<PAGE>
As filed with the Securities and Exchange Commission on April 6, 2000
Registration No. 333-31674
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------
LOGICAL DESIGN SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7371 22-3710893
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
465 South Street, Suite 103
Morristown, New Jersey 07960
(973) 971-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marilynne White, Esq.
General Counsel
Logical Design Solutions, Inc.
465 South Street, Suite 103
Morristown, New Jersey 07960
(973) 971-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Joseph W. Armbrust, Jr., Esq. Philip J. Boeckman, Esq.
Michael T. Kohler, Esq. Cravath, Swaine & Moore
Brown & Wood LLP Worldwide Plaza
One World Trade Center 825 Eighth Avenue
New York, New York 10048 New York, New York 10019
(212) 839-5300 (212) 474-1000
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
-----------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 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 of 1933, check the following box and list the
Securities Act of 1933 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(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
-------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
<CAPTION>
Title of each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered per Share Offering Price(1) Fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............ 4,025,000 $14 $56,350,000 $14,877 (2)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, APRIL 6, 2000
PROSPECTUS
3,500,000 Shares
[LOGO]Logical Design Solutions
Common Stock
$ per share
--------
We are selling 3,500,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 525,000 additional shares of our common
stock from the selling stockholders that we identify in this prospectus to
cover over-allotments. We will not receive any proceeds from the sale of shares
by the selling stockholders.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $12.00 and $14.00 per share. We
have applied to have our common stock included for quotation on the Nasdaq
National Market under the symbol "LDSI".
--------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds, before expenses, to Logical Design Solutions $ $
==== ====
</TABLE>
If the underwriters exercise in full their option to purchase additional
shares of our common stock to cover over-allotments, the proceeds to the
selling stockholders will be $ . The underwriters are offering the shares
subject to various conditions. The underwriters expect to deliver the shares to
purchasers on or about , 2000.
--------
Salomon Smith Barney Lehman Brothers
SG Cowen
, 2000
<PAGE>
[Inside cover page]
GRAPHIC:
[Graphic representation of the Logical Approach. Arrows in circular arrangement
labeled with each phase of the Logical Approach: strategy, blueprinting,
construction and assessment. Circular arrangement of aspects of the Logical
Approach performed within these phases: usability engineering, visual design,
engagement management, quality assurance and project management.]
[Left side of gatefold]
GRAPHIC:
[Picture of user at our Usability Center. User sits at computer terminal while
two evaluators at console observe through a glass window.]
[Right side of gatefold]
GRAPHIC:
Text: "The Logical Approach is our proprietary methodology which we utilize in
each of our client engagements. We begin by analyzing the client's business and
technical requirements to identify strategic e-business solutions. During
implementation, we deploy a team of professionals from the business strategy,
creative design and technology development areas. To provide feedback after
implementation, our competitive assessments of industry, market and technology
trends help evaluate solutions and tailor them strategically. We customize the
Logical Approach to suit the parameters of each client engagement." The words
"usability," "design," "strategy" and "technology" are superimposed across the
top of the second and third pages of the fold out.
1
<PAGE>
You should rely only on the information contained in this prospectus.
Neither we nor any of the underwriters or the selling stockholders have
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted.
You should not assume that the information provided by this prospectus is
accurate as of any date other than the date on the front of this prospectus.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 9
Forward-Looking Statements and Market Data................................. 17
Trademarks................................................................. 17
Use of Proceeds............................................................ 18
Dividend Policy............................................................ 18
Capitalization............................................................. 19
Dilution................................................................... 20
Selected Financial Data.................................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 23
Business................................................................... 32
Management................................................................. 43
Certain Transactions....................................................... 53
Principal Stockholders..................................................... 58
Selling Stockholders....................................................... 59
Description of Capital Stock............................................... 60
Shares Eligible for Future Sale............................................ 63
Underwriting............................................................... 65
Legal Matters.............................................................. 67
Experts.................................................................... 67
Where You Can Find More Information........................................ 67
Index to Financial Statements.............................................. F-1
</TABLE>
------------------
Until , 2000 (25 days after the commencement of this offering), all
dealers that buy, sell or trade the common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the more detailed information regarding Logical
Design Solutions, the risks of purchasing our common stock discussed under
"Risk Factors," and our financial statements and the accompanying notes. Unless
the context otherwise requires, references to "we," "us" or "our company" are
to Logical Design Solutions, Inc.
Except as otherwise indicated, all information in this prospectus reflects
the amendment and restatement of our certificate of incorporation which will
occur prior to the closing of this offering and assumes no exercise of the
underwriters' option to purchase additional shares of common stock from the
selling stockholders to cover over-allotments.
Logical Design Solutions
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We assist our clients in defining
strategies utilizing Internet technologies and use our experience in creative
design and systems engineering to design, architect, develop and implement
solutions to execute those strategies. We work with our clients to anticipate
and evolve their e-business initiatives across industry and technology trends.
Our solutions enable our clients to conduct business with their employees,
customers and partners using emerging technologies.
Over our 10-year history, we have evolved our business from developing
company-wide internal sites to developing complex internal and external
solutions that link companies with their outside partners. The e-business
solutions we develop provide our clients with the ability to interact and
transact business electronically with their diverse range of business
constituents, including on a business-to-business-to-consumer basis. We believe
one of our main strengths has been our ability to extend our clients' e-
business models to this increasingly diverse universe of users while managing
complex content and creating an interactive, targeted user experience.
We offer our services to market leaders in the following targeted industries
in which we have knowledge and experience: communications, financial services,
healthcare, manufacturing and publishing. We focus on building long-term
relationships with our clients. For example, AT&T was our first client in 1990
and we continue to provide e-business solutions for them today. We have
developed a blue-chip client list with significant repeat business. Our top ten
clients in 1999 based on revenues on a pro forma basis, giving effect to our
acquisition of Jump! Information Technologies, Inc., were Lucent Technologies,
AT&T, The Thomson Corporation, Aetna/US Healthcare, The Chase Manhattan Bank,
Winstar Communications, The MONY Group, SBC Communications, Johnson & Johnson
and Philip Morris Companies. Our top four clients each provided us with more
than $1.5 million in revenues in 1999 and each of our top ten clients generated
more than $250,000 in revenues in 1999.
In 1999, we had revenues of $15.8 million and incurred a net loss of $8.9
million. In 1999, on a pro forma basis, we had revenues of $17.9 million and
incurred a net loss of $9.0 million. Net loss in 1999 includes non-cash charges
of $7.5 million relating to the increase in market value of our redeemable
warrants and $1.1 million relating to stock-based compensation. In 1998, we had
revenues of $11.3 million and incurred a net loss of $614,000. Net loss in 1998
includes a non-cash charge of $366,000 relating to the increase in market value
of our redeemable warrants.
4
<PAGE>
Our Market Opportunity
A growing number of organizations are demanding more advanced, customized
Internet solutions. The availability of high quality professionals experienced
in designing, developing and implementing advanced Internet solutions is
limited, making the market for recruiting and retaining these individuals
extremely competitive. As a result, an increasing number of businesses, from
start-ups to established companies, engage professional services firms that
have focused on hiring and training these professionals to help them design and
implement these solutions. However, the availability of high quality
professionals who can perform the services we offer is limited. As with any
professional services firm, if our employees leave or we need to increase their
compensation to retain them, we may be prevented from operating at a profit.
A May 1999 study by International Data Corporation estimates that the
worldwide market for Internet services will grow from $7.8 billion in 1998 to
$78.6 billion in 2003, representing a compound annual growth rate of nearly
60%. Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can combine industry
knowledge and effective program management to formulate a focused, strategic
and integrated approach to e-business and to efficiently design and implement
large-scale, complex e-business solutions.
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise. Led by industry managers with long-term industry and
consulting experience, our focus on specific industries, or vertical markets,
forms the foundation for our business development efforts. We sell our services
primarily to executive level management using our reputation of experience in
their industry, a client list of major corporations and case studies that
support our ability to deliver end-to-end solutions in similar situations.
Integrated Solutions. We offer our clients a suite of comprehensive services
that includes the strategy, design and technology capabilities necessary to
develop e-business solutions. Our methodology, the Logical Approach, enables us
to provide these services in an integrated manner to bridge between business
and information technology units.
User Experience. Our commitment to advancing the user experience is
reflected in our Usability Center, our user testing and research center. At our
Usability Center, we analyze user requirements, navigate content presentation
and test Web sites based on the experiences of representative users.
Long-Term Client Relationships. We focus on building long-term relationships
with our clients. We strive to become our clients' e-business partner of choice
and assist our clients in managing the evolution of their e-business.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
. deepening client relationships;
. penetrating further into our vertical markets;
. continuing to develop leading-edge technology capabilities;
. retaining and hiring outstanding professionals; and
. expanding geographically.
5
<PAGE>
Our Approach to Engagements: The Logical Approach
In each of our engagements, we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. Using our Logical
Approach, we service our engagements with a team of professionals from the
business strategy, creative design and technology development areas,
coordinated by a dedicated project manager. We integrate industry-specific
strategy with enterprise level design and technological capabilities to provide
customized e-business solutions. To accomplish this, we use the comprehensive
methodology of the Logical Approach to apply, integrate and coordinate our
services over several phases of the engagement.
Our Incorporation and Offices
We started our business in 1990 as a New Jersey corporation. We recently
reorganized as a Delaware corporation. Our principal offices are located at 465
South Street, Suite 103 in Morristown, New Jersey 07960. Our telephone number
is (973) 971-0100.
6
<PAGE>
THE OFFERING
Common stock offered................
3,500,000 shares
Common stock outstanding after this
offering(1)......................... 13,626,401 shares
Use of proceeds..................... For repayment of indebtedness and general
corporate purposes, including working
capital, expansion of operations and
sales and marketing capabilities and
possible acquisitions. We will not
receive any proceeds from the sale of
shares by the selling stockholders.
Proposed Nasdaq National Market "LDSI"
symbol..............................
- --------
(1) Includes 2,150,000 shares of common stock issuable upon the exercise of
warrants outstanding with an exercise price of $0.01 per share. Excludes
the following shares of common stock that may be issued in the future:
. 2,275,230 shares issuable under our 1997 Stock Plan and our 1999 Stock
Plan upon the exercise of outstanding employee options at a weighted
average exercise price of $3.10 per share, including 1,000,000 shares
issuable pursuant to options granted to our Chief Executive Officer in
March 2000 as contemplated in the purchase agreement relating to our
1997 issuance of warrants and debentures;
. 28,000 shares issuable upon the exercise of outstanding director options
at an exercise price of $5.00 per share;
. 56,000 shares issuable upon the exercise of outstanding director options
at the initial public offering price; and
. 1,873,670 unissued shares authorized for future awards under our 1999
Stock Plan, our 2000 Non-Employee Director Plan and our Employee Stock
Purchase Plan.
7
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus. Statement of operations data for the years
ended December 31, 1995, 1996 and 1997 reflect our combined results with an
affiliated company, Logical Design Solutions International, Inc. Effective
December 31, 1997, Logical Design Solutions International, Inc. merged with and
into us and ceased to exist. Statement of operations data for the year ended
December 31, 1999 include the results of operations of Jump! Information
Technologies, Inc. from the date of its acquisition on November 10, 1999
through December 31, 1999. Pro forma statement of operations data for the year
ended December 31, 1999 reflect the acquisition of Jump! as if this transaction
had occurred on January 1, 1999. The as adjusted balance sheet data give effect
to our sale of the shares of common stock offered by this prospectus, the
application of the proceeds received thereby and the exercise of the warrants
upon consummation of this offering.
<TABLE>
<CAPTION>
Actual Pro Forma
--------------------------------------- ------------
Year Ended December 31, Year Ended
--------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ------- ------- ------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293
Operating expenses:
Selling, general and
administrative....... 1,203 2,082 3,491 4,768 6,978 7,779
Depreciation and
amortization......... 91 139 336 653 942 1,160
Stock-based
compensation......... -- -- -- -- 1,077 1,077
------ ------ ------- ------- ------- -------
Total............... 1,294 2,221 3,827 5,421 8,997 10,016
------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505)
Net income (loss)....... 884 1,716 1,597 (614) (8,944) (9,011)
====== ====== ======= ======= ======= =======
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 1,432 $33,454
Working capital............................................ 5,378 37,375
Total assets............................................... 12,051 43,880
Senior subordinated debentures............................. 5,424 --
Junior subordinated debentures............................. 1,418 --
Redeemable warrants........................................ 10,431 --
Stockholders' equity (deficiency).......................... (7,960) 41,141
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the risks described below and the other information in this prospectus
including our financial statements and the related notes before you decide to
buy our common stock. The trading price of our common stock could decline due
to any of these risks, and you could lose all or part of your investment.
We have a limited number of significant clients. If we lose a major client or
significant project, our revenues could be adversely affected.
We generate substantially all of our revenue from a limited number of major
clients. If we lose any major clients or any of our clients cancel or
significantly reduce a large project's scope, our results of operations could
be materially and adversely affected by the loss of revenue, and we would have
to seek to replace the client with new business. In 1999, our three largest
clients, Lucent, AT&T and Aetna/US Healthcare, accounted for approximately 28%,
24% and 12%, respectively, of our revenue (24%, 22% and 10%, respectively, on a
pro forma basis including our acquisition of Jump! Information Technologies,
Inc.). In addition, Research Institute of America, a subsidiary of The Thomson
Corporation, contributed approximately 13% of our revenue on a pro forma basis
in 1999. Our five largest clients contributed approximately 74% of our revenue
in 1999, on both an actual and a pro forma basis. In 1998, our two largest
clients, AT&T and Lucent, accounted for approximately 47% and 27%,
respectively, of our revenue. Our largest clients have historically been AT&T
and Lucent, which is a spin-off from AT&T. Mimi Brooks, our Chairwoman and
Chief Executive Officer, was employed with AT&T before she left to found our
company in 1990. Our five largest clients contributed approximately 83% of our
revenue in 1998. This risk is particularly relevant in the context of the
recent trend toward consolidation in our targeted industries. If one of our
major clients were to be acquired, there can be no assurance that the acquiring
company will continue to use our services and our revenues could decrease
materially. There is also the risk that one or more of our major customers will
replace us with one of our competitors or their in-house information technology
department.
We have a recent history of losses and expect to incur losses in the future.
We incurred net losses of $8.9 million and $614,000 during the years ended
December 31, 1999 and December 31, 1998, respectively. In addition, after
giving pro forma effect to our acquisition of Jump! our net loss for 1999 would
have been $9.0 million. We have been in business since 1990, and, as of
December 31, 1999, we had an accumulated deficit of $9.3 million. We expect to
continue to incur losses for the foreseeable future. We also expect to continue
to incur increasing selling, general and administrative expenses. As a result,
we will need to generate significant revenues to achieve profitability. If we
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
We may not be able to hire and retain highly skilled employees, which could
affect our ability to compete effectively.
Our business is people intensive and if we cannot recruit and retain highly
qualified employees, our business would suffer substantially. To succeed, we
must hire, train, motivate, retain and manage employees who are highly skilled
in the rapidly changing extranet, intranet and Internet technologies.
Individuals who have these skills and can perform the services we offer are
scarce. Competition for these individuals, therefore, is intense. We might not
be able to hire enough of them or to effectively train, motivate, retain and
manage the employees we do hire. This could hinder our ability to complete
existing projects and bid for new projects. In addition, because the
competition for qualified employees in our industry is intense, hiring,
training, motivating, retaining and managing employees with the strategic,
technical and creative skills we need is both time-consuming and expensive. The
competition for employees has increased our cash and non-cash compensation
9
<PAGE>
costs. These costs may increase after the offering because prospective
employees may perceive that the stock option component of our compensation may
not be as valuable as it was prior to the offering.
In addition, we use subcontractors to supplement our staffing requirements
and satisfy particular skills required on individual client engagements.
Subcontractors generally cost us more than our own personnel and, consequently,
we usually generate lower gross margins when using subcontractors. To the
extent we continue to use subcontractors, our gross margins may be lower.
We are growing quickly. Future growth of our business could make it difficult
to manage our resources.
Our rapid growth has stretched, and could continue to stretch, our
management, personnel, systems and resources. Our business has grown
substantially, both organically and through our acquisition of Jump! in late
1999, and we intend to continue to expand our operations in the foreseeable
future. Our sales have increased from $4.5 million in 1995 to $15.8 million in
1999 ($17.9 million in 1999 on a pro forma basis including our acquisition of
Jump!). As we grow quickly and add employees, managing employee utilization
will be more difficult and may lead to more volatility in our margins. To grow
our company, we must not only replace the employees who leave, but also hire
significant numbers of new employees. Our number of employees increased from
101 to 135 during 1999, and we have hired 25 additional employees from January
1, 2000 through March 31, 2000. We expect that we will need to continue to hire
and retain management personnel and other employees and continue to invest in
our systems and facilities. Our management has limited experience managing a
business of our size and no experience managing a public company. We are a
small company and our ability to absorb mistakes is more limited than many of
our competitors. If we do not manage the growth of our business effectively,
our results of operations and financial condition could be materially affected
by a lack of adequate personnel, systems or resources.
We have many client contracts that can be cancelled without penalty. If clients
terminate contracts with us on little or no notice, our results of operations
could suffer.
Most of our clients can reduce or cancel their contracts for our services
without penalty and with little or no notice. If a significant client or a
number of small clients terminate, significantly reduce or modify business
relationships with us, our results of operations could be materially and
adversely affected by the loss of revenue, and we would have to seek to replace
the client with new, significant business. Consequently, you should not predict
or anticipate our future revenue based on the number of clients we have, the
length of time we have had them or the number and size of our existing
engagements. When a client postpones, modifies or cancels an engagement, we
must seek to shift our employees to other engagements to minimize the resulting
adverse impact on our operating results. In addition, our operating expenses
are relatively fixed and cannot be reduced on short notice.
The form of our contracts with our clients may result in difficulty in
collecting fees, protecting our intellectual property and protecting ourselves
from liability.
Our work is typically performed for clients on the basis of a written
statement of work that is accepted by the client, which acceptance may be oral.
To the extent the statements of work do not fully set forth our legal rights,
we could experience difficulty in collecting fees, protecting our intellectual
property and protecting ourselves from liability.
We depend on fixed-price and retainer contracts, and our business may be
negatively impacted if we fail to accurately estimate the time and resources
necessary for our services.
As part of our strategy, we generally enter into fixed-price and retainer
fee contracts, rather than contracts based on payment for time and materials.
In order to manage our growth effectively, we must set fixed-price and retainer
fees accurately, maintain high employee utilization rates and maintain the
quality of our services. If
10
<PAGE>
we miscalculate the resources or time we need for these contracts, our gross
margins could decrease materially. Often, we fix the price before we finalize
the design specifications, which increases the risk that we will misprice these
contracts. The increasing complexity of our engagements, as described below,
makes accurately estimating our time and resources more difficult.
We expect to incur significant charges to operations during 2000 that will
adversely affect our net income and may cause our stock price to decline.
During 2000, we expect to record several significant charges to operations.
These charges include the following: (1) an anticipated charge of $15.6 million
in connection with stock-based compensation; (2) an anticipated charge of $17.5
million, assuming an initial public offering price of $13.00, for the accretion
to fair market value of our redeemable warrants; and (3) an anticipated charge
of $1.8 million for the accretion to redemption value of our senior
subordinated debentures. These charges will have a significant adverse impact
on our net income in 2000 and they may cause our stock price to decline after
this offering. In addition, we will continue to incur non-cash charges in
connection with our stock-based compensation from 2001 through 2004, which will
negatively impact our net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
The increased size and complexity of our engagements may make it more difficult
to meet client expectations and a failure to do so could damage our reputation
and business.
The complexity and average dollar size of our engagements has grown
significantly while the timeframe for completing engagements has generally
decreased. As our client engagements become larger and more complex and must be
completed in shorter timeframes, it becomes more difficult to manage the
development process and the likelihood and consequences of any mistakes
increase. Any inability by us to complete client solutions in a timely manner,
any defects contained in the solutions we deliver and any other failure by us
to achieve client expectations, could have a material adverse effect on our
reputation with the affected client and generally within our industry.
The e-business professional services market is highly competitive and has low
barriers to entry. If we cannot effectively compete, our revenues may decline.
Our market is new, intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase
over time because:
. there are few barriers to entering the e-business professional services
market;
. our industry is consolidating; and
. many of our competitors are forming strategic relationships.
We compete against other e-business professional services firms, as well as
a number of different types of companies that are not exclusively in the e-
business professional services business. These competitors, which generally
offer some of the professional services we offer, include:
. traditional strategic consulting firms;
. interactive advertising agencies;
. professional services groups of computer equipment companies;
. traditional systems integrators; and
. internal information technology departments of current or potential
clients.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing
11
<PAGE>
resources than we do. These competitors may be in a stronger position to
respond quickly to new or emerging technologies and changes in client
requirements. These competitors may also be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to potential clients, employees and strategic partners.
Further, our competitors may perform e-business services that are equal or
superior to our services or that achieve greater market acceptance than our
services. We have no patented or other proprietary technology that would
preclude or inhibit competitors from duplicating our services. We must rely on
the skills of our personnel and the quality of our client service. We cannot
assure you that we will be able to compete successfully against existing or
future competitors.
Our quarterly revenues and operating results are likely to fluctuate
significantly, which may cause our stock price to decline.
Our quarterly revenues and operating results have varied in the past and are
likely to vary significantly from quarter to quarter. This fluctuation may
cause our operating results to be below the expectations of securities analysts
and investors, and the price of our stock may fall. Factors that could cause
quarterly fluctuations include:
. the loss of a significant customer or engagement;
. our employee utilization rate, including our ability to transition
employees quickly from completed or terminated engagements to new
engagements;
. the introduction of new services or changes in pricing policies by us or
our competitors;
. our ability to manage costs, including employee costs and our selling,
general and administrative expenses;
. our clients' information technology budgeting;
. delays in commencing services on client projects; and
. the seasonality of our client engagements.
As a result of these factors, we believe that quarter-to-quarter comparisons
of our revenues and operating results are not necessarily meaningful.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview" for further discussion of the factors that may cause
our quarterly results to fluctuate.
Lack of growth or decline in Internet usage will cause our business to suffer.
We have derived a substantial portion of our revenue from projects involving
the Internet. If Internet usage does not continue to grow, our ability to
increase our revenues from these projects will be limited. The Internet is new
and rapidly evolving, and a number of factors may inhibit Internet usage. These
factors include inadequate network infrastructure, security concerns,
inconsistent service quality and lack of cost-effective, high-speed service.
For example, recent attacks by computer hackers on major e-commerce Web sites
have heightened concerns regarding the security and reliability of the
Internet. On the other hand, if Internet usage grows, the Internet
infrastructure may not support the demands this growth will place on it. The
Internet's performance and reliability may decline. In addition, outages and
delays have occurred throughout the Internet network infrastructure and have
interrupted Internet service. If these outages or delays occur frequently in
the future, Internet usage could grow more slowly or decline.
We have also derived a majority of our revenue from extranet and intranet
projects, and the usage of extranets and intranets may be affected by many of
the same factors affecting Internet usage.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
12
<PAGE>
. security;
. cost and ease of Internet access;
. intellectual property ownership;
. privacy;
. taxation; and
. liability issues.
Any costs we incur because of these factors could cause our gross margins to
decrease materially.
If we fail to keep pace with changing technologies, we may lose clients.
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. If we cannot
keep pace with these changes in a timely and cost-effective manner, we could
lose clients to competitors and our revenues could decrease. To achieve our
goals, we need to develop strategic e-business solutions that keep pace with
continuing changes in industry standards, information technology and client
preferences. We will have to improve the performance features and reliability
of our services to adapt to rapidly changing technologies. We could also incur
substantial costs to keep pace with changing technologies.
Our efforts to increase recognition of the Logical Design Solutions brand
nationally may not be successful, which may limit our ability to expand our
client base and attract acquisition candidates and employees.
We believe that building the Logical Design Solutions brand is critical for
expanding our client base, hiring and retaining employees and attracting
acquisition candidates. Historically, our branding efforts have been on a
regional basis and otherwise narrowly focused. Many of our competitors are
already nationally recognized and have active national advertising campaigns.
If we do not build the Logical Design Solutions brand on a national basis, we
may not be able to effect our growth strategy. We also believe that reputation
and name recognition will grow in importance as the number of companies
competing in the market for e-business professional services increases. The
branding of our name will also depend largely on our success in providing high
quality, reliable and cost-effective services. If clients do not perceive our
services as meeting their needs, or if we fail to market our services
effectively, we may be unsuccessful in maintaining and strengthening our brand.
If we fail to promote and maintain our brand, or incur excessive expenses to do
so, we could lose market share and our ability to grow our revenue may be
negatively impacted.
We depend on our Chief Executive Officer and our Chief Technology Officer, and
the loss of either of them may adversely affect our ability to attract and
retain customers and to compete effectively.
We believe that our success depends on the continued employment of our
founder, President and Chief Executive Officer, Mimi Brooks, and our Chief
Technology Officer, David W. Stoltzfus. If Ms. Brooks or Mr. Stoltzfus were
unable or unwilling to continue in their present positions, it would be very
difficult to replace them and our business could be adversely affected. Ms.
Brooks is particularly important to our business in providing strategic
direction and managing our customer relationships. Mr. Stoltzfus is
particularly important to our business in setting the strategic direction for
our use of technology and building our technological capabilities.
Future acquisitions or expansion could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations and your investment.
A component of our growth strategy is to expand geographically and by
acquisition. Establishing new office locations will likely require substantial
financial and management resources. We cannot assure you that
13
<PAGE>
we will select appropriate markets to enter, open new offices efficiently or
manage new offices profitably. Our failure to accurately assess these issues
could negatively impact our business. To date, we have made one acquisition. We
may not be able to make additional acquisitions on commercially acceptable
terms, or at all. Any acquisitions we may make in the future will also involve
risks. If we do acquire a company, we could have difficulty retaining and
assimilating that company's personnel. We may also incur substantial goodwill
in connection with any acquisitions which will cause our annual amortization
charge to increase. In addition, we could have difficulty integrating acquired
products, services or technologies into our operations. These difficulties
could disrupt our ongoing business, distract our management and employees,
increase our expenses and decrease revenue or gross margins. Furthermore, we
may incur debt or issue equity securities to pay for any future acquisitions.
If we issue equity securities, your ownership share of our company will be
reduced.
If we are unable to protect our intellectual property or if others claim we are
infringing on their intellectual property, we could incur significant expenses
or be prevented from providing our services.
Litigation to enforce our intellectual property rights, which consist of a
combination of copyright, trademark and trade secret laws and contractual
restrictions, could be expensive, divert management resources and may not
adequately protect our business. Existing trade secret and copyright laws
afford us only limited protection. Third parties may attempt to disclose,
obtain or use our processes and methodologies. This is particularly true in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. Others may independently
develop and obtain patents or copyrights for technologies that are similar or
superior to our processes and methodologies.
Some intellectual property rights developed during client engagements are
retained by the clients as our customer contracts are work-for-hire
arrangements. Although we believe that our services do not infringe upon the
intellectual property rights of third parties or our clients, we cannot assure
you that claims will not be asserted against us in the future by third parties
or our clients that our solutions or technologies are infringing upon their
intellectual property rights. We expect that the risk of infringement claims
against us and our clients will increase if more of our competitors obtain
patents for software products and processes.
We typically indemnify our clients against claims that we have violated a
third party's intellectual property rights. Assertion of claims against us or
our clients could result in litigation, and we may not be able to prevail in
the litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms, or
at all. Any of these claims, regardless of their outcome, could harm our
reputation, damage our relationships with clients, result in substantial costs
to us and divert management's attention from our operations.
While we provide customized technology solutions for specific client
engagements, part of our marketing and design strategy includes the reuse of
components of these solutions. Issues relating to the ownership of and rights
to use solutions can be complicated and there can be no assurance that disputes
will not arise that affect our ability to resell or reuse these solutions. Some
of our contracts may limit our ability to resell or reuse a solution and could
require us to incur additional expenses to develop new solutions for future
projects.
We are, and will continue to be, controlled by our founder and Chief Executive
Officer, Mimi Brooks, which could result in her taking actions that other
stockholders do not approve.
After this offering, our founder, President and Chief Executive Officer,
Mimi Brooks, will own approximately 52% of our outstanding common stock (or
55.1% if Ms. Brooks exercises her options), 49% (or 52.9% if Ms. Brooks
exercises her options) if the underwriters' over-allotment option is exercised
in full. This significant concentration of our common stock and the voting
power of that common stock in a single stockholder could have a depressive
effect on our stock price, since that stockholder will be able to control most
matters requiring stockholder approval. Among other things, Ms. Brooks will be
able to control or influence to a significant extent the outcome of all matters
required to be submitted to our stockholders for approval, including decisions
relating to the election of directors and significant corporate matters such as
decisions about acquisitions, sales of assets, mergers or similar transactions
and amendments to our certificate of incorporation and bylaws.
14
<PAGE>
Anti-takeover provisions of our amended and restated certificate of
incorporation and by-laws and provisions of Delaware law could delay or prevent
a change of control that you may favor.
Provisions of our amended and restated certificate of incorporation and
bylaws that will become effective upon the closing of this offering and
provisions of applicable Delaware law may discourage, delay or prevent a merger
or other change of control that stockholders may consider favorable. The
provisions of our amended and restated certificate of incorporation and bylaws,
among other things, will:
. divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms;
. limit the right of stockholders to remove directors;
. regulate how stockholders may present proposals or nominate directors
for election at annual meetings of stockholders; and
. authorize our board of directors to issue preferred stock in one or more
series, without stockholder approval.
The provisions of our amended and restated certificate of incorporation and
bylaws and provisions of Delaware law could:
. have the effect of delaying, deferring or preventing a change of control
of our company;
. discourage bids for our common stock at a premium over the market price;
or
. impede the ability of the holders of our common stock to change our
management.
See "Description of Capital Stock--Anti-Takeover Effects of Our Amended and
Restated Certificate of Incorporation and Bylaws and Provisions of Delaware
Law."
This offering's net proceeds may be allocated in ways with which you and other
stockholders may not agree.
We have not determined how most of the proceeds of this offering will be
spent. Approximately $8.7 million of the net proceeds will be used to repay our
outstanding senior subordinated debentures and junior subordinated debentures.
Our management may spend net proceeds from this offering remaining after the
repayment of that debt in ways with which you and our other stockholders may
not agree. See "Use of Proceeds."
The total price investors will pay for our common stock in this offering will
substantially exceed the value of our assets after subtracting our liabilities.
The price you will pay for our common stock will be substantially higher
than the book value per share of our outstanding stock after this offering. You
will suffer immediate and substantial dilution. Based on an assumed initial
public offering price of $13.00 per share, the dilution will be $9.89 per share
in the net tangible book value of the common stock issued in this offering. In
addition, investors in this offering will contribute 99.8% of the total amount
paid by all investors in our company but will own only 25.7% of the shares
outstanding.
Our stock has not traded publicly, and after this offering its market price may
fluctuate widely.
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could fluctuate substantially due
to:
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
15
<PAGE>
. technological innovations;
. changes in earnings estimates or recommendations by analysts; or
. general economic conditions.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. Fluctuations in our
common stock's market price may affect our visibility and credibility in the e-
business solutions market.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
After this offering, we will have 13,626,401 shares of common stock
outstanding. Sales of a large number of shares, or the availability of a large
number of shares for sale, could adversely affect the market price of our
common stock and could impair our ability to raise funds in additional stock
offerings. Following the expiration of a 180-day "lock up" period to which
substantially all of the shares held by our current stockholders will be
subject, the holders whose shares are subject to that lock-up period will in
general be entitled to dispose of their shares. Moreover, Salomon Smith Barney
Inc. may in its sole discretion and at any time without notice, release all or
any portion of the securities subject to the lock-up agreements.
The shares of common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by an affiliate of ours, the sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or any other applicable exemption under the
Securities Act.
As soon as practicable after this offering, we intend to register the shares
of common stock subject to outstanding stock options or reserved for issuance
under our stock plans. As of March 31, 2000, options to purchase 2,303,230
shares of common stock were outstanding.
After this offering, the holders of approximately 2,150,000 shares of our
common stock will have rights, subject to some conditions, to require us to
file registration statements covering their shares or to include their shares
in registration statements that we may file for ourselves or other
stockholders. By exercising their registration rights and selling a large
number of shares, these holders could cause the price of our common stock to
decline. Furthermore, if we were to include in a company-initiated registration
statement shares held by those holders pursuant to the exercise of their
registration rights, those sales could impair our ability to raise needed
capital by depressing the price at which we could sell our common stock.
You should be aware that there are benefits of this offering to existing
stockholders.
The underwriters named in this prospectus may purchase up to 525,000
additional shares of common stock from several of our existing stockholders to
cover over-allotments. The average price per share paid by these existing
stockholders is $.0084 per share. Based on an assumed initial offering price of
$13.00 per share and assuming the underwriters exercise the over-allotment
option in full, the net price per share that will be paid to the selling
stockholders is $12.09. Therefore, the average realized gain per share to the
selling stockholders would be $12.08. See "Dilution."
Further, our senior subordinated debentures and junior subordinated
debentures are held by some of our existing stockholders. We intend utilize a
portion of the proceeds of this offering to pay off these debentures.
16
<PAGE>
FORWARD-LOOKING STATEMENTS AND MARKET DATA
Many statements made in this prospectus under captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere are forward-looking
statements that are not based on historical facts and may prove to be
inaccurate. The words "expects," "anticipates," "estimates," "intends,"
"believes" and similar expressions are intended to identify forward-looking
statements. Forward-looking statements involve risks and uncertainties, and
there are important factors that could cause actual results to differ
materially from those expressed or implied by forward-looking statements. The
forward-looking statements made in this prospectus are based on management's
good faith best estimates through the date on which the statements are made.
This prospectus contains estimates of market size and growth and other
information related to the Internet. These estimates have been included in a
study published by International Data Corporation, a market research firm.
These estimates are based on various assumptions about events, trends and
activities. We have not independently verified the information and assumptions
on which these market estimates are based. However, we have no reason for
believing that the information and assumptions on which the market estimates
are based are incorrect or not reasonable. If any of the assumptions are wrong,
then the market estimates may also be wrong.
TRADEMARKS
"Logical Design Solutions" is a registered trademark of Logical Design
Solutions, Inc. and "The Logical Approach" is a service mark of Logical Design
Solutions, Inc. This prospectus also includes trademarks and trade names of
other parties.
17
<PAGE>
USE OF PROCEEDS
We will receive estimated proceeds of approximately $40.7 million from this
offering, net of underwriting discounts and estimated expenses, and based on an
assumed initial public offering price of $13.00 per share, the midpoint of the
expected price range. We will not receive any proceeds from the sale of shares
by the selling stockholders.
We intend to use approximately $32.0 million of the offering's net proceeds
for general corporate purposes, including working capital, expansion of
operations and sales and marketing activities and increases in personnel. We
will use approximately $8.7 million to pay off the total amount of outstanding
principal and accrued interest on our senior subordinated debentures and junior
subordinated debentures.
The senior subordinated debentures and the junior subordinated debentures
are held by:
. Mimi Brooks, our founder, Chief Executive Officer and Chairwoman;
. Samedan, Inc., which is wholly-owned by Paul F. Lozier, one of our
directors;
. Summit Partners, which is a significant stockholder affiliated with
Kevin Mohan, one of our directors; and
. Darren Bryden, a significant stockholder and former director and
executive officer.
Therefore, these related parties will receive a significant portion of the
proceeds of this offering.
The $5.54 million aggregate principal amount of outstanding senior
subordinated debentures accrue interest at a rate of 9.0% per annum and mature
on March 19, 2002. The senior subordinated debentures were issued at an
original issue discount of approximately $300,000 plus an additional discount
of $2.3 million attributable to our redeemable warrants issued in connection
with the senior subordinated debentures, resulting in an effective yield of
21%. The $1.11 million aggregate principal amount of outstanding junior
subordinated debentures accrue interest at 9.0% per annum and mature on March
19, 2003. We used the funds received from the issuance of the senior
subordinated debentures for working capital purposes. The junior subordinated
debentures were issued in connection with our conversion from a subchapter "S"
corporation to a subchapter "C" corporation and represented a distribution of
the retained earnings in the company. See "Certain Transactions."
We may use a portion of the proceeds for strategic acquisitions. From time
to time, in the ordinary course of business, we evaluate potential
acquisitions. We have no present understandings or agreements with respect to
any acquisition.
Pending use of the net proceeds for the above purposes, we intend to invest
the funds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We intend to retain future earnings, if any, to finance the expansion of its
business and do not expect to pay any cash dividends in the foreseeable future.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Liquidity and Capital Resources."
18
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of December 31, 1999 on
an actual basis and an as adjusted basis. The as adjusted basis presentation
reflects:
. the issuance of 2,150,000 shares of common stock upon the exercise of
outstanding warrants at an exercise price of $0.01 per share upon
consummation of this offering;
. amendment and restatement of our certificate of incorporation which will
occur prior to the closing of this offering; and
. our sale of 3,500,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the midpoint
of the expected price range.
The as adjusted basis presentation assumes no exercise of the underwriters'
option to purchase additional shares to cover over-allotments and also does not
include 1,205,918 shares of common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 or 1,097,312 shares of common stock
issuable upon exercise of stock options issued subsequent to December 31, 1999.
You should read this information together with the financial statements and
notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................. $ 1,432 $ 33,454
======= ========
Capital lease obligations--current........................ $ 76 $ 76
======= ========
Senior subordinated debentures............................ $ 5,424 --
Junior subordinated debentures............................ 1,418 --
Capital lease obligations, less current portion........... 199 $ 199
Redeemable warrants....................................... 10,431 --
Stockholders' equity (deficiency)
Preferred stock, par value $0.01 per share; no shares
authorized (actual); 10,000,000 shares authorized,
none issued and outstanding (as adjusted).............. -- --
Common stock, par value $0.01 per share; 15,000,000
shares
authorized, 7,969,801 shares issued and
outstanding (actual); 60,000,000 shares authorized,
13,619,801 shares issued and outstanding (as
adjusted).............................................. 6,713 75,360
Deferred stock compensation............................. (5,404) (4,107)
Accumulated deficit..................................... (9,269) (30,112)
------- --------
Total stockholders' equity (deficiency)................. (7,960) 41,141
------- --------
Total capitalization.................................. $ 9,512 $ 41,340
======= ========
</TABLE>
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, was
approximately $1.6 million, or $0.16 per share of common stock. We have
determined pro forma net tangible book value per share by subtracting
intangible assets from pro forma stockholders' equity and dividing that number
by 10,119,801 pro forma shares of common stock outstanding as of December 31,
1999. The preceding pro forma information gives effect to the exercise of
warrants to purchase 2,150,000 shares of common stock at $0.01 per share prior
to completion of this offering.
If we sell 3,500,000 shares of common stock in this offering at an assumed
initial public offering price of $13.00 per share and assuming our receipt of
the estimated net proceeds therefrom, our pro forma adjusted net tangible book
value as of December 31, 1999, would have been approximately $42.3 million, or
$3.11 per share. This represents an immediate increase in the net tangible book
value of $2.95 per share to existing stockholders and an immediate dilution of
$9.89 per share to new investors. The following table illustrates this per
share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value as of December 31, 1999......... $0.16
Increase per share of common stock attributable to the offering... 2.95
-----
Pro forma net tangible book value after the offering.............. 3.11
------
Net tangible book value dilution to new investors................. $9.89
=====
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors (at an assumed initial offering price of
$13.00 per share and without giving effect to the underwriting discount and
estimated offering expenses).
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Paid
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 10,119,801 74.3% $ 85,237 0.2% $.0084
New investors................. 3,500,000 25.7 45,500,000 99.8 13.00
---------- ---- ----------- ---- ------
Total....................... 13,619,801 100% $45,585,237 100% $ 3.35
========== ==== =========== ==== ======
</TABLE>
The table above does not include (1) options outstanding as of December 31,
1999 to purchase a total of 1,205,918 shares of common stock with a weighted
average per share exercise price of $2.15 or (2) options to purchase 1,106,550
shares of common stock issued subsequent to December 31, 1999 with a weighted
average exercise price of $4.17. If the options were to be exercised in full
for cash, pro forma net tangible book value per share after the offering would
remain $3.11, and there would be no increase per share attributable to new
investors and therefore no dilution. The table above also does not include
options to purchase 56,000 shares of common stock issued subsequent to December
31, 1999 exercisable at the initial public offering price.
20
<PAGE>
SELECTED FINANCIAL DATA
The following tables contain selected financial data as of December 31 in
each of the years 1995 through 1999 and for each of the years in the five-year
period ended December 31, 1999. The selected financial data for each of the
years in the five-year period ended December 31, 1999 have been derived from
our financial statements, which have been audited by Ernst & Young LLP,
independent auditors. Statement of operations data for the years ended 1995,
1996 and 1997 reflect our combined results with an affiliated company, Logical
Design Solutions International, Inc. Effective December 31, 1997, Logical
Design Solutions International merged with and into us and ceased to exist. The
selected financial data are qualified by reference to, and should be read in
conjunction with, our financial statements and the notes to those financial
statements, included elsewhere in this prospectus.
Statement of operations data for the year ended December 31, 1999 include
the results of operations of Jump! Information Technologies, Inc. from the
effective date of its acquisition on November 10, 1999. The pro forma statement
of operations data assume that the acquisition of Jump! occurred on January 1,
1999. The pro forma data may not, however, be indicative of the results of
operations that actually would have occurred had the Jump! acquisition occurred
at the beginning of the period presented or of the results of operations that
we may achieve in the future. The pro forma statement of operations data should
be read in conjunction with our unaudited pro forma financial information and
our financial statements and Jump!'s financial statements, which have been
audited by Ernst & Young LLP, included elsewhere in this prospectus. The as
adjusted balance sheet data give effect to our sale of the shares of common
stock offered in this prospectus, the application of the proceeds received
thereby and the exercise of the warrants upon consummation of this offering.
<TABLE>
<CAPTION>
Actual Pro Forma
----------------------------------------- ------------
Year Ended
Year Ended December 31, December 31,
----------------------------------------- ------------
1995 1996 1997 1998 1999 1999
------ ------ ------- ------- ------- ------------
(in thousands, except per share data)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940
Cost of revenue......... 2,288 3,339 4,377 5,562 7,541 8,647
------ ------ ------- ------- ------- -------
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293
------ ------ ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative....... 1,203 2,082 3,491 4,768 6,978 7,779
Depreciation and
amortization......... 91 139 336 653 942 1,160
Stock-based
compensation......... -- -- -- -- 1,077 1,077
------ ------ ------- ------- ------- -------
Total............... 1,294 2,221 3,827 5,421 8,997 10,016
------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505)
Interest expense, net... (25) (1) (510) (724) (962) (959)
Other income............ 9 8 12 14 20 25
------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... 904 1772 2,062 (729) (9,146) (9,162)
Income tax provision
(benefit).............. 20 56 465 (115) (202) (151)
------ ------ ------- ------- ------- -------
Net income (loss)....... $ 884 $1,716 $ 1,597 $ (614) $(8,944) $(9,011)
====== ====== ======= ======= ======= =======
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
---------------------------------- 1999
1995 1996 1997 1998 1999 As Adjusted
----- ------ ------ ------ ------ ------------
(in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.... $ 306 $1,355 $5,104 $3,510 $1,432 $33,454
Working capital.............. 827 1,740 6,051 5,327 5,378 37,375
Total assets................. 1,828 3,594 9,429 10,352 12,051 43,880
Capital lease obligations,
less current portion........ 10 2 -- 275 199 199
Senior subordinated
debentures.................. -- -- 3,558 4,400 5,424 --
Junior subordinated
debentures.................. -- -- 1,194 1,301 1,418 --
Redeemable warrants.......... -- -- 2,560 2,926 10,431 --
Stockholders' equity
(deficiency)................ 1,031 2,257 29 (284) (7,960) 41,141
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data," our financial statements and the notes to those financial statements
elsewhere in this prospectus.
Overview
Our revenue is generally comprised of fees generated for professional
services. We provide our services on a fixed-price, retainer, and time and
materials basis. In 1999, approximately 40% of our revenue was derived from
fixed-price contracts, 38% from retainer contracts and 22% from time and
materials contracts. On a pro forma basis, after giving effect to our
acquisition in November 1999 of Jump! Information Technologies, Inc., time and
material contracts would have generated approximately 31% of our 1999 revenues,
as all of Jump!'s contracts were time and material contracts. For fixed-price
and retainer-based engagements, we evaluate the technical complexity, work
effort required and the project's timetable to estimate and propose fixed
prices for these projects. A senior management team member must approve all of
our fixed-price proposals. For these contracts, we recognize revenue using a
percentage-of-completion method primarily based on costs incurred. We make
provisions for estimated losses on uncompleted contracts on a contract-by-
contract basis and recognize these provisions in the period in which the losses
are determined. To date, these losses have not been significant. Several of our
larger clients have entered into retainer-based billing arrangements. Under
these arrangements, clients are invoiced an equal amount on a monthly basis
over the term of the contract for the core engagement team. The retainer
agreements also provide for additional staff to be added to the engagement on
an as-needed basis. Fees associated with the additional staff are recorded on a
time and materials basis and are invoiced to the client on a monthly basis.
Most retainer agreements are for a term of one year, and include a renewal
clause. Consistent with our focus of establishing long-term client
relationships, our goal is to increase the number of retainer-based
relationships. This provides us with greater predictability of revenues and to
date have usually resulted in higher utilization for the core engagement team.
For time and materials contracts we recognize revenue as we perform services
and incur costs. We are generally reimbursed for reasonable expenses under all
of our contracts.
Revenue from a limited number of clients has comprised a substantial portion
of our revenues and is expected to represent a substantial portion of our
revenues in the foreseeable future. In 1997 and 1998, our five largest clients
accounted for approximately 82% and 83% of our revenue, respectively. In 1999,
our five largest clients accounted for approximately 74% of our revenue on both
an actual and a pro forma basis including our acquisition of Jump!, and Lucent
and AT&T accounted for approximately 28% and 24%, respectively (24% and 22%,
respectively, on a pro forma basis). AT&T and Lucent accounted for
approximately 55% and 26% of our retainer-based revenue in 1999, respectively.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our business, financial condition and results of
operations.
Cost of revenue represents our most significant expense and consists
primarily of salaries, bonuses and associated employee benefits for personnel
directly assigned to client projects and non-reimbursed direct expenses
incurred to complete projects. We plan to increase the number of our project
personnel in order to support our planned growth. We have hired 25 additional
employees from January 1, 2000 through March 31, 2000. There is increased
competition for qualified personnel that has increased our cash and non-cash
compensation costs. Our gross margins are impacted by our employee utilization.
Employee utilization can be affected by multiple factors, including rapid
growth and reductions in the number or size of projects in any period.
Reduction in employee utilization rates could cause further decline in gross
profit as a percentage of revenue. Cost of revenue also includes fees paid to
subcontractors for work performed on our projects. Subcontractors generally
cost us more than our own personnel and, consequently, we usually generate
lower gross margins when using subcontractors. In 1999, subcontractors
accounted for approximately 13% of our cost of revenue. In 1998 and 1997,
subcontractors accounted for approximately 3% and 12% of our cost of revenue,
23
<PAGE>
respectively. Subcontractors are called upon to supplement our staffing
requirements and satisfy particular skills required on individual client
engagements.
