletting,
or if Lessee shall request the consent of Lessor for any act Lessee proposed to
do, then Lessee shall pay Lessor's reasonable attorneys' fees incurred in
connection therewith.
15. Hazardous Waste. Lessee agrees that the leased Premises comply with
all applicable federal, state, and local environmental laws, regulations, and
rulings before and up to the commencement of the term of this Lease and that
there are not any hazardous or toxic substances prohibited by environmental
protection and enforcement agencies on or at the leased Premises.
Lessee will defend, indemnify, and hold Lessor harmless from and
against any and all actions, losses, liabilities, damages, claims, obligations,
debts, costs, and expenses (including attorneys' fees), known or unknown,
contingent or absolute, arising out of or resulting from any (i) petroleum based
products, (ii) oil, (iii) waste, (iv) chemical substance or mixture, (v) toxic,
hazardous, or regulated substance, mixture, or waste, and/or (vi) radioactive
substance stored, released, and/or disposed of this Lease by Lessee through and
including the date Lessor retakes possession of the leased Premises.
Lessee's obligations to take any action and indemnify Lessor
pursuant to Paragraphs 9(f) and 15 will survive the termination of this Lease
and continue until Lessee's obligations have been fulfilled.
16. Defaults; Remedies.
(a) Defaults. The occurrence of any one or more of the
following events shall constitute a material default and breach of this Lease by
Lessee:
(1) The vacating or abandonment of the Premises by
Lessee for ten (10) days; or
(2) The failure by Lessee to make any payment of rent
or any other payment required to be made by Lessee hereunder, as and when due,
where such failure shall continue for a period of three (3) days after written
notice thereof from Lessor to Lessee; or
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(3) The failure by Lessee to observe or perform any
of the covenants, conditions, or provisions of this Lease to be observed or
performed by Lessee, other than described in Paragraph 16(a)(2) above, where
such failure shall continue for a period of thirty (30) days after written
notice hereof from Lessor to Lessee; provided, that if the nature of Lessee's
default is such that more than thirty (30) days are reasonably required for its
cure, then Lessee shall not be deemed in default if Lessee commenced such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion; or
(4) (i) The making by Lessee of any general
arrangement for the benefit of creditors; (ii) the filing by or against Lessee
of a petition to have Lessee adjudged bankrupt or a petition for reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(ii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days; or
(5) The discovery by Lessor that any financial
statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of
Lessee, any successor in interest of Lessee, or any guarantor of Lessee's
obligation hereunder, and any of them, was materially false.
(b) Remedies. In the event of any such material default or
breach by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting lessor in the exercise of any right or remedy which
Lessor may have by reason of such default or breach:
(1) Without written notice or demand to Lessee,
re-enter the demised Premises and remove all persons thereon by force or
otherwise without being liable to indictment, prosecution, or damages therefor;
and/or
(2) Relet the demised Premises or any part thereof
for the balance of the Lease term as agent for the Lessee and receive rents
therefor and apply the same first to the payment of the expenses of reasonable
redecorating and making necessary repairs to the Premises, attorneys' fees,
broker's commission, advertising, and all other reasonable expenses of the
Lessor in re-entering the Premises and reletting the same; and/or
(3) Elect to accelerate the rent to be paid under
this Lease to make it all immediately due and payable. Lessor shall also be
entitled to recover from Lessee any special damages suffered by Lessor as a
result of Lessee's default. These remedies are not in limitation of any other
remedies at law.
Lessee shall be responsible for all costs, including
attorneys' fees, incurred by Lessor in enforcing any of the terms and provisions
of this Lease Agreement. In addition and in
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connection with the reletting of the demised Premises for the account of Lessee
as hereinabove provided, Lessor shall have the right to declare all monthly
installments due and payable and to proceed to obtain a judgment therefor
against Lessee. Thereafter, all sums collected from the reletting of the
Premises, less costs in connection therewith, shall be applied on said judgment
or if the judgment has been paid, turned over to Lessee.