Selling, general and administrative costs consist of salaries and bonuses
for executive and selected senior management, finance, recruiting, selling and
marketing and administrative personnel and associated employee benefits,
facilities costs, computer and office equipment, operating leases, training,
promotional expenses, travel expenses and all other corporate costs. Our sales
and marketing expenses are expected to increase as a percentage of revenue in
the future as we enhance our selling efforts. We expect selling, general and
administrative expenses to increase in absolute dollars as we expand our direct
sales force, open new offices, increase our recruiting efforts and incur
additional costs related to the growth of our business and operation as a
public company.
Depreciation and amortization consists of depreciation of property and
equipment using the straight-line method, generally over three to seven years,
based on the estimated useful lives of the respective assets. Goodwill from the
Jump! acquisition described below is being amortized over three years. We
expect to expand some of our current offices and expand geographically by
opening new offices in 2000 and 2001. This will require us to purchase
additional furniture, office equipment and computer and networking equipment,
all of which will increase our depreciation expense. If we make more
acquisitions, we may also have more goodwill to amortize.
Stock-based compensation expense in 1999 consists of grants to employees of
options to purchase approximately 400,000 shares of our common stock at an
exercise price below the deemed fair market value for financial reporting
purposes of the common stock on the dates of grant. In addition, in connection
with the acquisition of Jump!, we issued 109,500 shares of our common stock to
the former stockholders of Jump! which are subject to vesting provisions. These
1999 option grants and stock issuances resulted in a non-cash compensation
charge of $6.5 million, of which $1.1 million has been recorded through
December 31, 1999. In addition, since January 1, 2000, we have granted to our
employees and our Chief Executive Officer options to purchase 1,106,550 shares
of our common stock at exercise prices below the deemed fair market value for
financial reporting purposes of the common stock on the dates of grant. The
remaining balance of $5,405,000 from the 1999 option grants and stock issuances
and the non-cash compensation charge of $12.9 million resulting from the 2000
grants, based on deemed fair market value at December 31, 1999, will be
amortized over the remaining vesting schedule as follows:
<TABLE>
<CAPTION>
Amount of Deferred Stock
Compensation
------------------------
<S> <C>
Year Ended December 31,
2000........................ $15,612,000
2001........................ 1,349,000
2002........................ 742,000
2003........................ 599,000
2004........................ 12,000
</TABLE>
Increase in market value of redeemable warrants consists primarily of the
impact of accreting to fair market value our redeemable warrants, the value of
which increased substantially in 1999 based on a substantial increase in the
valuation of our company.
During fiscal 2000, we will also record significant charges to operations in
connection with the accretion to fair market value of the redeemable warrants
immediately prior to their exercise in connection with this offering and the
accretion to redemption value of the senior subordinated debentures. Based upon
the midpoint of the expected price range of this offering, the fiscal 2000
charge related to the redeemable warrants is estimated to be approximately
$17.5 million. Based upon an assumed redemption date of May 1, 2000, the charge
for the year ended December 31, 2000 relating to the accretion to redemption
value of the senior subordinated debentures will be approximately $1.8 million.
24
<PAGE>
Interest expense represents the accrual of interest on our senior and junior
debentures which is added to the principal over the term of the debentures. As
described in this prospectus under the caption "Certain Transactions," the
debentures were issued in 1997 to Summit Ventures IV, L.P. and other investors,
including our officers and directors. Interest income consists of interest
earned on funds held in a money market account.
In addition to the impact of the aforementioned non-cash charges, our
financial results may fluctuate from quarter to quarter based on such factors
as the type of project, number, complexity, size, scope and lead time of
projects in which we are engaged. More specifically, these fluctuations can
result from the contractual terms and degree of completion of these projects,
any delays incurred in connection with projects, employee utilization rates,
the adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects and general economic conditions.
In any given quarter, most of our revenues have been attributable to a
limited number of customers and we expect this to continue. As a result, the
cancellation or deferral of any of these engagements in a particular quarter
could significantly reduce our revenues, which would hurt our financial
performance. In addition, most of our operating expenses, particularly
personnel and rent, are relatively fixed and based upon anticipated revenues.
Consequently, unanticipated variations in the number, or progress toward
completion, of our projects may cause significant variations in operating
results in any particular quarter and could result in losses for that quarter.
An unanticipated termination of a major project, a client's decision not to
proceed with a project we anticipated or the completion during a quarter of
several major client projects, could result in underutilized employees and have
a material adverse effect on us. Further, a failure to book an expected order
in a given quarter or the need to provide training to our employees on new
technologies would not be offset by a corresponding reduction in costs and
could adversely affect our operating results. As a result of these factors, we
believe that period-to-period comparisons of our revenues and operating results
are not necessarily meaningful.
The sales cycle for our services is variable and several months may elapse
from the time we contact a potential client to the time we obtain approval to
commence an engagement. To market our services successfully, we typically must
educate our potential clients on the types and benefits of our services, which
can require significant time and resources. In addition, our clients often must
complete thorough internal and external pricing analyses and operating
comparisons, competitive evaluations and internal approval processes before
purchasing our services. Once a client contracts to purchase our services, the
time required to begin rendering our services may take longer than we plan.
Delays in obtaining client approvals or implementing services for our clients
may adversely effect our revenues and reputation and cause our operating
results to fluctuate.
In addition, we generally experience more activity in the second half of the
year, as clients attempt to complete projects by year end, than in the
beginning of the year, when many projects are just being contemplated and not
yet underway. Also, our work associated with developing and updating employee
self-service extranets for benefit plans has generally resulted in increased
activity in the second and third quarters as clients prepare for employee open
enrollment periods. If we do not have a sufficient number of employees
available to handle this increased activity, we generally hire subcontractors
to staff these projects. In the past, increased activity in the third quarter
has caused us to increase our use of subcontractors in that quarter, which has
had a negative affect on our gross margins in that quarter.
Recent Acquisition
In November 1999, we completed a merger with Jump! Information Technologies,
Inc. by exchanging 109,500 shares of our common stock, subject to vesting
provisions, and $525,000 in cash for all of the common stock of Jump!. In
addition, Jump!'s employee options were converted into options to purchase
25,339 shares of our common stock, of which 12,668 were unvested. We incurred
acquisition costs of $149,000 and issued 12,671 vested stock options valued at
$168,000 associated with the Jump! acquisition, which are included in goodwill.
The 109,500 shares of common stock we issued are subject to vesting provisions
and, including the
25
<PAGE>
unvested stock options granted, resulted in stock-based compensation of
$432,000 and deferred compensation charges of $1.3 million, based upon the
estimated fair market value of the shares at December 31, 1999, which will be
charged to operations over the vesting periods. Since these charges are based
upon the fair market value of the stock over the vesting schedule, the amounts
could be higher than those estimated at December 31, 1999. These shares will
become fully vested upon the completion of this offering. We accounted for this
transaction as a purchase. The historical information presented in this section
includes the results of operations of Jump! since the date of its acquisition.
Results of Operations
We had revenues of $15.8 million and $11.3 million and incurred net losses
of $8.9 million and $614,000 in 1999 and 1998, respectively. In 1999, on a pro
forma basis, we had revenues of $17.9 million and incurred a net loss of $9.0
million. Net losses for 1999 and 1998 include non-cash charges for the increase
in market value of our redeemable warrants and stock-based compensation
charges. In addition, we incurred non-cash charges for interest expense related
to the accretion to redemption value of our senior subordinated debentures.
Excluding these non-cash charges, our net losses would have been $362,000 for
1999 and $248,000 for 1998. Our loss from operations in both 1999 and 1998 were
negatively impacted by increased selling, general and administrative expenses
and personnel costs incurred by us in anticipation of future growth.
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue.................................................. 100.0% 100.0 % 100.0 %
Cost of revenue.......................................... 39.6 49.1 47.6
----- ----- -----
Gross profit............................................. 60.4 50.9 52.4
----- ----- -----
Operating expenses:
Selling, general and administrative.................... 31.6 42.1 44.1
Depreciation and amortization.......................... 3.0 5.8 5.9
Stock-based compensation............................... -- -- 6.8
----- ----- -----
Total................................................ 34.6 47.9 56.8
----- ----- -----
Income (loss) from operations............................ 25.8 3.0 (4.4)
Increase in market value of redeemable warrants.......... (2.6) (3.2) (47.3)
Interest expense, net.................................... (4.5) (6.2) (6.0)
----- ----- -----
Income (loss) before income taxes........................ 18.7 (6.4) (57.7)
Income tax provision (benefit)........................... 4.2 (1.0) (1.3)
----- ----- -----
Net income (loss)........................................ 14.5% (5.4)% (56.4)%
===== ===== =====
</TABLE>
1999 Compared to 1998
Revenue. Revenue increased $4.5 million, or 39.8%, to $15.8 million in 1999
from $11.3 million in 1998. This increase in revenue reflects increases in the
number of billed employee hours, the number of clients and the complexity of
engagements undertaken. The number of clients increased from 32 in 1998 to 44
in 1999. Jump! accounted for $266,000, or 5.9%, of the increase in our 1999
revenues.
Cost of Revenue. Cost of revenue increased $2.0 million, or 35.6%, to $7.5
million in 1999 from $5.6 million in 1998. The increase during 1999 was due
primarily to increases in the number of personnel needed to service the
increasing number and complexity of our engagements. Salary costs also
increased in 1999. Our professional staff increased to 95 at December 31, 1999
from 77 at December 31, 1998. As a percentage of revenue, cost of revenue
decreased to 47.6% during 1999 as compared to 49.1% during 1998.
26
<PAGE>
Gross Profit. Gross profit increased $2.5 million, or 43.9%, to $8.3 million
in 1999 from $5.8 million in 1998. The gross profit dollar increase reflects
the increase in revenue during 1999. As a percentage of revenue, gross profit
increased to 52.4% during 1999 as compared to 50.9% during 1998. The percentage
increase reflects an increase in our employee utilization, which was partially
offset by increased salary costs.
Selling, General and Administrative. Selling, general and administrative
costs increased $2.2 million, or 46.4%, to $7.0 million in 1999 from $4.8
million in 1998. This increase was due primarily to increased salaries for
sales, marketing and administrative personnel and increased facility costs.
Selling and marketing costs increased $1.3 million, or approximately 136%, to
$2.2 million in 1999 from $924,000 in 1998. The increase was due to increased
personnel-related costs and sales promotion efforts. Facility and related costs
increased approximately $434,000, or approximately 53%, to $1.25 million in
1999 from $816,000 in 1998. The increase in facility and related costs was due
to the addition of the New York City office in July 1998. As a percentage of
revenue, selling, general and administrative expenses increased to 44.1% in
1999 as compared to 42.1% in 1998.
Depreciation and Amortization. Depreciation and amortization costs increased
$289,000, or 44.2%, to $942,000 in 1999 from $653,000 in 1998. This increase
was due primarily to a full year of depreciation on the fixed assets in our New
York City office, which opened in July 1998, and goodwill associated with the
acquisition of Jump!. Goodwill charged to operations in 1999 totaled $33,000.
Stock-based Compensation. We incurred charges of $1.1 million in 1999 for
costs associated with our employee stock option plan. We had no stock-based
compensation in 1998.
Increase in Market Value of Redeemable Warrants. The increase in market
value for redeemable warrants amounted to $7.5 million in 1999 compared to
$366,000 in 1998. This increase in value is based on the substantial increase
in the valuation of our company at December 31, 1999 compared to the prior
year.
Interest Expense, Net. Interest expense, net increased $239,000, or 32.9%,
to interest expense of $963,000 in 1999 from interest expense of $724,000 in
1998. The increased interest expense is due to the accrual of interest on our
senior and junior debentures which is added to the principal over the term of
the debentures. Interest expense of $1.2 million was offset by interest income
of $201,000 earned during 1999.
Income Tax Provision (Benefit). Operating losses generated in 1999 were
carried back for tax purposes creating a tax benefit. The $202,000 income tax
benefit in 1999 represents a benefit from combined federal and state income
taxes at an effective rate of 2.3%. The income tax benefit of $115,000 in 1998
represented a benefit from combined federal and state income taxes at an
effective rate of 15.8%. These effective tax rates are lower than the statutory
rate primarily due to the impact of the accretion to market value of the
redeemable warrants.
1998 Compared to 1997
1998 was a building year for us. We opened our New York City office in July
1998, reorganized our professional staff into areas of expertise and rearranged
our sales organization using a vertical market approach.
Revenue. Revenue increased $277,000, or 2.5%, to $11.3 million in 1998 from
$11.1 million in 1997. Our ability to increase our revenues in 1998 was
negatively impacted by the factors set forth above.
Cost of Revenue. Cost of revenue increased $1.2 million, or 27.1%, to $5.6
million in 1998 from $4.4 million in 1997. This increase was due primarily to
the cost of additional professional staff and increased salary costs. We had 77
professional staff at December 31, 1998 and 63 at December 31, 1997. As a
percentage of revenue, cost of revenue increased to 49.1% during 1998 as
compared to 39.6% during 1997.
Gross Profit. Gross profit decreased $907,000, or 13.6%, to $5.8 million in
1998 from $6.7 million in 1997. The gross profit decrease reflects the increase
in cost of revenue during 1998. As a percentage of
27
<PAGE>
revenue, gross profit decreased to 50.9% during 1998 as compared to 60.4%
during 1997. The percentage decrease reflects the increase in the number of
employees, increased salary costs and a reduction in utilization.
Selling, General and Administrative. Selling, general and administrative
costs increased $1.3 million, or 36.6%, to $4.8 million in 1998 from $3.5
million in 1997. This increase was due primarily to increases in personnel, the
leasing of our New York City office and related facility costs to support
growth of our operations. Selling and marketing cost increased $110,000, or
approximately 14%, to $924,000 in 1998 from $814,000 in 1997. The increase was
due to increased personnel related costs and sales promotion efforts. Facility
and related costs increased approximately $334,000, or approximately 69%, to
$816,000 in 1998 from $482,000 in 1997. The increase in facility and related
costs was due to the addition of our New York City office in July 1998. As a
percentage of revenue, selling, general and administrative expenses increased
to 42.1% in 1998 compared to 31.6% in 1997.
Depreciation and Amortization. Depreciation and amortization costs increased
$317,000, or 94.5%, to $653,000 in 1998 from $336,000 in 1997. This increase
was due primarily to depreciation on our New York City office fixed assets
purchased in 1998.
Increase in Market Value of Redeemable Warrants. The increase in market
value of redeemable warrants amounted to $366,000 in 1998 compared to $288,000
in 1997. The increase in this charge is due to the redeemable warrants being
outstanding for a full year in 1998 compared to approximately nine months in
1997.
Interest Expense, Net. Interest expense, net increased $214,000, or 42%, to
$724,000 in 1998 from $510,000 in 1997. This increase was due primarily to
interest expense we incurred from our senior and junior debentures. Interest
expense of $985,000 was offset by interest income of $261,000 earned in 1998.
Income Tax Provision (Benefit). Operating losses generated in 1998 were
carried back for tax purposes creating a tax benefit. The $115,000 tax benefit
in 1998 represents a benefit from combined federal and state income taxes at an
effective rate of 15.8%. The income tax expense of $465,000 in 1997 represented
an expense from combined federal and state income taxes at an effective rate of
22.6%.
Quarterly Results of Operations
The following tables set forth unaudited quarterly financial data for the
periods indicated. We derived this data from unaudited financial statements,
and, in the opinion of our management, they include all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial results for the periods. Results of operations for any previous
fiscal quarter do not necessarily indicate what results may be for any future
period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,965 $2,636 $2,774 $2,955 $ 3,234 $ 3,365 $ 4,212 $ 5,028
Cost of revenue......... 1,237 1,346 1,456 1,523 1,582 1,584 2,216 2,159
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 1,728 1,290 1,318 1,432 1,652 1,781 1,996 2,869
------ ------ ------ ------ ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 1,038 1,021 1,289 1,417 1,425 1,608 1,492 2,453
Depreciation and
amortization.......... 115 138 194 209 223 234 225 260
Stock-based
compensation.......... -- -- -- -- 12 70 175 820
------ ------ ------ ------ ------- ------- ------- -------
Total.................. 1,153 1,159 1,483 1,626 1,660 1,912 1,892 3,533
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 575 131 (165) (194) (8) (131) 104 (664)
Increase in market value
of redeemable
warrants............... (96) (85) (90) (95) (1,749) (1,771) (1,936) (2,049)
Other income (expense).. (186) (187) (195) (142) (234) (232) (249) (227)
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... 293 (141) (450) (431) (1,991) (2,134) (2,081) (2,940)
Income tax provision
(benefit).............. 47 (23) (71) (68) (49) (52) (46) (55)
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... $ 246 $ (118) $ (379) $ (363) $(1,942) $(2,082) $(2,035) $(2,885)
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 41.7 51.1 52.5 51.5 48.9 47.1 52.6 43.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 58.3 48.9 47.5 48.5 51.1 52.9 47.4 57.0
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative........ 35.0 38.7 46.5 48.0 44.1 47.8 35.4 48.8
Depreciation and
amortization.......... 3.9 5.2 7.0 7.1 6.9 7.0 5.3 5.2
Stock-based
compensation.......... -- -- -- -- 0.4 2.0 4.2 16.3
----- ----- ----- ----- ----- ----- ----- -----
Total.................. 38.9 43.9 53.5 55.1 51.4 56.8 44.9 70.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 19.4 5.0 (6.0) (6.6) (0.3) (3.9) 2.5 (13.3)
Increase in market value
of redeemable
warrants............... (3.2) (3.2) (3.2) (3.2) (54.1) (52.6) (45.9) (40.7)
Other income (expense).. (6.3) (7.1) (7.0) (4.8) (7.2) (6.9) (6.0) (4.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 9.9 (5.3) (16.2) (14.6) (61.6) (63.4) (49.4) (58.5)
Income tax provision
(benefit).............. 1.6 (0.9) (2.6) (2.3) (1.5) (1.5) (1.1) (1.1)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 8.3% (4.4)% (13.6)% (12.3)% (60.1)% (61.9)% (48.3)% (57.4)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
We believe that period to period comparisons of our operating results are
not necessarily meaningful and that you should not rely on these comparisons as
indicators of future performance. See "Risk Factors--Our quarterly revenues and
operating results are likely to fluctuate significantly, which may cause our
stock price to decline."
Liquidity and Capital Resources
In June 1997, we entered into a $1.5 million line of credit with First Union
National Bank to be used for working capital purposes. The interest rate on
amounts borrowed are at First Union's Prime Rate. The credit facility expires
in June 2000, and will renew automatically for one additional year at the sole
discretion of First Union. The credit facility contains restrictions on us,
including a prohibition on the payment of cash dividends by us, and requires us
to comply with financial tests and to maintain specified financial ratios. As
of the date of this prospectus, we had no outstanding borrowings under the
credit facility.
On March 4, 1998, First Union extended to us an irrevocable standby letter
of credit in the amount of $549,000, as security for our New York office lease,
to expire on June 1, 1999. The letter of credit has been automatically extended
and will continue to automatically extend for annual periods through June 1,
2005. The amount of funds available decreases to $320,500 for the third year of
the letter, to $274,500 for the fourth year of the letter and to $137,250 after
the fourth year until the letter's expiration. The funds will only be made
available if and when we are in default on the terms of our office lease.
On February 9, 2000, First Union extended to us a standby letter of credit
in the amount of $970,667, as security for our new Morristown, New Jersey
office lease, to expire on June 15, 2010. The amount of funds available
decreases to $767,000 for the fourth, fifth and sixth years of the letter and
to $546,000 after the sixth year until the letter's expiration. The funds will
only be made available if and when we are in default on the terms of our office
lease.
Cash and cash equivalents decreased to $1.4 million at December 31, 1999,
from $3.5 million at December 31, 1998. In 1999, our net cash used in operating
activities was approximately $850,000, compared to net cash provided by
operating activities of approximately $514,000 in 1998. We experienced an
increased use of cash in 1999, primarily attributable to an expansion of our
business and an increase in our accounts receivable. Accounts receivable
increased to $5.5 million at December 31, 1999 from $2.8 million at
December 31, 1998. This increase in accounts receivable is attributable to our
increased revenues in the third
29
<PAGE>
and fourth quarters of 1999 compared to the same period in 1998. The average
age of our outstanding accounts receivables were approximately 87 days and 94
days as of December 31, 1999 and 1998, respectively. As of March 31, 2000, we
have collected approximately $4.8 million of the $5.5 million of accounts
receivable outstanding at December 31, 1999. In 1999, we also spent
approximately $493,000, net of cash acquired, in connection with our
acquisition of Jump!.
Unbilled engagement revenues increased approximately $270,000 from
approximately $17,000 at December 31, 1998 to approximately $287,000 at
December 31, 1999. This increase was primarily due to growth in the size and
number of our projects. All unbilled engagement revenues receivables as of
December 31, 1999 are expected to be invoiced during 2000. Unbilled engagement
revenues represent engagement revenues recognized in excess of amounts billed.
Capital expenditures of approximately $680,000, $1.8 million and $750,000
for 1999, 1998 and 1997, respectively, were used primarily for computer
equipment, office equipment and leasehold improvements related to our growth.
Capital expenditures for 2000 are expected to be approximately $2.5 million and
will be made principally for computer equipment, internally used software
purchases, office furniture and leasehold improvements to support our growth.
Our capital expenditure budget for 2000 includes our move from our current
Morristown facility to a larger facility, also in Morristown. Our capital
expenditure budget for 2000 does not include any other amounts we may spend on
expanding existing offices or building or acquiring new offices.
In 1999 and 1998, net cash used in financing activities was not significant.
In 1997, our net cash provided by financing activities was approximately
$1,952,000. We generated approximately $4,867,000 of cash from the issuance of
the senior subordinated debentures and redeemable warrants, net of deferred
financing costs, and made cash distributions to stockholders of approximately
$2,896,000, which was based on estimated available subchapter "S" earnings and
estimated required personal income tax payments.
We anticipate that the net proceeds of this offering, together with existing
sources of liquidity and funds generated from operations, should provide
adequate cash to fund our currently anticipated cash needs through at least the
next 18 months. To the extent we are unable to fund our operations from cash
flows, we may need to obtain financing from external sources in the form of
either additional equity or indebtedness. There can be no assurance that
additional financing will be available to us at all, or that, if available, the
financing will be obtainable on terms favorable to us.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards of derivative
instruments, including some derivative instruments embedded in other contracts,
and for hedging activities. In July 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not currently engage in derivative activity and do not expect the
adoption of this standard to have a material effect on our results of
operations, financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The SEC subsequently issued SAB 101A which delays
the implementation date of certain provisions of SAB 101. As a result, the
application of the guidance in SAB 101 will be required to be implemented no
later than our second quarter of 2000. We do not expect the adoption of SAB 101
to have a material effect on our financial statements.
30
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
We do not currently hold any derivative instruments and we do not engage in
hedging activities. Also, we do not have any outstanding variable interest rate
debt and currently do not enter into any transaction denominated in a foreign
currency. Thus, our direct exposure to interest rate and foreign exchange
fluctuations is minimal.
31
<PAGE>
BUSINESS
Overview
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We assist our clients in defining
strategies utilizing Internet technologies and use our experience in creative
design and systems engineering to design, architect, develop and implement
solutions to execute those strategies. We work with our clients to anticipate
and evolve their e-business initiatives across industry and technology trends.
Our solutions enable our clients to conduct business with their employees,
customers and partners using emerging technologies.
Since 1995, we have focused on providing solutions based on Internet
technologies. We have evolved our business from developing business-to-employee
high-volume, secure corporate intranet sites to developing complex business-to-
business extranets that link companies with their outside partners. Over the
last two years, we have extended our reach to service the diverse range of
constituents of our clients' businesses, including business-to-business-to-
consumer. We believe one of our main strengths has been our ability to extend
our clients' e-business models to an increasingly diverse universe of users
while managing complex content and creating an interactive, targeted user
experience. In 1999, approximately 80% of our revenues were attributable to
clients with which we had repeat business.
In each of our engagements we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. We focus on providing
our services to market leaders in the following targeted industries in which we
have knowledge and experience: communications, financial services, healthcare,
manufacturing and publishing.
We focus on building long-term relationships with our clients. For example,
AT&T was our first client in 1990 and we continue to provide e-business
solutions for them today. We have developed a blue-chip client list with
significant repeat business. Our top ten clients in 1999 based on revenues on a
pro forma basis, giving effect to our acquisition of Jump! Technologies, Inc.,
were Lucent Technologies, AT&T, The Thomson Corporation, Aetna/US Healthcare,
The Chase Manhattan Bank, Winstar Communications, The MONY Group, SBC
Communications, Johnson & Johnson and Philip Morris Companies. Our top four
clients each provided us with more than $1.5 million in revenues in 1999 and
each of our top ten clients generated more than $250,000 in revenues in 1999.
Industry Background
Increasing acceptance of the Internet and related corporate extranet and
intranet technologies has created numerous opportunities for companies seeking
growth and increased efficiencies in highly competitive and rapidly changing
markets. An intranet is a network which provides similar services (distribution
of information) within an organization to those provided by the Internet but
which is not necessarily connected to the Internet. An extranet is the
extension of a company's intranet out onto the Internet to allow selected
customers, suppliers and others to access the company's private data and
applications via the Internet. The Internet enables companies, consumers,
business partners, suppliers and employees to interact and transact business on
a one-to-one and one-to-many basis. In order to achieve this manner of
connectivity, a growing number of organizations are demanding more advanced,
customized Internet solutions. In addition, organizations are seeking to
differentiate themselves from their competitors by providing enhanced
experiences for their end-users with features that are easy to use and offer
personalized service.
Although companies are eager to capture the opportunities presented by the
Internet, the strategy, design and implementation of an effective e-business
solution requires special skills and expertise. These special skills include:
. assessing the strategic implications of the Internet for a business;
. integrating new and existing business processes;
32
<PAGE>
. developing creative initiatives for brand, content, and user experience;
and
. implementing the advanced technology required to support these
solutions.
The availability of high quality professionals experienced in designing,
developing and implementing advanced Internet solutions is limited, making the
market for recruiting and retaining these individuals extremely competitive. As
a result, an increasing number of businesses, from start-ups to established
companies, engage professional services firms to help them design and implement
these solutions. A May 1999 study by International Data Corporation estimates
that the worldwide market for Internet services will grow from $7.8 billion in
1998 to $78.6 billion in 2003, representing a compound annual growth rate of
nearly 60%.
Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can combine industry
knowledge and effective program management to formulate a focused, strategic
and integrated approach to e-business and to efficiently design and implement
large-scale, complex e-business solutions.
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise
Led by industry managers with long-term industry and consulting experience,
our vertical market focus and industry practice model form the foundation for
our business development efforts. We target the following industries:
communications, financial services, healthcare, manufacturing and publishing.
We sell our services primarily to executive level management using our
reputation of experience in their industry, a client list of major corporations
and case studies that support our ability to deliver end-to-end solutions in
similar situations. During our sales process, we seek to demonstrate our
ability to work within complex technical situations, while bringing a business
focus to the potential engagement.
Integrated Solutions
We offer our clients a suite of comprehensive services that covers strategy,
design and technology. Our methodology, the Logical Approach, enables us to
provide these services in an integrated manner to bridge between business and
information technology units. By using our multidisciplinary teams of
strategists, designers and technologists we provide the diverse skills required
to deliver comprehensive solutions. This ability to provide comprehensive
services offers our clients a single source in building an e-business solution.
User Experience
We seek to leverage our experience and credentials in usability engineering
as a competitive differentiator. We believe our usability capabilities help our
clients assess the needs of their increasingly demanding and diverse customer
base and engineer a user experience that is personalized, measurable and a
competitive market advantage. Our commitment to advancing the user experience
is reflected in our Usability Center, which we use to analyze user
requirements, navigate content presentation and test Web sites. Our focus on
the end user's experience is designed to provide our clients' employees,
customers and partners with a positive user experience, which leads to higher
levels of customer satisfaction and loyalty.
Long-Term Client Relationships
We focus on building long-term relationships with our clients. We strive to
become our clients' e-business partner of choice and assist our clients in
managing the evolution of their e-business. As we work with our clients, we
gain knowledge about their business, technical environment and internal
decision-making processes.
33
<PAGE>
We become familiar with a client's business and work closely with the client to
understand, predict and address its evolving business needs. Our focus on long-
term relationships has resulted in significant repeat business from our
clients.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
Deepen Client Relationships
We focus on growing our business with existing clients and leveraging these
relationships into new, expanded engagements. By offering our clients
integrated strategy, design and technology e-business solutions, we strive to
be the primary e-business services provider for our clients. We also believe
that our record of client satisfaction has led to long-term relationships with
our clients and to an increase in the amount, scope and complexity of services
requested by many of our clients. For instance, we began our work for AT&T in
1990 and we continue to provide a range of e-business solutions for them today.
In addition, our relationship with AT&T allowed us to obtain Lucent as a client
immediately following its spin-off from AT&T. Lucent remains a major client
today.
Further Penetrate our Vertical Markets
We have assembled industry practice groups of professionals experienced in
the business practices and processes of our targeted industries. We believe
that our industry focus enables us to provide effective solutions tailored to
the special needs of our clients. In each of our vertical industry groups, we
develop industry-specific offerings and capitalize on referrals from existing
clients. In addition, our industry experience reduces the knowledge asset
transfer on new engagements, improves efficiency of implementation and reduces
project delivery times by, among other things, allowing us to leverage those
elements of our e-business solutions for which there is repeat customer demand.
We intend to continue to utilize our knowledge and industry experience to
further penetrate and broaden our vertical market presence.
Continue to Develop Leading-Edge Technology Capabilities
We believe being able to deliver integrated, quality technical capabilities
is an important competitive advantage in our industry. Our technical
specialists in systems engineering and application development allow us to
offer customized, complex e-business solutions. We intend to continue to hire
additional software engineers and develop new technology skill-sets to deliver
quality solutions and meet the evolving needs of clients. We work with emerging
technologies and stay current with industry developments through our dedicated
team of technical specialists who evaluate new technologies and work on
innovative solutions.
Retain and Hire Outstanding Professionals
Retaining and attracting outstanding professionals is essential to our
growth. We focus on maintaining a culture that fosters innovation and
emphasizes professional development and plan to continue to do so. We support
each professional's development in their primary discipline through training
that is focused on their specific areas of expertise. We have developed a
consistent and cohesive corporate culture by primarily growing organically. Our
company culture encourages our professionals to work closely in
multidisciplinary groups to facilitate the development of integrated solutions
for our clients. We intend to continue to offer competitive compensation
packages, including equity participation through stock options for all of our
professionals.
34
<PAGE>
Expand Geographically
We believe that significant opportunities exist for our services beyond our
current locations, including serving existing and new clients in other markets.
We have expanded, and intend to continue to expand, our geographic presence,
both nationally and internationally, based on our clients' needs, our vertical
market focus and market opportunities. We intend to continue to expand
primarily through organic growth, which may be supplemented by strategic
acquisitions. Our strategic acquisition of Jump! in November 1999 added a
geographical presence for us in the Washington, D.C. metropolitan area,
expanded upon our technological capabilities and added a client relationship
with Research Institute of America, part of The Thomson Corporation, a
publishing conglomerate.
Our Approach to Engagements: The Logical Approach
In each of our client engagements, we apply the Logical Approach. Using our
Logical Approach, we service our engagements with a multidisciplinary team led
by a dedicated project manager who coordinates business strategy, design and
technology services. We integrate industry-specific strategy with enterprise
level design and technological capabilities to provide customized e-business
solutions. Our Logical Approach also provides for an ongoing process for
evaluating and tailoring a company's e-business solution. Ongoing assessments
of business and market trends, technology trends, competition, user
requirements, and application requirements provide continual feedback on the
company's e-business strategy.
The Logical Approach is a comprehensive methodology which integrates
multidisciplinary tasks across four phases: strategy, blueprint, construction
and post-implementation assessment. The Logical Approach is a scalable process
and we can customize the specific phases necessary to suit the parameters of
each client engagement. The inclusion of any phase or phases depends on the
type of solution required and the scope of the work.
Strategy
We believe that a client's e-business strategy should be integrated with its
overall business strategy. We enable our clients to develop a viable,
successful e-business strategy that balances enterprise objectives with user
needs and competitive market challenges. Our Usability Center helps tailor the
e-business strategy to specific user requirements. We work with senior business
managers to define the e-business strategy and the supporting strategic
technology plan. In developing an e-business strategy, we focus on designing
solutions that will meet our client's business objectives, such as reducing
costs, generating revenue through new channels or developing targeted, one-to-
one marketing initiatives. Our strategic consultants focus on understanding and
applying the appropriate e-business models to our clients' business. We assess
and define business requirements to solidify the e-business strategy, taking
into account numerous factors that may affect the strategy, such as industry
trends, shifts in a client's business direction and escalating competitive
forces.
Blueprint
During the blueprint phase we develop an integrated schematic of how to
bridge the gap between e-business strategy and construction. To establish a
blueprint, we examine the aspects of the client's technology and business that
are critical to a successful e-business initiative. We also refine the
functional and creative requirements that support the business strategy. The e-
business blueprint comprises the following elements:
. Infrastructure Migration Plan. Our consultants review and analyze the
client's current computer environment to ensure that it is stable and
reliable and that it can be expanded to handle the new requirements of
the e-business strategy. We identify gaps in the client's computer
environment and outline a plan to evolve the environment based on the e-
business strategy. We focus on utilizing the client's investment in
currently installed technology and mitigating the potential risks from
new technology.
35
<PAGE>
. Business Assimilation Plan. Our business analysts review and analyze the
client's current workflows, policies and procedures to identify areas
that will be significantly impacted by the e-business strategy. We
identify individual project releases to address these areas and plan
these releases to coincide with the delivery of specific e-business
functions and features.
. Marketing and Communications Plan. Our marketing consultants collaborate
with the client's corporate communications organization to establish or
enhance its online brand. Our consultants also collaborate with the
client to define strategies for communicating and introducing the e-
business capabilities to its employees, customers and partners.
. Internal Staff Skills and Capability. Our business analysts collaborate
with the client's internal information technology team to determine what
new capabilities will be required to implement and maintain its e-
business initiative.
. Release Plan. Our project managers develop a release plan which provides
an integrated, phased approach to delivering e-business capabilities for
the client. The release plan offers a functional view of what
capabilities will be delivered, over what time period and to which
constituents. It takes into account the schedules and resources outlined
in each of the plans listed above to ensure that there is a
comprehensive approach to rolling out the e-business solution.
Construction
During the construction phase, we integrate project management, software
engineering, software quality management and creative disciplines. We seek to
build e-business sites that deliver quality functionality and enhanced user
experiences on reliable and scalable infrastructures. We leverage systems and
processes already in place as well as pre-built, customizable modules of code
and design. We develop e-business solutions that use the latest proven
technologies to transform business processes. We offer technology
implementation services, including applications architecture design, technical
infrastructure design, custom application development, legacy and third party
software integration, as well as technology advisory services. Before we
deliver the application to our clients, as part of this phase, we conduct a
comprehensive series of test cases on the different applications.
As part of the construction process, we utilize our creative abilities to
address navigation, layout, information architecture, personalization and
branding. We seek to create e-business solutions that have direct, immediate
and relevant appeal and utility. As e-business solutions have become an
important point of contact with employees, customers and partners, the user
interface of these applications has become an increasingly visible component.
Recognizing this importance, among other things, we test the user interface of
our proposed solutions through representative users at our Usability Center. We
aim to provide intuitive, visually appealing and highly usable solutions
designed with the end user in mind.
Post-Implementation Assessment
After the client's site is constructed and delivered, we provide a wide
range of services aimed at ensuring that the site is achieving and continues to
achieve the client's e-business strategic objectives. A key technique that we
deploy is testing and focus group sessions in our Usability Center. These tests
and sessions help to ensure that the user is able to easily achieve the
benefits for which the e-business solution was designed. We also conduct
analysis of other sites to ensure that the client's site remains competitive
within the marketplace. Finally, we monitor industry trends and explore ways to
enhance and tailor the site. The results of our testing and analysis are then
fed back into the strategy phase of the Logical Approach, helping to make the
Logical Approach an ongoing process.
36
<PAGE>
Clients
We focus on providing our services to market leaders in the following
targeted industries: communications services, financial services,
manufacturing, healthcare and publishing. We utilize our industry experience in
serving our clients in each industry. The following is a representative sample
of our current clients.
Communications Services Manufacturing
AT&T International Paper
Bell Atlantic Johnson & Johnson
SBC Communications Lucent Technologies
Winstar Communications NCR
Philip Morris Companies
Financial Services
The Chase Manhattan Bank Publishing
Lehman Brothers The McGraw Hill Companies
Met Life The Thomson Corporation
The MONY Group
Healthcare
Aetna/US Healthcare
Pfizer
We seek to develop long-term relationships with our clients. We become
familiar with a client's business and work closely with the client to
understand, project and address the client's evolving strategic business needs.
In 1999, our five largest clients accounted for approximately 74% of our
revenue on both an actual and a pro forma basis including our acquisition of
Jump!. Our three largest clients in 1999, Lucent, AT&T and Aetna/US Healthcare,
contributed approximately 28%, 24% and 12%, respectively, of our revenue
(approximately 24%, 22% and 10%, respectively, on a pro forma basis). In
addition, Research Institute of America, a subsidiary of The Thomson
Corporation, contributed approximately 13% of our revenue on a pro forma basis
in 1999. In 1998, our five largest clients accounted for approximately 83% of
our revenue. Our two largest clients in 1998, AT&T and Lucent, contributed
approximately 47% and 27%, respectively, of our revenue. In 1997, our five
largest clients accounted for approximately 82% of our revenue. Our two largest
clients in 1997, AT&T and Lucent, contributed approximately 42% and 24%,
respectively of our revenue. No other clients contributed over 10% of our
revenue in 1999, 1998 or 1997.
Client Case Studies
We manage a significant range of e-business engagements including:
. customer self-service solutions for billing, customer care, and the
personalized delivery of information;
. enterprise self-service solutions for human resources, content
management, corporate communications and financial applications, such as
pension plans and profit sharing arrangements; and
. corporate e-business presence solutions, .com sites, corporate extranets
and new channel development sites.
Set forth below are several representative client engagements:
AT&T
We began our relationship with AT&T in 1990, developing corporate
information systems, and AT&T remains a major client today. Over our ten year
history with AT&T, we have utilized emerging technologies--
37
<PAGE>
moving from CD-Rom delivery to intranet, extranet and Internet-based solutions.
Examples of specific initiatives performed for AT&T include:
. Health and Insurance Information Center. In 1995, we created a
customized health and insurance intranet that allows employees to access
their benefits data, search provider directories, model the impact of
lifestyle changes on their benefits, enroll for benefits and compare
carrier options online. With this intranet, employees can now self-
manage many aspects of their human resources benefits and programs.
. Pension Update Information Center. In 1997, we created an extranet-
based self-service pension planning center, allowing employees to
personalize benefit amounts, receive detailed pension plan information
and model various retirement scenarios to project their pension benefits
under different retirement scenarios. This center has engaged and
assisted AT&T employees in learning about their pension benefits.
. Benefit Decisions 2000. In 1999, we created an Internet site providing
information on health and welfare plans for employees joining AT&T
through mergers and acquisitions. Through this Internet site, employees
from merged or acquired entities can, before joining AT&T, learn about
the enrollment process, model various benefit options and enroll in
specific benefit plans. This Internet site enhances communication of
benefit information and options to newly acquired employees and has
improved the transition of these employees into AT&T's core human
resources systems.
Our initiatives for AT&T support over 100 classes of users. Each user class
has its own profile and associated business rules that control the type of
pension and benefits modeling and content available to the user. The solutions
interface to existing enterprise resource planning systems and to multiple
external healthcare provider sites.
Lucent Technologies
Lucent became our client upon its spin-off from AT&T in September 1996 and
remains a major client today. We developed e-business strategies for Lucent, as
well as designed and implemented solutions that allow Lucent to better interact
with its employees and customers. Examples of e-business solutions developed
for Lucent include:
. Benefits Central. In 1997, we designed and implemented Benefits Central,
a personalized and secure intranet site, providing approximately 100,000
Lucent employees worldwide direct access to information about their
health and welfare benefits. This site provides online enrollment in
benefit plans, access to health provider listings, compensation and
financial information, as well as allows Web-enabled access to Lucent
stock quotes. The Benefits Central site utilizes XML, or Extensible
Markup Language, and hardware and software that allows the exchange of
information between the Web application and existing data sources. XML
is a standardized language used for the markup of documents that enables
companies to structure information so that it can be accessed or re-used
across multiple computing platforms. This architectural approach allows
the application to be independent of the back-end data source. Benefit
Central provides a self-service functionality to Lucent employees.
. NetCare Professional Services. In 1998, we designed, developed and
launched an e-commerce Internet site for Lucent products and Lucent's
NetCare management services division. This Internet site presents a
personalized site to each of NetCare's customers, incorporates a single
consistent interface for Lucent's extensive product line and provides
Lucent with a channel to efficiently communicate new information to its
customers. The Internet site also provides customer service, logging
customer requests, registrations, feedback and content updates. The
NetCare site uses scalable technologies such as application servers,
relational databases and LDAP, or Lightweight Directory Access Protocol,
directories. LDAP is a protocol for updating and searching online
directory services. This Internet site became a major customer service
delivery channel for the NetCare management services division.
38
<PAGE>
. The Solution Advisor. In 1999, we developed the marketing/customer
service application called Find Your Solution for Lucent's enterprise
division, which services its small-medium business market. This site
operates as a component of Lucent's company Web site. Lucent's
enterprise customers can access this application to assist them in
making voice and data networking communication decisions. Through an
online questionnaire, prospective customers provides information about
their industry, company and communications goals. Based on that input,
Find Your Solution provides them suggested solutions and Lucent product
information.
. Zingo. In 1999, we helped Lucent's wireless division develop a custom
mobile portal for small devices such as wireless phones and hand-held
computers. In addition to designing the portal's interface and branding
approach, we provided overall project management and coordination of the
multiple vendors who were engaged for this effort. This experimental
platform was targeted at telecommunications service providers and
enabled access to multiple third party applications.
The MONY Group
The MONY Group entered into a retainer contract with us in mid-1999 to
advise and assist them on their e-business initiatives. We provide advice,
design and enhancement development in an ongoing fashion for many areas of
MONY's public Web site. This support includes assistance with application
development, look and feel enhancements, navigation, design and content
analysis and creation. Among the projects are:
. Strategic Planning. We conducted a strategic infrastructure planning
effort, the purpose of which was to define the foundational
infrastructure for developing and deploying internally and externally
focussed e-business applications. We assembled and worked with a
steering committee made up of architects representing various areas
within MONY. The results of this joint effort was an infrastructure
recommendation and migration strategy to evolve to an e-business
environment.
. Weekly Activity Report. We redesigned and implemented a process to allow
MONY's independent international finance representatives to acquire
templates and file required reports via the Internet. MONY experienced
increased efficiencies by migrating from a telephone-based to an
Internet-based system. The new system has been designed by
representatives with hierarchical security within which to access
information.
. Trusted Advisor-Rep World. At the end of 1999, we built the Trusted
Advisor Internet site to provide financial planners, who represent
MONY's products, access to content information such as tax rules and
changes, research on investment products, forms and estate planning
tools.
. Broker Insight. We created an Internet application to support MONY's
global network of brokers. This system linked MONY's brokers with the
compliance documents, rules and sales tools they needed to provide
enhanced customer service to their and MONY's customer base.
Sales and Marketing
We primarily market our services to Fortune 500 companies. Our sales and
marketing organization is built around five industry practices and staffed with
professionals with industry and e-business experience. Each industry practice
team is led by a practice manager who has long-term industry and consulting
experience. Account executives and account managers report to the industry
practice managers. Account executives are responsible for generating leads,
qualifying opportunities and driving new revenue.
Account managers are responsible for strategic account management, proposal
development and revenue growth with key current clients. Our account management
model is focused around growing existing
39
<PAGE>
engagements and leveraging them into new engagements through cross and up sell
business development. This focus allows us to build a more solid understanding
of the business issues facing each client.
We have recently added channel managers to our industry teams. Channel
managers are responsible for establishing and leveraging partner relationships
into additional revenue streams. We seek additional business and technical
partnerships to drive new revenue, enhance our technology strength and provide
us with a first glance view of technology trends.
Currently the sales teams for our five industry practices are composed of a
total of 13 individuals. Our marketing team of four individuals provides both
corporate-wide and industry specific marketing support to drive our business
development. Marketing programs include corporate branding, public relations
programs, client success stories, advertising and promoting our executives for
speaking opportunities and sponsored event management.
Technological Capabilities
Our current technical organization is organized into separate areas of
expertise. Our senior level technology professionals average at least 10 years
of experience in large-scale application development and reports to our Chief
Technology Officer. This senior group provides overall leadership to our staff
on technology direction and engineering best practices as well as researching
emerging technologies. Our technical specialists in systems engineering and
application development design and deliver our e-business solutions. Our system
engineers have extensive experience across a broad range of Internet-based
technologies. We identify specific areas of concentration, which we view as
essential to deliver business-critical e-business solutions. These areas
include technologies for system reliability, scalability, security and
management. They also include areas of concentration focused on the user for
relationship management and personalization. In addition to specific products
and technologies, our specialists and architects understand distributed
computing architectures, which are essential for delivering e-business
solutions.
Strategic Affiliation with the Sun Microsystems / Netscape Alliance
We have established a strategic, non-exclusive affiliation with the Sun
Microsystems / Netscape Alliance. This affiliation provides us with early
access to training, product support and technology. In addition, this
relationship with the Alliance has led to several engagements, including with
Winstar Communications. The primary goals of our affiliation with the Alliance
are:
. to deepen our technical capability and understanding of industry leading
products and technologies that are commonly deployed in e-business
applications;
. to create or identify new revenue opportunities through referrals and
joint marketing; and
. to enhance our position as an industry leader in bill presentment and
payment solutions.
We intend to seek out additional strategic alliances and affiliations with
other technology service providers to increase our business opportunities.
Competition
We compete with other providers of e-business professional services. The
market for these services has grown dramatically in recent years as a result of
the increasing use of Internet technologies by businesses to interact and
transact with their employees, customers and partners. Our market is intensely
competitive, highly fragmented and subject to rapid technological change. We
expect competition to persist and intensify in the future. Our current and
potential competitors include:
. e-business professional services firms, such as Agency.com, Diamond
Technology Partners, iXL, Organic, Proxicom, Razorfish, Sapient, Scient,
USWeb/CKS and Viant;
. traditional strategic consulting firms, such as Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey;
40
<PAGE>
. interactive advertising agencies, such as Modem Media.Poppe Tyson and
OgilvyOne;
. professional services groups of computer equipment companies, such as
Hewlett-Packard and IBM;
. traditional systems integrators, such as Andersen Consulting, Cambridge
Technology Partners and EDS; and
. internal information technology departments of current or potential
clients.
We believe the principal competitive factors in our market are:
. vertical industry business knowledge and experience;
. breadth and integration of service offerings;
. cost and quality of service;
. client relationships;
. strategic expertise, technical knowledge and creative skills;
. ability to attract and retain quality professionals; and
. brand recognition and reputation.
Competition is intense in our industry. Our ability to compete favorably
across these competitive factors may be beyond our control.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. These competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. These
competitors may also be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential clients, employees and strategic partners. Further, our competitors
may perform e-business services that are equal or superior to our services or
that achieve greater market acceptance than our services. There are relatively
low barriers to entry into the e-business professional services industry. We
have no patented or other proprietary technology that would preclude or inhibit
competitors from entering the e-business professional services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client service. The costs to develop and provide e-business services are low.
Therefore, we expect to continually face additional competition from new
entrants into the market in the future. See "Risk Factor--The e-business
professional services market is highly competitive and has low barriers to
entry. If we cannot effectively compete, our revenues may decline."