Further, in the event of default on the part of Lessee, the
Lessor shall have the right to pursue any legal remedy available to it, and
Lessor shall have the right to bring distress proceedings without in any way
affecting its right to accelerate the balance of rental due and to bring an
action therefor.
(c) Default by Lessor. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable time,
but in no event later than thirty (30) days after written notice by Lessee to
Lessor; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days are required for performance, then Lessor shall
not be in default if Lessor commences performance within such thirty (30) days
period and thereafter diligently prosecutes the same to completion.
17. Condemnation. If the Premises or any portion thereof are taken
under the power of eminent domain, or sold under the threat of the exercise of
said power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than twenty-five percent
(25%) of the land area of the Premises which is not occupied by any improvements
is taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing only within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice within ten (10) days
after the condemnation authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent shall be reduced in the proportion that the land area taken
bears to the total land area of the premises. Any award for the taking of all or
any part of the Premises under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any award for loss of or damage to
Lessee's trade fixtures and removable personal property. In the event that this
Lease is not terminated by reason of such condemnation, Lessor shall, to the
extent of severance damages received by Lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation
except to the extent that Lessee has been reimbursed therefor by the condemning
authority. Lessee shall pay any amount in excess of such severance damages to
complete such repair.
18. Surrender of Premises. Lessee shall, at the termination of the
Lease term or any renewal or extension thereof, quietly and peacefully surrender
said Premises in as good condition and substantially in the same condition as
such Premises existed at the commencement of the Lease term, ordinary wear and
tear or damage or loss by fire or the elements excepted, unless
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Lessee shall be responsible for maintenance and repair by the terms of this
Lease, in which case Lessee shall repair such damage, regardless of cause,
except damage by fire, provided otherwise in this Lease, damage hereunder,
Lessee shall have full authority to remove from the demised Premises all of its
merchandise and trade fixtures, notwithstanding the fact that the same may have
heretofore been bolted or otherwise affixed to such Premises, all conditioned
upon the Lessee not then being in default hereunder and the repair by Lessee of
any damage resulting from such removal.
19. General Provisions.
(a) Estoppel Certificate. Lessee shall at any time upon not
less than ten (10) days' prior written notice from Lessor execute, acknowledge,
and deliver to Lessor a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder, or specifying
such defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such statement within such time
shall be conclusive upon lessee (i) that this Lease is in full force and effect,
without notification except as may be represented by Lessor, (ii) that there are
no uncured defaults in Lessor's performance, and (iii) that not more than on two
(2) months' rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(b) Lessor's Liability. The term "Lessor" as used herein shall
mean only the owner or owners at the time in question of the fee title or a
lessee's interest in a ground lease of the Premises, and in the event of any
transfer of such title or interest, Lessor herein named (and in case of any
subsequent transfers the then grantor) shall be relieved from and after the date
of such transfer of all liability as respects Lessor's obligations thereafter to
be performed, provided that any funds in the hands of Lessor or the then grantor
at the time of such transfer, in which Lessee has an interest, shall be
delivered to the grantee. The obligations contained in this Lease to be
performed by Lessor shall, subject as aforesaid, be binding on Lessor's
successor and assigns, only during their respective periods of ownership.
(c) Severability. The invalidity of any provision of this
Lease as determined by a court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
(d) Interest on Past-Due Obligations. Except as expressly
herein provided, any amount due to Lessor not paid when due shall bear interest
at ten percent (10%) per annum from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee, nor on
any amounts upon which late charges are paid by Lessee.
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(e) Time of Essence. Time is of the essence.
(f) Captions. Article and paragraph captions are not a part
hereof.
(g) Incorporation of Prior Agreements; Amendments. This Lease
contains all agreements of the parties with respect to any matter mentioned
herein. No prior agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only signed by the parties
in interest of the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither a real estate broker, nor any
cooperating broker on this transaction, nor the Lessor or any employees or
agents of any of said persons, has made any oral or written warranties or
representations to Lessee relative to the condition or use by Lessee of said
Premises, and Lessee acknowledges that Lessee assumes all responsibility
regarding the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease, except as otherwise specifically stated in this Lease.