Personnel
As of March 31, 2000, we had 160 employees. Of these, 123 were consulting
and service delivery professionals and 37 were management and administrative
personnel performing sales, marketing, human resources, finance, accounting,
legal and administrative functions.
None of our employees are represented by a labor union nor have we ever
experienced a work stoppage. We believe our employee relations are good.
Intellectual Property
We rely on a combination of trade secret, nondisclosure and other
contractual agreements, and copyright and trademark laws to protect our
intellectual property. We enter into confidentiality agreements with our
employees, generally require that our consultants and clients enter into
confidentiality agreements and limit access to and distribution of our
information. There can be no assurance that the steps we have taken in this
41
<PAGE>
regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our rights. We do not have any patents or patent
applications pending.
Generally, our client contracts provide a work-for-hire intellectual
property right for each client in the custom work developed specifically for
that client. The intellectual property rights in work done prior to the client
contract or independent of the services provided that client remain with us.
See "Risk Factors--If we are unable to protect our intellectual property or if
others claim we are infringing on their intellectual property, we could incur
significant expenses or be prevented from providing our services."
Facilities
Our headquarters and principal administrative, finance, legal, sales and
marketing operations are located in approximately 17,400 square feet of leased
office space in Morristown, New Jersey. Our lease expires in July 2001. We plan
to move from our current Morristown facility to an approximately 52,000 square-
foot facility in June 2000. The new office space, also in Morristown, will be
solely occupied by us under a lease, the term of which extends to February
2010. We also lease office space in New York City and Chantilly, Virginia. Our
office in New York City, which contains our Usability Center, is in an
approximately 18,000 square-foot facility under a lease that expires in July
2005. The lease for our 9,946 square-foot Chantilly, Virginia facility expires
in February 2006.
Legal Proceedings
We are from time to time involved in litigation incidental to the conduct of
our business. We are not a party to any lawsuit or proceeding that, in the
opinion of our management, is likely to have a material adverse effect on us.
42
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth, as of March 31, 2000, the name, age and
position within Logical Design Solutions of each of our directors, executive
officers and key employees.
<TABLE>
<CAPTION>
Name Age Position(s) With Company
---- --- ------------------------
<S> <C> <C>
Mimi Brooks.......... 39 President, Chief Executive Officer and Chairwoman
David W. Stoltzfus... 43 Chief Technology Officer and Director
John P. Fee.......... 39 Chief Operating Officer
E. Bruce Lovenberg... 42 Vice President, Chief Financial Officer and Secretary
Marilynne N. White... 42 Vice President and General Counsel
Thomas Shea.......... 39 Vice President--Sales
Paul F. Lozier....... 53 Director
Kevin McGilloway..... 51 Director
Kevin Mohan.......... 36 Director
Frank A. Pinto....... 55 Director
</TABLE>
Mimi Brooks is our founder and has served as President, Chief Executive Officer
and Chairwoman of our board of directors since its inception in 1990. Prior to
founding our company, Ms. Brooks served as a human resources information
systems executive for AT&T.
David W. Stoltzfus has been Chief Technology Officer since joining us in 1997
and a director since 1999. Prior to joining us, Mr. Stoltzfus was employed with
The Vanguard Group since 1988 where his most recent position was Principal in
Charge of Enterprise Architecture and was an officer of The Vanguard Group
since 1994.
John P. Fee has been Chief Operating Officer since joining us in 1999. Prior to
joining us, Mr. Fee served as Vice President of Thomson Consulting, a division
of The Thomson Corporation, a publishing conglomerate, since April 1997. Mr.
Fee served as Chief Information Officer of Gemini Consulting, a division of The
Cap Gemini Group, from October 1995 to March 1997, where he also served as a
member of the Cap Gemini IT Strategy Board. Mr. Fee served as an account
executive at Computer Systems Advisor, a provider of business modeling
solutions, from September 1989 to October 1995.
E. Bruce Lovenberg has been Vice President, Chief Financial Officer and
Secretary since joining us in 1996. Prior to joining us, Mr. Lovenberg was a
Senior Manager at Ernst & Young since 1985, where he served as Practice Leader
for the New Jersey--Entrepreneurial Services Group consulting practice. Mr.
Lovenberg is a Certified Public Accountant.
Marilynne N. White has been Vice President and General Counsel since joining us
in 1999. Prior to joining us, Ms. White was a vertical markets executive at
Thomson Consulting from 1998 to 1999. Ms. White served as Vice President of
Marketing and Sales at United Press International from 1997 to 1998 and as
senior advisor at the Office of Agreements' Compliance within the U.S.
Department of Commerce from 1996 to 1997. Ms. White earned a J.D. degree from
Georgetown University Law School in 1995.
Thomas J. Shea has been Vice President of Sales since June 1995. Prior to
that, Mr. Shea held various executive and managerial positions at Dun &
Bradstreet Information Services from 1985 to 1995.
Paul F. Lozier has served as a member of our board of directors since March
1997. Mr. Lozier has been President of Samedan, Inc., a corporate finance
consulting firm, since 1996. Prior to that time, from 1977 to 1996, Mr. Lozier
held various positions at Merrill Lynch, Pierce, Fenner & Smith Incorporated,
including serving as a Managing Director of Merrill Lynch Investment Banking
from 1988 to 1994. Mr. Lozier is also a director of The Bank of the Somerset
Hills.
43
<PAGE>
Kevin McGilloway has served as a member of our board of directors since March
2000. Mr. McGilloway has been Chief Information Officer and Managing Director
at Lehman Brothers Inc. since November 1994. Mr. McGilloway is also a director
of numerous public and not-for-profit companies. Lehman Brothers Inc. is one of
the lead underwriters for this offering.
Kevin Mohan has served as a member of our board of directors since March 1997.
Mr. Mohan has been a General Partner of Summit Partners, a venture capital
firm, since December 1997. Prior to that, from September 1994 to December 1997,
Mr. Mohan was a Vice President of Summit Partners. Mr. Mohan is also a director
of several privately held companies.
Frank A. Pinto has served as a member of our board of directors since March
2000. Mr. Pinto has been employed by Sun Microsystems Inc. since 1995 where his
most recent position was Vice President Computer Systems World Wide Sales.
Several of our directors were elected to the board pursuant to a
shareholders agreement that terminates as of the closing of this offering. The
shareholders agreement provides that Ms. Brooks is to be a director. Pursuant
to the shareholders agreement, Mr. Stoltzfus and Mr. Lozier were designated as
directors by Ms. Brooks and Mr. Mohan was designated by Summit Ventures IV,
L.P.
Classes of Directors
We plan to adopt a provision in our certificate of incorporation which will
divide our board of directors into three classes, denominated as Class I, Class
II and Class III. Members of each class hold office for staggered three-year
terms. At each annual meeting of our stockholders commencing in 2001, the
successors to the directors whose term expires at that meeting will be elected
to serve until the third annual meeting after their election or until their
successor has been elected and qualified. Mr. Mohan and Mr. Stoltzfus will
serve as the Class I directors whose terms expire at the 2001 annual meeting of
stockholders. Mr. McGilloway and Mr. Pinto will serve as the Class II directors
whose terms expire at the 2002 annual meeting of stockholders. Ms. Brooks and
Mr. Lozier will serve as Class III directors whose terms expire at the 2003
annual meeting of stockholders. With respect to each class, a director's term
will be subject to the election and qualification of their successors, or their
earlier death, resignation or removal. These provisions, when taken in
conjunction with other provisions of our amended and restated certificate of
incorporation authorizing the board of directors to fill vacant directorships,
may delay a stockholder from removing incumbent directors and simultaneously
gaining control of the board of directors by filling the vacancies with its own
nominees.
Board Committees
The audit committee reviews, acts on and reports to the board of directors
with respect to various auditing and accounting matters. These matters include
the selection of our auditors, the scope of the annual audits, fees to be paid
to the auditors, the performance of our independent auditors and our accounting
practices. The audit committee currently consists of Mr. Lozier, Mr. McGilloway
and Mr. Pinto.
The compensation committee determines the salaries and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of other employees and consultants. The compensation
committee also administers our various incentive compensation, stock and
benefit plans. The compensation committee currently consists of Mr. McGilloway
and Mr. Pinto.
Director Compensation
We do not currently compensate our directors who are also our employees.
Each non-employee director currently receives $1,000 of cash compensation per
meeting attended and is reimbursed for reasonable travel expenses for each
board meeting attended. Our directors will also be eligible for equity awards
under our 1999 Stock Plan and our 2000 Stock Plan for Non-Employee Directors,
see "--Stock Plans" below for a description of these plans.
44
<PAGE>
Executive Compensation
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and all other executive officers whose salary and bonus
for services rendered in all capacities to us for the fiscal year ended
December 31, 1999 exceeded $100,000. We will use the term "named executive
officers" to refer to these people later in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
Name and Principal Underlying All Other
Position(s) Year Salary Bonus Other(1) Options/SARS Compensation(2)
- ------------------ ---- -------- ------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Mimi Brooks
President, Chief
Executive
Officer and
Chairwoman............. 1999 $174,583 $75,000 $1,890 -- $4,800
David W. Stoltzfus
Chief Technology
Officer................ 1999 166,875 100,000 1,360 15,000 4,800
E. Bruce Lovenberg
Vice President,
Chief Financial Officer
and Secretary.......... 1999 124,750 30,000 -- 15,000 4,643
Thomas Shea
Vice President--Sales.. 1999 134,167 20,000 -- 15,000 4,625
</TABLE>
- --------
(1) Represents the value of leased automobiles provided by us.
(2) Contributions by us to our 401(k) plan made during 1999 for the named
officers.
Option Grants in Last Fiscal Year
The following table summarizes the options granted to each of the named
executive officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Potential
Individual Grants Realizable Realizable
--------------------------------------------- Value at Value at
Percent of Assumed Assumed
Number of Total Options Initial Annual Rates of
Securities Granted to Offering Stock Price
Underlying Employees in Price of $13.00 Appreciation for
Options Fiscal Exercise Expiration Per Share Option Term(1)
---------- ------------- -------- ---------- --------------- -----------------
Name Granted(2) Year Price Date 0% 5% 10%
---- ---------- ------------- -------- ---------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mimi Brooks............. -- -- -- -- -- -- --
David W. Stoltzfus...... 15,000 2.8% $2.20 1/1/09 $162,000 $251,315 $381,988
E. Bruce Lovenberg...... 10,000 1.9 2.20 1/1/09 108,000 167,543 254,658
5,000 0.9 2.20 12/31/09 54,000 87,960 140,062
Thomas Shea............. 10,000 1.9 2.20 1/1/09 108,000 167,543 254,658
5,000 0.9 2.20 12/31/09 54,000 87,960 140,062
</TABLE>
- --------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock, based upon
an assumed initial public offering price per share of $13.00 (the midpoint
of the offering range), appreciates from the date of grant to the
expiration of the option at annualized rates of 5% and 10%. These assumed
rates of appreciation have been specified by the SEC for illustrative
purposes only and are not intended to forecast future financial performance
or possible future
45
<PAGE>
appreciation of our stock. The actual amount the executive officer may
realize will depend on the extent to which the stock price exceeds the
exercise price of the options on the date the option is exercised.
(2) Represent incentive stock options granted under our 1999 Stock Plan. The
options vest over a four-year period with 25% vesting on each anniversary
of the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents information with respect to stock options
owned by the named executive officers at December 31, 1999. No stock options
were exercised by the named executive officers during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value Of Unexercised
Options at In-The-Money Options at
December 31, 1999 December 31, 1999(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mimi Brooks(2).............. -- -- -- --
David W. Stoltzfus.......... 100,000 115,000 $1,096,000 $1,258,000
E. Bruce Lovenberg.......... 50,000 65,000 548,000 710,000
Thomas Shea................. 75,000 90,000 822,000 984,000
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $13.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying these options.
(2) The table does not include options granted to Ms. Brooks subsequent to
December 31, 1999. For a description of these options, see "Stock Options
Granted in March 2000" below.
Stock Plans
1997 Stock Plan. The 1997 Stock Plan was designed to attract, incent and
retain the best available personnel and to promote the success of our
business, through grants of incentive stock options, nonqualified stock
options and stock purchase rights. We adopted the 1997 Stock Plan effective as
of September 10, 1997 following approval by the stockholders on September 10,
1997. As of March 31, 2000, there were options to purchase 983,100 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $2.13 per share. As of this date, there are no further shares available for
issuance under the 1997 Stock Plan.
1999 Stock Plan. The 1999 Stock Plan is designed to attract, incent and
retain the best available personnel and to promote the success of our
business, through grants of incentive stock options, nonqualified stock
options and stock purchase rights. The administrator administers the 1999
Stock Plan and determines to whom options and purchase rights are to be
granted and the terms and conditions, including the number of shares and the
period of exercisability, thereof. We adopted the 1999 Stock Plan effective as
of November 9, 1999 following approval by the stockholders on October 28,
1999. The 1999 Stock Plan was amended and restated by our board of directors
on March 1, 2000, and our stockholders approved it as so amended on , 2000.
Subject to adjustment as provided in the 1999 Stock Plan, the number of
shares of common stock that may be issued under the 1999 Stock Plan may not in
the aggregate exceed 2,750,000 shares, which may be shares of original
issuance or shares of restricted stock repurchased by us at their original
purchase price or a combination thereof. Our service providers, including
officers, directors and consultants, may be selected by the administrator to
receive benefits under the 1999 Stock Plan.
The administrator, which may be our full board of directors or the
compensation committee of the board, may grant incentive stock options to
employees that entitle the optionee to purchase shares of common stock. If
46
<PAGE>
the optionee owns stock representing more than 10% of the voting power of all
classes of stock, the exercise price will be not less than 110% of the fair
market value on the date of grant. Any other employee will have an exercise
price of not less than the fair market value on the date of grant. To the
extent that the fair market value of the incentive stock options exercisable
for the first time by the optionee during a calendar year exceeds $100,000,
these options will be treated as nonqualified stock options. The term of each
option will be stated in the applicable option agreement. In the case of an
incentive stock option, the term will be no longer than ten years from the date
of grant (five years in the case of an incentive stock option granted to an
optionee who, at the time of the grant, owned stock representing more than 10%
of the voting power of our capital stock).
The administrator may grant nonqualified stock options and stock purchase
rights to employees, directors or consultants that entitle the optionee to
purchase shares of common stock. The exercise price of a nonqualified option
will be determined by the administrator, except that a nonqualified option that
is intended to qualify as "performance-based compensation" for federal tax
purposes will have an exercise price of no less than 100% of the fair market
value on the date of grant.
Subject to adjustment as provided in the 1999 Stock Plan, no employee,
director or consultant will be granted, in any two fiscal years after the
offering, options to purchase more than 500,000 shares. In connection with his
or her initial service, an employee, director or consultant may be granted
options to purchase up to an additional 500,000 shares, which will not count
against the two fiscal year limit. A cancelled option will be counted against
the two fiscal year and the initial service limits.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, by promissory note, by surrender of
shares and by other forms of cashless exercise.
Stock purchase rights may be issued by the administrator alone or in
addition to other grants under this plan or cash awards outside this plan. The
administrator will determine the terms, conditions and restrictions to the
offer, including the number of shares that the offeree is entitled to purchase,
the price to be paid, the period to accept the offer and the form of the
restricted stock purchase agreement. Execution of the restricted stock purchase
agreement will be an acceptance of the offer. Unless the administrator
determines otherwise, the agreement will give us an option to repurchase the
shares at the price paid by the purchaser upon the voluntary or involuntary
termination of the purchaser's services to us. Upon exercise of the stock
purchase option, the purchaser will have rights equivalent to those of a
shareholder.
Options or purchase rights are not transferable by a participant except if
the administrator makes the right transferable or if transferred by will or the
laws of descent and distribution. If the administrator makes an option or a
purchase right transferable, the option or purchase right will contain
additional terms and conditions that the administrator deems appropriate. An
option or a purchase right may be exercised within 12 months following the
death of the optionee, by the optionee's estate or by the person who acquires
the right by bequest or inheritance, if the optionee would have been entitled
to exercise the right on the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
To the extent the administrator determines it to be desirable to qualify the
options as "performance-based compensation", the plan shall be administered by
a compensation committee of not less than two nonemployee directors who are
"non-employee directors" within the meaning of Rule 16b-3 and "outside
directors" within the meaning of Section 162(m) of the Code. In connection with
its administration of the stock plans, the compensation committee is authorized
to interpret the stock plans and related agreements and other documents. The
1999 Stock Plan may be amended from time to time by the board of directors,
with shareholder approval to the extent necessary and desirable to comply with
applicable law.
47
<PAGE>
As of March 31, 2000 there were options to purchase 1,292,130 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $3.83 per share. The total number of stock options or other awards that will
be granted under the 1999 Stock Plan in the future is not determinable at this
time. The 1999 Stock Plan is not the exclusive means by which we may grant
equity-based incentive awards and in no way limits our ability to grant equity-
based awards outside the 1999 Stock Plan.
Certain Tax Consequences of 1997 Stock Plan and 1999 Stock Plan. In general,
a participant will recognize ordinary income upon the exercise of a
nonqualified stock option in an amount equal to the difference between the
option price paid for the shares of common stock and the fair market value of
such shares. The participant's basis for capital gains purposes in the shares
acquired is equal to the sum of the exercise price paid and the amount taxable
as ordinary income. Upon the sale or other disposition of the shares, any
appreciation (or depreciation) in the value of the shares after the date of
exercise generally will be treated as capital gain (or loss) to the
participant, and will be long-term capital gain (or loss) if such shares were
held for more than one year after the date of exercise.
A participant will not recognize income upon the exercise of an incentive
stock option. However, the excess of the fair market value on the date of
exercise of the shares acquired over the option exercise price will generally
be included in alternative minimum taxable income. Whether a participant is
subject to the alternative minimum taxable income will depend on such
participant's other taxable income.
If a participant does not dispose of shares acquired pursuant to an
incentive stock option before the later of two years from the date of grant of
such option and one year after the date of exercise of the option, any gain or
loss realized on a subsequent disposition of such shares will be treated as a
long-term capital gain or loss. If, however, a participant disposes of shares
acquired pursuant to an incentive stock option before the expiration of the
one-year and two-year periods described above (a "disqualifying disposition"),
an amount equal to the excess of the fair market value of the shares at the
time of the option's exercise (or the proceeds of the disposition, if less)
over the option price will, in the year of disposition, be taxable to the
participant as ordinary income and deductible by us. If the shares are disposed
of at a loss, the loss will be a capital loss.
A participant's basis for capital gains purposes in shares acquired pursuant
to the exercise of an incentive stock option will be the amount paid by the
participant upon exercise of the option. However, if the participant does not
hold the shares for the one-year and two-year holding periods discussed above,
the participant's basis in the shares is increased by an amount equal to the
amount taxable as ordinary income.
If a participant uses previously acquired shares to pay all or a portion of
the option price on the exercise of a stock option (whether or not an incentive
stock option), no gain or loss is recognized with respect to the previously
acquired shares. The shares received upon exercise of the option, to the extent
of the number of previously acquired shares exchanged therefor, will have the
same basis and holding period for capital gain purposes as the previously
acquired shares.
If the option is a nonqualified stock option, the additional shares received
have a basis equal to the sum of the cash paid on exercise and the ordinary
income taxable to the participant as a result of the exercise. If the option is
an incentive stock option, the additional shares have a basis equal to the cash
paid on exercise (plus, if the one-year and two-year periods discussed above
have not been met with respect to shares acquired upon the previous exercise of
an incentive stock option, the amount includable in income). In each case, the
holding period for capital gain purposes begins on the date of the exercise of
the option.
The use of shares previously acquired by exercising an incentive stock
option in satisfaction of all or part of the exercise price for another option
(whether or not an incentive stock option) is a disposition of the previously
acquired shares for purposes of determining whether such shares have been held
for the one-year and two-year periods discussed above. All shares acquired upon
the exercise of an incentive stock option, including the previously acquired
shares, are considered to have been acquired upon the date of exercise for
purposes of these holding periods.
48
<PAGE>
A participant who purchases shares of common stock using a stock purchase
right will recognize ordinary income equal to the excess of the fair market
value of the shares (determined without regard to any restrictions on the
shares other than a restriction which by its terms will never lapse) over the
amount (if any) paid for such shares. The participant normally will recognize
this income in the first taxable year in which the shares are either no longer
subject to a risk of forfeiture or transferable. Under certain circumstances,
however, a participant may elect to recognize such income when he or she
purchases the shares. Any appreciation or depreciation in such shares from the
time the restrictions lapse (or, if earlier, the date on which the participant
elects to recognize income in respect of such shares) will generally be treated
as capital gain (or loss) to the participant, and will be long-term capital
gain (or loss) if such shares were held for more than one year after the date
of exercise.
We will be entitled to an income tax deduction that generally corresponds in
time and amount to the amount of any ordinary income recognized by a
participant, provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense, is not an
"excess parachute payment" within the meaning of Section 280G of the Code and
is not disallowed by the $1 million limitation on certain executive
compensation.
2000 Stock Plan for Non-Employee Directors. The 2000 Stock Plan for Non-
Employee Directors is designed to attract, incent and retain the best available
members of the board of directors and to promote the success of our business,
through grants of nonqualified stock options. The administrator administers the
plan and determines to whom options are to be granted and the terms and
conditions, including the number of shares and the period of exercisability,
thereof. We adopted the 2000 Stock Plan for Non-Employee Directors effective as
of March 1, 2000, and the stockholders approved the plan on , 2000.
Subject to adjustment as provided in the 2000 Stock Plan for Non-Employee
Directors, the number of shares of common stock that may be issued under the
plan may not in the aggregate exceed 500,000 shares, which may be shares of
original issuance or shares of restricted stock repurchased by us at their
original purchase price or a combination thereof. Our non-employee directors
may be selected by the administrator to receive benefits under the 2000 Stock
Plan for Non-Employee Directors.
The administrator, which will be our full board of directors, may grant
nonqualified stock options to our non-employee directors that entitle the
optionee to purchase shares of common stock. The term of each option will be
stated in the applicable option agreement. The administrator will determine the
exercise price of a nonqualified option, which may be equal to, less than or
greater than the fair market value per share on the date of grant. Each option
shall become cumulatively exercisable upon the completion of their periods of
service or the occurrence of events as the administrator will determine.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, promissory note, by surrender of shares
and other forms of cashless exercise.
Options are not transferable by a participant except if the administrator
makes the right transferable or if transferred by will or the laws of descent
and distribution. If the administrator makes an option or a purchase right
transferable, the option or purchase right will contain additional terms and
conditions that the administrator deems appropriate. An option may be exercised
within 12 months following the death of the optionee, by the optionee's estate
or by the person who acquires the right by bequest or inheritance, if the
optionee would have been entitled to exercise the right on the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
The 2000 Stock Plan for Non-Employee Directors may be amended from time to
time by the board of directors, with shareholder approval to the extent
necessary and desirable to comply with applicable law.
49
<PAGE>
As of March 31, 2000, there were option rights to purchase 28,000 shares of
common stock, at an exercise price of $5.00 per share, and 56,000 shares of
common stock, at an exercise price equal to the initial public offering price,
outstanding under this plan. The total number of stock options or other awards
that will be granted under the 2000 Stock Plan for Non-Employee Directors in
the future is not determinable at this time. The 2000 Stock Plan for Non-
Employee Directors is not the exclusive means by which we may grant equity-
based incentive awards and in no way limits our ability to grant equity-based
awards outside the 2000 Stock Plan for Non-Employee Directors.
Certain Tax Consequences of the 2000 Stock Plan for Non-Employee
Directors. In general, a participant will recognize ordinary income upon the
exercise of a nonqualified stock option in an amount equal to the difference
between the option price paid for the shares of common stock and the fair
market value of such shares. The participant's basis for capital gains purposes
in the shares acquired is equal to the sum of the exercise price paid and the
amount taxable as ordinary income. Upon the sale or other disposition of the
shares, any appreciation (or depreciation) in the value of the shares after the
date of exercise generally will be treated as capital gain (or loss) to the
participant, and will be long-term capital gain (or loss) if such shares were
held for more than one year after the date of exercise.
We will be entitled to an income tax deduction that generally corresponds in
time and amount to the amount of any ordinary income recognized by a
participant, provided that, among other things, the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code.
Stock Options Granted in March 2000
In March 2000, as contemplated by the 1997 purchase agreement relating to
the sale of debentures and warrants, we granted options to purchase 1,000,000
shares of our common stock to Ms. Mimi Brooks, our President and Chief
Executive Officer. These options have an exercise price of $3.35 per share with
respect to 500,000 shares and an exercise price of $4.82 per share with respect
to the other 500,000. All of these options have a 10-year term and were vested
immediately upon grant. The options are non-qualified stock options under the
Internal Revenue Code and will result in compensation income to Ms. Brooks at
the time of exercise equal to the difference between the exercise price and the
fair market value at that date. We will be entitled to a compensation deduction
for tax purposes that generally will correspond in time and amount to the
income recognized by Ms. Brooks. As described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," these options will
also result in compensation expense for financial accounting purposes in the
first quarter of fiscal 2000.
401(k) Profit Sharing Plan
Our 401(k) Profit Sharing plan covers all of our employees. The 401(k) plan
is intended to qualify under Section 401(k) of the Code. Consequently,
contributions to the 401(k) plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan. Further, contributions by us, if any, will be deductible by us when made.
Employees may elect to contribute up to 15% of their current compensation to
the 401(k) plan, up to the statutorily prescribed annual limit, which was
$10,500 in 1999. The 401(k) plan permits, but does not require, additional
matching contributions to the 401(k) plan by us on behalf of all participants
in the 401(k) plan. In 1999, we contributed $230,400 to the 401(k) plan.
Employee Stock Purchase Plan
The Board of Directors adopted an Employee Stock Purchase Plan (the "ESPP"),
effective immediately prior to the pricing of this offering. The ESPP was
approved by our stockholders on , 2000. A total of shares of
our common stock are reserved for issuance under the ESPP. Unless sooner
terminated at the discretion of the Board of Directors, the ESPP will terminate
on March 31, 2010.
50
<PAGE>
The ESPP is administered by the Compensation Committee. The Compensation
Committee has the authority to interpret the ESPP, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or advisable in administering the ESPP.
The purpose of the ESPP is to provide eligible employees of the Company and
designated subsidiaries with an opportunity to purchase common stock through
payroll deductions. The ESPP is neither subject to the provisions of ERISA nor
qualified under Section 401 of the Internal Revenue Code.
All employees of the Company and designated subsidiaries are eligible to
participate in the ESPP, other than employees whose customary employment is 20
hours or less per week or whose customary employment is for not more than five
months in any calendar year.
A participant in the ESPP may authorize contributions to the plan through
salary deductions of up to 15% of base compensation. The amounts so deducted
and contributed are applied to the purchase of full shares of common stock
during specified offering periods. The purchase price charged to participants
for such shares is 85% of the lesser of the fair market value of the shares on
the date of purchase or on the first day of the applicable offering period. The
fair market value of shares purchased by any employee during any calendar year
generally may not exceed $25,000. The initial offering period under the ESPP
will begin on the effective date of the plan and end two years later.
Subsequent offering periods will begin on each January 1 and July 1 (beginning
with July 1, 2000) and also end two years later. Shares will be purchased for
participating employees on specified days in each offering period. Shares
purchased under the ESPP will be held in separate accounts for each
participant. Although the offering periods will overlap, an employee may
participate in only one offering period at a time.
Participants may decrease their payroll deductions at any time but not more
than once during any calendar quarter. Participants may increase or decrease
their payroll deductions for any subsequent offering period by notifying the
ESPP administrator no later than 15 days prior to such offering period.
Participants may also withdraw from participation in the ESPP at any time on or
prior to the 15th day of the last month of the offering period. If a
participant withdraws from the ESPP, any contributions which have not been used
to purchase shares will be refunded. A participant who has withdrawn may not
participate in the ESPP again until the next offering period.
In the event of retirement or other termination of employment, any
contributions which have not yet been used to purchase shares will be refunded
and a certificate issued for the full shares in the participant's account.
Alternatively, a participant may elect to have his or her shares sold and the
proceeds, less selling expenses, remitted to him or her. In the event of a
participant's death, any contributions which have not yet been used to purchase
shares and all shares in such participant's account will be delivered to the
participant's beneficiary designated in writing and filed with us, or, if no
beneficiary has been designated or survives the participant, to the
participant's estate.
The ESPP is intended to qualify under Sections 421 and 423 of the Code. In
general, under Section 423, a participant who purchases common stock through
the ESPP will not recognize any income, and we will not be entitled to a
deduction for tax purposes, at the time of the purchase for the difference
between the then fair market value of the common stock and the purchase price
(i.e., the discount below fair market value). If the participant holds the
common stock until at least two years after the beginning of the offering
period and one year after the date of purchase, the participant generally
recognizes ordinary taxable income at the time of sale or other taxable
disposition of the common stock equal to the lesser of: (i) the amount by which
the fair market value of the common stock when granted exceeds the purchase
price (i.e., the discount below fair market value); or (ii) the amount, if any,
by which the common stock's fair market value at the time of the sale or other
taxable disposition exceeds the purchase price. The participant's tax basis in
the common stock will be increased by the amount recognized as ordinary income
and any further gain recognized on the sale or other taxable disposition will
be treated, under current tax rules, as long-term capital gain. In general, we
will not be allowed a tax deduction for any income recognized by the employee
pursuant to either purchase of the shares
51
<PAGE>
or the sale of such shares with respect to any such disposition. However, if
the participant disposes of shares of common stock acquired under the ESPP for
at least one year after the date of purchase (a "disqualifying disposition"),
the participant will recognize compensation income, and we generally will be
entitled to a tax deduction equal to the excess of the fair market value of the
shares on the date of purchase over the purchase price (i.e., the discount
below fair market value) regardless of the amount received by the participant
in connection with the disqualifying disposition. The participant's tax basis
in the shares disposed of will be increased by the amount recognized as
ordinary income and any further gain or loss realized upon the disqualifying
disposition will be short-term or long-term capital gain or loss, depending
upon the length of time between the purchase and the disqualifying disposition
of the shares.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee during 1999 were Ms. Brooks and
Messrs. Lozier and Mohan. The current members of the compensation committee are
Messrs. McGilloway and Pinto. No executive officer of our company serves on the
board of directors or compensation committee of any entity which has one or
more executive officers serving as a member of our board of directors or
compensation committee. For more information about transactions and
relationships between us and Ms. Brooks and Messrs. Lozier, Mohan, McGilloway
and Pinto, you should see the "--Directors, Executive Officers and Key
Employees" and "Certain Transactions" sections of this prospectus.
52
<PAGE>
CERTAIN TRANSACTIONS
Investment by Summit, Paul F. Lozier and Samedan, Inc.
Subordinated Debenture and Warrant Purchase Agreement
In March 1997, Summit Ventures IV, Summit Investors III, Samedan, Inc., and
Mr. Paul F. Lozier (the investors), and Ms. Mimi Brooks and Mr. Darren Bryden
(the principal shareholders) entered into a 9% senior subordinated debenture
and warrant purchase agreement and related agreements with us. Ms. Brooks is
our President and Chief Executive Officer and Chairwoman of our board of
directors and held these positions in March 1997. In March 1997, Mr. Bryden
served as our Executive Vice President. Mr. Mohan, who is a General Partner of
Summit Partners, and Mr. Lozier are currently directors of our company.
Under the purchase agreement, we agreed to issue and the investors agreed to
buy a total of approximately $5.5 million principal amount of 9% senior
subordinated debentures due March 2002 and warrants to purchase 2,150,000
shares of our common stock (giving effect to the anti-dilution provisions of
the warrant agreement discussed below), for a total consideration of
approximately $5.1 million in cash. The proceeds from the sale of the senior
subordinated debentures and the warrants were used to provide working capital
and to fund business expansion. The purchase agreement contains various
financial and negative covenants that restrict our ability to take specified
actions. The covenants will no longer apply to us upon consummation of this
offering.
Sale of Senior Subordinated Debentures
Pursuant to the purchase agreement, on March 19, 1997, we issued
approximately $5.5 million aggregate principal amount at maturity of 9% senior
subordinated debentures due March 2002. The senior subordinated debentures are
junior in right of payment to all senior debt. The senior subordinated
debentures bear interest from the date of issuance until the date of payment of
principal in full at the rate of 9.0%. Interest is computed on the basis of a
360-day year and the actual number of days elapsed on the unpaid principal
amount of senior subordinated debentures. Interest accrues and is compounded
annually on the senior subordinated debentures and will be paid upon payment of
principal. The net proceeds from the offering of the senior subordinated
debentures and warrants accompanying the senior subordinated debentures were
approximately $5.1 million after deducting the discount payable to the
purchasers and the offering expenses.
The principal amount of the senior debentures is payable in full on March
19, 2002, but we may prepay the senior subordinated debentures at any time in
whole or in installments of $100,000, without premium or penalty. The senior
subordinated debentures will be repaid in full with a portion of the proceeds
of this offering.
Warrant Agreement
Pursuant to the purchase agreement described above, we also entered into a
warrant agreement in connection with the issuance to the investors of the
warrants to purchase 2,150,000 shares of common stock. The warrant agreement
sets forth the provisions of the warrants and the terms and conditions on which
the warrants may be issued, exchanged, exercised and replaced. Under the
warrant agreement, each warrant certificate entitles the holder to purchase the
number of shares of common stock specified on the warrant certificate at a
purchase price of $0.01 per share at any time on or after March 20, 1997 and on
or before the expiration date, which is April 19, 2004.
The shares of common stock issuable upon exercise of the warrants are
subject to anti-dilution adjustments upon extraordinary distribution of our
assets, declaration or payment of a share dividend, combination of its
outstanding common stock into a smaller number of shares of common stock, or
issuance of any shares of its capital stock in a reclassification of its common
stock (including any reclassification in connection with a consolidation or
merger in which our company survives). In addition, in the event of a
consolidation or merger in which our company does not survive, a liquidating
dividend with respect to the common stock or a tender
53
<PAGE>
offer or exchange offer with respect to the common stock (other than a tender
offer opposed by our board of directors), the warrant holder will have the
right to receive the consideration with respect to the shares for which the
warrant is exercisable, reduced by the exercise price.
The holders of the warrants have agreed to exercise all of the warrants upon
the completion of this offering. Any warrants not exercised will terminate the
first business day following the completion of this offering.
Shareholders Agreement
On March 19, 1997, as a condition to the purchase agreement entered into on
the same date, we entered into a shareholder agreement with the principal
shareholders and investors. The agreement entitles the shareholders to a right
of first refusal and a right of participation on transfers by a principal
shareholder and preemptive rights to acquire a pro rata share of new securities
issued by us. The preemptive rights do not apply to this offering. The parties
also agreed to vote all shares owned by them for the election of directors
pursuant to the terms of the shareholders agreement.
Pursuant to its terms, the shareholders agreement will terminate immediately
prior to the consummation of this offering.
Samedan Engagement Letter
On March 8, 1997, we entered into an engagement letter with Samedan, Inc.
pursuant to which Samedan agreed to act as our financial advisor to assist us
in raising capital for a one-year term. Samedan, Inc., which is wholly-owned by
Mr. Lozier, was paid a fee of $200,000 in connection with the issuance of the
debentures and warrants, $80,000 of which was paid in cash. In consideration of
the remaining $120,000 of the fee and a cash payment of $123,402, Samedan
received $243,402 principal amount of senior subordinated debentures and
Mr. Lozier received warrants to acquire 100,000 shares.
Registration Rights Agreement
In connection with the purchase agreement, on March 19, 1997, we entered
into a registration rights agreement with Summit Ventures IV, L.P., Summit
Investors III, L.P., and Paul F. Lozier to provide these investors with demand
and "piggyback" registration rights with respect to shares of common stock
issuable upon exercise of the warrants acquired under the purchase agreement or
otherwise.
Registration demand rights granted under the agreement require us, at any
time, to register our common stock held by investors in connection with a firm
commitment underwriting upon written request by investors that hold in the
aggregate at least 25% of our outstanding common stock held by or issuable to
all investors party to the agreement, or any lesser percentage if the
anticipated aggregate price to the public of the offering would exceed $10
million. Investors meeting these requirements may collectively initiate up to
two demand right registrations. After any demand registration request, we are
obligated to promptly give written notice of the proposed registration to other
investors and use all commercially reasonable efforts to effect the
registration of the common stock issuable upon exercise of the warrants.
Additional investors may join in the demand registration upon a written request
given within 30 days after receipt of the notice from us. The number of
securities registered may be limited by the managing underwriter for marketing
purposes and, under those circumstances, the number of securities registered
will be divided pro rata among all investors that request registration. We are
only permitted to include shares held by us or the joining investors in the
demand registration if we have the consent of the investors initially
requesting registration or if inclusion of the additional shares of common
stock will not reduce the number or the offering price of shares to be
registered by those investors.
The investors party to the agreement also have "piggyback" registration
rights. If we determine to register any securities on our own account, for
security holders or for holders exercising registration rights other than
54
<PAGE>
the rights described above, we are obligated to give notice to investors
including the number of shares to be registered and the name of the proposed
underwriter. Investors will have 20 days from the date of delivery of the
written notice to request registration of the common stock issuable upon the
exercise of their warrants. We are obligated to use our best efforts to
register all securities specified in timely written requests submitted by
investors in response to our notice. Any limitation by the underwriter on the
number of securities to be registered will first exclude securities not held by
investors party to the agreement and their assignees and then exclude
securities pro rata based upon the total number of securities held by the
holders requesting registration. We are obligated to pay all expenses
associated with the registration, except for underwriting discounts and selling
commissions, and to keep the holders advised as to initiation and completion of
each registration. Expenses payable by the holders will be borne by the holders
pro rata on the basis of the number of shares registered by each. The investors
have agreed to waive their piggyback registration rights in connection with
this offering.
We are not obligated to effect a registration of securities under the
agreement if:
. we receive a written opinion that registration is not required under the
securities laws;
. we have obtained a no-action letter from the Securities and Exchange
Commission stating that registration is not required; or
. we determine in good faith that use of a prospectus would require
disclosure of material information for which we have a bona fide
business purpose for preserving as confidential and the securities laws
do not otherwise require disclosure of the information.
The investors party to the agreement are obligated to refrain from selling
registrable securities during any period when, and to the same extent that, our
officers are restricted in connection with an offering of securities by us.
Issuance of Junior Subordinated Debentures
In connection with the sale of the senior subordinated debentures and
warrants, we and Logical Design Solutions International, Inc., which was an
affiliated company, agreed to convert from a subchapter "S" corporation to a
subchapter "C" corporation. Prior to the closing of the sale in connection with
the conversion, we issued $1,114,289 aggregate principal amount of 9% junior
subordinated debentures due March 2003 to the principal shareholders, an amount
representing their retained earnings in the companies. Ms. Brooks received and
currently holds $1,073,900 principal amount of the debentures. The terms of the
junior subordinated debentures are identical to those of the senior
subordinated debentures in all material respects, except that the junior
subordinated debentures are payable one year after the senior subordinated
debentures and are junior in right of payment to all senior debt, including the
senior subordinated debentures. Upon events of default under the purchase
agreement, and in some cases only with the consent of the holder or holders of
greater than 50% of the principal amount of the senior subordinated debentures,
the unpaid principal amount and accrued and unpaid interest in the senior and
junior subordinated debentures will automatically become due and payable.
In addition, prior to the closing of the sale, we and Logical Design
Solutions International, Inc. distributed to the principal shareholders cash
equal to the amount of estimated federal and state income taxes payable by
these shareholders for periods prior to the closing date of the sale. In the
purchase agreement, the parties agreed that appropriate adjustments would be
made in the case of an overdistribution. During 1998, final subchapter "S" tax
calculations and income tax returns were prepared and returns filed for us and
Logical Design Solutions International, Inc., which resulted in the
finalization of taxes payable and earnings available for distribution to the
principal shareholders. This resulted in a reclassification of certain of the
distributions to the principal shareholders as loans by us to them in amounts
equal to the overdistribution, which included accrued interest from the closing
date of the sale, as agreed to by us, the principal shareholders and the
investors. As a result of the reclassification, Ms. Brooks executed a
promissory note to us in the amount of $401,932. The note accrues interest at a
9.0% rate compounded annually. The principal amount of the loan plus accrued
interest is
55
<PAGE>
due and payable on March 19, 2003. $447,151 of principal and accrued interest
was outstanding as of March 31, 2000 on the note from Ms. Brooks.
The junior subordinated debentures will be repaid in full with a portion of
the proceeds of this offering.
Jump! Transaction
In November 1999, we completed a merger with Jump! Information
Technologies, Inc., by exchanging 109,500 shares of our common stock and
$525,000 in cash for all of the common stock of Jump!. In addition, Jump!'s
options were converted into options to purchase 25,339 shares of our common
stock. We incurred acquisition costs of $149,000 and issued 12,671 vested
stock options valued at $168,000 associated with the Jump! acquisition, which
are included in goodwill. We accounted for this transaction as a purchase.
Mr. Allan Von Dette and Mr. William Engel, the Jump! shareholders, entered
into a shareholders agreement at the time of the acquisition governing their
rights and obligations with respect to the shares of common stock held by them
and in the escrow account described below. The agreement prohibits either
shareholder from selling or transferring any common stock without first giving
us and the non-selling shareholders a right of first refusal.
Under the shareholders agreement, we have agreed to repurchase any shares
of a Jump! shareholder whose employment with the firm is terminated. If the
termination is a voluntary resignation or an involuntary termination by us
with just cause, the repurchase price will be zero based on a termination date
prior to January 1, 2000, 25% of the fair market value based on a date of
termination from and including January 1, 2000 and prior to March 31, 2000,
50% from and including March 31, 2000 and prior to June 30, 2000, 75% from and
including June 30, 2000 and prior to September 30, 2000 and 100% of the fair
market value from September 30, 2000. If the employment is terminated for any
other reason, we will repurchase the shares for 100% of the fair market value.
This agreement will terminate upon the consummation of this offering.
Of the 109,500 shares issued in the acquisition of Jump!, 68,182 were
deposited into an escrow account as security for any general or tax
indemnification obligations by the sellers resulting from the acquisition. The
general indemnification covers any loss, liability, claim or damage from
failure of a representation or warranty or breach of any covenant in the Jump!
stock purchase agreement. The tax indemnification will indemnify against
liability for the taxes of Jump! for any pre-closing period, including real,
personal and intangible property taxes, and any liability of the sellers or
persons affiliated with Jump!. The sellers maintain the rights to dividends
and voting rights on the shares that are held in the escrow account.
The escrowed property will not to be distributed until the release of all
the escrow property on November 10, 2000. In the event of a merger, however,
if we are not the survivor of the merger, then one half of the escrow property
will be distributed to the Jump! shareholders, provided the Jump! shareholders
are still employed by us.
In the event of an initial public offering by us prior to termination of
the escrow account, the Jump! shareholders are permitted to substitute $75,000
for the escrow shares. Also, if the Jump! shareholders' employment is
terminated, we are obligated to repurchase the shares in accordance with the
Jump! shareholder agreement, and the Jump! shareholders must deposit up to
$75,000 of the proceeds from our repurchase into the escrow account.
Other Transactions
During 1998, Mr. Bryden, who was a director of our company, served as our
Executive Vice President until January 1999 and is beneficial owner of
approximately 6.3% of our outstanding common stock prior to this offering,
borrowed a total of $247,100 from us. Mr. Bryden executed a promissory note,
dated November 17, 1998, and a mortgage note and second mortgage, each dated
June 11, 1998 and each in favor of us. The
56
<PAGE>
promissory note is in the amount of $66,100 with interest compounded annually
at a rate of 8.5%. Under the mortgage note and second mortgage, Mr. Bryden
borrowed $181,000, interest compounded annually at a rate of 8.5%. As security
for the payment of the promissory note and second mortgage, Mr. Bryden has
executed a stock pledge agreement in favor of us, dated as of June 11, 1998,
under which he has pledged all shares of our capital stock owned by him up to a
maximum of $250,000 in market value. As of March 31, 2000, $278,583 of
principal and accrued interest is outstanding on the loan to Mr. Bryden.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of March 31, 2000 and as adjusted to reflect the sale of
common stock in this offering by:
. each person (or group of affiliated persons) who is the beneficial
owner of more than 5% of the outstanding common stock;
. each of the named executive officers;
. each of our directors; and
. all of the executive officers and directors as a group.
The persons named in this table have sole voting power for all shares of
common stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days after March 31, 2000, are deemed outstanding. These shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated, the address of each person named
below is c/o Logical Design Solutions, Inc., 465 South Street, Suite 103,
Morristown, New Jersey 07960.
The "Percent of Total After Offering" percentages include 2,150,000 shares
issuable upon the exercise of warrants which must be exercised prior to the
completion of this offering and assume that the option granted to the
underwriters to purchase additional shares is not exercised.
<TABLE>
<CAPTION>
Percent of Total
-----------------
Number of
Shares
Beneficially Before After
Name Owned Offering Offering
---- ------------ -------- --------
<S> <C> <C> <C>
Mimi Brooks(1)................................. 8,065,001 89.8% 55.1%
Summit Partners(2)............................. 2,050,000 20.4 15.0
Darren Bryden(3)............................... 785,000 9.8 5.8
E. Bruce Lovenberg(4).......................... 52,500 * *
David W. Stoltzfus(4).......................... 103,750 1.3 *
Thomas Shea(4)................................. 77,500 1.0 *
Paul F. Lozier(5).............................. 128,000 1.6 *
Kevin McGilloway(6)............................ -- -- --
Kevin Mohan(7)................................. 2,050,000 20.4 15.0
Frank A. Pinto(6).............................. -- -- --
All executive officers and directors as a group
(10 persons).................................. 10,476,751 92.0 70.4
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Includes 1,000,000 shares of common stock issuable upon the exercise of
stock options granted in March 2000. 325,841 of these shares are subject to
the underwriters' over-allotment option. See "Selling Stockholders."
(2) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Summit has agreed to exercise these warrants prior to the
completion of this offering. 94,547 of these shares are subject to the
underwriters' over-allotment option. See "Selling Stockholders." The
address of Summit Ventures IV, L.P. is 600 Atlantic Avenue, Suite 2800,
Boston, MA 02210.
(3) 100,000 of these shares are subject to the underwriters' over-allotment
option. See "Selling Stockholders." Mr. Bryden's address is 156 Smoke Rise
Road, Basking Ridge, NJ 07920.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
58
<PAGE>
(5) Includes (a) 100,000 shares of common stock issuable upon the exercise of
warrants, which are exercisable at any time at the option of the holder and
(b) 28,000 shares of common stock issuable upon the exercise of stock
options granted in March 2000. Mr. Lozier has agreed to exercise his
warrants prior to the completion of this offering. 4,612 of these shares
are subject to the underwriters' over-allotment option. See "Selling
Stockholders." Mr. Lozier's address is 40 Dellwood Drive, Madison, NJ
07940.
(6) Excludes options to purchase 28,000 shares granted upon acceptance of the
directorship. The grant of options is contingent upon consummation of the
initial public offering and the options are exercisable at the initial
public offering price. Options to purchase 7,000 shares are exercisable
immediately upon consummation of the offering. The remaining options become
exercisable in equal amounts, on each of the first three anniversaries of
the grant date.
(7) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Mr. Mohan is (i) a general partner of Stamps, Woodsum & Co.
IV, which is the general partner of Summit Ventures IV, L.P. and (ii) a
general partner of Summit Investors III, L.P. Mr. Mohan expressly disclaims
beneficial ownership of these shares, except as to his proportionate
interest in Summit Ventures IV, L.P. and Summit Investors III, L.P. The
address of Summit Ventures IV, L.P. is 600 Atlantic Avenue, Suite 2800,
Boston, MA 02210.
SELLING STOCKHOLDERS
The stockholders named in the following table have granted the underwriters
an option to purchase 525,000 additional shares solely to cover over-
allotments. The respective number of shares subject to the option by each
selling stockholder is set forth opposite their name and assumes that the
option is exercised in full. If the underwriters exercise only a portion of the
option, the number of shares to be sold by the selling stockholders will be
proportionately reduced on a pro rata basis.
The "Beneficial Ownership After the Offering" share numbers and percentages
include 2,150,000 shares issuable upon the exercise of warrants which must be
exercised prior to the completion of this offering and assume that the option
granted to the underwriters to purchase additional shares is exercised in full.
<TABLE>
<CAPTION>
Shares
to be Sold
Beneficial Ownership in the Beneficial Ownership
Prior to the Over-Allotment After the
Offering(1) Option Offering(1)
-------------------- -------------- --------------------
Name Number Percentage Number Percentage
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Mimi Brooks(2)........ 8,065,001 89.8% 325,841 7,739,160 52.9%
Summit Partners(3).... 2,050,000 20.4 94,547 1,955,453 14.4
Paul F. Lozier(4)..... 128,000 1.6 4,612 123,388 *
Darren Bryden(5)...... 785,000 9.8 100,000 685,000 5.0
-------
Total............... 525,000
=======
</TABLE>
- --------
(1) See the footnotes of the table under the heading "Principal Stockholders"
for information concerning calculation of the beneficial ownership of each
of the selling stockholders.
(2) Ms. Brooks is our founder, Chief Executive Officer and Chairwoman.
(3) Summit Partners is affiliated with Kevin Mohan, one of our directors.
(4) Mr. Lozier is one of our directors.
(5) Mr. Bryden is a former executive and former member of our board of
directors.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of the offering, our authorized capital stock will consist
of 60,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. The following information
relates only to our amended and restated certificate of incorporation, which
will be adopted prior to the closing of this offering.
Common Stock
As of the date of this prospectus, there were 7,976,401 shares of common
stock outstanding and held of record by 14 stockholders. Based upon the number
of shares outstanding as of the date of this prospectus and giving effect to
the issuance of 3,500,000 shares of common stock by us in this offering and
giving effect to the exercise of our redeemable warrants, there will be
13,626,401 shares of common stock outstanding upon completion of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. They do not have cumulative voting
rights. As a result, 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,
dividends, if any, as the board of directors may declare out of funds legally
available, subject to any preferential dividend rights of any then-outstanding
preferred stock. Upon our liquidation, dissolution or winding up, the holders
of common stock are entitled to receive ratably our net assets available after
the payment of all debts and other liabilities and subject to the prior rights
of any then-outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption or conversion rights. 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 we may designate and issue in the future. See "--
Preferred Stock."
Preferred Stock
As of the date of this prospectus, we had no outstanding shares of preferred
stock.
Following the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 10,000,000 shares of preferred stock in one or more series.
The board of directors may fix or alter the designations, preferences, rights
and any qualification, limitations or restrictions of the shares of any series,
including the dividend rights, dividend rates, conversion rights, voting
rights, redemption terms and prices, liquidation preferences and the numbers of
shares constituting any series. As of the closing of this offering, no shares
of preferred stock will be outstanding. Although the ability of the board of
directors to designate and issue preferred stock could provide flexibility in
possible acquisitions or other corporate purposes, issuance of preferred stock
may have adverse effects on the holders of common stock. The effects include:
. restrictions on dividends on the common stock if dividends on the
preferred stock have not been paid;
. dilution of voting power of the common stock to the extent the preferred
stock has voting rights; or
. deferral of participation in our assets upon liquidation until
satisfaction of any liquidation preference granted to holders of the
preferred stock.
In addition, issuance of preferred stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock and
accordingly may be used as an "anti-takeover" device. The board of directors,
however, currently does not contemplate the issuance of any preferred stock and
is not aware of any pending transactions that would be affected by that
issuance.
60
<PAGE>
Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation
and Bylaws and Provisions of Delaware Law
Our amended and restated certificate of incorporation and bylaws, which will
become effective prior to the closing of this offering, and provisions of
Delaware corporate law may hinder or delay a third party's attempt to acquire
us. They may also make it difficult for the stockholders to remove incumbent
management.
Classified Board of Directors; Removal; Vacancies. Our amended and restated
certificate of incorporation divides the board of directors into three classes.
The directors in each class serve three-year terms. The directors' terms are
staggered by class. Our classified board of directors is intended to provide
continuity and stability in the board of director's membership and policies.
However, a classified board of directors makes it more difficult for
stockholders to change the board of directors' composition quickly. Also, under
the amended and restated certificate of incorporation, directors may be removed
only for cause by a two-thirds stockholder vote. In addition, a majority of the
directors then in office can fill board vacancies and newly created
directorships resulting from any increase in the size of the board of
directors. This is true even if those directors do not constitute a quorum or
if only one director is left in office. These provisions could prevent
stockholders, including parties who want to take over or acquire us, from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our amended and restated bylaws will establish an
advance notice procedure regarding nominations of directors by stockholders and
other stockholder proposals. The advance notice procedure will not apply to
nominations of directors by the board of directors. For matters a stockholder
wishes to bring before an annual meeting of stockholders, the stockholder must
deliver us notice not less than 60 days nor more than 90 days before the first
anniversary of the preceding year's annual meeting of nominations and other
business to be brought before a an annual meeting of our stockholders. The
stockholder must put information in the notice regarding
. the stockholder and its holdings;
. the background of any nominee for director;
. the written consent to being named as a nominee and to serving as a
director if elected;
. any business desired to be brought before the meeting;
. the reasons for conducting the business at the meeting; and
. any material interest of the stockholder in the business proposed.
At a special meeting of stockholders called to elect directors, stockholders
can make a nomination only if they deliver to us a notice that complies with
the above requirements no later than the tenth day following the day on which
public announcement of the special meeting is made. The bylaws could preclude a
nomination for the election of directors or the conduct of certain business at
a particular meeting if the proper procedures are not followed. This may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
us.
Special Stockholders' Meetings. Our amended and restated certificate of
incorporation and bylaws will permit special meetings of the stockholders to be
called only by the board of directors, the Chairperson of the board, the Chief
Executive Officer or the President or holders of at least 75% of our securities
that are outstanding and entitled to vote in an election of directors.
Limitations on Stockholder Action by Written Consent. Our amended and
restated certificate of incorporation will place limits on the stockholders'
ability to act by written consent. Specifically, any action to be taken at a
stockholders' meeting may be taken without a meeting only if consented to
generally by stockholders having voting power of at least 75% of the voting
power of all shares of each class or series entitled to vote on the action.
61
<PAGE>
Authorized But Unissued Shares. Without stockholder approval, we can issue
shares of common stock and preferred stock up to the number of shares
authorized for issuance in our amended and restated certificate of
incorporation, except as limited by Nasdaq rules. We could use these additional
shares for a variety of corporate purposes. These purposes include future
securities offerings to raise additional capital, corporate acquisitions and
employee benefit plans. Our ability to issue these shares of common stock and
preferred stock could make it more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
Section 203 of Delaware Law. After this offering is completed, Section 203
of the Delaware General Corporation Law will apply to us. This section will
prohibit us from engaging in a "business combination" with an "interested
stockholder." This restriction will apply for three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes (1) mergers, (2) asset sales and (3) other transactions
resulting in a financial benefit to an interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our voting
stock. Section 203 could delay, defer or prevent a change in our control. It
might also reduce the price that investors might be willing to pay in the
future for shares of common stock.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation will provide that our
directors shall not be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1)
for any breach of the director's duty of loyalty to us or our stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under a provision of Delaware law relating
to unlawful payment of dividends or unlawful stock purchase or redemption of
stock or (4) for any transaction from which the director derives an improper
personal benefit. As a result of this provision, we and our stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
Our amended and restated bylaws will provide for the indemnification of
directors and officers and any person who is or was serving at our request as a
director, officer, employee, partner or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise to the fullest extent authorized by, and subject to the conditions
set forth in, the Delaware General Corporation Law against all expenses,
liabilities and losses. The indemnification provided under the bylaws will
include the right to be paid by us the expenses in advance of any proceeding
for which indemnification may be had in advance of its final disposition.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
We have applied to have our common stock listed on the Nasdaq National
Market under the trading symbol "LDSI."
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the availability for sale, of substantial amounts of our common
stock in the public market could adversely affect our common stock's prevailing
market price. Upon completion of this offering, we will have outstanding an
aggregate of 13,626,401 shares of our common stock, assuming no exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless the shares are purchased by our "affiliates" as that
term is defined in Rule 405 under the Securities Act. The remaining shares of
common stock held by existing stockholders are "restricted securities" as that
term is defined in Rule 144 under the Securities Act. Restricted securities may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701. These two rules are
summarized below. Further, as described below, holders of some of our common
stock have rights to have their shares registered and we plan to file a
registration statement to cover the shares issued under our option plans.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
this offering closes, a person who has beneficially owned common stock for at
least one year would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 136,264 shares of common stock immediately after
this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, these shares may be sold immediately upon the completion
of this offering.
Rule 701
As of March 31, 2000, options to purchase 2,303,230 shares of common stock
were outstanding.
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase common stock from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with certain restrictions, including the holding period
contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and may be sold:
. beginning 90 days after the date of this prospectus;
63
<PAGE>
. by persons other than affiliates subject only to the manner of sale
provisions of Rule 144; and
. by affiliates under Rule 144 without compliance with its one year
minimum holding period requirement.
Lock-Up Agreements
All of our officers and directors, and holders of substantially all of our
stock have signed lock-up agreements. Under these agreements, they agreed,
among other things, not to transfer or dispose of any shares of common stock,
or any securities convertible into shares of common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Salomon Smith Barney Inc. This consent
may be given at any time without public notice.
Registration Rights
Upon completion of this offering, stockholders owning an aggregate of
2,150,000 shares of common stock will have registration rights as to their
shares. All of these shares of common stock are subject to lock-up agreements.
These stockholders, or their transferees, will be entitled to request that we
register their shares and are entitled to piggyback registration rights. See
"Certain Transactions--Registration Rights Agreement." After registration,
these shares will be freely tradeable without restriction under the Securities
Act, unless the shares are purchased by affiliates.
Stock Plans
As soon as practicable after this offering, we intend to file registration
statements on Form S-8 under the Securities Act covering the shares of common
stock reserved for issuance under our stock option plans. The registration
statements are expected to automatically become effective upon filing.
Accordingly, shares registered under these registration statements will,
subject to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market shortly after this
offering closes, and in the case of our officers, directors and stockholders
who have entered into lock-up agreements, after the 180-day lock-up agreements
expire.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
Salomon Smith Barney Inc........................................
Lehman Brothers Inc.............................................
SG Cowen Securities Corporation.................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Lehman Brothers Inc.
and SG Cowen Securities Corporation are acting as representatives, propose to
offer some of the shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the shares to
dealers at the public offering price less a concession not in excess of $
per share. The underwriters may allow, and the dealers may reallow, a discount
not in excess of $ per share on sales to other dealers. If all the shares
are not sold at the initial offering price, the representatives may change the
public offering price and other selling terms. The representatives have advised
us that the underwriters do not intend to confirm any sales to any accounts
over which they exercise discretionary authority.
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
525,000 additional shares of our common stock at the public offering price less
the underwriting discount. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent this option is exercised, each underwriter will be
obligated, subject to some conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
At our request, the underwriters will reserve up to 5% of the shares of our
common stock to be sold in this offering, at the initial public offering price,
to our directors, officers and employees, as well as to some of our customers
and suppliers. This directed share program will be administered by Salomon
Smith Barney Inc. The number of shares of common stock available for sale to
the general public will be reduced to the extent these individuals purchase
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered by this prospectus. We have agreed to indemnify the underwriters
against some liabilities and expenses, including liabilities under the
Securities Act of 1933, in connection with sales of the directed shares.
We, our executive officers and directors and holders of substantially all of
our existing outstanding shares have agreed that, for a period of 180 days from
the date of this prospectus, we will not, without prior written consent of
Salomon Smith Barney Inc., dispose of or hedge, any shares of our common stock
or any securities convertible into, or exercisable or exchangeable for, our
common stock. Salomon Smith Barney Inc., in its sole discretion, may release
any of the securities subject to these lock-up agreements at any time without
notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be negotiated among us, the selling stockholders and the representatives.
Among the factors to be considered in determining the public offering price
will be:
. our record of operation;
. our current financial condition;
65
<PAGE>
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the industry in
which we compete;
. our management; and
. currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded
companies considered comparable to us.
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may
not develop and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "LDSI."
The following table shows the underwriting discount that we and the selling
stockholders will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total......................................... $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of our common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of shares made to prevent or retard a decline in the market price of the shares
while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchase shares originally sold by that syndicate
member.
Any of these activities may cause the price of the shares to be higher than
it would otherwise be in the open market in the absence of these transactions.
Salomon Smith Barney Inc. may effect these transactions on the Nasdaq National
Market or in the over-the-counter market, or otherwise and may discontinue them
at any time.
We estimate that our total expenses for this offering, excluding the
underwriting discount, will be $1.6 million.
Lehman Brothers Inc., one of the representatives, is a client of ours and we
may realize significant revenues in 2000 from this client relationship.
Further, Kevin McGilloway, who was elected in March 2000 to serve as a member
of our board of directors, is the Chief Information Officer of Lehman Brothers
Inc. Upon Mr. McGilloway's acceptance of his directorship with us, he was
granted options to purchase 28,000 shares exercisable at the initial public
offering price. The grant of the options is contingent upon consummation of the
initial public offering.
The representatives or their respective affiliates may in the future perform
various investment banking and advisory services for us from time to time, for
which they will receive customary fees. The representatives may, from time to
time, engage in transactions with and perform services for us in the ordinary
course of business.
66
<PAGE>
We and the selling stockholders have agreed to indemnify the underwriters
against some liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and other
legal matters will be passed upon for us by Brown & Wood LLP, New York, New
York. Legal matters in connection with the offering will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Jump! Information Technologies, Inc. as of December 31, 1998 and
for the periods from January 1, 1999 to November 9, 1999 and March 6, 1998
(inception) to December 31, 1998 as set forth in their report. We have included
these financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It includes
exhibits and schedules. This prospectus is part of the registration statement.
It does not contain all of the information that is in the registration
statement. The registration statement contains more information about us and
the common stock. Statements contained in this prospectus concerning the
provisions of documents filed as exhibits to the registration statement are
necessarily summaries which disclose the material terms of such documents. Each
of these statements is qualified in its entirety by reference to the copy of
the applicable document filed with the SEC. You may read and copy all or any
portion of the registration statement at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room's operations. The registration statement is also available to you on the
SEC's Internet site (http://www.sec.gov). We intend to furnish our stockholders
with annual reports containing financial statements audited by our independent
accountants and make available quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year. These reports are
also available to you on the SEC's Internet site.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information
<TABLE>
<S> <C>
Overview.................................................................. F-2
Unaudited Pro Forma Statement of Operations for the year ended December
31, 1999................................................................. F-3
Notes to Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1999........................................................ F-3
Logical Design Solutions, Inc.
Report of Independent Auditors............................................ F-4
Balance Sheet at December 31, 1998 and 1999............................... F-5
Statements of Operations for each of the three years in the period ended
December 31, 1999........................................................ F-6
Statements of Changes in Stockholders' Equity (Deficiency) for each of the
three years in the period ended December 31, 1999........................ F-7
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999........................................................ F-8
Notes to Financial Statements............................................. F-10
Jump! Information Technologies, Inc.
Report of Independent Auditors............................................ F-23
Balance Sheet at December 31, 1998........................................ F-24
Statements of Income for the period from March 6, 1998 (inception) to
December 31, 1998 and
January 1, 1999 to November 9, 1999...................................... F-25
Statements of Cash Flows for the period from March 6, 1998 (inception) to
December 31, 1998 and January 1, 1999 to November 9, 1999................ F-26
Notes to Financial Statements............................................. F-27
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statement of operations for the year ended
December 31, 1999 set forth below presents our results of operations for 1999
as if the acquisition of Jump! Information Technologies, Inc. on November 10,
1999 had occurred at January 1, 1999. The unaudited pro forma statement of
operations for the fiscal year ended December 31, 1999 combines, with
appropriate adjustments, our audited results of operations for our year ended
December 31, 1999 and the audited results of operations of Jump! for the period
ended November 10, 1999.
The unaudited pro forma statement of operations has been prepared on the
basis of preliminary assumptions and estimates. The unaudited pro forma
statement of operations may not be indicative of the results of operations that
would have been achieved if the acquisition of Jump! Information Technologies,
Inc. had been effected on the date indicated or which may be achieved in the
future. The unaudited pro forma statement of operations and notes thereto
should be read in conjunction with "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of Logical Design Solutions and Jump! Information
Technologies, Inc., all included elsewhere in this prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Jump! Actual
(January 1,
1999-
LDS November 9, Pro Forma LDS
Actual 1999)(1) Adjustments Pro Forma
------- ------------ ----------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $15,839 $2,101 $ -- $17,940
Cost of revenue.................. 7,541 1,106 -- 8,647
------- ------ ----- -------
Gross profit................... 8,298 995 -- 9,293
------- ------ ----- -------
Operating expenses:
Selling, general and
administrative................ 6,978 801 -- 7,779
Depreciation and amortization.. 942 13 205(2) 1,160
Stock-based compensation....... 1,077 -- -- 1,077
------- ------ ----- -------
Total........................ 8,997 814 205 10,016
------- ------ ----- -------
Income (loss) from operations.... (699) 181 (205) (723)
Increase in market value of
redeemable warrants............. (7,505) -- -- (7,505)
Interest expense, net............ (1,163) -- -- (1,163)
Interest income.................. 201 3 -- 204
Other income..................... 20 5 -- 25
------- ------ ----- -------
Income (loss) before income
taxes........................... (9,146) 189 (205) (9,162)
Income tax provision (benefit)... (202) 72 (21)(3) (151)
------- ------ ----- -------
Net income (loss)................ $(8,944) $ 117 $(184) $(9,011)
======= ====== ===== =======
Basic net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Diluted net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Weighted average common shares
outstanding..................... 7,868 -- 94(4) 7,962
======= ====== ===== =======
Weighted average common shares
and common share equivalents.... 7,868 -- 94(4) 7,962
======= ====== ===== =======
</TABLE>
- --------
Notes to Unaudited Pro Forma Statement of Operations
(1) In November 1999, Logical Design Solutions, Inc. ("LDS" or the "Company")
acquired 100% of the outstanding stock of Jump! Information Technologies,
Inc. ("Jump!"), a publishing and information services e-business solutions
provider located in Chantilly, Virginia, for a purchase price of
approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$167,000 relating to 12,671 vested stock options and (iii) $149,000 in
closing costs. The fair value of the total assets and total liabilities
related to this acquisition was $578,000 and $452,000, respectively, and
goodwill amounted to $715,000. Goodwill is being amortized over an
estimated useful life of three years.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations
of the acquired business is included in the Company's results of operations
from the acquisition date.
(2) To record amortization expense related to goodwill for January 1, 1999
through November 9, 1999.
(3) To adjust the benefit for income taxes as if Jump! was acquired on January
1, 1999.
(4) To adjust the weighted average common shares outstanding as if the stock
issued in connection with the acquisition had been issued on January 1,
1999.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Logical Design Solutions, Inc.
We have audited the accompanying balance sheets of Logical Design Solutions,
Inc. (the "Company") as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Logical Design Solutions,
Inc. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Hackensack, New Jersey /s/ Ernst & Young LLP
February 17, 2000, except for Note 17
as to which the date is March 1, 2000
F-4
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------------------
1999 Pro Forma
1998 1999 (Note 16)
----------- ----------- --------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ 3,509,742 $ 1,432,005 $ 1,453,505
Accounts receivable, less allowance
for doubtful accounts of $215,566
and $50,000 in 1998 and 1999,
respectively...................... 2,758,373 5,529,901 5,529,901
Unbilled engagement revenues....... 17,365 287,174 287,174
Prepaid expenses and other......... 101,041 125,487 125,487
Refundable income taxes............ 375,000 309,137 309,137
Deferred income taxes.............. 107,200 40,608 40,608
----------- ----------- -----------
Total current assets............. 6,868,721 7,724,312 7,745,812
Property and equipment, net.......... 2,527,933 2,554,171 2,554,171
Deferred financing costs, net of
accumulated amortization of $134,726
and $212,509 in 1998 and 1999,
respectively........................ 245,888 168,105 168,105
Loans to stockholders................ 653,801 711,346 711,346
Deferred income taxes................ 43,348 43,348
Goodwill, net of accumulated
amortization of $ -0- and $33,342 in
1998 and 1999, respectively......... 682,572 682,572
Other assets......................... 55,550 167,420 167,420
----------- ----------- -----------
$10,351,893 $12,051,274 $12,072,774
=========== =========== ===========
Liabilities and stockholders' equity
(deficiency)
Current liabilities:
Capital lease obligations--
current........................... $ 70,473 $ 75,703 $ 75,703
Accounts payable................... 149,124 448,465 448,465
Accrued expenses................... 720,443 1,467,361 1,467,361
Unearned engagement revenues....... 487,075 305,995 305,995
Deferred income taxes--current..... 114,700 48,863 48,863
----------- ----------- -----------
Total current liabilities........ 1,541,815 2,346,387 2,346,387
Senior Subordinated Debentures
(redemption value of $7,048,803 at
December 31, 1999).................. 4,399,599 5,424,063 5,424,063
Junior Subordinated Debentures--
Related Parties..................... 1,301,114 1,417,902 1,417,902
Capital lease obligations............ 274,921 199,219 199,219
Deferred income taxes................ 36,386 36,386
Other liabilities.................... 192,000 156,217 156,217
Redeemable warrants.................. 2,926,381 10,431,337 --
Stockholders' equity (deficiency):
Common stock, no par value,
15,000,000 shares authorized,
7,850,001 and 7,969,801 shares
issued and outstanding at December
31, 1998 and 1999, respectively
(10,119,801
on a pro forma basis--unaudited).. 40,543 6,713,082 34,684,582
Deferred stock compensation........ (5,404,671) (5,404,671)
Accumulated deficit................ (324,480) (9,268,648) (26,787,311)
----------- ----------- -----------
Total stockholders' equity
(deficiency).................... (283,937) (7,960,237) 2,492,600
----------- ----------- -----------
$10,351,893 $12,051,274 $12,072,774
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................ $11,052,478 $11,329,920 $15,839,348
Cost of revenue........................ 4,377,578 5,562,159 7,541,531
----------- ----------- -----------
Gross profit........................... 6,674,900 5,767,761 8,297,817
Operating expenses:
Selling, general and administrative.. 3,490,688 4,767,329 6,977,744
Depreciation and amortization........ 335,886 653,275 942,131
Stock-based compensation............. 1,077,037
----------- ----------- -----------
3,826,574 5,420,604 8,996,912
----------- ----------- -----------
Income (loss) from operations.......... 2,848,326 347,157 (699,095)
Other income (expense):
Increase in market value of
redeemable warrants................. (288,048) (366,333) (7,504,956)
Interest expense..................... (667,527) (984,880) (1,163,918)
Interest income...................... 157,308 260,890 201,374
Other................................ 11,481 14,131 20,071
----------- ----------- -----------
(786,786) (1,076,192) (8,447,429)
----------- ----------- -----------
Income (loss) before income taxes...... 2,061,540 (729,035) (9,146,524)
Provision (benefit) for income taxes... 465,000 (115,097) (202,356)
----------- ----------- -----------
Net income (loss)...................... $ 1,596,540 $ (613,938) $(8,944,168)
=========== =========== ===========
Basic net income (loss) per common
share................................. $.20 $(.08) $(1.14)
=========== =========== ===========
Diluted net income (loss) per common
share................................. $.17 $(.08) $(1.14)
=========== =========== ===========
Weighted-average common shares
outstanding........................... 7,850,001 7,850,023 7,867,786
=========== =========== ===========
Weighted-average common shares and
common share equivalents.............. 9,532,262 7,850,023 7,867,786
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Retained Total
Common Stock Deferred Earnings Stockholders'
-------------------- Stock (Accumulated Equity
Shares Amount Compensation Deficit) (Deficiency)
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 7,850,001 $ 39,348 $ -- $ 2,217,539 $ 2,256,887
Distributions to
stockholders......... (3,824,237) (3,824,237)
Net income............ 1,596,540 1,596,540
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1997................... 7,850,001 39,348 -- (10,158) 29,190
Distributions to
stockholders......... (44,348) (44,348)
Reclassification of
distributions........ 343,964 343,964
Stock options
exercised............ 500 1,195 1,195
Net loss.............. (613,938) (613,938)
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1998................... 7,850,501 40,543 -- (324,480) (283,937)
Issuance of common
stock and vested
stock options in
connection with
acquisition.......... 109,500 1,897,737 (1,297,600) 600,137
Stock options
exercised............ 9,800 23,194 23,194
Compensatory stock
option grants........ 4,751,608 (4,107,071) 644,537
Net loss.............. (8,944,168) (8,944,168)
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1999................... 7,969,801 $6,713,082 $(5,404,671) $(9,268,648) $(7,960,237)
========= ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 1,596,540 $ (613,938) $(8,944,168)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation.......................... 268,855 474,067 647,728
Amortization.......................... 67,031 179,208 294,403
Deferred income taxes................. 150,000 (147,200) (50,356)
Accretion to redemption value--Senior
Debentures........................... 147,278 265,209 384,863
Accrued interest--Senior Debentures... 392,101 533,954 582,011
Accrued interest--Junior Debentures... 79,394 107,431 116,788
Accrued interest--loans to
stockholders......................... (62,737) (57,545)
Amortization of original issuance
discount--Senior Debentures.......... 47,000 42,155 57,590
Stock-based compensation.............. 1,077,037
Accretion of redeemable warrants...... 288,048 366,333 7,504,956
Other................................. (2,449) (6,050)
Changes in operating assets and
liabilities, net of effects of
business acquisition:
Accounts receivable, net............. (1,249,285) 164,323 (2,509,417)
Unbilled project revenues............ 8,952 (8,559) (269,809)
Prepaid expenses and other........... (31,268) (41,255) (24,446)
Refundable income taxes.............. (375,000) 65,863
Other assets......................... 1,683 (12,968) 5,220
Accounts payable..................... 399,017 (341,994) 228,185
Accrued expenses..................... 32,296 273,931 157,325
Unearned project revenues............ 209,262 (396,490) (358,157)
Accrued payroll and related
expenses............................ 173,422 123,492 283,407
Income taxes payable................. (36,385) (13,615) --
Other liabilities.................... (39,971)
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 2,543,941 513,898 (854,543)
Cash flows from investing activities:
Proceeds from sale of fixed assets..... 17,156
Purchases of property and equipment.... (746,886) (1,785,501) (682,532)
Business acquisition, net of cash
acquired.............................. (493,384)
----------- ----------- -----------
Net cash used in investing activities... (746,886) (1,768,345) (1,175,916)
Cash flows from financing activities:
Issuance of Senior Debentures and
redeemable warrants................... 5,123,902
Deferred financing costs............... (257,339) (3,275)
Payments on notes payable.............. (8,321) (2,080)
Payments on capital lease obligations.. (10,327) (44,256) (70,472)
Distributions to stockholders.......... (2,895,948) (44,348)
Proceeds from exercise of stock
options............................... 1,195 23,194
Loans to stockholders.................. (247,100)
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. 1,951,967 (339,864) (47,278)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................ 3,749,022 (1,594,311) (2,077,737)
Cash and cash equivalents, beginning of
year................................... 1,355,031 5,104,053 3,509,742
----------- ----------- -----------
Cash and cash equivalents, end of year.. $ 5,104,053 $ 3,509,742 $ 1,432,005
=========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Income taxes paid................................ $351,000 $420,717 $ 7,306
======== ======== ==========
Interest paid.................................... $ 1,306 $ 29,585 $ 22,667
======== ======== ==========
Non-cash financing activities:
Issuance of Senior Subordinated Debentures and
redeemable warrants in lieu of financial
advisory fees................................... $120,000 $ -- $ --
======== ======== ==========
Capital lease obligations........................ $ -- $389,650 $ --
======== ======== ==========
Reclassification of distributions to stockholders
to loans to stockholders........................ $ -- $343,964 $ --
======== ======== ==========
Issuance of common stock and vested stock options
in connection with business acquisition......... $ -- $ -- $1,897,737
======== ======== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Logical Design Solutions, Inc. ("LDS" or the "Company") is a professional
services provider of e-business solutions primarily to Fortune 500 companies.
The Company advises its clients on e-business strategies and designs and
implements customized, complex e-business solutions. LDS focuses on providing
its services in the following targeted industries: communications, financial
services, healthcare, manufacturing and publishing.
Prior to the investment and restructuring discussed in Note 2 and through
December 31, 1997, LDS and an affiliated company known as Logical Design
Solutions International, Inc. ("LDSI") provided the above services. Both LDS
and LDSI were controlled by a common majority stockholder. Effective December
31, 1997 and as contemplated in the March 1997 investment (see Note 2), LDSI
merged with and into LDS and LDSI ceased to exist. Pursuant to that merger, the
100 shares of LDSI common stock issued and outstanding, which were held by the
majority stockholder of LDS, were converted into one share of common stock of
the Company. The accompanying 1997 statements of operations and cash flows of
the Company include the 12 month results of operations of LDS and LDSI on a
combined basis.
In November 1999, the Company acquired 100% of the outstanding capital stock
of Jump! Information Technologies, Inc. ("Jump!") (see Note 3). In December
1999, Jump! was merged into the Company, with the Company being the surviving
corporation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents. Cash and equivalents
include funds held in a money manager investment account. The amounts invested
in this manner, the cost of which approximates market, were approximately
$3,100,000 and $1,137,000 at December 31, 1998 and 1999, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using
the straight- line method based on the estimated useful lives of the assets.
Deferred Financing Costs
Costs incurred in connection with the issuance of the Senior Debentures (as
defined below) have been deferred and are being amortized over the life of the
related debt.
F-10
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Revenue Recognition
In accordance with Statement of Position 81-1, "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts," the Company uses
the percentage-of-completion method of reporting revenues for fixed-fee
engagements in progress measured by the percentage of costs incurred to date to
estimated total costs for each project. Under this method, engagement revenues
are recorded based upon the estimated stage of completion of each engagement.
Under retainer-based engagements, clients are invoiced an equal amount on a
monthly basis over the term of the contract for the core engagement team. The
retainer agreements also provide for additional staff to be added to the
engagement on an as-needed basis. Fees associated with the additional staff are
recorded on a time and materials basis. Under time and materials basis
contracts, revenue is recognized as services are provided. Reimbursable
engagement costs are excluded from revenue as the Company incurs these costs on
behalf of its customers. Revenue from maintenance agreements are recognized
ratably over the terms of the agreements. Maintenance revenue totaling
approximately $225,000, $246,000 and $220,000 in 1997, 1998 and 1999,
respectively, is included in revenues.
Projected or realized losses under contracts are provided for in the period
when the losses are first determined.
Unbilled engagement revenues represent engagement revenues recognized in
excess of amounts billed. Billings in excess of revenue recognized are
classified as unearned engagement revenues.
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Prior to March 19, 1997, LDS elected to be taxed under the provisions of
Subchapter "S" of the Internal Revenue Code (Subchapter "S"). Under those
provisions, LDS did not pay federal corporate income taxes on its taxable
income. Instead, the Company's stockholders were liable for individual federal
income tax on the Company's taxable income. Effective March 19, 1997, LDS
became taxable under the provisions of Subchapter "C" of the Internal Revenue
Code (Subchapter "C") (see Note 2). Effective December 31, 1997, LDSI, which
previous to that date was taxed under the provisions of Subchapter "S", became
taxable under the provisions of Subchapter "C".
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions primarily to
Fortune 500 companies. The Company performs ongoing, informal credit
evaluations of its customers' financial condition and requires no collateral
from its customers. The Company maintains an allowance for potential credit
losses, when necessary. Historically, those losses have been within
management's expectations. During the years ended December 31, 1997, 1998 and
1999, the Company wrote off $16,460, $0, and $215,566, respectively, of
accounts receivable and increased the allowance for doubtful accounts by
$36,460, $215,566 and $50,000, respectively.
In 1997 and 1998, the Company's two largest clients accounted for
approximately 66% and 73% of total revenue and 55% and 66% of total accounts
receivable, respectively. In 1999, the Company's three largest clients
accounted for approximately 64% and 61% of total revenue and total accounts
receivable, respectively.
F-11
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Individual customers who accounted for 10% or more of the Company's total
revenue and the corresponding industry classification are as follows:
<TABLE>
<CAPTION>
Percentage of
Total Revenue
For Year Ended
Customer Industry December 31,
-------- ----------------- --------------
1997 1998 1999
---- ---- ----
<C> <S> <C> <C> <C>
A Communications 42% 47% 24%
B Manufacturing 24% 26% 28%
C Financial Services -- -- 12%
</TABLE>
The Company periodically has cash balances in excess of Federal Deposit
Insurance Corporation limits.
Research and Development Costs
Research and development expenditures are charged to operations as
incurred. To date, substantially all research and development activities of
the Company have been pursuant to customer engagements and, accordingly, have
been expensed as a cost of the engagements.
Goodwill
Goodwill represents the excess of cost over the fair value of the net
assets acquired and is being amortized on a straight-line basis over an
estimated useful life of three years. Management periodically evaluates the
recoverability of goodwill by comparing anticipated undiscounted future cash
flows from operations to the carrying value of the goodwill. Should the
evaluation indicate that the goodwill is not recoverable, an adjustment would
be recorded.
Impairment of Long-Lived Assets
The Company applies Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Management periodically evaluates whether events or
circumstances have occurred that indicate that the remaining estimated useful
lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that remaining balances may not be
recoverable.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
F-12
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The fair value of each of the following instruments approximates their
carrying value because of the short maturity of these instruments: cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities. The carrying values of capital lease obligations and junior
subordinated debentures approximate fair value since the related interest rates
approximate rates currently available to the Company. The carrying value of
senior subordinated debentures is based upon relative fair values of the
debentures and the warrants at date of issuance with accretion to face value
through the scheduled redemption date. (See Note 6 regarding redemption values
which approximates fair value.) The fair value of the redeemable warrants is
based upon an independent valuation. (See Note 13.)
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings Per Share
("FAS 128"). All earnings per share amounts for all periods have been presented
to conform to the requirements of FAS 128.
Comprehensive Income
No statement of comprehensive income has been included in the accompanying
financial statements since there are no differences to be reported from the
accompanying statements of operations or stockholders' equity.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards of derivative
instruments, including some derivative instruments embedded in other contracts,
and for hedging activities. In July 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not currently engage in derivative activity and does not
expect the adoption of this standard to have a material effect on its results
of operations, financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related to
revenue recognition policies. The SEC subsequently issued SAB 101A which delays
the implementation date of certain provisions of SAB 101. As a result, the
application of the guidance in SAB 101 will be required to be implemented no
later than our second quarter of 2000. The Company does not expect the adoption
of SAB 101 to have a material effect on its financial statements.
2. Investment and Restructuring
In March 1997, LDS effected a restructuring (the "Restructuring") in
connection with the issuance of Senior Subordinated Debentures (see Note 6) and
Warrants to purchase common stock to certain investment funds of a venture
capital group and other investors (collectively, the "Investors") (see Notes 1,
10 and 13). In connection with the Restructuring, effective March 19, 1997, LDS
converted from a Subchapter "S" Corporation to a Subchapter "C" Corporation for
income tax purposes.
F-13
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
3. Business Combination
In November 1999, the Company acquired 100% of the outstanding stock of
Jump! Information Technologies, Inc., a publishing and information services e-
business solutions provider located in Chantilly, Virginia, for a purchase
price of approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$168,000 of vested stock options (12,671 vested stock options were issued) and
(iii) $149,000 in closing costs. The Company also issued 109,500 shares of
common stock in connection with this acquisition. The fair value of the total
assets and total liabilities related to this acquisition was $578,000 and
$452,000, respectively, and goodwill amounted to approximately $715,000.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations of
the acquired business are included in the Company's results of operations from
the acquisition date.
In connection with the Jump! acquisition, the Company issued 109,500 shares
of its common stock to the former Jump! shareholders and entered into a
shareholders' agreement with them governing their rights and obligations with
respect to the 109,500 shares held by them. Under the shareholders' agreement,
the Company will repurchase any shares of a Jump! shareholder whose employment
with the Company is terminated. If the termination is a voluntary resignation
or an involuntary termination by the Company with just cause, the repurchase
price will be zero if the termination occurs prior to January 1, 2000, 25% of
the fair market value based on a date of termination from and including January
1, 2000 but prior to March 31, 2000, 50% from and including March 31, 2000 and
prior to June 30, 2000, 75% from and including June 30, 2000 and prior to
September 30, 2000 and 100% of the fair market value from September 30, 2000.
If the employment is terminated for any other reason, the Company will
repurchase the shares for 100% of the fair market value. This agreement shall
terminate upon a firmly underwritten public offering with gross proceeds to the
Company of at least $10 million.
Based upon the estimated fair market value of these shares at December 31,
1999, the Company recorded $432,500 of stock-based compensation and $1,297,600
of deferred compensation which will be amortized over the vesting period.
Deferred compensation and the related compensation expense will be adjusted on
a prospective basis over the vesting schedule based on changes in fair market
value of the common stock during the period.
The following table represents the unaudited pro forma results of operations
for the years ended December 31, 1998 and 1999 as if the above acquisition had
occurred on January 1 of the respective year:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue....................................... $12,545,000 $17,940,000
Net loss...................................... $ (764,000) $(9,011,000)
Basic net loss per common share............... $ (.10) $ (1.13)
Diluted net loss per share.................... $ (.10) $ (1.13)
</TABLE>
The pro forma amounts reflect the amortization of the excess of purchase
price over the net assets acquired. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
acquisition taken place at the beginning of the period presented nor are they
intended to be indicative of results that may occur in the future.
F-14
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
4. Property and Equipment
Major classes of property and equipment and their related estimated useful
lives as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
(Years) 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment................. 3 $ 1,590,602 $ 2,219,004
Office equipment................... 5 354,628 393,438
Furniture and fixtures............. 7 722,836 907,049
Equipment under capital lease...... 3 440,186 440,186
Leasehold improvements............. * 657,234 657,234
----------- -----------
3,765,486 4,616,911
Less accumulated depreciation and
amortization...................... (1,237,553) (2,062,740)
----------- -----------
$ 2,527,933 $ 2,554,171
=========== ===========
</TABLE>
- --------
* Lesser of term of lease or estimated useful life.
5. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued payroll and related expenses................ $511,034 $ 918,683
Accrued professional fees........................... 76,411 269,245
Other accrued expenses.............................. 132,998 279,433
-------- ----------
$720,443 $1,467,361
======== ==========
</TABLE>
6. Subordinated Debt
Senior Subordinated Debentures
On March 19, 1997, LDS issued Senior Subordinated Debentures ("Senior
Debentures") in the aggregate principal amount of $5,540,736 for an aggregate
cash purchase price of $5,123,902. In connection with the issuance of the
Senior Debentures, LDS also issued a warrant to acquire 2,150,000 shares,
subject to adjustment, of common stock ("Warrants"). Upon issuance, the
Warrants were recorded at their relative fair market value in relation to the
Senior Debentures, resulting in an allocation of $2,272,000 of proceeds from
the Senior Debentures to the Warrants and an effective interest rate of 21.0%
on the Senior Debentures (see Note 13). The accretion to redemption value of
the Senior Debentures, based on deemed fair market value on date of issuance,
is being recorded as interest expense as an adjustment to yield over the five
year life of the Senior Debentures.
The Senior Debentures are payable in full on March 19, 2002 and accrue
interest from the date of issuance until the date of payment of principal at
the rate of 9.0% per year compounded annually. Interest is payable upon payment
of principal which is due March 19, 2002. The redemption value of the Senior
Subordinated Debentures, including accrued interest of approximately $1.5
million, was approximately $7.0 million at December 31, 1999.
F-15
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Junior Subordinated Debentures
In connection with the above transaction, LDS made distributions to its
management stockholders in the form of Junior Subordinated Debentures ("Junior
Debentures"). The Junior Debentures are payable in full on March 19, 2003 and
accrue interest from the date of issuance until the date of payment of
principal at the rate of 9.0% per year compounded annually. Interest is payable
upon payment of principal which is due March 19, 2003.
7. Lines of Credit
The Company has a line of credit arrangement with a bank which allows for
borrowings up to $1,500,000. Borrowings under this line accrue interest at the
prime rate. This line expires on June 30, 2000 and is subject to annual
renewal.
The Company also has a $150,000 equipment line of credit. Under this line,
80% of the cost of the equipment purchased is eligible for borrowing.
Borrowings under this line accrue interest at the prime rate plus .25%.
Borrowings under the equipment line are repaid in 36 monthly installments, plus
interest.
There were no outstanding borrowings under these lines of credit at December
31, 1999.
The lines of credit contain various financial covenants which require the
Company to, among other requirements, maintain a minimum current ratio and a
maximum debt to equity ratio.
8. Capital Lease Obligations
The Company leases certain office equipment under leases classified as
capital leases for financial reporting purposes. The following is a schedule of
future minimum lease payments under these agreements and the present value of
the payments as of December 31, 1999:
<TABLE>
<S> <C>
Year ended December 31:
2000......................................................... $ 92,983
2001......................................................... 92,983
2002......................................................... 92,983
2003......................................................... 130,995
--------
309,944
Less amount representing interest............................ (35,022)
--------
Present value of minimum lease payments...................... $274,922
========
</TABLE>
9. Commitments
Leases
The Company leases office space, automobiles and office equipment under
noncancelable operating lease agreements which expire through February 2010.
Aggregate annual future minimum lease payments under these noncancelable leases
are, including the new Morristown facility, as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000....................................................... $ 2,480,000
2001....................................................... 2,431,000
2002....................................................... 2,229,000
2003....................................................... 2,306,000
2004....................................................... 2,320,000
2005 and thereafter........................................ 8,857,000
-----------
$20,623,000
===========
</TABLE>
F-16
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$347,500, $617,700 and $934,500, respectively.
Letters of Credit
The Company has outstanding letters of credit of $549,000 and $80,000 at
December 31, 1999.
Employment Agreements
The Company has employment contracts with several key employees. The
agreements provide for minimum salary amounts and discretionary performance
bonus arrangements as determined and approved by the Board of Directors.
10. Related Party Transactions
The principal stockholders periodically obtain advances from the Company.
These amounts are recorded in the balance sheet as loans to stockholders.
During 1997, and as contemplated and agreed upon by the parties involved in the
issuance of the Senior Debentures and Junior Debentures (see Note 6), the
principal stockholders also received cash distributions based on estimated
available LDS and LDSI Subchapter "S" earnings and estimated required personal
income tax payments. During 1998, final LDS and LDSI Subchapter "S" income tax
returns were prepared and filed which resulted in the finalization of taxes
payable and earnings available for distribution to stockholders. This resulted
in a reclassification during 1998 of $343,964 between distributions to
stockholders and loans to stockholders as agreed upon by the Company, the
stockholders and the Investors. This excess cash distribution represents
amounts agreed upon by the parties to be retained in the business at the time
of the transaction. The parties agreed to record these amounts as loans to
stockholders. Interest has been accrued on these amounts at 9.0% and is
included in the loans to stockholders' balance. In addition, during 1998 the
Company advanced $247,100 to a principal stockholder in order to purchase a
personal residence. That amount is secured by a note and a second mortgage on
the property. These notes accrue interest payable monthly at 8.5%. The notes,
including all principal and interest, are due between June and August 2003.
Under certain conditions the Company can accelerate the repayment of the notes.
In connection with these advances, the stockholder and the Company executed an
agreement under which the stockholder pledged 785,000 shares of common stock as
collateral for the obligation to the Company.
11. Income Taxes
The provision (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------ --------- ---------
Subchapter Subchapter
"S" Corp. "C" Corp. Total Total Total
---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $205,000 $205,000 $ 25,000 $(152,000)
State.................... $47,000 63,000 110,000 7,103
------- -------- -------- --------- ---------
47,000 268,000 315,000 32,103 (152,000)
Deferred:
Federal.................. 120,000 120,000 (125,000) (6,207)
State.................... 30,000 30,000 (22,200) (44,149)
-------- -------- --------- ---------
150,000 150,000 (147,200) (50,356)
------- -------- -------- --------- ---------
Income taxes............... $47,000 $418,000 $465,000 $(115,097) $(202,356)
======= ======== ======== ========= =========
</TABLE>
F-17
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The provision (benefit) for income taxes reconciled to the amount computed
by applying the statutory federal rate of 34% to the income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax............................ 34.0% (34.0)% (34.0)%
Increases (decreases):
Increase in market value of redeemable warrants....... 4.8 17.1 29.0
Stock-based compensation.............................. -- -- 2.5
Income attributable to "S" Corporation periods........ (26.8) -- --
Establishment of initial deferred tax liabilities upon
conversion from
"S" to "C" Corporation............................... 8.1 -- --
Other................................................. 2.5 1.1 .2
----- ----- -----
Income taxes............................................ 22.6% (15.8)% (2.3)%
===== ===== =====
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts................... $ 86,200 $ 20,000
Deferred income................................... -- 12,500
Accrued vacation.................................. 21,000 8,108
-------- --------
107,200 40,608
Noncurrent:
Net operating loss carryforward................... -- 43,348
-------- --------
Total deferred tax assets............................. 107,200 83,956
Deferred tax liabilities:
Current:
Cash to accrual conversion--Jump!................. -- (48,863)
Cash to accrual conversion--LDSI.................. (114,700) --
-------- --------
(114,700) (48,863)
Noncurrent:
Depreciation...................................... -- (29,500)
Amortization...................................... -- (6,886)
-------- --------
-- (36,386)
-------- --------
Total deferred tax liabilities........................ (114,700) (85,249)
-------- --------
Net deferred tax liabilities.......................... $ (7,500) $ (1,293)
======== ========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $720,000 for state tax reporting purposes, which expire between
2006 and 2019.
F-18
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
12. Employee Benefit Plan
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees, subject to minimum age and service requirements. The Company may
make contributions to the Plan. Any such contributions are determined on an
annual basis and are at the discretion of the Board of Directors. Contributions
for the years ended December 31, 1997, 1998 and 1999 were $142,700, $153,700
and $230,400, respectively.
13. Stockholders' Equity
Effective March 17, 1997, LDS amended its certificate of incorporation to
increase the number of shares authorized to 1,500,000 shares and the Board of
Directors authorized and approved a 3,925-for-one stock split increasing the
number of outstanding shares from 200 shares to 785,000 shares.
Effective September 10, 1997, LDS amended its certificate of incorporation
to increase the number of shares authorized to 15,000,000 shares and the Board
of Directors further authorized and approved a ten-for-one stock split
increasing the number of shares outstanding to 7,850,000.
All per share amounts have been adjusted for the above stock splits, except
as otherwise indicated.
In connection with the issuance of Senior Debentures (see Note 6), LDS also
issued Warrants to certain Investors to acquire 2,150,000 common shares. The
Warrants may be exchanged for an equal number of shares of common stock of LDS.