(h) Notices; Communications; Time. Any notice demand, or
communication given or required to be given hereunder shall be in writing and
shall be either (i) personally delivered, or by written notice hand-delivered to
Lessee at the foregoing address, or if to Lessee posted to the entrance to the
demised Premises, or (ii) transmitted by United States express, certified, or
registered mail, postage prepaid, at the parties' respective addresses appearing
on the first page hereof. Except as otherwise specified herein, all notices,
demands, and other communications given by express, certified, or registered
mail shall be deemed given when deposited into the United States mail, properly
addressed and with postage prepaid, and if given by personal delivery, on the
date of receipt. If the last day for giving notice or demand or performing any
act hereunder falls on a Saturday, Sunday, or day on which the main post offices
at Lakeland, Florida, is not open for regular transaction of business, the time
shall be extended to the next day that is not a Saturday, Sunday, or post office
holiday. Any party may change its address for purposes hereof by notice to the
others in accordance with the provisions of this paragraph.
(i) Waivers. No waiver by Lessor of any provision hereof shall
be deemed a waiver of any other provision hereof or of any subsequent breach by
Lessee of the same or any other provision. Lessor's consent to or approval of
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of
any provision hereof, other than the failure of Lessee to pay the particular
rent so accepted, regardless of Lessor's knowledge of such preceding breach at
the time of acceptance of such rent.
(j) Recording. Lessee shall not record this lease without
Lessor's prior written consent, and such recordation shall, at the option of
Lessor, constitute a non-curable default of Lessee hereunder.
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(k) Holding Over. If Lessee remains in possession of the
Premises or any part thereof after the expiration of the term hereof without the
express written consent of Lessor, such occupancy shall be a tenancy from month
to month at a rental in the amount of the last monthly rental, plus all other
charges payable hereunder, and upon all the terms hereof applicable to a
month-to-month tenancy.
(l) Cumulative Remedies. No remedy or election hereunder shall
be deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
(m) Covenants and Conditions. Each provision of this Lease
performance by Lessee shall be deemed both a covenant and a condition.
(n) Binding Effect and Choice of Law. Subject to any
provisions hereof restricting assignment or subletting by Lessee and subject to
the provisions of Paragraph 17(b), this Lease shall bind the parties and their
respective heirs, devisees, personal representatives, successors, and assigns.
This Lease shall be governed by the law of the State of Florida.
(o) Subordination. This Lease, at Lessor's option, shall be
subordinate to any ground lease, mortgage, or any other hypothecation for
security now or hereafter placed upon the real property of which the Premises
are a part, and to any and advances made on the security thereof and to all
renewals, modifications, consolidations, replacements, and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgage or ground lessor shall elect to have this Lease prior to the lien of
its mortgage or ground lease, and shall give written notice thereof to Lessee,
this lease shall be deemed prior to such mortgage or ground lease, whether this
Lease is dated prior or subsequent to the date of said mortgage or ground lease
or the date of recording thereof.
Lessee agrees to execute any documents required to effectuate
such subordination or to make this Lease prior to the lien of any mortgage or
ground lease, as the case may be, and failing to do so within ten (10) days
after written demand, does hereby make, constitute, and irrevocably appoint
Lessor at Lessee's attorney-in-fact and in Lessee's name, place, and stead, to
do so.
(p) Attorneys' Fees. If either party hereto brings an action
to enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, at or before trial or on appeal, shall be entitled to that
party's reasonable attorneys' fees and costs to be paid by the losing party as
fixed by the court. Such costs include, but are not limited to, costs of appeal,
court costs, and court reporter's fees.
(q) Lessor's Access. Lessor and Lessor's agents shall have the
right to enter the Premises at reasonable times for the purpose of inspecting
the same, showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements, or additions to the Premises or
to the building of which they are a part as Lessor may deem
-15-
necessary or desirable. Lessor may at any time place on or about the Premises
any ordinary "For Sale" signs, and Lessor may at any time during the last one
hundred twenty (120) days of the term hereof place on or about the Premises any
ordinary "For Lease" signs, all without rebate of rent or liability to Lease.