The Warrants are exercisable on March 19, 2004 at a price of $.01 per share and
expire on March 19, 2004 or earlier as defined in the warrant agreement. The
shares of common stock issuable upon exercise of the Warrants are subject to
demand registration rights on the part of the Investors and piggyback
registration rights. LDS has reserved 2,150,000 shares of common stock for
issuance upon the exercise of the Warrants.
The Warrants are subject to a Redemption Agreement which permits the
Investors to put the Warrants to LDS for redemption at the fair market value
(as agreed upon in good faith between the Company and the Investors) of the
shares of common stock issuable upon the exercise of the Warrants at the
earlier of the occurrence of a liquidity event (as defined) or March 19, 2003.
In the event a redemption request is made on March 19, 2003, the Warrants will
be redeemed 50% on March 19, 2003 and 50% on March 19, 2004. Under the terms of
the Warrant Agreement, each holder of Warrants must immediately exercise all
Warrants held upon the completion of an initial public offering of LDS common
shares.
In accordance with Emerging Issues Task Force No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, the Company estimated the fair value of the Warrants at
date of issuance. The Company has continued to estimate the fair value of the
Warrants with changes in fair value amortized and reported in the statements of
operations based upon an anticipated date of redemption of the Warrants of
March 19, 2003. At each balance sheet date the fair value was determined by an
independent valuation and, based on these valuations, the Company increased the
carrying value of the Warrants and recorded a charge of $288,048, $366,333 and
$7,504,956 in the statements of operations for the years ended December 31,
1997, 1998 and 1999, respectively. The estimated fair value of the warrants as
of December 31, 1999 was approximately $34 million.
F-19
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
14. Earnings Per Share
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted-average common shares outstanding used
to
calculate basic earnings per share.............. 7,850,001 7,850,023 7,867,786
Net effect of dilutive warrants based on treasury
stock
method using average market price............... 1,682,261 * *
--------- --------- ---------
Weighted-average common shares and common share
equivalents used to calculate diluted earnings
per share....................................... 9,532,262 7,850,023 7,867,786
========= ========= =========
</TABLE>
- --------
* The dilutive stock options and warrants are not included as their effect is
anti-dilutive.
15. Stock Option Plans
Effective September 10, 1997, the stockholders of the Company approved the
1997 Stock Option Plan ("1997 Plan"). On October 28, 1999, the Board of
Directors adopted the Company's 1999 Stock Option Plan ("1999 Plan"). Under the
Plans (the 1997 Plan and 1999 Plan, collectively), the Company issues options
at exercise prices equal to fair value at the date of grant and no compensation
expense is recorded. Options granted under the Plans are designated as either
nonqualified stock options or incentive stock options. Under the terms of the
1997 Plan, the Company has reserved 1,000,000 shares of common stock for
issuance upon exercise of options. Under the terms of the 1999 Plan, the
Company has reserved 330,000 shares of common stock for issuance upon exercise
of options. No option will have a term in excess of ten years under the Plans.
The administrator, which may be the Board of Directors or a committee thereof,
is responsible for determining the individuals to be granted options, the
number of options each individual will receive, the option price per share and
the exercise period of each option. Options granted pursuant to the Plans
generally vest over a one to four year period from date of grant.
Of the 527,118 stock options issued during the year ended December 31, 1999,
non-qualified options to purchase 130,000 shares and incentive stock options to
purchase 268,818 shares at exercise prices of $2.20 were considered to be below
the deemed fair market value at date of grant for financial reporting purposes.
In accordance with APB 25, compensation expense will be recognized as the
difference between the exercise prices of these options at their respective
grant dates and the deemed fair value for financial reporting purposes of the
common stock. The Company recorded $644,537 of compensation expense during 1999
based on the vesting schedules of these options. In addition, the Company
recorded deferred stock compensation of $4,107,071 as of December 31, 1999;
these amounts are included as a reduction of stockholders' equity and are being
amortized to compensation expense over the vesting period of the options
granted, which range from one to four years from the date of grant.
F-20
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The following table summarizes information about stock options outstanding
at December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Stock Exercise Stock Exercise Stock
Price Options Price Options Price Options
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... $ -- -- $2.04 565,000 $2.12 758,500
Granted............... 2.04 565,000 2.39 204,100 2.20 527,118
Exercised............. -- -- 2.39 (500) 2.37 (9,800)
Canceled.............. -- -- 2.39 (10,100) 2.30 (69,900)
----- ------- ----- ------- ----- ---------
Options outstanding, end
of year................ $2.04 565,000 $2.12 758,500 2.15 1,205,918
===== ======= ===== ======= ===== =========
Options exercisable, end
of year................ $ -- -- $2.11 178,250 $2.13 424,484
===== ======= ===== ======= ===== =========
</TABLE>
The weighted-average fair value of options granted was $.66 per share or
$135,000 and $10.16 per share or $5,400,000 for the years ended December 31,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
Weighted-Average
Option Exercise Outstanding Remaining
Class Price Options Contractual Life
------ -------- ----------- ----------------
<S> <C> <C> <C>
1997................................ $2.04 550,000 7.7 years
1998................................ $2.39 136,600 8.3 years
1999................................ $2.20 519,318 9.5 years
========= =========
1,205,918 8.5 years
========= =========
</TABLE>
Pro forma information regarding net income (loss) is required by FAS 123 and
has been determined as if the Company had been accounting for its employee
stock options under the fair value method of that statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option-pricing fair value model with the following weighted-average
assumptions: volatility of near-zero; risk-free interest rate of 6.8% in 1999
and 5.35% in 1998 and 1997; no dividends; and an expected life of the options
of five years for options granted in 1999 and six years for options granted in
1998 and 1997. Had compensation cost been recognized based on the fair value of
the employee stock options on the date of grant under the methodology
prescribed by FAS 123, the Company's pro forma net income (loss) would have
been approximately $1.6 million, ($760,000) and ($9.5 million) in 1997, 1998
and 1999, respectively, and pro forma basic and diluted net (loss) income per
common share would have been ($1.21) and ($.10) in 1999 and 1998, respectively.
Pro forma basic and diluted net income per common share would have been $.20
and $.16 in 1997, respectively.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option and the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
16. Unaudited Pro Forma Balance Sheet
The Company is planning to file a registration statement with the Securities
and Exchange Commission that would permit the Company to sell shares of common
stock in an initial public offering. The unaudited pro
F-21
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
forma balance sheet reflects the effects of the automatic exercise of all
redeemable warrants into 2,150,000 shares of the Company's common stock upon
the completion of the initial public offering and the accretion of the
redeemable warrants to fair market value, based on the midpoint of the expected
price range of the Company's initial public offering.
17. Subsequent Events
Leases
The Company will be moving its headquarters and principal operations from
its current Morristown, New Jersey location to a new location, also in
Morristown, in June 2000. In February 2000, the Company entered into a ten year
lease for this new office space. Minimum annual lease payments amount to
$1,456,000 for the first three years of the lease, $1,534,000 for years four
through six, and $1,638,000 for years seven through ten. In connection with the
lease agreement, the Company obtained a letter of credit for $970,667 to be
used as security. The letter of credit requirement is reduced to $767,000 on
February 10, 2004, $546,000 on February 10, 2006, and will be released after
lease termination.
Stock Options
Effective March 1, 2000, the Board of Directors amended the Company's 1999
Stock Plan to increase the number of common shares reserved for issuance from
330,000 to 2,750,000. In addition, on this same date, the Board of Directors
approved the 2000 Stock Plan for Non-Employee Directors ("2000 Plan"). Under
the terms of the 2000 Plan, the Company has reserved 500,000 shares of common
stock for issuance upon exercise of options.
From January 1, 2000 to March 1, 2000, the Company issued non qualified
options to purchase 1,070,250 shares and incentive stock options to purchase
36,300 shares of common stock at exercise prices between $3.35 and $5.00 (which
were considered to be below the deemed fair market value for financial
reporting purposes). In accordance with APB 25, stock-based compensation
expense will be recorded based on the vesting schedules of these options, which
range from immediate vesting at date of grant (1,000,000 options) to four
years, and will amount to approximately $12.9 million.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jump! Information Technologies, Inc.
We have audited the accompanying balance sheet of Jump! Information
Technologies, Inc. (the "Company") as of December 31, 1998, and the related
statements of income and cash flows for the periods from March 6, 1998
(inception) to December 31, 1998 and January 1, 1999 to November 9, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jump! Information
Technologies, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for the periods from March 6, 1998 (inception) to December
31, 1998 and January 1, 1999 to November 9, 1999, in conformity with accounting
principles generally accepted in the United States.
Hackensack, New Jersey /s/ Ernst & Young LLP
February 4, 2000
F-23
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash............................................................... $ 24
Accounts receivable................................................ 279,933
Deferred income taxes.............................................. 50,079
--------
Total current assets............................................. 330,036
Computer equipment, net of accumulated depreciation of $7,975........ 36,235
Deferred income taxes................................................ 12,520
Other assets......................................................... 14,270
--------
$393,061
========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 2,575
Deferred revenue................................................... 124,996
Loan from stockholder.............................................. 23,162
Income taxes payable............................................... 10,209
Deferred income taxes.............................................. 111,973
--------
Total current liabilities........................................ 272,915
Deferred revenue..................................................... 31,251
Stockholders' equity: 1,500
Class A, Voting Common Stock, no par value, 2,100,000 shares
authorized, 2,100,000 shares issued and outstanding...............
Class B, Non-Voting Common Stock, no par value, 500,000 shares
authorized, none issued or outstanding............................ (1,500)
Loan to stockholders............................................... 88,895
--------
Retained earnings.................................................. 88,895
--------
Total stockholders' equity....................................... $393,061
========
</TABLE>
See accompanying notes.
F-24
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December 31, November
1998 9, 1999
------------ ----------
<S> <C> <C>
Revenue................................................ $1,215,364 $2,100,571
Cost of revenue........................................ 457,614 1,105,822
---------- ----------
Gross profit........................................... 757,750 994,749
Selling, general and administrative.................... 613,878 801,030
Depreciation and amortization.......................... 7,975 12,795
---------- ----------
Income from operations................................. 135,897 180,924
Other income:
Interest income...................................... 2,237 2,773
Other................................................ 10,344 5,443
---------- ----------
Income before provision for income taxes............... 148,478 189,140
Provision for income taxes............................. 59,583 72,208
---------- ----------
Net income............................................. $ 88,895 $ 116,932
========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December November
31, 1998 9, 1999
----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 88,895 $ 116,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 7,975 12,795
Deferred income taxes............................ 49,374 (5,062)
Changes in operating assets and liabilities:
Accounts receivable............................ (279,933) 17,822
Other assets................................... (14,270) (102,820)
Accounts payable and accrued expenses.......... 2,575 96,679
Deferred revenues.............................. 156,247 20,830
Income taxes payable........................... 10,209 77,270
Other liabilities.............................. 4,187
--------- ---------
Net cash provided by operating activities.......... 21,072 238,633
Cash flows from investing activities
Capital expenditures............................... (44,210) (170,169)
--------- ---------
Net cash used in investing activities.............. (44,210) (170,169)
Cash flows from financing activities
Purchase of treasury stock......................... (15,210)
Loan to stockholders............................... (1,500) 1,500
Proceeds from the sale of common stock............. 1,500
Loan from stockholder.............................. 23,162 (23,162)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 23,162 (36,872)
--------- ---------
Net increase in cash............................... 24 31,592
Cash, beginning of period.......................... -- 24
--------- ---------
Cash, end of period................................ $ 24 $ 31,616
========= =========
Supplemental cash flow disclosures
Income taxes paid.................................. $ -- $ 5,700
========= =========
</TABLE>
See accompanying notes.
F-26
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Jump! Information Technologies, Inc. ("Jump!" or the "Company") is a
publishing and information services e-business solutions provider located in
Chantilly, Virginia.
Jump! was incorporated on March 6, 1998 as Net3 Technologies, Inc. The
Company's name was changed to Jump! Information Technologies, Inc. on November
10, 1998.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Computer Equipment
Computer equipment is recorded at cost. Depreciation is recorded using the
straight line method over the estimated useful life of the assets of three
years.
Revenue Recognition
The Company's revenue is generated from contracts that are billed on a time
and materials basis. Under these contracts, revenue is recognized as services
are provided.
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions to its customers.
The Company performs ongoing, informal credit evaluations of its customers'
financial condition and requires no collateral from its customers.
One customer accounted for 100% of total revenue in 1998 and 100% of
accounts receivable at December 31, 1998. This same customer accounted for 96%
of total revenue in 1999. The loss of this customer would have a material
impact on the financial condition of the Company.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price.
F-27
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
2. Commitments
Leases
The Company leases office space under a noncancelable operating lease
agreement which will expire in June 2005. Aggregate annual future minimum lease
payments under this noncancelable lease is as follows:
<TABLE>
<S> <C>
Year ended December 31:
1999........................................................ $ 159,000
2000........................................................ 206,000
2002........................................................ 217,000
2002........................................................ 224,000
2003........................................................ 230,000
2004 and thereafter......................................... 605,000
----------
$1,641,000
==========
</TABLE>
Rent expense for the periods ended December 31, 1998 and November 9, 1999
was approximately $111,000 and $136,000, respectively.
Employment Agreements
The Company has employment contracts with certain key employees. The
agreements provide for minimum salary amounts and discretionary performance
bonus arrangements as determined and approved by the Board of Directors.
3. Related Party Transactions
The initial capital contribution by the founding stockholders was funded
through a $1,500 loan from the Company. That amount is recorded as "loan to
stockholders" and reflected as a reduction to stockholders' equity in the
December 31, 1998 balance sheet.
In December 1998, a Company officer and stockholder loaned the Company
approximately $23,000 for working capital purposes. That amount is classified
as "loan from stockholder" in the December 31, 1998 balance sheet. The loan was
repaid in full in March 1999.
4. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, November 9,
1998 1999
------------ -----------
<S> <C> <C>
Current:
Federal....................................... $ 8,861 $64,954
State......................................... 1,348 12,316
------- -------
10,209 77,270
Deferred:
Federal....................................... 41,968 (4,303)
State......................................... 7,406 (759)
------- -------
49,374 (5,062)
------- -------
Income taxes.................................... $59,583 $72,208
======= =======
</TABLE>
F-28
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The provision for income taxes for the 1998 and 1999 periods differed from
the amount computed by applying the statutory federal rate of 34% to pre-tax
income principally due to the effect of state taxes.
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 was as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue........................................... $ 62,599
Deferred tax liabilities:
Cash to accrual conversion................................. (111,973)
---------
Net deferred tax liabilities................................. $ (49,374)
=========
</TABLE>
5. Stockholders' Equity
Effective November 10, 1998, the Company amended its certificate of
incorporation to create two classes of common stock ("Class A, Voting Common
Stock" and "Class B, Non-Voting Common Stock") and increase the number of
shares authorized to 2,100,000 shares of Class A, Voting Common Stock and
500,000 shares of Class B, Non-Voting Common Stock. In addition, the Board of
Directors authorized and approved a 700-for-one stock split of Class A, Voting
Common Stock increasing the number of shares issued and outstanding from 300
shares to 2,100,000 shares. The stock split has been given retroactive effect
in these financial statements.
6. Stock Options
Effective November 10, 1998, the Board of Directors and stockholders
approved the Jump! Information Technologies, Inc. Non-Qualified Stock Option
Plan (the "Plan"). Under the terms of the Plan, the Company has reserved all
500,000 shares of Class B, Non-Voting Common Stock for issuance upon exercise
of options. The Plan is administered by a committee comprised of one or more
individuals appointed by the Board of Directors. This committee is responsible
for determining the individuals to be granted options, the number of options
each individual will receive, the option price per share and the exercise
period of each option. All options expire in ten years from date of grant.
Options granted pursuant to the Plan generally vest over a two year period from
date of grant.
The following table summarizes information about stock options outstanding
at December 31, 1998 and November 9, 1999:
<TABLE>
<CAPTION>
1998 1999
----------------- ------------------
Weighted- Weighted-
Average Average
Exercise Stock Exercise Stock
Price Options Price Options
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period........................... $-- -- $.25 234,000
Granted......................... .25 234,000 .25 192,000
Exercised....................... .25 (39,000)
Canceled........................ -- -- .25 (156,000)
---- ------- ---- --------
Options outstanding, end of
period........................... $.25 234,000 $.25 231,000
==== ======= ==== ========
Options exercisable, end of
period........................... $-- -- $.25 39,000
==== ======= ==== ========
</TABLE>
F-29
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The weighted-average fair value of options granted was $.07 per share or
$16,000 for the period ended December 31, 1998 and $.07 per share or $13,000
for the period ended November 9, 1999.
Pro forma information regarding net income is required by FAS 123 and has
been determined as if the Company had been accounting for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using the minimum value method for
non-public companies permitted by FAS 123 with the following assumptions:
weighted average risk-free interest rate of 6.71%; no dividends; and weighted
average expected life of the options of five years. Had compensation cost been
recognized based on the fair value of the employee stock options on the date
of grant under the methodology prescribed by FAS 123, the Company's net income
would have decreased by approximately $1,000 in 1998 and $8,000 in 1999.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
7. Subsequent Events
Pursuant to a stock purchase agreement dated November 10, 1999, the
stockholders of the Company sold 100% of the Company's outstanding capital
stock to Logical Design Solutions, Inc. ("LDS"), a third party.
In December 1999, Jump! was merged into its acquirer, LDS, with LDS being
the surviving corporation.
F-30
<PAGE>
[Inside backcover page]
GRAPHIC:
[Logical Design Solutions' Logo is
positioned in the center of the page over
a background of arrows in a circular arrangement.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 Shares
Logical Design Solutions, Inc.
Common Stock
[LOGO of Logical Design Solutions(R)]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Lehman Brothers
SG Cowen
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee, and the Nasdaq National Market listing application fee, are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 14,877
National Association of Securities Dealers, Inc. filing fee.... 6,135
Nasdaq National Market listing application fee................. 95,000
Printing and engraving fees and expenses....................... 400,000
Legal fees and expenses........................................ 700,000
Accountants' fees and expenses................................. 350,000
Blue Sky fees and expenses..................................... 15,000
Transfer Agent and Register fees and expenses.................. 20,000
Miscellaneous expenses......................................... 13,988
-----------
Total........................................................ $1,615,000
===========
</TABLE>
- --------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that the person is or was a director, officer, employee or agent of the
corporation, or is or was servicing at the request of the corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding if the
person acted in good faith in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify the person serving in that capacity who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred by the
person in connection with the defense or settlement of the action or suit if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for the
expenses which the Court of Chancery or other court shall deem proper. The
provisions regarding indemnification and advancement of expenses under Section
145 of the DGCL shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, stockholders' or disinterested directors' vote or
otherwise.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that the provision
shall not eliminate or
II-1
<PAGE>
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 174 of the DGCL (relating to unlawful payment of
dividends and unlawful stock purchase and redemption); or (iv) for any
transaction from which the director derived an improper personal benefit.
As permitted by Section 145(e) of the DGCL, Logical Design Solutions'
amended and restated certificate of incorporation and amended and restated
bylaws will provide that the company shall indemnify its directors, officers
and any person serving at the request of the company as a director, officer,
employee, partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan. The
company will also be permitted to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee, partner (limited or general) or agent of another
corporation or of a partnership, joint venture, limited liability company,
trust or other enterprise, against any liability asserted against that person
or incurred by that person in any of those capacities, or arising out of that
person's resulting status, and related expenses, whether or not the Registrant
would have the power to indemnify that person against that liability under the
provisions of the DGCL.
Item 15. Recent Sales of Unregistered Securities.
(a) On March 18, 1997, the company issued approximately $1.1 million
aggregate principal amount at maturity of 9% junior subordinated debentures to
Mary K. Brooks and Darren A. Bryden in consideration of certain retained
earnings. These debentures were issued without registration under the
Securities Act in reliance upon an exemption from registration under Section
4(2).
(b) On March 19, 1997, the company issued approximately $5.5 million
aggregate principal amount at maturity of 9% senior subordinated debentures to
Summit Ventures IV, L.P., Summit Investors III, L.P. and Samedan, Inc. and
warrants to acquire 2,150,000 shares of common stock to Summit Ventures IV,
L.P., Summit Investors III, L.P. and Mr. Paul F. Lozier for total consideration
of approximately $5.1 million. These debentures and warrants were issued
without registration under the Securities Act in reliance upon an exemption
from registration under Section 4(2).
(c) Between August 29, 1997 and March 31, 2000, the company granted options
to purchase a total of 2,404,568 shares of common stock under the company's
1997 Stock Plan, the company's 1999 Stock Plan and the company's 2000 Stock
Plan for Non-Employee Directors. During that period, the company issued 16,900
shares of common stock to its employees for a total of $40,012 upon the
exercise of the options. These securities were issued without registration
under the Securities Act in reliance upon an exemption from registration under
Rule 701 and Section 4(2).
(d) On November 10, 1999, the company issued 109,500 shares of its common
stock, along with $525,000, in exchange for all of the outstanding securities
of Jump! Information Technologies, Inc. These shares were issued without
registration under the Securities Act in reliance upon an exemption from
registration under Section 4(2).
(e) On March 2, 2000, the Registrant issued an aggregate of 7,976,401
shares of common stock to the stockholders of Logical Design Solutions, Inc., a
New Jersey corporation ("LDSNJ"), pursuant to a merger in which LDSNJ merged
with and into the Registrant, which prior to the merger had been a wholly-owned
subsidiary of LDSNJ. These securities were issued without registration under
the Securities Act in reliance upon an exemption from registration under
Section 4(2).
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Stock Purchase Agreement, dated November 10, 1999, by and among Allan
Von Dette and William Engel and Logical Design Solutions, Inc.
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.+
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.+
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc.
to be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
4.2 Form of Junior Subordinated Debenture of Logical Design Solutions,
Inc.
4.3 Form of Senor Subordinated Debenture of Logical Design Solutions, Inc.
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement,
dated as of March 19, 1997, among Logical Design Solutions, Inc.,
principal stockholders of Logical Design Solutions, Inc., Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and
Samedan, Inc.
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., principal stockholders of Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.4 Registration Rights Agreement, dated as of March 19, 1997, among
Logical Design Solutions, Inc., Summit Ventures IV, L.P., Summit
Investors III, L.P. and Paul F. Lozier.+
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.6 Logical Design Solutions, Inc. Employee Stock Purchase Plan.*
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.+
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.+
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.+
10.10 Lease Agreement, dated February 9, 2000, between MSGW Madison, L.L.C.
and Logical Design Solutions, Inc.
10.11 Lease Agreement, dated March 25, 1998, between Bank of Communications
and Logical Design Solutions, Inc.
10.12 Software Channel Program Agreement dated August 23, 1999 between Sun
Microsystems, Inc. and Logical Design Solutions, Inc.
10.13 Sun Professional Services Subcontractor Master Consulting Agreement
dated January 18, 2000 between Sun Microsystems, Inc. and Logical
Design Solutions, Inc.
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.+
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
II-3
<PAGE>
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant under the foregoing provisions, 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 director, office or controlling persons 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 the indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Morristown, State of New Jersey, on April 6, 2000.
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mimi Brooks
By: _________________________________
Mimi Brooks
President, Chief Executive
Officer
and Chairwoman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Marilynne N. White and E. Bruce Lovenberg
his or her true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, any and all capacities, to sign any and all amendments (including
post-effective amendments) of and supplements to this Registration Statement,
or any related registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, to all intents and purposes and
as fully as they might or could do in person, hereby ratifying and confirming
all that such attorneys-in-fact and agents, or his or her substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
* President, Chief Executive April 6, 2000
___________________________________________ Officer and Chairwoman
Mimi Brooks (Principal Executive
Officer)
/s/ E. Bruce Lovenberg Chief Financial Officer April 6, 2000
___________________________________________ (Principal Financial and
E. Bruce Lovenberg Accounting Officer)
* Chief Technology Officer April 6, 2000
___________________________________________ and Director
David W. Stoltzfus
* Director April 6, 2000
___________________________________________
Paul Lozier
* Director April 6, 2000
___________________________________________
Kevin Mohan
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Frank A. Pinto Director April 6, 2000
___________________________________________
Frank A. Pinto
/s/ Kevin McGilloway Director April 6, 2000
___________________________________________
Kevin McGilloway
</TABLE>
- ----------------
/s/ E. Bruce Lovenberg
*By: ___________________________
E. Bruce Lovenberg
Attorney-in-fact
/s/ Marilynne N. White
*By: ___________________________
Marilynne N. White
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Stock Purchase Agreement, dated November 10, 1999, by and among Allan
Von Dette and William Engel and Logical Design Solutions, Inc.
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.+
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.+
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc. to
be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
4.2 Form of Junior Subordinated Debenture of Logical Design Solutions, Inc.
4.3 Form of Senior Subordinated Debenture of Logical Design Solutions, Inc.
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997, among Logical Design Solutions, Inc., principal
stockholders of Logical Design Solutions, Inc., Summit Ventures IV,
L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P. and Paul F.
Lozier.+
10.4 Registration Rights Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III,
L.P. and Paul F. Lozier.+
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.
and Paul F. Lozier.+
10.6 Logical Design Solutions, Inc. Employee Stock Purchase Plan.*
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.+
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.+
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.+
10.10 Lease Agreement, dated February 9, 2000, between MSGW Madison, L.L.C.
and Logical Design Solutions, Inc.
10.11 Lease Agreement, dated March 25, 1998, between Bank of Communications
and Logical Design Solutions, Inc.
10.12 Software Channel Program Agreement dated August 23, 1999 between Sun
Microsystems, Inc. and Logical Design Solutions, Inc.
10.13 Sun Professional Services Subcontractor Master Consulting Agreement
dated January 18, 2000 between Sun Microsystems, Inc. and Logical Design
Solutions, Inc.
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.3 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.+
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
<PAGE>
EXHIBIT 2.1
_________________________________
STOCK PURCHASE AGREEMENT
among
Allan Von Dette
and
William Engel,
on the one hand,
and
Logical Design Solutions, Inc.,
on the other hand.
___________________________________________________
Dated as of November 10, 1999
___________________________________________________
<PAGE>
Table of Contents
Page
----
1. Purchase and Sale of the Shares...................................... 1
2. Closing.............................................................. 1
(a) Closing....................................................... 1
(b) Consideration................................................. 1
(c) Escrow........................................................ 1
3. Representations and Warranties of the Sellers........................ 1
(a) Organization and Standing; Books and Records.................. 2
(b) Authority..................................................... 2
(c) Ownership of Capital Stock of the Company; the Shares......... 2
(d) No Conflicts; Consents........................................ 3
(e) Capital Stock of the Company.................................. 3
(f) Equity Interests.............................................. 4
(g) Financial Statements; Undisclosed Liabilities................. 4
(h) Absence of Changes or Events.................................. 4
(i) Taxes......................................................... 5
(j) Assets Other than Real Property Interests..................... 6
(k) Title to Real Property........................................ 7
(l) Contracts..................................................... 7
(m) Litigation.................................................... 7
(n) Insurance..................................................... 8
(o) Benefit Plans................................................. 8
(p) Compliance with Applicable Laws............................... 9
(q) Employee and Labor Matters.................................... 9
(r) Transactions with Affiliates.................................. 10
(s) Corporate Name................................................ 10
(t) Customers..................................................... 10
(u) Private Offering.............................................. 10
(v) Intellectual Property......................................... 11
(w) Technology.................................................... 11
(x) Brokers....................................................... 12
4. Representations and Warranties of the Buyer.......................... 12
(a) Authority..................................................... 12
(b) No Conflicts; Consents........................................ 12
(c) LDS Shares.................................................... 12
(d) Brokers....................................................... 12
5. Covenants of the Sellers............................................. 13
(a) Confidentiality............................................... 13
(b) Supplemental Disclosure....................................... 13
(c) Corporate Name................................................ 13
(d) Records....................................................... 13
i
<PAGE>
6. Covenants of the Buyer............................................... 14
(a) Confidentiality............................................... 14
(b) Supplemental Disclosure....................................... 14
(c) Employees and Employee Benefit Plans.......................... 14
(d) Establishment of Retention Bonus Pool......................... 14
7. Mutual Covenants..................................................... 15
(a) Further Assurances............................................ 15
(b) Publicity..................................................... 15
8. Conditions to Closing................................................ 15
(a) Each Party's Obligation....................................... 15
(b) The Sellers' Obligation....................................... 16
(c) The Buyer's Obligation........................................ 16
9. Indemnification...................................................... 17
(a) Tax Indemnification........................................... 17
(b) General Indemnification by the Sellers........................ 18
(c) General Indemnification by the Buyer.......................... 18
(d) Losses Net of Insurance, etc.................................. 18
(e) Termination of Indemnification under Sections
9(b) and 9(c)................................................. 19
(f) Procedures Relating to Indemnification
(Other than under Section 9(a))............................... 19
(g) Other Claims.................................................. 21
(h) Procedures Relating to Indemnification of Tax Claims.......... 21
(i) Satisfaction of Claims........................................ 22
10. Tax Matters.......................................................... 22
11. Assignment........................................................... 24
12. No Third-Party Beneficiaries......................................... 25
13. Survival............................................................. 25
14. Expenses............................................................. 25
15. Amendments........................................................... 25
16. Notices.............................................................. 25
17. Interpretation; Exhibits and Schedules............................... 26
18. Counterparts......................................................... 26
19. Entire Agreement..................................................... 26
20. Severability......................................................... 27
ii
<PAGE>
21. Consent to Jurisdiction.............................................. 27
22. Governing Law........................................................ 27
Exhibit A Form of Escrow Agreement
Exhibit B Form of Employment Agreement
Exhibit C Confidentiality Agreement, as Amended
Exhibit D Form of Stockholders Agreement
Schedule 2(b) Selling Stockholders/Consideration
Schedule 3(e) Capital Stock of the Company
Schedule 3(g) Financial Statements; Undisclosed Liabilities
Schedule 3(h) Absence of Changes or Events
Schedule 3(i) Taxes
Schedule 3(k) Title to Real Property
Schedule 3(l) Contracts
Schedule 3(n) Insurance
Schedule 3(o) Benefit Plans
Schedule 3(p) Compliance with Applicable Laws
Schedule 3(r) Transactions with Affiliates
Schedule 3(t) Customers
Schedule 3(v) Intellectual Property
iii
<PAGE>
Table of Definitions
Applicable Laws ......................................................3(p)
Auditor ..........................................................2(d)(iv)
Beardsley Purchase ...............................................3(c)(iv)
Benefit Plans .....................................................3(o)(i)
Buyer ...........................................................Preamble
Closing ..............................................................2(a)
Closing Date .........................................................2(a)
Code ...........................................................3(i)(i)(D)
Confidentiality Agreement ............................................5(c)
Consideration ....................................................Preamble
Contracts ............................................................3(l)
ERISA .............................................................3(o)(i)
Employment Agreements .............................................8(c)(v)
Escrow Agent .........................................................2(c)
Escrow Agreement .....................................................2(c)
Escrow Amount ........................................................2(c)
Financial Statements .................................................3(g)
Governmental Entity ..................................................3(d)
Intellectual Property ................................................3(v)
Interest Rate .....................................................2(d)(v)
IRS ............................................................3(i)(i)(C)
LDS Shares ...........................................................2(b)
Leased Property ......................................................3(k)
Loss .................................................................9(d)
Material Adverse Effect...............................................3(a)
New Jersey Act .......................................................3(d)
Non-Voting Stock .................................................3(c)(iv)
October Balance Sheet ................................................3(g)
Pension Plans ...................................................3(o)(iii)
Permitted Liens....................................................3(j)(i)
Plan .............................................................3(e)(ii)
Pre-Closing Tax Period .........................................3(i)(i)(E)
Property Taxes ....................................................9(a)(i)
Records ..............................................................5(f)
RIA ..............................................................3(l)(ii)
Schupp Buy-Back ..................................................3(c)(iv)
Securities Act .......................................................3(u)
Sellers .........................................................Preamble
Service Agreement ....................................................5(b)
Shareholders Agreement ..........................................8(c)(iii)
Shares ..........................................................Preamble
Straddle Period ......................................................9(a)
Subsidiary ...........................................................3(a)
System Software ......................................................3(w)
iv
<PAGE>
Tax Claim ............................................................9(h)
Tax or Taxes ...................................................3(i)(i)(A)
Tax Return .....................................................3(i)(i)(B)
Third Party Claim ....................................................9(f)
Virginia Act .........................................................3(d)
Voting Stock .........................................................3(e)
Year 2000 Compliant ..................................................3(w)
v
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of November 10, 1999, by and among Allan
Von Dette and William Engel (the "Sellers"), on the one hand, and Logical Design
Solutions, Inc., a corporation organized under the laws of the State of New
Jersey (the "Buyer"), on the other hand.
The Sellers desire to sell to the Buyer, and the Buyer desires to purchase
from the Sellers, all of the issued and outstanding shares of the Class A,
Voting Common Stock, no par value per share (the "Shares"), of Jump! Information
Technologies, Inc., a corporation organized under the laws of the Commonwealth
of Virginia that is wholly-owned of record by the Sellers (the "Company"), in
exchange for the consideration set forth in Section 2 (the "Consideration").
Accordingly, the Sellers and the Buyer hereby agree as follows:
1. Purchase and Sale of the Shares. On the terms and subject to the
-------------------------------
conditions of this Agreement, the Sellers shall sell, transfer and deliver or
cause to be sold, transferred and delivered to the Buyer, and the Buyer shall
purchase from the Sellers, in each case free and clear of all liens, charges and
encumbrances of any kind, the Shares for the Consideration, payable as set forth
below in Section 2.
2. Closing. (a) Closing. The closing (the "Closing") of the purchase and
------- -------
sale of the Shares shall be held at the offices of Brown & Wood llp, One World
Trade Center, New York, New York 10048, at 10:00 a.m. New York City time on
November 10, 1999 (the "Closing Date").
(b) Consideration. At the Closing, (i) subject to Section 2(c) below, the
Buyer shall deliver to each Seller, (x) the cash component of the Consideration
as set forth on Schedule 2(b) hereto payable by the Buyer to each Seller in
immediately available funds by wire transfer to a bank account designated in
writing by such Seller and (y) the number of shares of common stock of the
Buyer, no par value per share (the "LDS Shares"), as set forth on Schedule 2(b)
hereto issuable by the Buyer to each such Seller and (ii) each Seller shall
deliver or cause to be delivered to the Buyer certificates representing all
Shares owned of record by such Seller, duly endorsed in blank or accompanied by
stock powers duly endorsed in blank in proper form for transfer, with
appropriate transfer stamps, if any, affixed.
(c) Escrow. In connection with Section 9 hereof, the number of LDS Shares
set forth under the column heading "Escrow Amounts LDS Shares" on Schedule 2(b)
hereto (the "Escrow Amount") of the Consideration shall be delivered by the
Buyer on the Closing Date to First Union National Bank, as escrow agent (the
"Escrow Agent"), under an escrow agreement to be entered into on or immediately
prior to the Closing Date by the Sellers, the Buyer and the Escrow Agent
substantially in the form of Exhibit A hereto (the "Escrow Agreement").
3. Representations and Warranties of the Sellers. The Sellers hereby
---------------------------------------------
jointly and severally represent and warrant to the Buyer as follows:
<PAGE>
(a) Organization and Standing; Books and Records. (i) The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia. The Company has no Subsidiaries (as defined
below). The Company has all requisite corporate power and authority necessary to
carry on its business as presently conducted and to enable it to own, lease or
otherwise hold its properties and assets. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the conduct or nature of its business or the ownership, leasing or holding
of its properties or assets makes such qualification necessary, except such
jurisdictions where the failure to be so qualified or in good standing,
individually or in the aggregate, would not have a material adverse effect on
the business, condition (financial or otherwise), results of operations or
prospects of the Company (a "Material Adverse Effect"). The term "Subsidiary"
means each person of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by the Company.
(ii) The Sellers have delivered to the Buyer true and complete
copies of the Articles of Incorporation and By-laws, each as amended to date, of
the Company. The stock certificates and transfer books and the minute books of
the Company (which have been made available for inspection by the Buyer prior to
the execution and delivery of this Agreement) are true and complete.
(b) Authority. Each Seller has all requisite power and authority to
enter into this Agreement and the Escrow Agreement, to perform his obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. All acts and other proceedings required to be taken by each Seller
to authorize the execution, delivery and performance of this Agreement and the
Escrow Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly and properly taken. This Agreement and the Escrow
Agreement have been duly executed and delivered by each Seller and constitute
legal, valid and binding obligations of each Seller, enforceable against each
Seller in accordance with their terms. Any action required to be taken by the
shareholders of the Company or Board of Directors of the Company in connection
with approving this Agreement and authorizing the consummation of the
transactions contemplated herein has been taken.
(c) Ownership of Capital Stock of the Company; the Shares. (i) The
Sellers are the record owners of the Shares listed beside their respective names
on Schedule 2(b) hereto. Each Seller has good and valid title to such Shares
held of record, in each case free and clear of any liens, charges or
encumbrances of any kind.
(ii) Upon delivery to the Buyer at the Closing of certificates
representing the Shares, duly endorsed by the Sellers for transfer to the Buyer,
and upon the Sellers' receipt of the Consideration (net of the Escrow Amount),
good and valid title to the Shares will pass to the Buyer, free and clear of any
liens, charges or encumbrances of any kind, other than those arising from acts
of the Buyer or its affiliates. Other than this Agreement, the Shares are not
subject to any agreement, contract, commitment, understanding or arrangement,
2
<PAGE>
including any such agreement, contract, commitment, understanding or arrangement
restricting or otherwise relating to the voting, dividend rights or disposition
of the Shares.
(iii) Each of the shareholders agreement, dated October 30, 1998,
among the Sellers, Jeffrey Beardsley, John Schupp and the Company and the voting
agreement, dated October 30, 1998, among the Sellers and Jeff Beardsley has been
validly terminated.
(iv) Immediately prior to the Closing, the Company purchased all
of the shares of Series A, Class B, Non-Voting Common Stock, no par value per
share, of the Company (the "Non-Voting Stock") owned by Jon Schupp (the "Schupp
Buy-Back"). Immediately prior to the Closing, each of the Sellers purchased
350,000 Voting Shares from Jeffrey Beardsley (the "Beardsley Purchase"). The
consummation of the Schupp Buy-Back and the Beardsley Purchase were each in
compliance with all applicable Federal and state laws and regulations relating
to the offer, sale and purchase of securities.
(d) No Conflicts; Consents. The execution and delivery of this
Agreement by each Seller and the Escrow Agreement by each Seller do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any lien, charge or encumbrance of any kind upon any of the properties or
assets of the Company under, any provision of (i) the Articles of Incorporation
or By-laws of the Company, (ii) any note, bond, mortgage, indenture, deed of
trust, license, lease, contract, commitment, agreement or arrangement to which
the Company is a party or by which it or its properties or assets are bound or
(iii) any judgment, order or decree, or statute, law, ordinance, rule or
regulation, applicable to the Company or its properties or assets. No consent,
approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Federal, state, local or foreign government or
any court of competent jurisdiction, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, or any
national securities or commodities exchange or other regulatory or self-
regulatory body or association (a "Governmental Entity") is required to be
obtained or made by or with respect to any Seller or the Company or any of their
respective affiliates in connection with (A) the execution, delivery and
performance of this Agreement or the Escrow Agreement or the consummation of the
transactions contemplated hereby or thereby or (B) the conduct by the Company of
its business following the Closing as conducted on the date hereof, except for
filings (if any) to be made pursuant to the Virginia Stock Corporation Act (the
"Virginia Act") or the New Jersey Business Corporation Act (the "New Jersey
Act").
(e) Capital Stock of the Company. (i) The authorized capital stock of
the Company consists of 2,100,000 shares of Class A Voting Common Stock, no par
value per share (the "Voting Stock"), and 500,000 shares of Non-Voting Stock, of
which no shares of Non-Voting Stock are issued and outstanding and 2,100,000
shares of Voting Stock, constituting the Shares, are duly authorized and validly
issued and outstanding, fully paid and nonassessable, and
3
<PAGE>
all the certificates representing the Shares are in the physical possession of
the Sellers. Except for the Shares, there are no shares of capital stock of the
Company outstanding. None of the Shares have been issued in violation of, or are
subject to, any purchase option, call, right of first refusal, preemptive,
subscription or similar right under any provision of applicable law, the
Articles of Incorporation or By-laws of the Company or any agreement, contract
or instrument to which any Seller or the Company is a party or by which any of
them or any of their respective properties or assets is bound. There are no
outstanding warrants, options, rights, "phantom" stock rights, agreements,
convertible or exchangeable securities or other commitments. There are no equity
securities of the Company reserved for issuance for any purpose. There are no
outstanding bonds, debentures, notes or other indebtedness having the right to
vote on any matters on which stockholders of the Company may vote.
(ii) The Company's Non-Qualified Stock Option Plan (the "Plan") has
been validly terminated and is no longer in force or effect and all options
previously issued under the Plan have been validly terminated and are no longer
in force or effect. Attached hereto as Schedule 3(e), are the written agreements
entered into by each holder of previously issued options regarding termination
of his or her options.
(f) Equity Interests. The Company does not directly or indirectly own
any capital stock of or other equity interests in any corporation, partnership
or other person, and the Company is not a member of or participant in any
partnership, joint venture or similar person.
(g) Financial Statements; Undisclosed Liabilities. (i) Schedule 3(g)
sets forth (A) the unaudited balance sheet, dated as of October 31, 1999, of the
Company (the "October Balance Sheet"), (B) the unaudited balance sheet of the
Company as of December 31, 1998, and the unaudited statements of operations of
the Company for the period from inception (March 1, 1998) to December 31, 1998
(the financial statements described in clauses (A) and (B) above, are
collectively referred to herein as the "Financial Statements") and (C) other
known liabilities of the Company. The Financial Statements are complete and
correct, are in accordance with the books and records of the Company and fairly
present the financial condition and results of operations of the Company as of
the respective dates thereof and for the respective periods indicated.
(ii) The Company does not have any liabilities or obligations of
any nature (whether accrued, absolute, contingent, threatened or otherwise),
except (A) as disclosed, reflected or reserved against in the October Balance
Sheet, (B) for liabilities and obligations incurred in the ordinary course of
business since the date of the October Balance Sheet, incurred not in violation
of this Agreement and that would not, individually or in the aggregate, result
in a Material Adverse Effect, (C) for Taxes (as defined in Section 3(i)) and (D)
as disclosed on Schedule 3(g).
(h) Absence of Changes or Events. Except as set forth in Schedule
3(h), since the date of the October Balance Sheet, there has not been any
material adverse change (or any development that is reasonably likely to result
in any material adverse change) in the business, assets, condition (financial or
otherwise), results of operations or prospects of the Company.
4
<PAGE>
Except as set forth in Schedule 3(h), since the date of the October Balance
Sheet, the business of the Company has been conducted in the ordinary course and
in substantially the same manner as previously conducted, and the Company has
not (i) declared or paid any dividend or made any other distribution to its
stockholders whether or not upon or in respect of any shares of its capital
stock, (ii) redeemed or otherwise acquired any shares of its capital stock or
issued any capital stock or any option, warrant or right relating thereto or any
securities convertible into or exchangeable for any shares of capital stock,
(iii) adopted or amended any Benefit Plan (as defined in Section 3(o)), except
as required by law, or entered into or amended any employment, severance or
consulting agreement, contract or similar arrangement, (iv) granted to any
director, officer or employee any increase in compensation or benefits, except
for increases for any such director, officer or employee in the ordinary course
of business consistent with past practice or as may be required under existing
agreements, (v) incurred or assumed any liability, obligation or indebtedness
for borrowed money or guaranteed any such liability, obligation or indebtedness,
(vi) extended any credit to any person, except in the ordinary course of
business, (vii) permitted, allowed or suffered any of its assets to become
subject to any mortgage, security interest, lien, charge, encumbrance, easement,
covenant, right-of-way or other similar restriction of any nature whatsoever,
(viii) cancelled any indebtedness or waived any claims or rights of substantial
value, except for customer trade adjustments in the ordinary course of business
that do not exceed $1,000 individually or $5,000 in the aggregate, (ix) entered
into any agreement, contract or other arrangement with any Seller or any of
their affiliates, (x) made any change in any method of accounting or accounting
practice or policy, (xi) made, changed or revoked any election relating to the
Company or the Shares under any Tax law, except as required by law or (xii)
entered into, or modified, amended, terminated, or permitted the lapse of, any
lease of real property or other material agreement relating to real property.
(i) Taxes. (i) For purposes of this Agreement, (A) "Tax" or "Taxes"
shall mean all taxes, charges, fees, levies or other assessments, including,
without limitation, income, gross receipts, excise, property, sales,
withholding, social security, occupation, use, service, license, payroll,
franchise, transfer and recording taxes, fees and charges, including estimated
taxes, imposed by the United States or any taxing authority (domestic or
foreign), whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest, fines, penalties or
additional amounts attributable to, or imposed upon, or with respect to any such
taxes, charges, fees, levies or other assessments; (B) "Tax Return" shall mean
any return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes; (C) "IRS" shall mean the Internal
Revenue Service; (D) "Code" shall mean the Internal Revenue Code of 1986, as
amended; and (E) "Pre-Closing Tax Period" shall mean all taxable periods ending
on or beforeDecember 31, 1998.
(ii) The Company is a "C" corporation as defined in the Code and has
been a "C" corporation since inception.
(iii) Since inception, the only jurisdictions where the Company has
filed any income tax returns are with the Federal government of the United
States of America
5
<PAGE>
and with the Commonwealth of Virginia. The Sellers have delivered to the Buyer
true and correct copies of all Tax Returns.
(iv) Except as set forth in Schedule 3(i), (A) the Company has (x)
duly filed with the appropriate Governmental Entities all Tax Returns required
to be filed by it on or prior to the date hereof, and such Tax Returns are true,
correct and complete in all material respects and (y) duly paid in full all
Taxes for the Pre-Closing Tax Period, (B) there are no liens for Taxes upon the
Shares or the assets of the Company except for statutory liens for current Taxes
not yet due, (C) the Company has complied in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441,
1442, 3121 and 3402 of the Code or similar provisions under any foreign laws)
and has, within the time and the manner prescribed by law, withheld from and
paid over to the proper Governmental Entities all amounts required to be so
withheld and paid over under applicable laws, (D) no Federal, state, local or
foreign audits or other administrative proceedings or court proceedings are
presently pending with regard to any Taxes or Tax Returns of the Company, and
the Company has not received notice of any pending audits or proceedings, (E)
there are no outstanding written requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against the Company, (F) the Company is not a party to any
agreement providing for the allocation or sharing of Taxes, (G) the Company is
not a party to any agreement, contract or other arrangement that could result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code and (H) no power of
attorney has been executed by the Company with respect to any matter relating to
Taxes which is currently in force.
(j) Assets Other than Real Property Interests. (i) The Company has good
and valid title to all assets (other than real property interests) reflected on
the October Balance Sheet or acquired after the date thereof, except those sold
or otherwise disposed of for fair value since the date of the October Balance
Sheet in the ordinary course of business consistent with past practice and not
in violation of this Agreement, in each case free and clear of all liens,
charges or encumbrances of any kind except (A) mechanics', carriers', workmen's,
repairmen's or other like liens arising or incurred in the ordinary course of
business, liens arising under original purchase price conditional sales
contracts and equipment leases with third parties entered into in the ordinary
course of business and liens for Taxes that are not due and payable or that may
thereafter be paid without penalty and (B) other imperfections of title or
encumbrances, if any, that do not, individually or in the aggregate, materially
impair the continued use and operation of the assets to which they relate in the
business of the Company as presently conducted (the liens and imperfections of
title described in clauses (A) and (B) above are hereinafter referred to
collectively as "Permitted Liens").
(ii) All leased personal property of the Company is in all material
respects in the condition required of such property by the terms of the lease
applicable thereto during the term of the lease and upon the expiration thereof,
and the Company has made all payments required by all such leases.
6
<PAGE>
(k) Title to Real Property. The Company does not own in fee any real
property. Schedule 3(k) sets forth a complete list of all real property and
interests in real property leased by the Company (individually, a "Leased
Property"). The Company has good and valid title to the leasehold estates in all
Leased Property free and clear of all liens, charges and encumbrances
(including, without limitation, leases, subleases, assignments, easements,
covenants, rights-of-way and other similar restrictions of any nature
whatsoever), except (A) such as are set forth in Schedule 3(k), (B) Permitted
Liens, (C) easements, covenants, rights-of-way and other similar restrictions of
record, (D) any conditions that may be shown by a current, accurate survey or
physical inspection of any Leased Property made prior to Closing and (E) (I)
zoning, building and other similar restrictions, (II) mortgages, security
interests, liens, charges, encumbrances, easements, covenants, rights-of-way and
other similar restrictions that have been placed by any developer, landlord or
other third party on property over which the Company has easement rights or on
any Leased Property, and subordination or similar agreements relating thereto,
and (III) unrecorded easements, covenants, rights-of-way and other similar
restrictions, none of which items set forth in clauses (I), (II) and (III),
individually or in the aggregate, materially impair the continued use and
operation of the property to which they relate in the business of the Company as
presently conducted. The current use by the Company of the offices located on
Leased Property does not violate any local zoning or similar land use or
government regulations in any material respect.
(l) Contracts. (i) Schedule 3(l) sets forth a true and complete list of
all agreements, contracts, leases, subleases, licenses, options, instruments or
arrangements (oral or written) (collectively, the "Contracts") which the Company
is a party to. Except as set forth in Schedule 3(l), all Contracts are valid,
binding and in full force and effect and are enforceable by the Company in
accordance with its terms. Except as set forth in Schedule 3(l), the Company has
performed all material obligations required to be performed by it to date under
the Contracts and it is not (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect thereunder and, to
the knowledge of the Sellers, no other party to any of the Contracts is (with or
without the lapse of time or the giving of notice, or both) in breach or default
in any material respect thereunder. All Contracts have been made available for
inspection by the Buyer prior to the execution and delivery of this Agreement.
All third party consents necessary to consummate the transactions set forth
herein (if any) have been received by the Company.
(ii) The special agreement, dated April 1, 1998, by and between the
Company and Research Institute of America Group ("RIA") relating to a $250,000
"conditional investment" has been validly amended such that paragraphs 4, 5 and
6 of such agreement are no longer in force or effect. Such amendment is attached
hereto on Schedule 3(l).
(m) Litigation. There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry before any Governmental Entity or any
private arbitration tribunal now pending, or, to the best knowledge of the
Sellers, threatened, against, relating to or affecting the Company or the
properties, assets or business of the Company or the transactions contemplated
by this Agreement and the Escrow Agreement. To the knowledge of the Sellers,
there is no basis
7
<PAGE>
for any such claim, action, suit, proceeding, arbitration, investigation or
inquiry which, individually or in the aggregate, may have a Material Adverse
Effect. Neither the Company nor any of the directors, officers or employees of
the Company has been permanently or temporarily enjoined or prohibited by
judgment, order or decree of any Governmental Entity from engaging in or
continuing any conduct or practice in connection with the businesses engaged in
by the Company. There is not in existence any judgment, order or decree of any
Governmental Entity enjoining or prohibiting the Company from taking, or
requiring the Company to take, any action of any kind or to which the Company or
any of its properties or assets is subject or bound. The Company is not in
violation in any material respect of any judgment, order or decree of any
Governmental Entity.
(n) Insurance. The Company maintains policies of fire and casualty,
liability and other forms of insurance in such amounts, with such deductibles
and against such risks and losses as are reasonable for the business and assets
of the Company. The insurance policies maintained with respect to the Company
and its assets and properties are listed in Schedule 3(n). All such policies are
in full force and effect, all premiums due and payable thereon have been paid
(other than retroactive or retrospective premium adjustments that are not yet,
but may be, required to be paid with respect to any period ending prior to the
Closing Date), and no notice of cancellation or termination has been received
with respect to any such policy which has not been replaced on substantially
similar terms prior to the date of such cancellation. The activities and
operations of the Company have been conducted in a manner so as to conform in
all material respects to all applicable provisions of such insurance policies.
(o) Benefit Plans. (i) Schedule 3(o) sets forth a list and brief
description of all "employee benefit plans" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all
other retirement, deferred compensation, health, fringe benefit, severance or
similar employee benefit or compensation arrangements (all the foregoing being
herein called "Benefit Plans") maintained by the Company for the benefit of any
director, officer or employee of the Company. The Sellers have delivered or made
available to the Buyer true, complete and correct copies of (A) each Benefit
Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (B)
the most recent annual report on Form 5500 (together with all schedules and
exhibits filed therewith) filed with the IRS with respect to each Benefit Plan
(if any such report was required) and the most recent summary annual report
distributed to participants with respect to each Benefit Plan for which a
summary annual report is required and (C) the most recent summary plan
description for each Benefit Plan for which such a summary plan description is
required. None of the Benefit Plans is (A) a "multiple employer plan" (within
the meaning of Section 413(c) of the Code), (B) a "multiemployer plan" (within
the meaning of Section 3(37) of ERISA), or (C) a "welfare benefit fund" (within
the meaning of Section 419(e) of the Code). None of the Benefit Plans is subject
to Section 412 of the Code or Title IV of ERISA, and the Company has not
previously maintained or contributed to (or been required to maintain or
contribute to) any plan which was subject to Section 412 of the Code or Title IV
of ERISA with respect to which the Company could have any liability therefor.
The Company is not a member of a controlled group, under common control, or
required to be treated
8
<PAGE>
as a single employer with any other entity (within the meaning of Section
414(b), (c) or (m) of the Code or Section 4001(a)(14) or (b)(1) of ERISA).
(ii) Each Benefit Plan has been administered in all material
respects in accordance with its terms. The Company and all the Benefit Plans are
in compliance in all material respects with the applicable provisions of ERISA
and the Code and all other applicable law. There are no lawsuits, actions,
termination proceedings or other proceedings pending or, to the knowledge of the
Sellers, threatened against or involving any Benefit Plan and, to the knowledge
of the Sellers, there are no investigations by any Governmental Entity or other
claims (except claims for benefits payable in the normal operation of the
Benefit Plans) pending or threatened against or involving any Benefit Plan or
asserting any rights to benefits under any Benefit Plan.
(iii) All Benefit Plans which are "employee pension benefits plans"
(as defined in Section 3(2) of ERISA) (the "Pension Plans") have been the
subject of determination letters from the IRS to the effect that such Pension
Plans are qualified and exempt from Federal income taxes under Sections 401(a)
and 501(a), respectively, of the Code, and no such determination letter has been
revoked nor, to the knowledge of the Sellers, has revocation been threatened,
nor has any such Pension Plan been amended or administered since the date of its
most recent determination letter or application therefor in any respect that
would adversely affect its qualification.
(iv) None of the Benefit Plans which is a "employee welfare benefit
plans" (as defined in Section 3(1) of ERISA) provides for post-retirement
medical, dental or life insurance benefits, the cost of which is not entirely
borne by the retirees eligible therefor.
(v) Except as set forth in Schedule 3(o), no director, officer or
employee or former director, officer or employee of the Company will become
entitled to payment or accelerated vesting of any stock option bonus,
retirement, severance, job security or similar benefit or any enhanced benefit
solely as a result of the transactions contemplated hereby.
(p) Compliance with Applicable Laws. The Company is in compliance in all
material respects with all applicable statutes, laws, ordinances, rules, orders
and regulations of any Governmental Entity ("Applicable Laws"), including,
without limitation, (i) the Foreign Corrupt Practices Act, (ii) the Federal
Election Campaign Act, (iii) any provision of any Applicable Law relating to
campaign financing and/or contributions to political candidates, political
parties, political action committees and the like and (iv) any provision of any
Applicable Law relating to government procurement practices and procedures.
Except as set forth in Schedule 3(p), none of the Sellers or the Company has
received any written communication since inception of the Company from a
Governmental Entity that alleges that the Company is not in compliance in any
material respect with any Applicable Laws.
(q) Employee and Labor Matters. (i) No action, suit, complaint, charge,
arbitration, inquiry, proceeding or investigation by or before any Governmental
Entity (including without limitation the Equal Employment Opportunity
Commission), brought by or on behalf of
9
<PAGE>
any employee, prospective employee, former employee, retiree, labor organization
or other representative of the Company's employees is pending or, to the best
knowledge of the Sellers, threatened against the Company or any employee of the
Company (including, without limitation, with respect to alleged sexual
harassment); (ii) no grievance is pending or, to the best knowledge of the
Sellers, threatened against the Company; (iii) the Company is not a party to, or
otherwise bound by, any consent decree with, or citation by, any Governmental
Entity relating to employees or employment practices; and (iv) the Company is in
compliance with all applicable laws, agreements, contracts, and policies
relating to employment, employment practices, wages, hours, and terms and
conditions of employment (including, without limitation, with respect to
workmen's compensation laws and disability insurance coverage laws). The Company
is not a party to any collective bargaining agreements.
(r) Transactions with Affiliates. (i) Except as set forth in Schedule 3(r),
none of the Contracts between the Company, on the one hand, and any Seller or
any of his affiliates (other than the Company), on the other hand, will continue
in effect subsequent to the Closing. Except as set forth in Schedule 3(r), after
the Closing neither any Seller nor any of his affiliates will have any interest
in any property (real or personal, tangible or intangible) or contract used in
or pertaining to the business of the Company. Neither any Seller nor any of his
affiliates has any direct or indirect ownership interest in any person in which
the Company has any direct or indirect ownership interest or with which the
Company competes or has a business relationship.
(ii) The Sellers and the employees of the Company have repaid all
outstanding amounts due to the Company.
(s) Corporate Name. The Company (i) has the exclusive right to use the name
"Jump! Information Technologies, Inc." as the name of a corporation in the
Commonwealth of Virginia and (ii) has not received any notice of conflict since
inception with respect to the rights of others regarding such name.
(t) Customers. Except as set forth in Schedule 3(t), the Company does not
have any customer from which it received more than 1% of its revenues during its
most recent full fiscal year. Except as set forth in Schedule 3(t), since the
date of the October Balance Sheet, there has not been any material adverse
change in the business relationship of the Company with any customer set forth
in Schedule 3(t).
(u) Private Offering. Each of the Sellers (i) is acquiring all of the LDS
Shares to be acquired by him hereunder with no view or intention to offer for
sale any of the LDS Shares in a manner which would violate the Securities Act of
1933, as amended (the "Securities Act") or state securities laws; (ii) has
carefully reviewed and understands the risks of, and other considerations
relating to, acquiring the LDS Shares and an investment in the Buyer, and fully
understands the limitations on transfer of the LDS Shares under the Securities
Act and state securities laws and acknowledges and agrees that the certificates
representing the LDS Shares shall contain a legend regarding restrictions on
transfer under the Securities Act and the Shareholders Agreement (as defined
herein); (iii) has consulted his own financial, legal and tax advisors with
respect to the economic, legal and tax consequences of an investment in the LDS
10
<PAGE>
Shares and has not relied on the Buyer, its officers, directors, affiliates or
professional advisors for advice as to such consequences; (iv) is knowledgeable
and experienced with regard to the business of the Buyer; (v) has received all
information he has requested in connection with his entry into this Agreement
and his acquisition of the LDS Shares, and has been given the opportunity and
right to meet the representatives of the Buyer and to investigate and inquire
into all aspects of the Buyer and the terms and conditions of the acquisition of
the LDS Shares.
(v) Intellectual Property. Schedule 3(v) sets forth a true and complete
list of all copyrights, patents, trademarks (registered or unregistered), trade
names and service marks and applications therefor and other material
intellectual property and proprietary rights, whether or not subject to
statutory registration or protection (collectively, "Intellectual Property"),
owned, used, filed by or licensed to the Company. With respect to registered
trademarks, Schedule 3(v) sets forth a list of all jurisdictions in which such
trademarks are registered or applied for and all registration and application
numbers. Except as set forth in Schedule 3(v), the Company owns, and the Company
has the right to use, execute, reproduce, display, perform, modify, enhance,
distribute, prepare derivative works of and sublicense, without payment to any
other person, all Intellectual Property listed in Schedule 3(v) and the
consummation of the transactions contemplated hereby will not conflict with,
alter or impair any such rights.
The Company has not granted any options, licenses or agreements of any kind
relating to Intellectual Property listed in Schedule 3(v) or the marketing or
distribution thereof. The Company is not bound by or a party to any options,
licenses or agreements of any kind relating to the Intellectual Property of any
other person, except as set forth in Schedule 3(v) and except for agreements
relating to computer software licensed to the Company in the ordinary course of
business. Subject to the rights of third parties set forth in Schedule 3(v),
all Intellectual Property listed in Schedule 3(v) is free and clear of the
claims of others and of all liens, security interests and encumbrances
whatsoever. The conduct of the business of the Company as presently conducted
does not violate, conflict with or infringe the Intellectual Property of any
other person. Except as set forth in Schedule 3(v), (i) no claims are pending,
or to the knowledge of the Sellers, threatened, against the Company by any
person with respect to the ownership, validity, enforceability, effectiveness or
use of any Intellectual Property and (ii) since inception, the Sellers and the
Company have not received any communications alleging that the Company has
violated any rights relating to Intellectual Property of any person or entity.
(w) Technology. The Sellers have taken all commercially reasonable measures
in order to insure that the computer software, computer firmware, computer
hardware (whether general or special purpose), and other similar or related
items of automated, computerized, and/or software system(s) that are material to
the Company's financial and informational systems (collectively, the "System
Software") are Year 2000 Compliant (as defined below). "Year 2000 Compliant"
means, with respect to any System Software, that such System Software will (i)
operate prior to, during and after the calendar year 2000 without error relating
to the date related data, and (ii) properly recognize and indicate dates in the
calendar year 2000 and beyond as both input and output.
11
<PAGE>
(x) Brokers. No Seller nor the Company is subject to any valid claim of any
broker, investment banker, finder or other intermediary in connection with the
transactions contemplated by this Agreement.
4. Representations and Warranties of the Buyer. The Buyer hereby
-------------------------------------------
represents and warrants to the Sellers as follows:
(a) Authority. The Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of New Jersey. The Buyer has
all requisite corporate power and authority to enter into this Agreement and the
Escrow Agreement, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be taken by the Buyer to authorize the
execution, delivery and performance of this Agreement and the Escrow Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly and properly taken. This Agreement and the Escrow Agreement have been
duly executed and delivered by the Buyer and constitute legal, valid and binding
obligations of the Buyer, enforceable against the Buyer in accordance with their
respective terms.
(b) No Conflicts; Consents. The execution and delivery of this Agreement
and the Escrow Agreement by the Buyer do not, and the consummation of the
transactions contemplated hereby and thereby and compliance with the terms
hereof and thereof will not, conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any lien, charge
or encumbrance of any kind upon any of the properties or assets of the Buyer
under, any provision of (i) the Certificate of Incorporation or By-laws of the
Buyer, (ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, contract, commitment, agreement or arrangement to which the
Buyer is a party or by which any of its properties or assets is bound or (iii)
any judgment, order or decree, or statute, law, ordinance, rule or regulation,
applicable to the Buyer or any of its properties or assets. No consent,
approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made by or with respect to the Buyer or any of its affiliates in connection
with the execution, delivery and performance of this Agreement or the Escrow
Agreement or the consummation of the transactions contemplated hereby and
thereby.
(c) LDS Shares. Assuming that the representations set forth in Sections
3(b) and 3(u) are true and further assuming that the Sellers have the requisite
power and authority to be the lawful owners of the LDS Shares, upon delivery to
each of the Sellers at the Closing of certificates representing the LDS Shares
and upon the Buyer's receipt of the Shares, good and valid title to the LDS
Shares will pass to the Sellers, free and clear of any liens, charges or
encumbrances of any kind, other than those arising from acts of the Sellers.
(d) Brokers. The Buyer is not subject to any valid claim of any broker,
investment banker, finder or other intermediary in connection with the
transactions contemplated by this Agreement.
12
<PAGE>
5. Covenants of the Sellers. The Sellers jointly and severally covenant and
------------------------
agree as follows:
(a) Confidentiality. The Sellers acknowledge that in connection with the
purchase and sale of the Shares and the consummation of the other transactions
contemplated hereby, they and the Company are subject to the terms of a
confidentiality agreement, dated August 4, 1999, as amended by a letter
agreement dated August 12, 1999, both attached hereto as Exhibit C, between the
Buyer and the Company (the "Confidentiality Agreement"), the terms of which are
incorporated herein by reference. Each Seller hereby affirms that all terms and
conditions set forth in the Confidentiality Agreement remain in full force and
effect and apply to, among other things, this Agreement and the transactions
contemplated hereunder.
(b) Supplemental Disclosure. The Sellers shall give prompt notice to the
Buyer of (i) any representation or warranty made by any Seller contained in this
Agreement that is qualified as to materiality becoming untrue or inaccurate or
any such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by any Seller to comply
with or satisfy in any material respect any covenant or agreement to be complied
with or satisfied by it under this Agreement; provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants or
agreements of the parties.
(c) Corporate Name. The Sellers shall not use, or permit any other person
(other than the Company or the Buyer and any person authorized by the Company or
the Buyer) to use, the name "Jump! Information Technologies, Inc." or any
variation thereof using the words "Jump! Information Technologies, Inc." for any
purpose whatsoever.
(d) Records. On the Closing Date, the Sellers shall deliver or cause to be
delivered to the Buyer all agreements, documents, books, records and files,
including records and files stored on computer disks or tapes or any other
storage medium (collectively, "Records"), if any, in the possession of the
Sellers relating to the business and operations of the Company, subject to the
following exceptions:
(i) The Buyer recognizes that certain Records may contain
incidental information relating to the Sellers, and that the Sellers may retain
such Records and shall provide copies of the relevant portions thereof to the
Buyer;
(ii) The Sellers may retain copies of all Records prepared in
connection with the sale of the Shares, including bids received from other
parties, if any, and analyses relating to the Company; and
(iii) The Sellers may retain any Tax Returns and supporting work
papers, and the Buyer shall be provided with copies of such Tax Returns only to
the extent that they relate to the Company's separate returns or separate Tax
liability. The Sellers may have reasonable access to the records of the Company
for tax purposes.
13
<PAGE>
6. Covenants of the Buyer. The Buyer covenants and agrees as follows:
----------------------
(a) Confidentiality. The Buyer acknowledges that the information being
provided to it in connection with the purchase and sale of the Shares and the
consummation of the other transactions contemplated hereby is subject to the
terms of the Confidentiality Agreement, the terms of which are incorporated
herein by reference. The Buyer hereby affirms that all terms and conditions set
forth in the Confidentiality Agreement remain in full force and effect and apply
to, among other things, this Agreement and the transactions contemplated
hereunder.
(b) Supplemental Disclosure. The Buyer shall give prompt notice to the
Sellers of (i) any representation or warranty made by it contained in this
Agreement that is qualified as to materiality becoming untrue or inaccurate or
any such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants or
agreements of the parties.
(c) Employees and Employee Benefit Plans. (i) The Buyer shall, or shall
cause the Company to, offer employment, on an at will basis and at substantially
the same rates of compensation as in effect immediately prior to the Closing, to
all employees of the Company employed at the Closing Date. Notwithstanding
anything to the contrary, no contracts of employment shall be deemed to have
been created pursuant to this Section.
(ii) The Buyer shall cause service by employees of the Company to
be recognized under each benefit plan or arrangement established, maintained or
contributed to by the Buyer after the Closing for the benefit of any such
employees for purposes of (A) eligibility to participate and (B) vesting, but in
no event shall such service be taken into account in determining the accrual of
benefits under any such benefit plan or arrangement, including, but not limited
to, a defined benefit plan.
(iii) At and after the Closing Date, the Buyer shall make adequate
provisions to carry out the agreements set forth in this Section 6(c).
(d) Establishment of Retention Bonus Pool. The Buyer shall establish, or
cause the Company to establish, a retention bonus pool in the aggregate amount
of $50,000 that shall be funded as of the Closing Date for the benefit of
certain employees of the Company (not including the Sellers or Jeffrey
Beardsley), which bonus pool shall have such terms and conditions as are
determined by the Sellers (in their sole discretion) after consulting with the
Buyer, including provisions with respect to who shall receive a bonus,
allocation of individual amounts, timing of payments, vesting schedules and
performance criteria.
14
<PAGE>
7. Mutual Covenants.
----------------
(a) Further Assurances. The Sellers shall cooperate with the Buyer, and
the Buyer shall cooperate with the Sellers, in filing any necessary
applications, reports or other documents with, giving any notices to, and
seeking any consents from, all Governmental Entities and all third parties as
may be required in connection with the consummation of the transactions
contemplated by this Agreement and the Escrow Agreement and the performance by
the Company of its business after such consummation, and in seeking necessary
consultation with and prompt favorable action by any such Governmental Entity or
third party. From time to time, as and when requested by another party hereto, a
party hereto shall execute and deliver, or cause to be executed and delivered,
all such documents and instruments and shall take, or cause to be taken, all
such further or other actions as such other party may reasonably deem necessary
or desirable to consummate the transactions and the agreements set forth herein.
(b) Publicity. The Sellers and the Buyer agree that no public release or
announcement concerning the transactions contemplated hereby shall be issued by
any party hereto or the Company without the prior consent of (i) the Buyer in
the case of a release or an announcement by a Seller or the Company or (ii) the
Sellers in the case of a release or an announcement by the Buyer (in each case
which consent shall not be unreasonably withheld), except as such release or
announcement may be required by law or the rules or regulations of any United
States or foreign securities exchange, in which case the party required to make
the release or announcement shall, if practicable, allow the Buyer or the
Sellers, as the case may be, reasonable time to comment on such release or
announcement in advance of such issuance. The Sellers shall not make any
comments or statements with respect to the transactions contemplated hereby to
any third party (including without limitation members of the news media,
securities analysts and employees of the Company) without the prior consent of
the Buyer.
8. Conditions to Closing.
---------------------
(a) Each Party's Obligation. The respective obligation of each party
hereto to effect the transactions contemplated hereby is subject to the
satisfaction or waiver as of the Closing of the following conditions:
(i) No statute, rule, regulation, executive order, decree,
temporary restraining order, preliminary or permanent injunction or other order
shall have been enacted, entered, promulgated, enforced or issued by any
Governmental Entity and no other legal restraint or prohibition preventing the
purchase and sale of the Shares or any of the other transactions contemplated by
this Agreement or the Escrow Agreement shall be in effect.
(ii) All third party consents (including those set forth on
Schedule 3(l)) and all consents of or filings with Governmental Entities
necessary (including pursuant to the New Jersey Act or the Virginia Act, if any)
for the consummation of the transactions contemplated hereby shall have been
received or made and proof thereof shall be delivered at the Closing.
15
<PAGE>
(b) The Sellers' Obligation. The obligation of the Sellers to sell and
deliver the Shares to the Buyer is subject to the satisfaction or waiver as of
the Closing of the following conditions:
(i) The representations and warranties of the Buyer made in this
Agreement qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, as of the
Closing, except to the extent such representations and warranties expressly
relate to an earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not so
qualified shall be true and correct in all material respects, on and as of such
earlier date). The Buyer shall have duly performed, complied with and satisfied
in all material respects all covenants, agreements and conditions required by
this Agreement to be performed, complied with or satisfied by the Buyer by the
time of the Closing. The Buyer shall have delivered to the Sellers a certificate
dated the Closing Date and signed by an officer of the Buyer confirming the
foregoing.
(ii) There shall not be pending or threatened against the Company
or any Seller any suit, action or proceeding by any Governmental Entity (or any
suit, action or proceeding by any other person that has a reasonable likelihood
of success), challenging or seeking to restrain or prohibit the purchase and
sale of the Shares or any of the other transactions contemplated by this
Agreement or the Escrow Agreement.
(c) The Buyer's Obligation. The obligation of the Buyer to purchase the
Shares from the Sellers is subject to the satisfaction (or waiver by the Buyer)
as of the Closing of the following conditions:
(i) The representations and warranties of the Sellers made in this
Agreement qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, as of the
Closing, except to the extent such representations and warranties expressly
relate to an earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not so
qualified shall be true and correct in all material respects, on and as of such
earlier date). The Sellers shall have duly performed, complied with and
satisfied in all material respects all covenants, agreements and conditions
required by this Agreement to be performed, complied with or satisfied by the
Sellers by the time of the Closing. Each Seller shall have delivered to the
Buyer a certificate dated the Closing Date and signed by such Seller confirming
the foregoing.
(ii) There shall not be pending or threatened against the Buyer,
the Company or any of their directors or officers any suit, action or proceeding
by any Governmental Entity (or any suit, action or proceeding by any other
person that has a reasonable likelihood of success), (A) challenging or seeking
to restrain or prohibit the purchase and sale of the Shares or any of the other
transactions contemplated by this Agreement or the Escrow Agreement or seeking
to obtain from the Buyer or any of its subsidiaries in connection with the
purchase and sale of the Shares any damages in excess of $1,000,000, (B) seeking
to prohibit or limit the ownership or operation by the Buyer or the Company of
any material portion of the business or
16
<PAGE>
assets of the Buyer, its subsidiaries or the Company, or to compel the Buyer,
its subsidiaries or the Company to dispose of or hold separate any material
portion of the business or assets of the Buyer, its subsidiaries or the Company,
in each case as a result of the purchase and sale of the Shares or any of the
other transactions contemplated by this Agreement or the Escrow Agreement, (C)
seeking to impose limitations on the ability of the Buyer to acquire or hold, or
exercise full rights of ownership of, the Shares, including the right to vote
the Shares on all matters properly presented to the stockholders of the Company
or (D) seeking to prohibit the Buyer or any of its subsidiaries from effectively
controlling in any material respect the business or operations of the Company.
(iii) The Buyer and each of the Sellers shall have executed and
delivered at Closing a shareholder agreement, substantially in the form of
Exhibit D hereto (the "Shareholders Agreement").
(iv) Each Seller, the Buyer and the Escrow Agent shall have
executed and delivered at Closing the Escrow Agreement.
(v) The Company and each of the Sellers shall have executed and
delivered at Closing employment agreements substantially in the form of Exhibit
B hereto (the "Employment Agreements").
9. Indemnification.
---------------
(a) Tax Indemnification. The Sellers, jointly and severally, shall
indemnify the Buyer and its affiliates (including the Company) and each of their
respective directors, officers, employees, stockholders, agents and other
representatives against and hold them harmless from (x) any liability for Taxes
of the Company for any Pre-Closing Tax Period, (y) any liability for Taxes of
the Sellers or any other person (other than the Company) which is or has ever
been affiliated with the Company and (z) any liability for reasonable legal,
accounting, appraisal, consulting or similar fees and expenses for any item
attributable to any item in clause (x) or (y) above. The Buyer shall, and after
the Closing shall also cause the Company to, indemnify each Seller and its
affiliates and each of their respective employees, agents and representatives
against and hold them harmless from any liability for Taxes of the Company or
any affiliate for any taxable period ending after December 31, 1998 (except to
the extent such taxable period began before December 31, 1998, in which case the
Buyer's indemnity will cover only that portion of any such Taxes that are not
for the Pre- Closing Tax Period). In the case of any taxable period that
includes (but does not end on) December 31, 1998 (a "Straddle Period"):
(i) real, personal and intangible property Taxes ("property Taxes")
of the Company for any Pre-Closing Tax Period (other than Taxes imposed in
connection with the sale of the Shares or otherwise in connection with this
Agreement or the transactions contemplated hereby) shall be equal to the amount
of such property Taxes for the entire Straddle Period multiplied by a fraction,
the numerator of which is the number of days during the Straddle Period that are
in the Pre-Closing Tax Period and the denominator of which is the number of days
in the Straddle Period; and
17
<PAGE>
(ii) the Taxes of the Company (other than property Taxes) for the
Pre-Closing Tax Period (other than Taxes imposed in connection with the sale of
the Shares or otherwise in connection with this Agreement or the transactions
contemplated hereby) shall be computed as if such taxable period ended as of the
close of business on December 31, 1998. The indemnity obligations of the Sellers
in respect of Taxes for a Straddle Period shall equal the excess of (x) such
Taxes for the Pre-Closing Tax Period over (y) the sum of (i) the amount of such
Taxes for the Pre-Closing Tax Period paid by the Sellers or any of its
affiliates (other than the Company) at any time and (ii) the amount of such
Taxes paid by the Company on or prior to December 31, 1998. The Sellers, jointly
and severally, shall initially pay such excess to the Buyer five days prior to
the date on which the Tax Return (including any Tax Return with respect to
estimated Taxes) with respect to the liability for such Taxes is required to be
filed (and if no such Tax Return is required to be filed, five days prior to the
date satisfaction of the Tax liability is required by the relevant taxing
authority). The payments to be made pursuant to this paragraph by the Sellers
with respect to a Straddle Period shall be appropriately adjusted to reflect any
final determination (which shall include the execution of Form 870-AD or any
successor form) with respect to Taxes for the Straddle Period.
(b) General Indemnification by the Sellers. The Sellers, jointly and
severally, shall indemnify the Buyer and its affiliates (including the Company)
and each of their respective directors, officers, employees, stockholders,
agents and representatives against and hold them harmless from any loss,
liability, claim, damage or expense (including reasonable legal fees and
expenses) suffered or incurred by any such indemnified party (other than any
relating to Taxes, for which indemnification provisions are set forth in Section
9(a) hereof) arising from, relating to or otherwise in respect of (i) any
failure of any representation or warranty of any of the Sellers contained in
this Agreement which survives the Closing or in any certificate delivered
pursuant hereto to be true and correct and (ii) any breach of any agreement or
covenant of any Seller contained in this Agreement.
(c) General Indemnification by the Buyer. The Buyer shall, and shall
cause the Company to, indemnify each Seller, its affiliates and each of their
respective employees, agents and representatives against and hold them harmless
from any loss, liability, claim, damage or expense (including reasonable legal
fees and expenses) suffered or incurred by any such indemnified party (other
than any relating to Taxes, for which indemnification provisions are set forth
in Section 9(a)) arising from, relating to or otherwise in respect of (i) any
failure of any representation or warranty of the Buyer contained in this
Agreement which survives the Closing or in any certificate delivered pursuant
hereto to be true and correct and (ii) any breach of any agreement or covenant
of the Buyer contained in this Agreement.
(d) Losses Net of Insurance, etc. The amount of any loss, liability,
claim, damage, expense or Tax for which indemnification is provided under this
Section 9 shall be net of any amounts actually recovered by the indemnified
party under insurance policies with respect to such loss, liability, claim,
damage, expense or Tax (collectively, a "Loss") and shall be (i) increased to
take account of any net Tax cost incurred by the indemnified party arising from
the receipt of indemnity payments hereunder (grossed up for such increase) and
(ii) reduced to take
18
<PAGE>
account of any net Tax benefit realized by the indemnified party arising from
the incurrence or payment of any such Loss. In computing the amount of any such
Tax cost or Tax benefit, the indemnified party shall be deemed to recognize all
other items of income, gain, loss, deduction or credit before recognizing any
item arising from the receipt of any indemnity payment hereunder or the
incurrence or payment of any indemnified Loss. Any indemnity payment under this
Agreement shall be treated as an adjustment to the Consideration for Tax
purposes, unless a final determination (which shall include the execution of a
Form 870-AD or successor form) with respect to the indemnified party or any of
its affiliates causes any such payment not to be treated as an adjustment to the
Consideration for United States Federal income Tax purposes.
(e) Termination of Indemnification under Sections 9(b) and 9(c). The
obligations to indemnify and hold harmless a party hereto pursuant to Sections
9(b) and 9(c), shall terminate at the close of business on the date which is one
(1) year after the Closing Date, except as follows:
(i) in the case of Sections 3(i) and 3(o), such representations and
warranties shall terminate when the applicable statute of limitations has
expired; and
(ii) in the case of Sections 3(b), 3(c)(i), 3(c)(ii), 3(e)(i), 3(u)
and Sections 4(a) and 4(c), such representations and warranties shall not
expire;
provided, however, that such obligations to indemnify and hold harmless shall
- -------- -------
not terminate with respect to any item as to which the person to be indemnified
or the related party thereto shall have, before the expiration of the applicable
period, previously made a claim by delivering a notice of such claim (stating in
reasonable detail the basis of such claim) to the indemnifying party.
(f) Procedures Relating to Indemnification (Other than under Section
9(a)). In order for a party (the "indemnified party") to be entitled to any
indemnification provided for under this Agreement (other than under Section
9(a)) in respect of, arising out of or involving a claim or demand made by any
person against the indemnified party (a "Third Party Claim"), such indemnified
party must notify the indemnifying party in writing, and in reasonable detail,
of the Third Party Claim within 10 business days after receipt by such
indemnified party of written notice of the Third Party Claim; provided, however,
-------- -------
that failure to give such notification shall not affect the indemnification
provided hereunder except to the extent the indemnifying party shall have been
actually prejudiced as a result of such failure (except that the indemnifying
party shall not be liable for any expenses incurred during the period in which
the indemnified party failed to give such notice). Thereafter, the indemnified
party shall deliver to the indemnifying party, within five business days after
the indemnified party's receipt thereof, copies of all notices and documents
(including court papers) received by the indemnified party relating to the Third
Party Claim.
If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the indemnified
party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not reasonably
--------
19
<PAGE>
objected to by the indemnified party. Should the indemnifying party so elect to
assume the defense of a Third Party Claim, the indemnifying party shall not be
liable to the indemnified party for legal expenses subsequently incurred by the
indemnified party in connection with the defense thereof. If the indemnifying
party assumes such defense, the indemnified party shall have the right to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the indemnifying party, it being
understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the indemnifying party has
failed to assume the defense thereof (other than during the period prior to the
time the indemnified party shall have given notice of the Third Party Claim as
provided above).
If the indemnifying party so elects to assume the defense of any Third
Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof. Such cooperation
shall include the retention and (upon the indemnifying party's request) the
provision to the indemnifying party of records and information which are
reasonably relevant to such Third Party Claim, and making employees available on
a mutually convenient basis to provide additional information and explanation of
any material provided hereunder. Whether or not the indemnifying party shall
have assumed the defense of a Third Party Claim, the indemnified party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the indemnifying party's prior written consent (which
consent shall not be unreasonably withheld). If the indemnifying party shall
have assumed the defense of a Third Party Claim, the indemnified party shall
agree to any settlement, compromise or discharge of a Third Party Claim which
the indemnifying party may recommend and which by its terms obligates the
indemnifying party to pay the full amount of the liability in connection with
such Third Party Claim, which releases the indemnifying party completely in
connection with such Third Party Claim and which would not otherwise adversely
affect the indemnified party.
Notwithstanding the foregoing, the indemnifying party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
reasonable fees and expenses of counsel incurred by the indemnified party in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the indemnified party which the indemnified party reasonably determines,
after conferring with its outside counsel, cannot be separated from any related
claim for money damages. If such equitable relief or other relief portion of
the Third Party Claim can be so separated from that for money damages, the
indemnifying party shall be entitled to assume the defense of the portion
relating to money damages. The indemnification required by Section 9(b) and
9(c) shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred. All claims under Section 9(b)
or 9(c) other than Third Party Claims shall be governed by Section 9(g). All
Tax Claims (as defined in Section 9(h)) shall be governed by Section 9(h).
20
<PAGE>
(g) Other Claims. In the event any indemnified party should have a claim
against any indemnifying party under Section 9(b) or 9(c) that does not involve
a Third Party Claim being asserted against or sought to be collected from such
indemnified party, the indemnified party shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any indemnified
party so to notify the indemnifying party shall not relieve the indemnifying
party from any liability which it may have to such indemnified party under
Section 9(b) or 9(c), except to the extent that the indemnifying party
demonstrates that it has been materially prejudiced by such failure. If the
indemnifying party does not notify the indemnified party within 45 calendar days
following its receipt of such notice that the indemnifying party disputes its
liability to the indemnified party under Section 9(b) or 9(c), such claim
specified by the indemnified party in such notice shall be conclusively deemed a
liability of the indemnifying party under Section 9(b) or 9(c) and the
indemnifying party shall pay the amount of such liability to the indemnified
party on demand or, in the case of any notice in which the amount of the claim
(or any portion thereof) is estimated, on such later date when the amount of
such claim (or such portion thereof) becomes finally determined. If the
indemnifying party has timely disputed its liability with respect to such claim,
as provided above, the indemnifying party and the indemnified party shall
proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute shall be resolved by litigation in
an appropriate court of competent jurisdiction.
(h) Procedures Relating to Indemnification of Tax Claims. If a claim
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to the Buyer, one of its affiliates or any of their respective
directors, officers, employees, stockholders, agents or representatives pursuant
to Section 9(a), then the Buyer shall give notice to the Sellers in writing of
such claim and of any counterclaim the Buyer proposes to assert (a "Tax Claim");
provided, however, that the failure to give such notice shall not affect the
- -------- -------
indemnification provided hereunder except to the extent the Sellers have been
actually and materially prejudiced as a result of such failure. If a Tax Claim
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to either of the Sellers or one of their affiliates pursuant
to Section 9(a), then the Sellers shall give notice to the Buyer in writing of
such Tax Claim; provide, however, that the failure to give such notice shall not
------- -------
affect the indemnification provided hereunder except to the extent the Buyer has
been actually and materially prejudiced as a result of such failure.
With respect to any Tax Claim relating to a taxable period ending on or
prior to December 31, 1998, the Sellers shall control all proceedings and may
make all decisions taken in connection with such Tax Claim (including selection
of counsel) and, without limiting the foregoing, may in their sole discretion
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto, and may, in their
sole discretion, either pay the Tax claimed and sue for a refund where
applicable law permits such refund suits or contest the Tax Claim in any
permissible manner; provided, however, that the Sellers must first consult in
-------- -------
good faith with the Buyer before taking any action with respect to the conduct
of a Tax Claim. Notwithstanding the foregoing, (i) the Sellers shall not settle
any Tax Claim without the prior written consent of the Buyer, which consent
shall not
21
<PAGE>
be unreasonably withheld, (ii) the Buyer, and counsel of its own choosing, shall
have the right to participate fully in all aspects of the defense of such Tax
Claim, (iii) the Sellers shall inform the Buyer, reasonably promptly in advance,
of the date, time and place of all administrative and judicial meetings,
conferences, hearings and other proceedings relating to such Tax Claim, (iv) the
Buyer shall be entitled to have its representatives (including counsel,
accountants and consultants) attend and participate in any such administrative
and judicial meetings, conferences, hearings and other proceedings relating to
such Tax Claim and (v) the Sellers shall provide to the Buyer all information,
document requests and responses, proposed notices of deficiency, notices of
deficiency, revenue agent's reports, protests, petitions and any other documents
relating to such Tax Claim promptly upon receipt from, or in advance of
submission to (as the case may be), the relevant taxing authority.
The Sellers and the Buyer shall jointly control and participate in all
proceedings taken in connection with any Tax Claim relating to Taxes of the
Company for a Straddle Period. Neither the Sellers nor the Buyer shall settle
any such Tax Claim without the prior written consent of the other.
The Buyer shall control all proceedings with respect to any Tax Claim
relating to a taxable period beginning after December 31, 1998. None of the
Sellers shall have any right to participate in the conduct of any such
proceeding.
The Buyer shall, and shall cause the Company and each of its affiliates, on
the one hand, to, and each Seller and its affiliates, on the other hand, shall,
reasonably cooperate in contesting any Tax Claim, which cooperation shall
include the retention and, upon request, the provision to the requesting person
of records and information which are reasonably relevant to such Tax Claim, and
making employees available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim.
(i) Satisfaction of Claims. In the event the Buyer shall be entitled to
recover any amount pursuant to the indemnification provisions set forth in this
Section 9, the Buyer shall look to the Escrow Amount only, and shall not seek to
recover any amount directly from any Seller, except for indemnification claims
that survive pursuant to Sections 9(e)(i) and 9(e)(ii), in which case the Buyer
shall first look to the Escrow Amount and shall not seek to recover any amount
directly from any Seller until the Escrow Amount shall be exhausted and/or the
Escrow Agreement has terminated. Except for claims made pursuant to Sections
9(e)(i) and 9(e)(ii) hereof, no claim for indemnification under this Section 9
may be made, and the Sellers shall not have any liability for any and all claims
which, when aggregated with all previous claims for which payment has been made
under this Section 9, exceeds $150,000.
10. Tax Matters.
-----------
(a) For any taxable period of the Company that includes (but does not
end on) the Closing Date, the Buyer shall timely prepare and file with the
appropriate taxing authorities all Tax Returns required to be filed and shall
pay all Taxes due with respect to such Returns;
22
<PAGE>
provided that the Sellers shall reimburse the Buyer (in accordance with the
- --------
procedures set forth in Section 9(a)) for any amount owed by the Sellers
pursuant to Section 9(a) with respect to the taxable periods covered by such Tax
Returns. For any taxable period of the Company that ends on or before December
31, 1998, the Sellers shall timely prepare and file with the appropriate taxing
authorities all Tax Returns required to be filed, and shall pay all Taxes due
with respect to such Tax Returns (or, if the Buyer or the Company pays such
Taxes after the Closing Date, shall reimburse the Buyer in accordance with the
procedures set forth in Section 9(a) hereof); provided, however, that no such
-------- -------
Tax Return shall be filed without the prior written consent of the Buyer. The
Buyer and the Sellers agree to cause the Company to file all Tax Returns for the
taxable period including the Closing Date on the basis that the relevant taxable
period ended as of the close of business on the Closing Date, unless the
relevant taxing authority will not accept a Tax Return filed on that basis.
(b) The Sellers shall, and shall cause the Company to, and the Buyer
shall, reasonably cooperate, and shall cause their respective affiliates,
officers, employees, agents, auditors and other representatives reasonably to
cooperate, in preparing and filing all Tax Returns and in resolving all disputes
and audits with respect to all taxable periods relating to Taxes, including by
maintaining and making available to each other all records necessary in
connection with Taxes, provided, however, in no event shall the Buyer be
-------- -------
required to provide any Tax Return to the Sellers. The Buyer and the Sellers
recognize that the Sellers and their affiliates will need access, from time to
time, after the Closing Date, to certain accounting and Tax records and
information held by the Company to the extent such records and information
pertain to events occurring prior to the Closing Date; therefore, the Buyer
agrees, and agrees after the Closing to cause the Company, to allow the Sellers
and their agents and other representatives, at times and dates mutually
acceptable to the parties, reasonable access to such records from time to time,
during normal business hours and at the Sellers' expense.
(c) The amount or economic benefit of any refunds, credits or offsets
of Taxes of the Company for any taxable period ending on or before the Closing
Date shall be for the account of the Sellers. Notwithstanding the foregoing,
(i) any such refunds, credits or offsets of Taxes shall be for the account of
the Buyer to the extent such refunds, credits or offsets of Taxes are
attributable (determined on a marginal basis) to the carryback from a taxable
period beginning after the Closing Date (or the portion of a Straddle Period
that begins on the day after the Closing Date) of items of loss, deduction or
credit, or other tax items, of the Company (or any of its affiliates, including
the Buyer) and (ii) to the extent the Buyer or the Company pays after the
Closing Date any amount with respect to Taxes for any such taxable period,
refunds of such Taxes (determined on a first-in, first-out basis) shall be for
the account of the Buyer. The amount or economic benefit of any refunds,
credits or offsets of Taxes of the Company for any taxable period beginning
after the Closing Date shall be for the account of the Buyer. The amount or
economic benefit of any refunds, credits or offsets of Taxes of the Company for
any Straddle Period shall be equitably apportioned between the Sellers, on the
one hand, and the Buyer, on the other hand. Each party shall forward, and shall
cause its affiliates to forward, to the party entitled pursuant to this Section
10(c) to receive the amount or economic benefit of a refund, credit or offset to
Tax the amount of such refund, or the economic benefit of such credit
23
<PAGE>
or offset to Tax, within 30 days after such refund is received or after such
credit or offset is allowed or applied against other Tax liability, as the case
may be; provided, however, that any such amounts payable pursuant to this
-------- -------
Section 10(c) shall be net of any Tax cost or Tax benefit to the party making
payment pursuant to this Section 10(c) and its affiliates attributable to the
receipt of such refund, credit or offset to Tax and/or the payment of such
amounts pursuant to this Section 10(c). The Buyer and the Sellers shall treat
any amounts payable pursuant to this Section 10(c) as an adjustment to the
Consideration unless a final determination (which shall include the execution of
a Form 870-AD or successor form) causes any such payment not to be treated as an
adjustment to the Consideration for United States Federal income Tax purposes.
(d) The Sellers shall file any amended consolidated, combined or
unitary Tax Returns for taxable years ending on or prior to the Closing Date
which are required as a result of examination adjustments made by the IRS or by
the applicable state, municipal, provincial, local or foreign taxing authorities
for such taxable years as finally determined; provided, however, that no such
-------- -------
Return shall be filed without the prior written consent of the Buyer, which
consent shall not be unreasonably withheld.
For those jurisdictions in which separate Tax Returns are filed by the
Company, any required amended returns resulting from such examination
adjustments, as finally determined, shall be prepared by the Sellers and
furnished to the Company for approval, signature and filing at least 30 days
prior to the due date for filing such Tax Returns.
(e) All transfer, documentary, sales, use, registration and other such
Taxes (including all applicable real estate transfer or gains Taxes and stock
transfer Taxes) and related fees (including any penalties, interest and
additions to Tax) incurred in connection with the sale of the Shares or
otherwise in connection with this Agreement, the Escrow Agreement and the
transactions contemplated hereby and thereby shall be paid by the Sellers, and
the Sellers and the Buyer shall cooperate in timely preparing and filing all Tax
Returns as may be required to comply with the provisions of such Tax laws. The
Sellers shall bear and pay any stock transfer Taxes due as a result of the sale
of the Shares to the Buyer.
(f) The Sellers shall deliver to the Buyer at the Closing a duly
executed and acknowledged certificate, in form and substance acceptable to the
Buyer and in compliance with the Code and Treasury Regulations, certifying such
facts as to establish that the sale of the Shares and any other transactions
contemplated hereby are exempt from withholding under Section 1445 of the Code.
11. Assignment. This Agreement and the rights and obligations hereunder shall
----------
not be assignable or transferable by any Seller or the Buyer (including by
operation of law in connection with a merger, or sale of substantially all the
assets, or any dissolution, of the Buyer or any Seller) without the prior
written consent of the Buyer or the Sellers, as the case may be; provided,
--------
however, that the Buyer may assign its right to purchase the Shares hereunder to
- -------
an affiliate of the Buyer with the prior written consent of the Sellers (which
consent will not be unreasonably withheld); provided further, that no assignment
-------- -------
shall limit or affect the assignor's obligations hereunder. Any attempted
assignment in violation of this Section 11 shall be void.
24
<PAGE>
12. No Third-Party Beneficiaries. Except as provided in Sections 6(c), 6(d)
----------------------------
and Section 9 hereof, this Agreement is for the sole benefit of the parties
hereto and their permitted assigns, and nothing herein expressed or implied
shall give or be construed to give to any person, other than the parties hereto
and such assigns, any legal or equitable rights hereunder.