(r) Signs. Lessee must secure permission in writing from
Lessor to erect or place any awning, marquee, or sign of any type on the
exterior of the demised Premises. All signs shall comply with all governmental
sign ordinances. No sign may be erected which, in Lessor's opinion, is
offensive, not in conformity with signs of other tenants, or otherwise
objectionable. Upon the expiration of the Lease term, Lessee shall remove such
signs and shall repair any damage and close any holes caused by removal. Lessee
is responsible for all expenses regarding signs, including any electrical costs
with respect to lighted signs. Any property not removed from the Premises upon
the expiration of the term shall become the property of Lessor.
(s) Trash. Lessee shall be responsible for the removal and
proper disposal of all trash from the leased Premises. If Lessee fails to
promptly remove and dispose of its trash and keep the Premises in a clean,
sightly, and healthful condition, as provided in this Lease, Lessor or his
agents, servants, or employees may enter the Premises without such entrance
causing or constituting a termination of this Lease or an interference with
Lessee's possession of the Premises, and Lessor may remove all trash and place
the Premises in a clean, sightly, and healthful condition; and Lessee shall pay
Lessor, in addition to the rent hereby reserved, a minimum charge of Fifty
Dollars ($50.00) per occasion or Lessor's actual expenses if more than Fifty
Dollars ($50.00).
(t) Merger. The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not
work a merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
(u) Corporate Authority. If the Lessee is a corporation, the
individual executing this Lease on behalf of Lessee represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
(v) Consents. Wherever in this Lease the consent of one party
is required to an act of the other party, such consent shall not be unreasonably
withheld.
(w) Guarantor. In the event that there is a guarantor of this
Lease, said guarantor shall have the same obligations as Lessee for payment of
and all monetary claims or items under this Lease.
(x) Quiet Possession. Upon Lessee paying the fixed rent
reserved hereunder and observing and performing all of the covenants,
conditions, and provisions on Lessee's part to
-16-
be observed and performed hereunder, Lessee shall have quiet possession of
the premises for the entire term hereof subject to all of the provisions of this
Lease.
(y) Sidewalk and Common Areas. Lessee agrees not to obstruct
the sidewalk or common parking area in front of the demised Premises or the area
in the rear of the demised Premises. Lessee further agrees that it shall
maintain the good appearance of the sidewalk immediately in front of the demised
Premises and the area immediately to the rear of the demised Premises.
(z) Mechanic's Lien. Said Premises shall not be subject to any
lien under the Mechanic's Lien Law of the State of Florida as a result of any
improvements made by Lessee. Lessee shall not permit the Premises to be subject
to any lien for labor, services, or material furnished at the request of Lessee
or its agent, and it shall ensure that all amounts owed for labor, services, or
materials shall be paid for by it promptly.
(aa) Binding on Successors, Heirs, and Assigns: This Lease
Agreement shall be binding and obligatory upon the heirs, assigns and successors
of the respective parties.
(bb) Outside Lighting. An additional [Lessee will contract
directly with the city] $_______ per month for area lights per five thousand
(5,000) square feet of building space leased or fraction thereof shall be added
to the rent unless Lessee contracts directly with the City of Lakeland to
provide a minimum of one (1) area light per five thousand (5,000) square feet or
fraction thereof. The City of Lakeland is responsible for maintenance and
electricity for area lights per their contract agreement.
(cc) No Broker. Lessee represents to Lessor that the Premises,
or any portion of the buildings of which the Premises are a part, were not
presented to it or any person representing it by any broker or other person, and
that no broker or other person was involved in the leasing of the Premises, and
warrants that no claim for commission for said leasing shall be presented to
Lessor.
(dd) Radon Gas. Section 404.056(a), Florida Statutes, requires
that the following notification be given on real estate documents:
"Radon Gas: Radon is a naturally occurring
radioactive gas that, when it is accumulated in a
building in sufficient quantities, may present health
risks to persons who are exposed to it over time.
Levels of radon that exceed federal and state
guidelines have been found in buildings in Florida.
Additional information may be obtained from your
county public health unit."
(ee) Impact Fees. The Lessee shall be responsible for the
payment of any impact or growth fees or assessments which may be imposed upon
the demised Premises by any governmental agency by virtue of the Lessee's
occupation of the Premises, or by virtue of any
-17-
alterations to the Premises or increased use in the Premises by the Lessee or
any use by the Lessee which causes the imposition of such fees or assessments.
20. Special Conditions.
[ ] Attached as Exhibit "A"
[ ] None
IN WITNESS WHEREOF, the parties have hereunto set their hands and
seals.
Signed, sealed and delivered
in the presence of: JOE P. RUTHVEN INVESTMENTS
By:
- -------------------------------- --------------------------------
Joe P. Ruthven
- -------------------------------- "Lessor"
(Witnesses as to Lessor)
Signed, sealed and delivered
in the presence of: EARTH AND OCEAN SPORTS, INC.
By:
- -------------------------------- --------------------------------
Tony Glydon
- -------------------------------- "Lessee"
(Witnesses as to Lessee)
LESSEE'S HOME ADDRESS:
----------------------------------------------------------
DRIVER'S LICENSE #: DATE OF BIRTH STATE
---------------------- ------------- -------
PHONE: SOCIAL SECURITY #:
----------------------------------- ---------------------
EXHIBIT 11.1
EARTH AND OCEAN SPORTS, INC.
STATEMENT RE: EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, JANUARY 31,
----------- ----------- ----------- -----------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 36,700 $ 58,400 $ (290,674) $ (337,500) $ (321,026)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding 1,263,431 1,263,431 1,493,207 1,263,431 1,493,207
Common stock equivalents issued within
twelve months of initial public offering 776,289 776,289 546,513 776,289 546,513
Weighted average number of common and
common equivalent shares outstanding 2,039,720 2,039,720 2,039,720 2,039,720 2,039,720
========= ========= ========= ========= =========
Net income (loss) per share $ 0.02 $ 0.03 $ (0.14) $ (0.17) $ (0.16)
========== ========== ========== ========== ==========
</TABLE>
- ------
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
stock, stock options and stock warrants issued at prices below the initial
public offering price during the 12-month period immediately preceding the
initial filing date of the Company's Registration Statement of its initial
public offering have been included as outstanding for all periods presented. The
dilutive effect of the common stock equivalents was computed in accordance with
the treasury-stock method.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ RICHARD A. EISNER & COMPANY, LLP
Cambridge, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
After the 1.684575-for-1 stock split discussed in Note 11(a) to the
Company's financial statements is effected, we expect to be in a position
to render the following audit report.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JAN-31-1997 OCT-31-1996
<CASH> 4115 8055
<SECURITIES> 0 0
<RECEIVABLES> 2928574 2319553
<ALLOWANCES> 161500 151900
<INVENTORY> 3133588 3220612
<CURRENT-ASSETS> 6317971 5804950
<PP&E> 3716419 3666529
<DEPRECIATION> 1039794 886759
<TOTAL-ASSETS> 10174214 9664824
<CURRENT-LIABILITIES> 6692821 6768664
<BONDS> 0 0
0 0
0 0
<COMMON> 14932 14932
<OTHER-SE> (678634) (357608)
<TOTAL-LIABILITY-AND-EQUITY> 10174214 9664824
<SALES> 2874662 12404051
<TOTAL-REVENUES> 2874662 12404051
<CGS> 2030589 7585115
<TOTAL-COSTS> 2030589 7585115
<OTHER-EXPENSES> 953852 4267101
<LOSS-PROVISION> 27638 245857
<INTEREST-EXPENSE> 183609 596652
<INCOME-PRETAX> (321026) (290674)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (321026) (290674)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (321026) (290674)
<EPS-PRIMARY> (.16) (.14)
<EPS-DILUTED> (.16) (.14)
</TABLE>