13. Survival. The agreements and covenants set forth herein shall survive
--------
the Closing. The representations and warranties in this Agreement and in any
certificate delivered pursuant hereto shall survive the Closing solely for
purposes of Sections 9(b) and (c) and shall terminate at the close of business
on the date which is one (1) year after the Closing Date, except as follows:
(i) in the case of Sections 3(i) and 3(o), such representations and
warranties shall terminate when the applicable statute of limitations has
expired; and
(ii) in the case of Sections 3(b), 3(c)(i), 3(c)(ii), 3(e)(i), 3(u) and
Sections 4(a) and 4(c), such representations and warranties shall not expire.
14. Expenses. Whether or not the transactions contemplated hereby are
--------
consummated, and except as otherwise specifically provided in this Agreement or
the Escrow Agreement, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses.
15. Amendments. No amendment, modification or waiver in respect of this
----------
Agreement shall be effective unless it shall be in writing and signed by the
Buyer and the Sellers.
16. Notices. All notices or other communications required or permitted to
-------
be given hereunder shall be in writing and shall be delivered by hand or sent by
telecopy or sent, postage prepaid, by registered, certified or express mail or
reputable overnight courier service and shall be deemed given when so delivered
by hand, or telecopied, or if mailed, three days after mailing (one business day
in the case of express mail or overnight courier service), as follows:
(i) if to the Sellers,
Allan Von Dette
6858 Compton Heights Circle
Clifton, VA 21024
and
William Engel
14150 Newbrook Drive
Suite 210
Chantilly, VA 20151
25
<PAGE>
with a copy to:
Foust & Clark, P.C.
8345-A Greensboro Drive
McLean, VA 22102
Telecopy No.: (703) 893-7907
Attention: Gorham S. (Rory) Clark, Esq.
and
(ii) if to the Buyer,
Logical Design Solutions, Inc.
465 South Street
Suite 103
Morristown, NJ 07960
Telecopy No.: (973) 734-1695
Attention: E. Bruce Lovenberg
with copies to:
Brown & Wood LLP
One World Trade Center
New York, NY 10048
Telecopy No.: (212) 839-5599
Attention: J. Armbrust, Esq.
or such other address as any party may from time to time specify by written
notice to the other parties hereto.
17. Interpretation; Exhibits and Schedules. The headings contained in this
--------------------------------------
Agreement, in any Exhibit or Schedule hereto and in the table of contents to
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. All Exhibits and Schedules
annexed hereto or referred to herein are hereby incorporated in and made a part
of this Agreement as if set forth in full herein. Any capitalized terms used in
any Schedule or Exhibit but not otherwise defined therein, shall have the
meaning as defined in this Agreement.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
19. Entire Agreement. This Agreement, the Employment Agreements, the
----------------
Shareholders Agreement, the Confidentiality Agreement and the Escrow Agreement
contain the
26
<PAGE>
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and supersede all prior agreements and understandings
relating to such subject matter. The parties hereto shall not be liable or bound
to any other party in any manner by any representations, warranties or covenants
relating to such subject matter except as specifically set forth herein, in the
Confidentiality Agreement or in the Escrow Agreement.
20. Severability. If any provision of this Agreement (or any portion
------------
thereof) or the application of any such provision (or any portion thereof) to
any person or circumstance shall be held invalid, illegal or unenforceable in
any respect by a court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision hereof (or the remaining
portion thereof) or the application of such provision to any other persons or
circumstances.
21. Consent to Jurisdiction. The Buyer and the Sellers irrevocably submit
-----------------------
to the exclusive jurisdiction of (a) the Superior Court of the State of New
Jersey, Chancery Division of Morris County and (b) the United States District
Court for the District of New Jersey, for the purposes of any suit, action or
other proceeding arising out of this Agreement, the Escrow Agreement or any
transaction contemplated hereby or thereby. The Buyer and the Sellers agree to
commence any action, suit or proceeding relating hereto or to the Escrow
Agreement either in the United States District Court for the District of New
Jersey or if such suit, action or other proceeding may not be brought in such
court for jurisdictional reasons, in the Superior Court of the State of New
Jersey, Chancery Division of Morris County. The Buyer and the Sellers further
agree that service of any process, summons, notice or document by U.S.
registered mail to such party's respective address set forth in Section 16 above
shall be effective service of process for any action, suit or proceeding in New
Jersey with respect to any matters to which it has submitted to jurisdiction in
this Section 21. The Buyer and the Sellers irrevocably and unconditionally waive
any objection to the laying of venue of any action, suit or proceeding arising
out of this Agreement, the Escrow Agreement or the transactions contemplated
hereby in (i) the Superior Court of the State of New Jersey, Chancery Division
of Morris County or (ii) the United States District Court for the District of
New Jersey, and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
22. Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by and construed in accordance with the
internal laws of the State of New Jersey applicable to agreements made and to be
performed entirely within such State, without regard to the conflicts of law
principles of such State.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
Logical Design Solutions, Inc.
/s/ E. Bruce Lovenberg /s/ Allan Von Dette
_____________________________________ ______________________________
E. Bruce Lovenberg By: Allan Von Dette
Secretary and Chief Financial Officer
/s/ William Engel
_______________________________
By: William Engel
28
<PAGE>
Exhibit 4.2
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Junior Subordinated Debenture
Due March 19, 2003
Morristown, New Jersey
No. J-1 March 18, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Mary Kay Brooks, or its
registered assigns, the sum of Six Hundred Ninety Five Thousand One Hundred
Twenty Two and 45/100 ($695,122.45) Dollars on March 19, 2003, together with
interest, computed on the basis of the actual number of days elapsed over a 360-
day year, on the unpaid principal balance hereof until paid in full at the rate
of nine percent (9%) per annum from the date hereof. Interest shall accrue and
compound annually and shall be paid upon each payment or prepayment of
principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Junior Debenture (as defined below) together with a
late charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Junior Debenture may designate in writing to the Company before the scheduled
payment date.
<PAGE>
This Junior Debenture is one of a duly authorized issue of Junior
Debentures designated as "9% Junior Subordinated Debentures due March 19, 2003"
(herein called the "Junior Debentures"), in the aggregate principal amount of
$1,114,289.50 and issued under a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement, dated as of March 19, 1997 (herein called the "Agreement"),
among the Company, certain of its shareholders, Summit Ventures IV, L.P., Summit
Investors III, L.P., Paul F. Lozier and Samedan, Inc., to which Agreement and
all agreements supplemental thereto reference is hereby made for a statement of
the respective rights and duties thereunder of the Company, and the holders of
the Junior Debentures, and the terms upon which the Debentures are, and are to
be, delivered.
The principal of this Junior Debenture is subject to prepayment under
certain circumstances, together with accrued interest, all as more particularly
set forth in the Agreement. The Company agrees to make such payments of
principal and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Junior Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Junior Debenture is issued
subject to such provisions, and each holder of Junior Debentures, by accepting
the same, agrees to and shall be bound by such provisions and agrees to take
such action as may be necessary or appropriate to effectuate the subordination
as provided in the Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Junior Debentures may be in certain circumstances declared, and upon such
declaration shall become, immediately due and payable, in the manner, with the
effect and subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Junior
Debenture or of the Agreement shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
interest on this Junior Debenture at the times, places, and rates, and in the
coin or currency, herein prescribed.
Under certain circumstances as are more fully set forth in the Agreement,
this Junior Debenture is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose, upon surrender and cancellation of this Junior Debenture, upon
presentation of a duly executed written instrument of transfer satisfactory to
the Company and upon the transferee's written agreement to be bound by the
provisions of the Agreement, and thereupon a new Junior Debenture or Junior
Debentures, of the same aggregate principal amount and in authorized
denominations, will be issued to the transferee or transferees in exchange
therefor; and this Junior Debenture, with or without other Junior Debentures may
in like manner be exchanged for one or more new Junior Debentures of other
authorized denominations but of the same aggregate principal amount, all subject
to the terms and conditions set forth in the Agreement. Any such transfer or
exchange shall be without
2
<PAGE>
charge by the Company. Transfer tax or the like (if any) shall be paid by the
holder hereof or the transferee.
All terms used in this Junior Debenture which are not defined herein and
are defined in the Agreement shall have the meanings assigned to them in the
Agreement.
This Junior Debenture shall be deemed to be a contract made under the laws
of the Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
IN WITNESS WHEREOF, the Company has caused this Junior Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By:____________________________
Attest:________________ Name: Mary Kay Brooks
Title: President
161623-1
3
<PAGE>
Exhibit 4.3
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Senior Subordinated Debenture
Due March 19, 2002
Morristown, New Jersey
No. S-1 March 19, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Summit Ventures IV,
L.P., or its registered assigns, the sum of Five Million, Thirty-Two Thousand,
Five Hundred Twenty-One Dollars ($5,032,521) on March 19, 2002, together with
interest, computed on the basis of the actual number of days elapsed over a 360-
day year, on the unpaid principal balance hereof until paid in full at the rate
of nine percent (9%) per annum from the date hereof. Interest shall accrue and
compound annually and shall be paid upon each payment or prepayment of
principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Debenture (as defined below) together with a late
charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Debenture may designate in writing to the Company before the scheduled payment
date.
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its "9% Senior Subordinated Debentures due March 19, 2002"
(herein called the "Debentures"), in the aggregate principal amount of
$5,296,833.71 and issued under a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement, dated as of March 19, 1997 (herein
53
<PAGE>
called the "Agreement"), among the Company, certain of its shareholders, Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.,
to which Agreement and all agreements supplemental thereto reference is hereby
made for a statement of the respective rights and duties thereunder of the
Company, and the holders of the Debentures, and the terms upon which the
Debentures are delivered.
The principal of this Debenture is subject to prepayment under certain
circumstances, together with accrued interest, all as more particularly set,
forth in the Agreement. The Company agrees to make such payments of principal
and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Debenture is issued subject
to such provisions, and each holder of Debentures, by accepting the same, agrees
to and shall be bound by such provisions and agrees to take such action as may
be necessary or appropriate to effectuate the subordination as provided in the
Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Debentures may be in certain circumstances declared, and upon such declaration
shall become, immediately due and payable, in the manner, with the effect and
subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Debenture or
of the Agreement shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this
Debenture at the times, places, and rates, and in the coin or currency, herein
prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Debenture is transferable by the registered owner hereof, in person or by duly
authorized attorney, on the books of the Company to be kept for that purpose,
upon surrender and cancellation of this Debenture, upon presentation of a duly
executed written instrument of transfer satisfactory to the Company and upon the
transferee's written agreement to be bound by the provisions of the Agreement,
and thereupon a new Debenture or Debentures, of the same aggregate principal
amount and in authorized denominations, will be issued to the transferee or
transferees in exchange therefor; and this Debenture, with or without other
Debentures may in like manner be exchanged for one or more new Debentures of
other authorized denominations but of the same aggregate principal amount, all
subject to the terms and conditions set forth in the Agreement. Any such
transfer or exchange shall be without charge by the Company. Transfer tax or the
like (if any) shall be paid by the holder hereof or the Transferee.
All terms used in this Debenture which are not defined herein and are
defined in the Agreement shall have the meanings assigned to them in the
Agreement.
This Debenture shall be deemed to be a contract made under the laws of the
Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
54
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161611-1
55
<PAGE>
EXHIBIT 10.1
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Dated as of March 19, 1997
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Dated as of March 19, 1997
TABLE OF CONTENTS
ARTICLE I
PURCHASE AND SALE OF SENIOR DEBENTURES AND WARRANTS
1.1 Purchase and Sale of Subordinated Debentures...................... 1
1.2 Issuance of Warrants.............................................. 1
1.3 Investment Units.................................................. 1
1.4 Warrant Shares.................................................... 2
1.5 Closing........................................................... 2
1.6 Use of Proceeds................................................... 2
1.7 Distributions to Certain Shareholders............................. 2
1.8 Termination of S Corporation Status............................... 3
1.9 Merger of LDS and LDSI............................................ 3
1.10 Issuance of Junior Subordinated Debentures........................ 3
1.11 Option Pools...................................................... 4
1.12 Description of Senior Debentures.................................. 4
1.13 Description of Junior Debentures.................................. 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
2.1 Organization and Corporate Power................................... 5
2.2 Authorization...................................................... 6
2.3 Government Approvals............................................... 6
2.4 Authorized and Outstanding Stock................................... 7
2.5 Subsidiaries....................................................... 7
2.6 Financial Information.............................................. 7
2.7 Events Subsequent to the Date of the Financial Statements.......... 8
2.8 Litigation......................................................... 8
2.9 Compliance with Laws and Other Instruments......................... 8
2.10 Taxes.............................................................. 8
2.11 Real Property; Environmental Matters............................... 9
2.12 Personal Property................................................. 10
2.13 Patents, Trademarks, etc.......................................... 10
2.14 Agreements of Directors, Officers and Employees................... 10
2.15 Governmental and Industrial Approvals............................. 11
2.16 Contracts and Commitments......................................... 11
2.17 Registration Rights............................................... 11
2.18 Insurance Coverage................................................ 11
2.19 Employee Matters.................................................. 11
2.20 No Brokers or Finders............................................. 12
i
<PAGE>
2.21 Transactions with Affiliates...................................... 12
2.22 Assumptions; Guarantees, etc. of Indebtedness of Other Persons.... 12
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
3.1 Accounts and Reports.............................................. 12
3.2 Payment of Taxes.................................................. 14
3.3 Maintenance of Key Man Insurance.................................. 14
3.4 Compliance with Laws, etc......................................... 14
3.5 Inspection........................................................ 14
3.6 Corporate Existence; Ownership of Subsidiaries.................... 15
3.7 Compliance with ERISA............................................. 15
3.8 Board Approval.................................................... 15
3.9 Financings........................................................ 15
3.10 Meetings of the Board of Directors................................ 15
3.11 Rule 144A Information............................................. 15
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
4.1 Investments in Other Persons...................................... 16
4.2 Distributions..................................................... 16
4.3 Dealings with Affiliates.......................................... 17
4.4 Merger............................................................ 17
4.5 Limitation on Options............................................. 18
4.6 Limitation on Subsidiary Dividends and Other Distributions........ 18
4.7 No Conflicting Agreements......................................... 18
4.8 Change in Business................................................ 18
4.9 Indebtedness...................................................... 18
4.10 Minimum Net Income................................................ 18
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
5.1 Representations and Warranties.................................... 19
5.2 Permitted Transfers; Legends...................................... 21
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 Agreement to Subordinate.......................................... 22
6.2 Acceleration of Senior Debt....................................... 22
6.3 Insolvency, Etc................................................... 23
6.4 Payments Held in Trust............................................ 23
6.5 The Company's Obligations Unconditional........................... 23
6.6 Subrogation Upon Payment of Senior Debt........................... 23
6.7 Notice............................................................ 24
6.8 Knowledge......................................................... 24
ii
<PAGE>
ARTICLE VII
CONDITIONS OF PURCHASERS' OBLIGATION
7.1 Effect of Conditions.............................................. 24
7.2 Representations and Warranties.................................... 24
7.3 Performance....................................................... 24
7.4 No Material Adverse Change........................................ 24
7.5 Opinion of Counsel................................................ 25
7.6 Board Election.................................................... 25
7.7 Redemption Agreement.............................................. 25
7.8 Shareholders Agreement............................................ 25
7.9 Registration Rights Agreement..................................... 25
ARTICLE VIII
CONDITIONS OF THE COMPANY'S OBLIGATIONS
8.1 Effect of Conditions.............................................. 25
8.2 Representations and Warranties.................................... 25
8.3 Performance....................................................... 25
8.4 Payment........................................................... 25
ARTICLE IX
DEFAULTS AND REMEDIES
9.1 Events of Default; Acceleration................................... 26
9.2 Rescission of Acceleration........................................ 28
ARTICLE X
CERTAIN DEFINITIONS
ARTICLE XI
MISCELLANEOUS
11.1 Senior Debenture Payments......................................... 30
11.2 Form, Registration, Transfer and Exchange of Senior Debentures.... 31
11.3 Survival of Representations....................................... 31
11.4 Parties in Interest............................................... 31
11.5 Debentures Owned by Affiliates.................................... 32
11.6 Amendments and Waivers............................................ 32
11.7 Notices........................................................... 32
11.8 Expenses.......................................................... 33
11.9 Counterparts...................................................... 33
11.10 Effect of Headings................................................ 33
11.11 Transferability as Unit........................................... 33
11.12 Governing Law..................................................... 34
iii
<PAGE>
EXHIBITS
A Form of 9 % Senior Subordinated Debenture
B Warrant Agreement
C Merger Agreement
D Form of 9% Junior Subordinated Debenture
E Opinion of Brown & Wood LLP
F Redemption Agreement
G Shareholders Agreement
H Registration Rights Agreement
iv
<PAGE>
March 19, 1997
To: The Persons listed on
Schedule 1.1 attached hereto:
------------
Re: Senior Subordinated Debentures and Warrants
Ladies and Gentlemen:
Logical Design Solutions, Inc., a New Jersey corporation ("LDS"), and Mary
Kay Brooks and Darren Bryden (each a "Principal Shareholder" and collectively
the "Principal Shareholders"), hereby agree with each of you as follows:
ARTICLE I
PURCHASE AND SALE OF SENIOR DEBENTURES AND WARRANTS
1.1 Purchase and Sale of Subordinated Debentures. At the Closing (as herein
defined), LDS will sell to you (the "Purchasers") for the aggregate purchase
price of Five Million Two Hundred Forty - Three Thousand Nine Hundred and Two
($5,243,902) Dollars 9% Senior Subordinated Debentures of the Company (as
defined herein) (the "Senior Debentures") in the aggregate principal amount of
$5,540,735.71. Each of the Purchasers agrees to purchase, separately and
severally, the aggregate amount of Senior Debentures and Warrants (as defined
below) set forth opposite its name on Schedule 1.1 hereto. The Company shall not
be obligated to sell any of the Senior Debentures or the Warrants unless all
conditions set forth in Article VIII hereof shall have been satisfied or waived.
The Senior Debentures shall be in the form of Exhibit A attached hereto.
1.2 Issuance of Warrants. At the Closing, LDS will issue to the Purchasers
warrants (the "Warrants") to acquire an aggregate of 215,000 shares of common
stock, no par value per share (the "Common Stock"), of LDS. The Warrants will be
issued pursuant to a Warrant Agreement in the form of Exhibit B attached hereto
(the "Warrant Agreement").
1.3 Investment Units. The Senior Debentures and the Warrants constitute
investment units ("Investment Units") for the purposes of Section 1273(c)(2)(A)
of the Internal Revenue Code of 1986 as amended (the "Code"). In accordance with
such section and Section 1273(b)(2) of the Code, the issue price of investment
units of a Purchaser is the amount such Purchaser pays for its Senior Debenture.
LDS and the Purchasers agree that within thirty (30) days after the Closing they
will in good faith agree in writing as to the allocation of the issue price
between the Senior Debentures and the Warrants in proportion to their respective
fair market values. None of the parties will take any position in its tax
returns that is inconsistent with such agreed upon allocation. LDS will provide
the Purchasers with any information necessary for them to report their income
from this transaction properly.
<PAGE>
1.4 Warrant Shares. LDS shall at all times reserve from its authorized but
unissued capital a sufficient number of shares of Common Stock (the "Warrant
Shares") for issuance upon exercise of the Warrants granted pursuant to the
Warrant Agreement.
1.5 Closing. Subject to the satisfaction or waiver of the conditions set
forth in Articles VII and VIII hereof, the sale and purchase of the Senior
Debentures and Warrants shall be made at a closing (the "Closing") to be held at
the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation, 101
Federal Street, Boston, Massachusetts, at 10:00 A.M. on March 19, 1997 or such
later date as may be agreed upon by the Company and the Purchasers. The date on
which the Closing occurs is referred to herein as the "Closing Date". Payment at
the Closing for the Senior Debentures and Warrants shall be by wire transfer
payable in immediately available federal funds. Each Purchaser shall pay that
amount for the Senior Debentures and Warrants being acquired by it at the
Closing as is set forth on Schedule 1.1 hereof. At the Closing, the Company will
deliver to each Purchaser one or more notes representing the Senior Debentures
purchased by such Purchaser and one or more warrant certificates evidencing the
Warrants being acquired by such Purchaser in such denominations and issued in
such names as may be requested by such Purchaser.
1.6 Use of Proceeds. The proceeds from the sale of the Senior Debentures
and Warrants will be used to provide working capital and to fund business
expansion and expenses associated with the transaction contemplated in this
Agreement.
1.7 Distributions to Certain Shareholders. The parties agree that the
following distributions shall be made to shareholders of LDS and Logical Design
Solutions International, Inc. ("LDSI") at or prior to the Closing:
(a) Prior to the Closing, each of LDS and LDSI shall have distributed to
their respective shareholders an aggregate amount of $1,014,6004 representing
their aggregate retained earnings as of December 31, 1995.
(b) It is expected that within 120 days following the Closing, Bell
Atlantic will commit to make to LDSI a payment or payments in the aggregate
amount of $1.7 million relating to the licensing of LDSI's Teletrac product
(such payment referred to herein as the "Prospective Exclusivity Payment"). The
parties agree that if within such 120 day period Bell Atlantic does commit to
make such payment, LDSI will distribute to its sole shareholder the account
receivable consisting of such commitment to make such payment. Neither LDS nor
LDSI shall have any obligation to make any such distributions to the extent that
Bell Atlantic does not commit to make such Prospective Exclusivity Payment.
(c) At or prior to the Closing, LDS and LDSI shall have distributed to
their respective shareholders amounts equal to the federal and state income
taxes payable by such shareholders (at an assumed rate of 37%), as shareholders
of S corporations, an aggregate amount of $634,798.27 with respect to the income
earned by LDS and LDSI during the period January 1, 1996 through December 31,
1996, and $215,596.41 with respect to income earned by LDS and LDSI during the
period January 1, 1997 through February 28, 1997; provided, however, that no
such distributions shall be made with respect to any income tax incurred by such
shareholders with respect to the other distributions set forth in this Section
1.7, nor with respect to the receipt
2
<PAGE>
by such shareholders of the Junior Subordinated Debentures described below.
Following the Closing, if it is determined that the Company has either
overdistributed or underdistributed amounts otherwise payable to the Principal
Shareholders, appropriate adjustments will be made.
1.8 Termination of S Corporation Status. LDS shall take such steps as the
Purchasers may request to terminate its status as an S corporation, effective as
of the Closing Date.
1.9 Merger of LDS and LDSI. (a) Immediately following the distribution
described in Section 1.7(b), and in all events within 120 days following the
Closing, LDS and LDSI shall be merged (such transaction referred to herein as
the "Merger"), with LDS surviving such Merger. As used hereafter in this
Agreement, the term "Company" shall mean LDS prior to the Merger, and shall mean
LDS as the surviving corporation following the Merger; provided that for
purposes of Article 11, except as otherwise noted, the term "Company" shall mean
LDS and LDSI on a combined basis as if the Merger had occurred prior to the date
hereof. Such merger shall be effected on the terms set forth in the merger
agreement in the form of Exhibit C attached hereto (the "Merger Agreement")
which shall be approved by the shareholders of each of LDS and LDSI and executed
on behalf of each such corporation prior to the Closing Date. The Principal
Shareholders agree that they shall take such action as may be required to effect
such merger in accordance with the terms of the Merger Agreement.
(b) Unless expressly called for or permitted by this Agreement or otherwise
consented to by the Purchasers in writing, from the Closing Date through the
date of the Merger, LDSI shall:
(i) perform in all material respects all obligations of LDSI under
agreements, contracts and instruments relating to or affecting its
properties, assets and business;
(ii) comply in all material respects with all statutes, laws,
ordinances, rules and regulations applicable to the Company;
(iii) not merge or consolidate with, or agree to merge or consolidate
with, or purchase substantially all the assets of, or otherwise acquire a
business or any corporation;
(iv) not make any dividends, distribution or other payments with
respect to its capital stock;
(v) not incur any indebtedness for borrowed money;
(vi) not incur any capital expenditure, or commit to an), such capital
expenditure, in excess of $5,000; and
(vii) not create or enlarge or enhance any employee benefit plan or
enter into any employment contract or increase compensation paid to any
officer paid to LDSI.
1.10 Issuance of Junior Subordinated Debentures. Effective as of March 18,
1997, LDS and LDSI distributed to the Principal Shareholders as set forth on
Schedule 1.10 of 9% Junior Subordinated Debentures in the forms of Exhibit D and
D-1, respectively, attached hereto
3
<PAGE>
(collectively, the "Junior Debentures" and, together with the Senior Debentures,
the "Debentures") in the aggregate principal amount of $1,114,289.50. The Junior
Debentures will be subordinate to the Senior Debentures as hereinafter set
forth.
1.11 Option Pools. Within thirty (30) days after the Closing, Date, there
shall be established three option plans (collectively, the "Option Plans"), each
of which shall be reasonably acceptable in form and substance to the Purchasers
and shall provide for the issuance of options, as follows:
(a) An option pool ("Option Pool A") will be established for current and
future senior management members and directors of the Company, and there shall
be reserved for issuance thereunder 100,000 shares of common stock.
(b) An option pool ("Option Pool B") shall be established for the Principal
Shareholders, with the exercise price of options granted pursuant thereto based
upon an equity evaluation of the Company of $40 million and there shall be
50,000 shares of Common Stock reserved for issuance under such plan.
(c) A third option pool ("Option Pool C") will be established for Mimi
Brooks and Darren Bryden, with the exercise price of options granted pursuant
thereto based upon an equity valuation of the Company of $60 million. There
shall be 50,000 shares of Common Stock reserved for issuance under such plan.
1.12 Description of Senior Debentures. The Senior Debentures shall have the
following terms, and shall be entitled to the following rights and benefits:
(a) The principal amount of the Senior Debentures shall be paid March 19,
2002. The Senior Debentures may, at each Purchaser's option, be pre consummation
of a Liquidity Event (as herein defined). The Company may prepay the Senior
Debentures at any time and from time to time in whole or in installments of $
100,000, without premium or penalty. Each such prepayment shall be preceded by
two Business Days' notice. Any partial prepayment of the Senior Debentures shall
be allocated among all holders of Senior Debentures pro rata in proportion to
the principal amount of the Senior Debentures held by each.
(b) The Senior Debentures shall bear interest from the date of issuance
until the date of payment of principal in full at the rate of 9% per year.
Interest shall be computed on the basis of a 360-day year and the actual number
of days elapsed, on the unpaid principal amount of the Senior Debentures.
Interest shall accrue and compound annually and shall be paid upon payment of
principal.
(c) Any interest not paid when due and payable shall thereafter be paid on
demand by the Purchasers, together with a late charge of two percent (2%) of the
amount of interest payment due.
(d) All payments of principal and interest on the Senior Debentures shall
be made by the Company in lawful money of the United States of America in
immediately available federal funds (or at the request of the holder of a Senior
Debenture, by certified or bank check or wire transfer) on the date such payment
is due.
4
<PAGE>
(e) The indebtedness evidenced by the Senior Debentures shall be junior and
subordinate in right of payment to all Senior Debt, as that term is defined in
Article VI hereof but shall be senior in right of payment to all indebtedness
evidenced by the Junior Debentures.
1.13 Description of Junior Debentures.
(a) The principal amount of the Junior Debentures shall be payable in full
on March 19, 2003. The Junior Debentures may, at the holders' option, be prepaid
in full upon consummation of a Liquidity Event. The Company may prepay the
Junior Debentures from time to time in whole or installments of $100,000,
without premium or penalty. Each such prepayment shall be preceded by two
Business Days' notice. Any partial prepayment of the Junior Debentures shall be
allocated among all holders of Junior Debentures pro rata in proportion to the
principal amount of the Junior Debentures held by each.
(b) The Junior Debentures shall bear interest on the date of issuance until
the date of payment of principal in full at the rate of 9% per year. Interest
shall be computed on the basis of a 360-day year and the actual number of days
elapsed, on the unpaid principal amount of the Junior Debentures. Interest shall
accrue and compound annually and shall be paid upon payment of principal.
(c) Any interest not paid when due and payable shall thereafter be paid on
demand by the holders of the Junior Debentures, together with a late charge of
2% of the amount of interest payment due.
(d) All payments of principal and interest on the Junior Debentures shall
be made by the Company in lawful money of the United States of America in
immediately available federal funds (or at the request of a holder of a Junior
Debenture, by certified or bank check or wire transfer) on the date such payment
is due.
(e) The indebtedness evidenced by the Junior Debentures shall be junior and
subordinate in right of payments to all Senior Debt, as that term is defined in
Article VI hereof, including, with respect to the Senior Debentures,
indebtedness evidenced thereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS
In order to induce the Purchasers to purchase the Senior Debentures and
Warrants, the Company and the Principal Shareholders, acting jointly and
severally, make the following representations and warranties which shall be
true, correct and complete in all respects on the date hereof and shall be true,
correct and complete in all material respects as of the Closing except for those
representations and warranties that address matters only as of a particular date
or only with respect to a specific period of time:
2.1 Organization and Corporate Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own its properties and to carry on its business
5
<PAGE>
as presently conducted. The Company is qualified as a foreign corporation in
good standing in each jurisdiction in which it owns or leases real property or
maintains employees.
2.2 Authorization. (a) The Company has all necessary corporate power and
has taken all necessary corporate action required for the due authorization,
execution, delivery and performance by the Company of this Agreement, the
Warrant Agreement, the Debentures, the Shareholders Agreement, the Redemption
Agreement and the Registration Rights Agreement (such agreements other than this
Agreement hereinafter referred to collectively as the "Related Agreements") and
any other agreements or instruments executed by the Company in connection
herewith or therewith and the consummation of the transactions contemplated
herein or therein, and for the due authorization, issuance and delivery of the
Debentures, the Warrants, and upon exercise of the Warrants pursuant to the
terms of the Warrant Agreement and upon payment of the exercise price therefor,
the Warrant Shares. The issuance of the Debentures, the Warrants and the Warrant
Shares does not require any further corporate action and is not and, except as
set forth in the Related Agreements, will not be subject to any preemptive
right, right of first refusal or the like. This Agreement and the Related
Agreements and the other agreements and instruments executed by the Company in
connection herewith or therewith will each be a valid and binding obligation of
the Company enforceable in accordance with its respective terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws relating to or affecting
enforcement of creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered' in a proceeding in equity or at law).
(b) Each Principal Shareholder has full legal capacity and unrestricted
power to execute and deliver this Agreement and the Related Agreements to which
he or she is a party, and any other agreements or instruments executed by him or
her in connection herewith or therewith and to consummate the transactions
contemplated herein or therein. This Agreement, the Related Agreements and the
other agreements and instruments executed by the Principal Shareholders in
connection herewith or therewith each will be a valid and binding obligation of
the Principal Shareholders enforceable in accordance with its respective terms,
except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws relating
to or affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
(c) Each Principal Shareholder owns, of record and beneficially, the number
of shares of Common Stock set forth opposite his or her name on Schedule 2.4
hereto, free and clear of any pledges, security interests, liens, charges or
other encumbrances.
2.3 Government Approvals. No consent, approval, license or authorization
of, or designation, declaration or filing with, any court or governmental
authority is or will be required on the part of the Company or the Principal
Shareholders in connection with the execution, delivery and performance by the
Company or the Principal Shareholders of this Agreement, any of the Related
Agreements and any other agreements or instruments executed by the Company or
the Principal Shareholders in connection herewith or therewith, or in connection
with the issuance of the Debentures, the Warrants and the Warrant Shares, except
for (i) those which have already been made or granted, (ii) those which may be
required under state securities or "blue
6
<PAGE>
sky" laws, and (iii) the filing of registration statements with the Securities
and Exchange Commission (the "Commission") and any applicable state securities
commission as specifically provided for in the Registration Rights Agreement.
2.4 Authorized and Outstanding Stock. The authorized capital stock of LDS
consists of 1,500,000 shares of Common Stock, of which 785,000 shares are
validly issued and outstanding and held of record and owned beneficially by the
Persons set forth on Schedule 2.4 attached hereto, free and clear of all liens,
security interests, restrictions on transfer, and other encumbrances, and the
authorized capital stock of LDSI consists of 2,500 shares of Common Stock, of
which 100 shares are validly issued and outstanding and held of record and owned
beneficially by the Persons set forth on Schedule 2.4 attached hereto, free and
clear of all liens, security interests, restrictions on transfer, and other
encumbrances. All issued and outstanding shares of capital stock of LDS and LDSI
are, and upon exercise of the Warrants pursuant to the terms of the Warrant
Agreement and upon payment of the exercise price therefor, all Warrant Shares
will be, duly and validly authorized, validly issued and fully paid and
non-assessable and free from any restrictions on transfer, except for
restrictions imposed by federal or state securities or "blue-sky" laws and
except for those imposed pursuant to this Agreement and any Related Agreement.
Except as set forth on Schedule 2.4, there are no outstanding warrants, options,
commitments, preemptive rights, rights to acquire or purchase, conversion rights
or demands of any character relating to the capital stock or other securities of
LDS or LDSI. All issued and outstanding shares of capital stock of LDS and LDSI
were issued (i) in transactions exempt from the registration provisions of the
Act, and (ii) in compliance with or in transactions exempt from the registration
provisions of applicable state securities or "blue-sky" laws.
2.5 Subsidiaries. The Company does not have any Subsidiaries or other
equity investment in any other Person.
2.6 Financial Information. The Company has previously delivered to the
Purchasers the financial statements of the Company for the year ended December
31, 1996, accompanied by the audit report of Ernst & Young LP (the "Audited
Financial Statements"), and the financial statements of the Company for the year
ended December 31, 1995 and for the two months ended February 28, 1997 (the
"Unaudited Financial Statements" and, together with the Audited Financial
Statements, the "Financial Statements"). The Financial Statements are in
accordance with the books and records of the Company and present fairly in
accordance with generally accepted accounting principles applied on a basis
consistent with prior periods the financial condition and results of operations
of the Company as of the dates and for the periods shown; provided, however,
that the Unaudited Financial Statements do not have all footnotes recorded in
accordance with generally accepted accounting principles, and are subject to
year-end adjustments. Except in connection with the transactions contemplated
herein, the Company has no liability or obligation, contingent or otherwise,
which is not adequately reserved against or reflected in the Audited Financial
Statements, except for liabilities and obligations incurred in the ordinary
course of business since December 31, 1996. Since December 31, 1996, except in
connection with the transactions contemplated herein, (i) there has been no
change in the business, assets, liabilities, condition (financial or otherwise)
or operations of the Company except for changes in the ordinary course of
business which would not have a Material Adverse Effect, and (ii) none of the
business, prospects, condition (financial or otherwise), operations,
7
<PAGE>
property or affairs of the Company has been materially adversely affected by any
occurrence or development, individually or in the aggregate, whether or not
insured against.
2.7 Events Subsequent to the Date of the Financial Statements. Except in
connection with the transactions contemplated herein, and except as set forth on
Schedule 2.7, since December 31, 1996, the Company has not, except in the
ordinary course of business, (i) issued any stock, stock options, warrants or
other securities convertible into or exchangeable for capital stock, or any bond
or other corporate security, (ii) borrowed any money (except under revolving
lines of credit which existed as of December 31, 1996) or mortgaged, pledged or
subjected to any lien any of its assets, tangible or intangible, (iii) sold,
assigned or transferred any of its tangible assets, or canceled any debt or
claim, or (iv) suffered any material loss of property or waived any right of
substantial value. Except as set forth on Schedule 2.7, since December 31, 1996,
the Company has not declared or made any payment or distribution to stockholders
or purchased or redeemed any shares of its capital stock or other securities.
2.8 Litigation. Except as otherwise set forth on Schedule 2.8 hereto, there
is no litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company or the Principal Shareholders threatened, against the
Company or affecting any of its properties or assets, or against any officer,
key employee or shareholder of the Company in his or her capacity as such, and,
to the knowledge of the Company and the Principal Stockholders, no event has
occurred nor does there exist any condition on the basis of which any
litigation, proceeding or investigation is reasonably likely to be instituted
with any substantial likelihood of recovery where such recovery would have a
Material Adverse Effect. Neither the Company nor any officer, key employee or
shareholder of the Company in his or her capacity as such is, to the knowledge
of the Company and the Principal Shareholders, in material default with respect
to any order, writ, injunction, decree, ruling or decision of any court,
commission, board or other government agency.
2.9 Compliance with Laws and Other Instruments. The Company is in
compliance with all of the provisions of this Agreement and of its charter and
by-laws, and, in all material respects with the provisions of each mortgage,
indenture, lease, license, other agreement or instrument, judgment, decree,
judicial order, statute, and regulation by which it is bound or to which it or
its properties are subject. Neither the execution, delivery or performance of
this Agreement and the Related Agreements nor the consummation of the
transactions contemplated hereby and thereby, nor the offer, issuance, sale or
delivery of the Debentures, the Warrants and Warrant Shares, with or without the
giving of notice or passage of time, or both, will violate, or result in any
breach of, or constitute a default under, or result in the imposition of any
encumbrance upon any asset of the Company pursuant to any provision of its
charter or by-laws, subject to the Charter Amendments, or any statute, rule or
regulation, contract, lease, judgment, decree or other document or instrument by
which the Company is bound or to which it or any of its properties are subject,
or will cause the Company to lose the benefit of any right or privilege it
presently enjoys or cause any Person who is expected to normally do business
with the Company to discontinue to do so on the same basis, except for
violations, breaches, defaults, encumbrances or losses which would not have a
Material Adverse Effect.
2.10 Taxes. Each of LDS and LDSI is a S corporation within the meaning of
the Internal Revenue Code of 1986, as amended (the "Code") for federal income
tax purposes and
8
<PAGE>
has been a S corporation continually since the date of its formation. The
Company has filed all tax returns, reports and forms (including statements of
estimated taxes owed) required to be filed within the applicable periods for
such filings and has paid all taxes required to be paid, and has established
adequate reserves (net of estimated tax payments already made) for the payment
of all taxes payable in respect to the period subsequent to the last periods
covered by such returns. All such tax returns, reports and forms are true,
correct and complete. Each of LDS and LDSI has properly classified for tax
purposes all employees, consultants and independent contractors, and has made
all filings and has withheld and paid all taxes, required to have been filed,
withheld or paid in connection with services provided by such persons. Adequate
amounts have been withheld by LDS and LDSI from its respective employees for all
periods in compliance with the tax, social security and unemployment withholding
provisions of all federal, state, local and foreign laws. No deficiencies for
any tax are currently assessed against LDS or LDSI, and no tax returns of LDS or
LDSI have ever been audited, and, to the knowledge of LDS or LDSI and the
Principal Shareholders, there is no such audit pending and the Company has not
received any notice for any taxing authority that it is contemplating such an
audit. There is no tax lien, whether imposed by any federal, state or local
taxing authority, outstanding against the assets, properties or business of LDS
or LDSI, other than any lien for taxes not yet due and payable. For the purposes
of this Agreement, the term "tax" shall include all federal, state, local and
foreign taxes, including income, franchise, property, sales, use, gross
receipts, excise, withholding, payroll and employment taxes or other similar
assessments of any kind whatsoever, including all interest, penalties and
additions imposed with respect to such amounts.
2.11 Real Property; Environmental Matters.
(a) Schedule 2.11 sets forth the addresses and uses of all real property
that the Company owns or leases or subleases, and any lien (exclusive of any
statutory landlord's lien) or encumbrance for which the Company is liable and
which the Company has secured with any such owned real property or leasehold
interest, specifying in the case of each such lease or sublease, the name of the
lessor or sublessor, as the case may be, the lease term and the obligations of
the lessee thereunder (or in lieu thereof, attaching a copy of such lease or
sublease). There are no defaults by the Company, or to the actual knowledge of
the Company and the Principal Shareholders (without investigation by the Company
or the Principal Shareholders), by any other party thereto, which might curtail
in any material respect the present use by the Company of the property listed on
Schedule 2.11. The performance by the Company of this Agreement and the Related
Agreements will not result in the termination of, or in any increase of any
amounts payable under, any lease listed on Schedule 2.11.
(b) All real property, owned or leased by the Company comply with all
applicable laws, rules, regulations, order, ordinances, judgments and decrees of
any governmental authorities with respect to all environmental statutes, rules
and regulations. The Company has not received notice of, nor does the Company or
any Principal Shareholder have knowledge of, any past or present events,
conditions, circumstances, activities, practices, incidents, actions or plans of
the Company which may cause noncompliance with, or which may give rise to any
liability for any claim, action, suit, proceeding, hearing, or investigation,
based on or related to the disposal, storage, handling, manufacture, processing,
distribution, use, treatment or transport, or the emission, discharge, release
or threatened release into the environment, of any Substance (as defined
herein). As used in this Section 2.11, the term "Substance" or "Substances"
shall mean
9
<PAGE>
any pollutant, hazardous substance, hazardous material, hazardous waste or toxic
waste, as defined in any presently enacted federal, state or local statute or
any regulation that has been promulgated pursuant thereto. No part of any of the
real property owned or leased by the Company has been listed or proposed for
listing on the National Priorities List established by the United States
Environmental Protection Agency, or any other such list by any federal, state or
local authorities.
(c) The Company has all registrations, permits, licenses, and approvals
issued by or on behalf of any federal, state or local governmental body or
agency if any ("Environmental Permits") that are required in connection with the
operation by the Company of its business, the discharge or emission of
Substances by the Company from real property owned or leased by the Company or
the generation, treatment, storage, transportation, or disposal of any such
Substances by the Company.
2.12 Personal Property. Except as set forth on Schedule 2.12 and except for
property sold or otherwise disposed of in the ordinary course of business since
December 31, 1996, the Company owns free and clear of any liens or encumbrances,
all of the personal property reflected as owned by the Company in the most
recent balance sheet contained in the Financial Statements, and all other
material items of personal property acquired by the Company through the date
hereof. All material items of such personal property are in normal operating
condition, wear and tear excepted.
2.13 Patents, Trademarks, etc. Set forth on Schedule 2.13 is a list and
brief description of all material patents, patent rights, patent applications,
trademarks, trademark applications, service marks, service mark applications
trade names and copyrights and all applications for such that are in the process
of being prepared, owned by or registered in the name of the Company, or of
which the Company is a licensor or licensee or in which the Company has any
right, and in each case a brief description of the nature of such right. The
Company owns or possesses adequate licenses or other rights to use all patents,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names, copyrights, manufacturing processes, formulae,
trade secrets and know how (collectively, "Intellectual Property") necessary or
desirable to the conduct of its business as conducted and as proposed to be
conducted, and to conduct and market any educational course or program now
marketed or conducted by the Company and no claim is pending or, to the
knowledge of the Company and the Principal Shareholders, threatened to the
effect that the operations of the Company infringe upon or conflict with the
asserted rights of any other person under any Intellectual Property, or that the
Company does not have the right to market any educational course or program, and
there is no known basis for any such claim (whether or not pending or
threatened). No claim is pending or, to the knowledge of the Company and the
Principal Shareholders, threatened to the effect that any such Intellectual
Property owned or licensed by the Company, or which the Company otherwise has
the right to use, is invalid or unenforceable by the Company, and there is no
known basis for any such claim (whether or not pending or threatened).
2.14 Agreements of Directors, Officers and Employees. To the knowledge of
the Company, no director, officer or employee of or consultant to the Company is
in violation of any terms of any employment contract, non-competition agreement,
non-disclosure agreement, patent disclosure or assignment agreement or other
contract or agreement containing restrictive
10
<PAGE>
covenants relating to the right of any such director, officer, employee or
consultant to be employed or engaged by the Company because of the nature of the
business conducted or proposed to be conducted by the Company, or relating to
the use of trade secrets or proprietary information of others.
2.15 Governmental and Industrial Approvals. The Company has all the
material permits, licenses, orders, franchises and other rights and privileges
of all federal, state, local or foreign governmental or regulatory bodies
necessary for the conduct of its business as presently conducted. All such
permits, licenses, orders, franchises and other rights and privileges are in
full force and effect and, to the knowledge of the Company and the Principal
Shareholders, no suspension or cancellation of any of them is threatened, and
none of such permits, licenses, orders, franchises or other rights and
privileges will be affected by the consummation of the transactions contemplated
in this Agreement and the Related Agreements.
2.16 Contracts and Commitments. Except in connection with the transactions
set forth herein, and except as set forth on Schedule 2.16 attached hereto, the
Company has no contract, obligation or commitment which is material or which
involves a potential material commitment or any stock redemption or stock
purchase agreement, stock option plan, shareholders' agreement, financing
agreement, license or real property lease. For purposes of this Section 2.16, a
contract, obligation or commitment shall be deemed material if it requires
expenditures to be made by the Company within one year from the date hereof in
excess of $100,000 or requires payment to the Company within one year from the
date hereof in excess of $100,000 and is not cancelable by the Company without
penalty within 30 days.
2.17 Registration Rights. The Company has not granted any rights relating
to registration of its capital stock under the Act or state securities laws
other than those contained in the Registration Rights Agreement.
2.18 Insurance Coverage. Schedule 2.18 hereto contains an accurate list of
the insurance policies currently maintained by the Company. Except as described
on Schedule 2.18, there are currently no claims pending against the Company
under any insurance policies currently in effect and covering the property,
business or employees of the Company, and all premiums due and payable with
respect to the policies maintained by the Company have been paid to date. All
such policies are in full force and effect and provide insurance, including
without limitation, liability insurance, in such amounts and against such risks
as is customary for companies engaged in similar businesses to the Company to
protect employees, properties, assets, businesses and operations of the Company.
2.19 Employee Matters. Except as set forth on Schedule 2.19, and except as
set forth herein, the Company does not have in effect any employment agreements,
consulting agreements, deferred compensation, severance, pension or retirement
agreements or arrangements, bonus, incentive or profit-sharing plans or
arrangements, or labor or collective bargaining agreements, written or oral. The
Company and the Principal Shareholders have no knowledge that any of the
officers or other key employees of the Company presently intends to terminate
his employment. The Company is in compliance in all material respects with all
applicable laws and regulations relating to labor, employment, fair employment
practices, terms and conditions of employment, and wages and hours. The Company
is in material compliance
11
<PAGE>
with the terms of all plans, programs and agreements listed on Schedule 2.19,
and each such plan, program or agreement is in material compliance with all of
the requirements and provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). No such plan or program has engaged in any
"prohibited transaction" as defined in Section 4975 of the Code, or has incurred
any "accumulated funding deficiency" as defined in Section 302 of ERISA, nor has
any reportable event as defined in Section 4043(b) of ERISA occurred with
respect to any such plan or program. With respect to each plan listed on
Schedule 2.19, any required filings, including all filings required to be made
with the United States Department of Labor and Internal Revenue Service, have
been timely filed, except where the failure to make such filings will not have a
Material Adverse Effect. The consummation of the transactions contemplated
hereby will not entitle any employee of the Company to receive any bonus,
severance or other payment.
2.20 No Brokers or Finders. Except for a fee in the amount of $200,000
payable to Samedan, Inc., of which fee $80,000 shall be paid by the Company in
cash at the Closing, and $120,000 of which shall be paid through the issuance of
Senior Debentures and Warrants as provided in Article 1, the parties hereto
agree that no person has or will have, as a result of the transactions
contemplated by this Agreement, any right, interest or claim against or upon the
Company or any Purchaser for any commission, fee or other compensation as a
finder or broker because of any act or omission by the Company or any Purchaser.
2.21 Transactions with Affiliates. Except as set forth on Schedule 2.21,
and except as set forth herein, there are no loans, leases or other continuing
transactions between the Company on the one hand, and any officer or director of
the Company or any person owning five percent (5%) or more of the Common Stock
of the Company or any respective family member or affiliate of such officer,
director or shareholder on the other hand.
2.22 Assumptions; Guarantees, etc. of Indebtedness of Other Persons. Except
as set forth on Schedule 2.22, the Company has not assumed, guaranteed, endorsed
or otherwise become directly or contingently liable on or for any indebtedness
for borrowed money of any other Person, except guarantees by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business.
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that except as is otherwise provided in Sections 3.12, 3.13
and Section 11.4, it will observe the following covenants on and after the
Closing Date and until the first to occur of (i) consummation of a Qualified
Public Offering, and (ii) repayment in full of all obligations under the
Debentures and redemption of all Warrant Shares.
3.1 Accounts and Reports. The Company will, and will cause each of its
Subsidiaries to, maintain a system of accounts in accordance with generally
accepted accounting principles consistently applied and the Company will, and
will cause each of its Subsidiaries to, keep full
12
<PAGE>
and complete financial records. The Company will furnish to each Purchaser the
information set forth in this Section 3.1.
(a) Within ninety (90) days after the end of each fiscal year, a copy of
the consolidated and consolidating balance sheet of the Company and its
Subsidiaries as at the end of such year, together with consolidated and
consolidating statements of income, shareholders' equity and cash flow of the
Company and its Subsidiaries for such year, setting forth in each case in
comparative form the corresponding figures for the preceding fiscal year, all in
reasonable detail and accompanied by the unqualified report of Ernst & Young LP
or such other of the six largest public accountant firms (measured by total
revenues) as may be selected from time to time by the Board of Directors;
provided that such consolidating statements need not be audited.
(b) Within thirty (30) days after each month, a preliminary consolidated
and consolidating balance sheet of the Company and its Subsidiaries as of the
end of such month and preliminary consolidated and consolidating statements of
income, shareholders' equity and cash flow for such month and for the period
commencing at the end of the previous fiscal year and ending with the end of
such month, setting forth in each case in comparative form the corresponding
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail.
(c) At the time of delivery of each monthly and annual statement, a
certificate, executed by either the president or chief financial officer of the
Company stating that such officer has reviewed the provisions of Articles III,
IV and IX of this Agreement and has no knowledge of any default by the Company
or any Subsidiary in the performance or observance of any of the provisions
thereof or, if such officer has such knowledge, specifying such default.
(d) Not later than thirty (30) days prior to the end of each fiscal year, a
copy of the operating plan and budget for the next fiscal year required under
Section 3.8.
(e) Promptly upon receipt thereof, any written report, any so called
"management letter", and any other reports submitted to the Company or any
Subsidiary by its independent public accountants relating to the business,
prospects or financial condition of the Company and its Subsidiaries.
(f) Promptly after the commencement thereof, notice of (i) all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
Company (or any Subsidiary) which, if successful, would have a Material Adverse
Effect; and (ii) all material defaults by the Company or any Subsidiary (whether
or not declared) under any agreement for money borrowed (unless waived or cured
within applicable grace periods);
(g) Promptly upon sending, making available, or filing the same, all
reports and financial statements as the Company (or any Subsidiary) shall send
or make available generally to the shareholders of the Company as such or to the
Commission; and
(h) Such other information with regard to the business, properties or the
condition or operations, financial or otherwise, of the Company or its
Subsidiaries as the Purchasers may from time to time reasonably request.
13
<PAGE>
3.2 Payment of Taxes. The Company will pay and discharge (and cause any
Subsidiary to pay and discharge) all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits, or upon any properties
belonging to it, prior to the date on which penalties attach thereto, and all
lawful claims which, if unpaid, might become a lien or charge upon any
properties of the Company (or any Subsidiary), provided that neither the Company
nor any Subsidiary shall be required to pay any such tax, assessment, charge,
levy or claim which (i) has not been asserted or is not owed, or (ii) is being
contested in good faith and by proper proceedings if the Company or such
Subsidiary shall have set aside on its books adequate reserves in the opinion of
management and the Company's independent accountants with respect thereto.
3.3 Maintenance of Key Man Insurance. The Company will, at its expense, use
its best effort to maintain a life insurance policy with a death benefit of at
least $ 1,000,000 with a responsible and reputable insurance company payable to
the Company on the life of each of Mary Kay Brooks and Darren Bryden. The
Company will maintain such policies and will not cause or permit any assignment
of the proceeds of such policies and will not borrow against such policies. The
Company will add one designee of the Purchasers as a notice party to such
policy, and will request that the issuer of each policy provide such designee
with ten (10) days' notice before either such policy is terminated (for failure
to pay premium or otherwise) or assigned, or before any change is made in the
designation of the beneficiary thereof. Each of the Principal Shareholders
hereby represents and warrants that he or she has not in the past been denied
insurance on usual and customary rates available for an insured without a
pre-existing condition, and that he or she has no knowledge of any fact or
circumstance which would prevent the Company from obtaining life insurance on
his or her life at such usual and customary rates.
3.4 Compliance with Laws, etc. The Company will comply (and cause each of
its Subsidiaries to comply) with all applicable laws, rules, regulations and
orders of any governmental authority, the noncompliance with which would have a
material adverse effect on the business, condition or results of operations of
the Company and its Subsidiaries, taken as a whole.
3.5 Inspection. At any reasonable time during normal business hours and
from time to time, but not more frequently than once per calendar quarter,
respectively, for all Purchasers and not more than once every twelve months for
all unaffiliated transferees of the Purchasers, as a group, the Company (and
each of its Subsidiaries) will permit (i) any one or more of the Purchasers who
then own, of record or beneficially, any Debentures, Warrants or Warrant Shares
who owns, of record or beneficially, at least ten percent (10%) of the then
outstanding principal amount of the Debentures, Warrants or Warrant Shares, and
(ii) any of the agents or representatives of the foregoing Persons, to examine
and make copies of and extracts from the records and books of account of and
visit the properties of the Company (and any of its Subsidiaries) and to discuss
the Company's affairs, finances and accounts with any of its officers or
directors; provided that any Person or Persons exercising rights under this
Section 3.5 shall (i) use all reasonable efforts to ensure that any such
examination or visit results in a minimum of disruption to the operations of the
Company and (ii) shall agree in writing to keep any proprietary information of
the Company disclosed to him in the course of such inspection confidential in a
manner consistent with prudent business practices and treatment of such Person's
or Persons' own confidential information and not use such proprietary
information for
14
<PAGE>
any purpose in competition with the Company's business. The rights granted under
this Section 3.5 shall be in addition to any rights which any Purchaser may have
under applicable law.
3.6 Corporate Existence; Ownership of Subsidiaries. The Company will, and
will cause its Subsidiaries to, at all times preserve and keep in full force and
effect their corporate existence, and rights and franchises material to the
business of the Company and its Subsidiaries, taken as a whole, and will
qualify, and will cause each of its Subsidiaries to qualify, to do business as a
foreign corporation in any jurisdiction where the failure to do so would have a
Material Adverse Effect. The Company shall at all times own of record and
beneficially, free and clear of all liens, charges, restrictions, claims and
encumbrances of any nature, a majority of the issued and outstanding capital
stock of each of its Subsidiaries.
3.7 Compliance with ERISA. The Company will comply (and cause each of its
Subsidiaries to comply) in all material respects with all minimum funding
requirements applicable to any pension or other employee benefit plans which are
subject to ERISA or to the Code, and comply in all other material respects with
the provisions of ERISA and the Code, and the rules and regulations thereunder,
which are applicable to any such plan. Neither the Company nor any of its
Subsidiaries will permit any event or condition to exist which could permit any
such plan to be terminated under circumstances which cause the lien provided for
in Section 4068 of ERISA to attach to the assets of the Company or any of its
Subsidiaries.
3.8 Board Approval. Not later than thirty (30) days prior to the end of
each fiscal year, the Company will prepare and submit to its Board of Directors
for its approval prior to such year end an operating plan and budget, cash flow
projections and profit and loss projections, all itemized in reasonable detail
for the immediately following year.
3.9 Financings. The Company will promptly provide to the Board of Directors
the details and terms of, and any brochures or investment memoranda prepared by
the Company related to, any possible financing of any nature for the Company (or
any of its Subsidiaries), whether initiated by the Company or any other Person.
3.10 Meetings of the Board of Directors. The Directors shall schedule
regular meetings not less frequently than once every fiscal quarter. The Company
shall reimburse all members of the Board of Directors of the Company for all
direct out-of-pocket expenses incurred by them in attending such meetings.
3.11 Rule 144A Information. The Company shall, upon the written request of
any Purchaser, provide to such Purchaser and to any prospective institutional
transferee of the Debentures designated by such Purchaser, such financial and
other information as is reasonably available to the Company or can be obtained
by the Company without material expense and as such Purchaser may reasonably
determine is required to permit such transfer to comply with the requirements of
Rule 144A promulgated under the Act.
15
<PAGE>
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that except as is otherwise provided in Section 11.4, it
will comply (and will cause each Subsidiary to comply) for the benefit of the
Purchasers with each of the provisions of this Article IV on and after the
Closing Date and until the first to occur of (i) consummation of a Qualified
Public Offering and (ii) repayment of all obligations under the Debentures and
redemption of all Warrants or Warrant Shares.
4.1 Investments in Other Persons. The Company will not make or permit any
Subsidiary to make any loan or advance to any Person, or purchase, otherwise
acquire, or permit any Subsidiary to purchase or otherwise acquire, the capital
stock or assets of any Person without the prior approval of the Purchasers,
except:
(i) investments by the Company or a Subsidiary in evidences of
indebtedness issued or fully guaranteed by the United States of America and
having a maturity of not more than one year from the date of acquisition;
(ii) investments by the Company or a Subsidiary in certificates of
deposit, notes, acceptances and repurchase agreements having a maturity of
not more than one year from the date of acquisition issued by a bank
organized in the United States having a combined capital and surplus of at
least $50,000,000;
(iii) loans, advances or investments from the Company to any
Subsidiary, a Subsidiary to the Company or from a Subsidiary to another
Subsidiary;
(iv) investments by the Company or a Subsidiary in A-rated or better
commercial paper having a maturity of not more than one year from the date
of acquisition; and
(v) investments by the Company or a Subsidiary in "money market" fund
shares, or in "money market" accounts fully insured by the Federal Deposit
Insurance Corporation and sponsored by banks and other financial
institutions, provided that such "money market" fund or "money market"
accounts invest principally in investments of the types described in
clauses (i), (ii) or (iv) of this subsection 4. 1.
4.2 Distributions. Except as otherwise expressly set forth in this
Agreement and the Related Agreements, the Company will not declare or pay any
dividends, purchase, redeem, retire, or otherwise acquire for value any of its
capital stock (or rights, options or warrants to purchase such shares) now or
hereafter outstanding, return any capital to its shareholders as such, or make
any distribution of assets to its shareholders as such, or permit any Subsidiary
to do any of the foregoing, except that the Subsidiaries may declare and make
payment of cash and stock dividends, return capital and make distributions of
assets to the Company and except that nothing herein contained shall prevent the
Company from:
16
<PAGE>
(i) effecting a stock split or declaring or paying any dividend
consisting of shares of any class of capital stock to the holders of shares
of such class of capital stock; or
(ii) complying with the terms of the Redemption Agreement.
4.3 Dealings with Affiliates. Except as set forth herein and in the Related
Agreements, and except for those transactions listed in Schedule 4.3 attached
hereto, the Company will not enter into any transaction with any officer or
director of the Company or any Subsidiary or holder of any class of capital
stock of the Company, or any member of their respective immediate families or
any corporation or other entity directly or indirectly controlling, controlled
by or under common control with one or more of such officers, directors or
shareholders or members of their immediate families, unless the interest of such
person is disclosed in advance to the Board of Directors, such transaction is on
arm's-length terms which are no less favorable to the Company or any Subsidiary
than those which could have been obtained from an unaffiliated third party, and
such transaction is approved by a disinterested majority of the Board of
Directors of the Company or such Subsidiary.
4.4 Merger. Except as set forth herein, the Company shall not, and shall
not permit any Subsidiary to merge or consolidate with any other corporation, or
sell, assign, lease or otherwise dispose of or voluntarily part with the control
of (whether in one transaction or in a series of transactions) all, or
substantially all, of its assets (whether now owned or hereinafter acquired) or
sell, assign or otherwise dispose of (whether in one transaction or in a series
of transactions) any of its accounts receivable (whether now in existence or
hereinafter created) at a discount or with recourse, to any Person, or permit
any Subsidiary to do any of the foregoing, (i) except for sales or other
dispositions of assets in the ordinary course of business, and (ii) except that
(a) any wholly owned Subsidiary may merge into or consolidate with or transfer
assets to any other wholly owned Subsidiary, and (b) any wholly owned Subsidiary
may merge into or transfer assets to the Company. Notwithstanding the provisions
of this Section 4.4, if in connection with the sale, merger or consolidation of
the Company, (i) all of the Debentures are paid in full, and the Purchasers
receive with respect to their Warrants or Warrant Shares cash or "Liquid
Securities" (as herein defined), and (ii) if such transaction is consummated
prior to the fourth anniversary of the Closing Date, the amount to be received
by the Purchasers for their Warrants or Warrant Shares is at least equal to the
amount paid by the Purchasers for the Senior Debentures, less all interest paid
or accrued by the Company on the Senior Debentures, then the Company may
consummate such transaction without the approval of the Purchasers. The term
"Liquid Securities" means securities which are tradeable without regard to
volume limitations (except for (i) such restrictions on transfer that may be
imposed in order for a transaction to be accounted for as a pooling of
interests, and (ii) for restrictions under an issuer's internal guidelines
pertaining to transfers by affiliates), and which have been issued by an entity
with market capitalization of at least $750 million, and for which the average
daily trading volume of such securities during the 30 day period immediately
preceding such transaction exceeds 100,000 shares; provided that if securities
are received pursuant to an agreement which provides for the filing of a
registration statement to cover or permit resales of such securities, such
securities shall be deemed "Liquid Securities".
17
<PAGE>
4.5 Limitation on Options. Except as otherwise expressly set forth in this
Agreement and the Related Agreements, the Company shall not grant any options,
warrants or other rights to acquire shares of Common Stock or other equity
securities of the Company, other than pursuant to the Option Plans.
4.6 Limitation on Subsidiary Dividends and Other Distributions. The Company
shall not permit any of its Subsidiaries, directly or indirectly, to create or
suffer to exist or become effective any encumbrances or restrictions on the
ability of any of its Subsidiaries to (i) pay dividends or make any other
distributions on its capital stock or any other interest or participation in its
profit owned by any of the Company or any of its Subsidiaries, or pay any
indebtedness owed by any of the Subsidiaries, (ii) make loans or advances to the
Company, or (iii) transfer any of its properties or assets to the Company.
4.7 No Conflicting Agreements. The Company agrees that neither it nor any
Subsidiary will, without the consent of the Purchasers, enter into or amend any
agreement, contract, commitment or understanding which would restrict or
prohibit the exercise by the Purchasers of any of their rights under this
Agreement or any of the Related Agreements.
4.8 Change in Business. The Company will continue to remain principally
engaged in the line of business in which it is engaged on the date hereof, and
will not, without the consent of the Purchasers, enter into any unrelated
business.
4.9 Indebtedness. Except as otherwise expressly set forth in this Agreement
and the Related Agreements, the Company will not, and will not permit any
Subsidiary to, incur or suffer to remain any Indebtedness for borrowed money
other than (i) Indebtedness evidenced by the Senior Debentures, (ii)
Indebtedness evidenced by the Junior Debentures, (iii) Indebtedness consisting
of Senior Debt, (iv) Indebtedness under a bank line of credit, (v) Indebtedness
incurred or assumed in connection with the acquisition of a Person to the extent
permitted under Sections 4.1 and 4.4 and (vi) as expressly set forth in this
Agreement and the Related Agreements. In addition, the Company will not incur
any Indebtedness ranking senior to or pari passu with the Senior Debentures
(other than trade payables in the normal course of business) if for any
consecutive twelve month period ending at the close of any fiscal quarter
occurring after the Closing Date, Consolidated Net Income before interest and
taxes for such twelve month period is less than 1.5 times the interest payments
on the Senior Debentures and any debt ranking senior or pari passu with the
Senior Debentures (including non-cash interest on the Senior Debentures) for
such twelve month period.
4.10 Minimum Net Income. The Company and its Subsidiaries shall have
Consolidated Net Income for the twelve consecutive months ending on the last day
of each of its fiscal quarters (treated as a single accounting period),
commencing with the quarter ending March 31, 1997, of at least $ 1.00.
Notwithstanding the provision of Section 4.10, if the Board of Directors of the
Company (including all designees of Summit Ventures IV, L.P.) unanimously
approves a business plan or budget that forecasts Consolidated Net Income of
less than $1.00, then this Section 4.10 shall be deemed to have been waived with
respect to the period of time covered by such business plan or budget, and the
Purchasers shall not have any right of acceleration under Article IX, or any
right to designate additional directors under the Shareholder
18
<PAGE>
Agreement if Consolidated Net Income is less than $1.00 during the period
covered by such business plan or budget.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
5.1 Representations and Warranties. Each Purchaser hereby represents and
warrants to the Company as follows:
(a) With respect to such of the Purchasers as are individuals, such
Purchaser has full legal capacity and unrestricted power to execute and deliver
this agreement and the Related Agreements to which he or she is a party, and any
other agreements or instruments executed by him or her in connection herewith or
therewith and to consummate the transactions contemplated herein or therein.
With respect to such of the Purchasers as are partnerships, such Purchaser is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite partnership power and
authority and has taken all necessary partnership action required for the due
authorization, execution, delivery and performance by the Purchaser of this
Agreement and the Related Agreements, and any other agreements or instruments
executed by the Purchaser in connection herewith or therewith and the
consummation of the transactions contemplated herein or therein;
(b) This Agreement, the Related Agreements and the other agreements and
instruments executed by such Purchaser in connection herewith or therewith will
each be a legal, valid and binding obligations of such Purchaser, enforceable
against such Purchaser in accordance with their respective terms;
(c) No consent, approval, license or authorization of, or designation,
declaration or filing with, any court or governmental authority is or will be
required on the part of the Purchasers in connection with the execution,
delivery and performance by the Purchasers of this Agreement, any Related
Agreements and any other agreements or instruments executed by the Purchasers in
connection herewith or therewith.
(d) The Purchasers are in compliance with all the provisions of this
Agreement and their organizational and partnership documents, if any, and in all
material respects with the material provisions of each other agreement or
instrument, judgment, decree, judicial order, statute and regulation by which
they are bound or to which they are subject. Neither the execution, delivery or
performance of this Agreement and the Related Agreements nor the consummation of
the transactions contemplated hereby and thereby, will materially violate, or
result in any material breach of, or constitute a default under any provision of
the Purchasers organization or partnership documents, if any, or any statute,
rule or regulation, contract, lease, judgment, decree or other document or
instrument by which the Purchasers is bound.
(e) Each Purchaser is acquiring the Senior Debentures, Warrants and Warrant
Shares solely for its own account as an investment and not with a view to any
distribution or resale thereof in violation of the Securities Act. Each
Purchaser has been advised that the Senior Debentures, Warrants and Warrant
Shares have not been registered under the Securities Act or
19
<PAGE>
under the provisions of any state securities or "blue sky" law. Each Purchaser,
by accepting the Senior Debentures, Warrants and Warrant Shares, agrees and
acknowledges that it will not directly or indirectly, offer, transfer, sell,
assign, pledge, encumber, hypothecate or dispose of any of such Senior
Debentures, Warrants or Warrant Shares (or to solicit any offers to purchase or
otherwise acquire or take a pledge of any of the Senior Debentures, Warrants or
Warrant Shares) unless such offer, transfer, sale, assignment, pledge,
encumbrance, hypothecation or other disposition is made (i) pursuant to an
effective registration statement under the Securities Act and in compliance with
all applicable state securities or "blue sky" laws or (ii) pursuant to an
available exemption from registration under, or otherwise in compliance with,
the Securities Act and all applicable state securities or "blue sky" laws. Such
Purchaser understands and agrees that in the case of a transfer or other
disposition made pursuant to clause (ii) above, each Purchaser of Senior
Debentures, Warrants or Warrant Shares shall be required to provide to the
Company an opinion of counsel reasonably satisfactory to the Company to the
effect that registration under the Securities Act is not required and a written
certification (or in the Company's discretion, an opinion of counsel reasonably
acceptable to the Company (who may be counsel employed by the Purchaser)) that
qualification or registration under any such state securities laws and
regulations is not required (or that any applicable state qualification or
registration requirements have been satisfied in full).
(f) Each Purchaser is an "Accredited Investor" (as such term is defined in
Rule 501 of Regulation D of the Securities Act). The financial situation of the
Purchaser is such that it can afford to bear the economic risk of holding the
unregistered Senior Debentures, Warrants or Warrant for an indefinite period of
time. Each Purchaser can afford to suffer the complete loss of its investment in
the Senior Debentures, Warrants or Warrant Shares. The knowledge and experience
of the Purchaser in financial and business matters is such that it is capable of
evaluating the risk of the investment in the Securities. Each Purchaser
acknowledges that it has had access to such financial and other information, and
has been afforded the opportunity to ask such questions of representatives of
the Company and receive answers thereto, as the each Purchaser has deemed
necessary in connection with its decision to purchase the Senior Debentures,
Warrants or Warrant Shares, and that no representation or warranties, express or
implied, are being made by the Company with respect to the Company, the Senior
Debentures, Warrants or Warrant Shares, other than those expressly set forth
herein.
(g) Such Purchaser has been advised and understands that the Senior
Debentures, Warrants and Warrant Shares have not been registered under the Act,
on the grounds that no distribution or public offering of the Senior Debentures,
Warrants or Warrant Shares is to be effected, and that in this connection, the
Company is relying in part on the representations of such Purchaser set forth in
this Article V;
(h) Such Purchaser has been further advised and understands that no public
market now exists for any of the securities issued by the Company and that a
public market may never exist for the Senior Debentures, Warrants or Warrant
Shares; and
(i) Except as set forth on Schedule 5.1, no person has or will have, as a
result of the transaction contemplated by this Agreement, any right, interest or
claim against or upon the Purchasers or the Company or any of its Subsidiaries
for any commission, fee or other compensation as a finder or broker because of
any act or omission by such Purchaser.
20
<PAGE>
(j) Such Purchaser is not subscribing for the Senior Debentures, Warrants
and Warrant Shares as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine or similar
media or broadcast over television or radio or presented at any seminar or
meeting;
(k) Each of the Purchasers represents, warrants and covenants that it shall
maintain in confidence, and shall not use or disclose without the prior written
consent of the Company, any information identified as confidential that is
furnished to it by the Company ("Confidential Information") in connection with
the herein contemplated offering (the "Offering"). This obligation of
confidentiality shall not apply, however, to any information (a) in the public
domain through no unauthorized act or failure to act by any Purchaser, (b)
lawfully disclosed to such Purchaser by a third party who possessed such
information without any obligation of confidentiality, (c) known previously by
such Purchaser or lawfully developed by such Purchaser independent of any
disclosure by the Company, or (d) disclosed to legal or financial advisors in
the ordinary course of evaluating this investment; provided, however, that such
advisors agree to be bound by the provisions of this Section 5.1(k). Each
Purchaser further covenants that such Purchaser shall return to the Company all
tangible materials containing such information upon request by the Company.
Notwithstanding the foregoing, in the event that a Purchaser is required by
subpoena, civil investigative demand or similar legal process to disclose any
Confidential Information, such Purchaser agrees that it will promptly notify the
Company of such request or requirement prior to any such disclosure so that the
Company may seek to oppose such disclosure or to obtain an appropriate
protective order or other appropriate remedy. Such Purchaser shall not be liable
for the disclosure of Confidential Information pursuant to the preceding
sentence unless such disclosure was caused by or resulted from a previous
disclosure not permitted by this Agreement. Such Purchaser agrees that it will
exercise its best efforts, without cost to such Purchaser, to assist the Company
in obtaining a protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information. The foregoing
provisions of this Section 5.1 (k) notwithstanding, any Purchaser may disclose
and use any Confidential Information in connection with the enforcement of its
rights hereunder and in any action, suit or is preceding relating thereto.
5.2 Permitted Transfers; Legends. The Company agrees that it will permit a
transfer of Senior Debentures, Warrants and Warrant Shares by a Purchaser which
is a partnership or limited liability company to an affiliated partnership or
limited liability company of such Purchaser, and that following consummation of
the first sale of equity securities by the Company pursuant to a registration
statement filed under the Act, it will permit, upon prior written request, (i) a
transfer of the Senior Debentures, Warrants and Warrant Shares by a partnership
to one or more of its partners, where no consideration is exchanged therefor by
such partners, or to a retired or withdrawn partner who retires or withdraws
after the date hereof in full or partial distribution of his interest in such
partnership, or to the estate of any such partner or the transfer by gift will
or intestate succession of any partner to his spouse or to his siblings, lineal
descendants or ancestors of such partner of his spouse, or to a trust created
for the benefit of one or more of the foregoing and (if such Person agrees to be
subject to this Agreement and Related Agreements and) (ii) a sale or other
transfer of any of the Senior Debentures, Warrants or Warrant Shares, if the
transferee agrees in writing to be subject to the terms hereof and the Related
Agreements to the same extent as if it were an original Purchaser hereunder and
upon obtaining assurance satisfactory to the Company that such transaction is
exempt from the
21
<PAGE>
registration requirements of, or is covered by an effective registration
statement under the Act and applicable state securities or "blue-sky" laws,
including without limitation, receipt of an unqualified opinion of counsel
reasonably satisfactory to the Company. The certificates representing the Senior
Debentures, Warrants or Warrant Shares shall bear a legend evidencing such
restriction on transfer substantially in the following form:
"This security has been acquired for investment and has not been
registered under the Securities Act of 1933 (the "Act") or the
securities laws of any state. This security may not be transferred by
sale, assignment, pledge or otherwise unless (i) a registration
statement therefor under the Act is in effect or (ii) the corporation
has received an opinion of counsel, which opinion is reasonably
satisfactory to the corporation to the effect that such registration
is not required under the Act or the securities laws of any state.
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 Agreement to Subordinate. The Company agrees, and each holder of the
Debentures by its acceptance thereof agrees, that notwithstanding any other
provision of this Agreement or the Debentures, the payment of the principal of
and interest on each and all of the Debentures shall be subordinate and junior
in right of payment, to the extent and in the manner hereinafter set forth, to
the prior payment in full of all Indebtedness of the Company at any time
outstanding for money borrowed from commercial banks, including any extensions,
renewals, modifications or refinancings thereof, whether outstanding on the date
hereof or hereafter created or incurred, which is not by its terms subordinate
and junior to or on parity with the Debentures and which is permitted hereby at
the time it is created or incurred, and that such subordination is for the
benefit of and may be enforced by the holder(s) of Senior Debt against the
Company and any holder of the Debentures. Furthermore, each holder of a Junior
Debenture, by his or her acceptance thereof agrees, that notwithstanding any
other provision of this Agreement or the Junior Debentures, the payment of the
principal of and interest on each and all of the Junior Debentures shall be
subordinate and junior in right of payment, to the extent and in the manner
hereinafter set forth, to the prior payment in full of all Indebtedness of the
Company under the Senior Debentures, and that such subordination is for the
benefit of and may be enforced by the holders of Senior Debt against the Company
and any holder of the Junior Debentures. Such Indebtedness of the Company to
which the Debentures are subordinate and junior is referred to herein as "Senior
Debt", and in the case of the Junior Debentures, the term Senior Debt shall also
include any obligations of the Company under the Senior Debentures. Each holder
of Debentures by its acceptance thereof agrees to execute, acknowledge and
deliver such instruments, subordination agreements, inter-creditor agreements
and other agreements as any holder of Senior Debt may from time to time request
which are not on terms inconsistent with the terms hereunder in order to
confirm, reflect and implement such subordination.
6.2 Acceleration of Senior Debt. Upon maturity of any Senior Debt, whether
by acceleration (unless waived or rescinded in writing), lapse of time or
otherwise, no payment shall be made on account of principal of or interest on
the Debentures until all principal of and
22
<PAGE>
accrued and unpaid interest on all such matured Senior Debt shall have been paid
in full or such payment shall have been duly provided for.
6.3 Insolvency, Etc. In the event of any insolvency or bankruptcy
proceeding, or any receivership, liquidation, reorganization or similar
proceedings in connection therewith (or upon the distribution of the assets of
the Company in connection therewith) relative to the Company or to its property,
or in the event of any proceedings for voluntary liquidation, dissolution or
other winding-up of the Company, whether or not involving insolvency or
bankruptcy, upon any assignment for the benefit of creditors, or any other
marshaling of the assets and liabilities of the Company, then and in such event
the holders of Senior Debt shall be entitled to receive payment in full of all
obligations of principal and accrued and unpaid interest with respect to Senior
Debt before the holders of Debentures shall be entitled to receive any payment
of principal or interest upon the Debentures, provided, however, that if a
payment or distribution in respect of the Debentures (i) is authorized by a
final, non-appealable order or decree giving explicit effect to the
subordination of the Debentures to Senior Debt and made by a court of competent
jurisdiction in a reorganization or bankruptcy proceeding or (ii) is in the form
of securities or obligations which by their terms are subordinate and junior (at
least to the extent provided in this Article VI) to the payment of all Senior
Debt then outstanding, then such payment or distribution may be made to the
holders of Debentures notwithstanding the occurrence of the events described in
this Section 6.3.
6.4 Payments Held in Trust. If the holder of any Debenture receives any
payment or distribution of any character, whether in cash, securities or other
property, or whether in the form of a payment from the Company or any guarantor
or any other party, with respect to such Debentures which such holder is not
entitled to receive on account of the provisions of this Article VI and has
knowledge or has received notice that it is not so entitled, such holder will
hold any amounts so received in trust for the benefit of the holders of Senior
Debt and will forthwith turn over such payment or distribution to the holders of
Senior Debt and upon receipt such payment or distribution shall be applied to
Senior Debt until the same shall have been paid in full.
6.5 The Company's Obligations Unconditional. The provisions of this Article
VI are for the purpose of defining the relative rights of holders of Senior Debt
on the one hand, and the holders of Debentures on the other hand, against the
Company and its property. Nothing herein shall impair, as between the Company,
its creditors other than the holders of Senior Debt, and the holders of
Debentures, the obligation of the Company, which is unconditional and absolute,
to pay to the holders thereof the full amount of the principal and accrued and
unpaid interest on the Debentures, in accordance with the terms thereof and the
provisions hereof, and to comply with all of its covenants and agreements
contained herein; nor shall anything herein prevent the holder of any Debentures
from exercising all remedies otherwise permitted by applicable law or hereunder
upon default hereunder or under any Debenture, subject to the rights, if any,
under this Article VI of holders of Senior Debt to receive payments and
distributions otherwise payable to the holders of Debentures.
6.6 Subrogation Upon Payment of Senior Debt. Subject to such conditions as
the holder(s) of Senior Debt may require, upon payment in full of all Senior
Debt, the holders of the Debentures shall be subrogated to the rights of the
holders of Senior Debt to receive payments or
23
<PAGE>
distributions of assets of the Company applicable to Senior Debt, to the extent
that distributions otherwise payable to the holders of Debentures have been
applied to the payment of Senior Debt, until the principal of and accrued and
unpaid interest on the Debentures shall have been paid in full. For the purposes
of such subrogation, no payments or distributions to the holders of Senior Debt
of any cash, property or securities which the holders of Debentures would be
entitled to receive except for the provisions of this Article VI shall, as
between the Company and its creditors (other than the holders of Senior Debt)
and the holders of Debentures, be deemed to be a payment by the Company to or on
account of Senior Debt.
6.7 Notice. The Company shall promptly notify the holders of Debentures of
any facts known to the Company that would cause a payment of any obligations
with respect to the Debentures to violate this Article VI, but failure to give
such notice shall not affect the subordination of the Debentures to Senior Debt
provided herein.
6.8 Knowledge. No holder of any Debenture shall at any time be charged with
knowledge of any of the events described in Sections 6.2 or 6.3 hereof or the
existence of any other facts which would prohibit the making of any payment of
monies to such holder or the taking of any acceleration or other action by such
holder by virtue of the provisions of this Article VI unless and until such
holder shall have received written notice of such events or facts signed, as the
case may be, by an officer of the Company or by the holder of Senior Debt.
ARTICLE VII
CONDITIONS OF PURCHASERS' OBLIGATION
7.1 Effect of Conditions. The obligation of the Purchaser to purchase and
pay for the Debentures and Warrants at the Closing shall be subject at its
election to the satisfaction or waiver of each of the conditions stated in the
following Sections of this Article.
7.2 Representations and Warranties. The representations and warranties of
the Company and the Principal Shareholders contained in this Agreement shall be
true and correct in all material respects on the Closing Date with the same
effect as though made on and as of that date, and the Purchasers shall have
received a certificate dated as of such Closing Date and signed on behalf of the
Company and the Principal Shareholders to that effect.
7.3 Performance. The Company and the Principal Shareholders shall have
performed and complied in all material respects with all of the agreements,
covenants and conditions contained in this Agreement required to be performed or
complied with by it and them at or prior to such Closing Date, and the
Purchasers shall have received a certificate dated as of such Closing Date and
signed on behalf of the Company and the Principal Shareholders to that effect.
7.4 No Material Adverse Change. The business, properties, assets or
condition (financial or otherwise) of the Company shall not have been materially
adversely affected since the date of this Agreement, whether by fire, casualty,
act of God or otherwise, and there shall have been no other changes in the
business, properties, assets, condition (financial or otherwise), management or
prospects of the Company that would have a Material Adverse Effect.
24
<PAGE>
7.5 Opinion of Counsel. The Purchasers shall have received an opinion,
dated the Closing Date, from Brown & Wood LLP, counsel to the Company, in the
form attached as Exhibit E.
7.6 Board Election. Concurrently with the Closing, the Board of Directors
of the Company shall have been expanded to seven members, two of whom shall be
designees of the Purchasers as provided in the Shareholders' Agreement.
7.7 Redemption Agreement. The Company shall have executed and delivered to
the Purchasers the Redemption Agreement in the form of Exhibit F attached
hereto.
7.8 Shareholders Agreement. The Company and the Principal Shareholders
shall have executed and delivered to the Purchasers the Shareholders Agreement
in the form of Exhibit G attached hereto, and the existing shareholder agreement
among the Company and the Principal Shareholders shall have been terminated.
7.9 Registration Rights Agreement. The Company shall have executed and
delivered to the Purchasers the Registration Rights Agreement in the form of
Exhibit H attached hereto.
ARTICLE VIII
CONDITIONS OF THE COMPANY'S OBLIGATIONS
8.1 Effect of Conditions. The obligation of the Company to sell the
Debentures and Warrants at the Closing shall be subject at its election to the
satisfaction or waiver of each of the conditions stated in the following
Sections of this Article.
8.2 Representations and Warranties. The representations and warranties of
the Purchasers contained in this Agreement shall be true and correct in all
material respects on the Closing Date with the same effect as though made on and
as of that date and the Company shall have received a certificate on the Closing
Date and signed on behalf of each Purchaser to that effect.
8.3 Performance. The Purchasers shall have performed and complied in all
material respects with all of the agreements, covenants and conditions contained
in the Agreement required to be performed or complied with by them at or prior
to such Closing, and the Company shall have received a certificate dated as of
such Closing and signed on behalf of the Purchasers to that effect.
8.4 Payment. Each of the Purchasers shall have delivered payment to the
Company in respect of their purchases of the Senior Debentures and Warrants.
25
<PAGE>
ARTICLE IX
DEFAULTS AND REMEDIES
9.1 Events of Default; Acceleration
An "Event of Default" occurs if:
(1) The Company defaults in the payment of any principal or interest of any
Debenture when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(2) In the case of the Senior Debentures, the Company or any Subsidiary
shall fail to perform or observe any covenant contained in Article IV of this
Agreement, other than Section 4.10, and such default shall not have been
remedied within twenty calendar days after such default shall first have become
known to any officer of the Company or written notice thereof shall have been
received by the Company (regardless of the source of such notice); or
(3) In the case of the Senior Debentures, the Company shall fail to perform
or observe the covenant contained in Section 4.10, and such failure shall
continue for at least twenty-four (24) months, commencing with any month
following the month in which the Closing Date occurs.
(4) In the case of the Senior Debentures, the Company or any of its
Subsidiaries defaults in the performance or observance of any other agreement,
term or condition contained in the Senior Debentures, this Agreement or the
Related Agreements and such default shall not have been remedied within twenty
calendar days after such default shall first have become known to any officer of
the Company or written notice thereof shall have been received by the Company
(regardless of the source of such notice); or
(5) The Company or any Subsidiary shall default (subject to any applicable
grace period) in the payment of any principal of or premium, if any, or interest
on any other Indebtedness or obligation with respect to borrowed money the
outstanding principal of which is, at the time of such default, in an aggregate
amount greater than $100,000 or shall default in the performance of any material
term of any instrument evidencing such Indebtedness or of any mortgage,
indenture or agreement relating thereto, and the effect of such default is to
cause, or to permit the holder or holders of such obligation to cause, such
Indebtedness or obligation to become due and payable prior to its stated
maturity, unless such failure to pay or perform shall have been waived in
writing by the requisite holders of such Indebtedness or other obligation; or
(6) The Company or any Subsidiary pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
26
<PAGE>
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property,
(D) makes a general assignment for the benefit of its creditors, or
(E) is the debtor in an involuntary case which is not dismissed within
60 days of the commencement thereof; or
(7) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) provides for relief against the Company or any Subsidiary in an
involuntary case,
(B) appoints a Custodian of the Company or any Subsidiary for all or
substantially all of its property, or
(C) orders the liquidation of the Company or any Subsidiary; or
(8) A final, non-appealable judgment for the payment of money in an amount
in excess of $200,000 shall be rendered against the Company or any of its
Subsidiaries (other than any judgment as to which a reputable insurance company
shall have accepted full liability in writing) and shall remain undischarged for
a period (during which execution shall not be effectively stayed) of 30 days
after the date on which the right to appeal has expired; or
(9) Any representation or warranty made by the Company in this Agreement or
in the Related Agreements shall prove to be materially false or incorrect on the
date as of which made; then and in any such case (a) upon the occurrence of any
Event of Default described in clause (6) or (7) above, the unpaid principal
amount of and accrued and unpaid interest on the Debentures shall automatically
become due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby waived by the Company, and (b) upon the occurrence
of any other Event of Default, in addition to any other rights, powers and
remedies permitted by law or in equity, the holder or holders of greater than
50% in principal amount of the Senior Debentures then outstanding may, at its or
their option, by notice in writing to the Company, declare all of the Debentures
to be, and all of the Debentures shall thereupon be and become, immediately due
and payable together with interest accrued and unpaid thereon and all other sums
due hereunder, without presentment, demand, protest or other notice of any kind,
all of which are waived by the Company.
Upon the occurrence of any such Event of Default, the holders of Debentures
may proceed to protect and enforce their rights by an action at law, suit in
equity or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or in the Debentures held by them, for an
injunction against a violation of any of the terms hereof or thereof, or for the
pursuit of any other remedy which it may have by virtue of this Agreement or
pursuant to applicable law. The Company shall pay to the holders of Debentures
upon demand the reasonable costs and expenses of collection and of any other
actions referred to in this Article IX, including without limitation reasonable
attorney's fees, expenses and disbursements.
27
<PAGE>
No course of dealing and no delay on the part of the holders of Debentures
in exercising any of their rights shall operate as a waiver thereof or otherwise
prejudice the rights of any holder of the Debentures, nor shall any single or
partial exercise of any right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
No right, power or remedy conferred hereby or by the Debentures on the holders
thereof shall be exclusive of any other right, power or remedy referred to
herein or therein or now or hereafter available at law, in equity, by statute or
otherwise.
9.2 Rescission of Acceleration. At any time after any declaration of
acceleration of all the Debentures shall have been made pursuant to Section 9.1
by any holder or holders of the Senior Debentures and before a judgment or
decree for the payment of money due has been obtained by such holder or holders,
the holder or holders of at least a majority in aggregate principal amount of
the Senior Debentures at the time outstanding may, by written notice to the
Company and to the other holders of the Debentures rescind and annul such
declaration and its consequences, provided that (i) the principal of and accrued
and unpaid interest on the Debentures which shall have become due otherwise than
by such declaration of acceleration shall have been duly paid, and (ii) all
Events of Default other than the nonpayment of principal of and accrued and
unpaid interest on the Debentures which have become due solely by such
declaration of acceleration shall have been cured or waived by the holders of a
majority in aggregate principal amount of the Debentures at the time
outstanding. No rescission or annulment referred to above shall affect any
subsequent Default or any right, power or remedy arising out of such subsequent
Default.
ARTICLE X
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Act" means the Securities Act of 1933, as amended.
"Agreement" means this 9% Senior Subordinated Debenture and Warrant
Purchase Agreement as from time to time amended and in effect between the
parties.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"Business Day" shall mean day which is not a legal holiday in the
Commonwealth of Massachusetts or the City of Boston or New York City.
"Cash and Cash Equivalents" means cash and investments in certificates of
deposit, money market funds and obligations issues or guaranteed by the United
States Government or any instrumentality thereof, in each case only if due and
payable on demand or within thirty (30) days after the date of purchase.
"Closing" shall have the meaning set forth in Section 1.5.
28
<PAGE>
"Closing Date" shall have the meaning set forth in Section 1.5.
"Commission" shall have the meaning set forth in Section 2.3.
"Company" shall have the meaning set forth in Section 1.9.
"Consolidated Net Income" means, for any period, the Company's and its
Subsidiaries' consolidated net income after any income and franchise tax, as
determined in conformity with generally accepted accounting principles
consistently applied, but excluding: (a) the income of any Person (other than
Subsidiaries of the Company) in which the Company or any of its Subsidiaries has
an ownership interest, unless received by the Company or its Subsidiary under
cash distributions; (b) any after-tax gains or losses attributable to asset
dispositions; and (c) to the extent not included in clauses (a) and (b) above,
any after-tax extraordinary non-cash gains or extraordinary non-cash losses.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" shall mean an Event of Default or any event which with notice or
lapse of time or both would become an Event of Default.
"Event of Default" shall have the meaning set forth in Section 9.1.
"Indebtedness" means all obligations, contingent or otherwise, whether
current or long-term, which in accordance with generally accepted accounting
principles would be classified upon the obligor's balance sheet as indebtedness
(other than deferred taxes) and shall also include capitalized leases,
guarantees, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, including any agreement to purchase or otherwise acquire
the obligations of others or any agreement, contingent or otherwise, to furnish
funds for the purchase of goods, supplies or services for the purpose of payment
of the obligations of others, excluding accounts payable incurred in the
ordinary course of business.
"Lien" shall mean any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement, and the
filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction).
"Liquidity Event" shall mean any one or more of the following: (i) a
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary; (ii) a sale, merger or similar transaction involving the Company,
as the result of which those persons who held 100% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; (iii) the sale of all or substantially all of the
assets of the Company; or (iv) consummation of the first Qualified Public
Offering.
29
<PAGE>
"Material Adverse Effect" means a material and adverse effect on the
assets, liabilities, properties, business, results of operation, prospects or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole.
"Person" means an individual, corporation, partnership, joint venture,
trust or unincorporated organization or a government or agency or political
subdivision thereof.
"Purchasers" shall have the meaning set forth in Section 1.1.
"Qualified Public Offering" means the first public offering of securities
of the Company pursuant to a registration statement filed under the Act in which
the gross proceeds received by the Company are at least $30 million and in
connection with which the Senior Debentures are paid in full.
"Related Agreements" shall have the meaning set forth in Section 2.2.
"Senior Debt" shall have the meaning set forth in Section 6.1.
"Subsidiary" or "Subsidiaries" means any corporation, association or other
business entity of which the Company and/or any of its other Subsidiaries
directly or indirectly owns at the time more than fifty percent (50%) of the
outstanding voting shares of every class of such corporation or trust other than
directors' qualifying shares.
"Tangible Net Worth" means the value of the Company's tangible assets less
its liabilities, as determined in accordance with generally accepted accounting
principles, consistently applied.
ARTICLE XI
MISCELLANEOUS
11.1 Senior Debenture Payments. The Company agrees that, so long as any
Purchaser shall hold any Senior Debentures, it will make payments of principal
and interest on any Senior Debenture held by such Purchaser not later than 2:00
p.m., Boston, Massachusetts time, on the date such payment is due, in
immediately available federal funds, by credit to the Purchaser's account, as
specified in Schedule 1.1 hereto, or such other account or accounts as the
Purchaser may designate in writing, notwithstanding any contrary provision
contained herein or any Senior Debenture with respect to the place of payment.
Each Purchaser agrees that, before disposing of any Senior Debenture, it or its
nominee will make a notation thereon of all principal payments previously paid
thereon and of the date to which interest thereon has been paid, and will notify
the Company of the name and address of the transferee of such Senior Debenture
and will follow the procedures set forth in Section 5.2 hereof and in the
Related Agreements. At the election of any subsequent holder of any Senior
Debenture which has made the same agreements relating to such Senior Debenture
as the Purchaser has made in this Section 11.1, the Company will make payments
of principal and interest to the account of such successor holder in the same
manner as set forth above.
30
<PAGE>
11.2 Form, Registration, Transfer and Exchange of Senior Debentures. The
Senior Debentures are issuable as registered notes and in denominations of not
less than $ 10,000 or any integral multiple thereof. The Company shall keep at
its principal office the register in which the Company shall provide for the
registration of the Senior Debentures and for transfers of the Senior
Debentures. Upon surrender for registration of transfer of any Senior Debenture
at such office, the Company shall execute and deliver, at its expense, one or
more new such Senior Debenture or Senior Debentures of like tenor and of like
aggregate principal amount, which new Senior Debenture or Senior Debentures
shall each be a registered Senior Debenture. At the option of the holder of any
Senior Debenture, such Senior Debenture may be exchanged for other Senior
Debentures, of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Senior Debenture to be exchanged at the office of
the Company. Whenever any Senior Debenture is so surrendered for exchange, the
Company shall execute and deliver, at its expense, the Senior Debentures which
the holder thereof making the exchange is entitled to receive. Every Senior
Debenture presented or surrendered for registration of transfer shall be duly
endorsed, or be accompanied by a written instrument of transfer duly executed by
the holder of such Senior Debenture or such holder's attorney-in-fact duly
authorized in writing and the holder thereof shall agree in writing to follow
the procedures set forth in Section 5.2 hereof and in the Related Agreements
relating to transfers. Any Senior Debenture issued in exchange for any Senior
Debenture or upon transfer thereof shall carry the rights to unpaid interest and
interest to accrue which were carried by the Senior Debenture so exchanged or
transferred, and neither gain nor loss of interest shall result from any such
transfer or exchange. Upon receipt by the Company of an affidavit of the
treasurer, assistant treasurer, or other responsible official of any Purchaser
(or, in the case of holders of Senior Debentures other than a Purchaser,
evidence reasonably satisfactory to the Company) of the ownership of and the
loss, theft, destruction or mutilation of a Senior Debenture and (i) in case of
loss, theft or destruction of a Senior Debenture, of indemnity reasonably
satisfactory to it or (ii) in the case of the mutilation of any Senior
Debenture, upon surrender and cancellation thereof, the Company, at its expense,
shall execute and deliver in lieu thereof a new Senior Debenture of like tenor
and of a like principal amount and dated and bearing interest from the date to
which interest has been paid on such lost, stolen, destroyed or mutilated Senior
Debenture.
11.3 Survival of Representations. The representations, warranties,
covenants and agreements made herein or in any certificates or documents
executed in connection herewith shall survive the execution and delivery hereof
and the closing of the transactions contemplated hereby.
11.4 Parties in Interest. Except as otherwise set forth herein, all
covenants, agreements, representations, warranties and undertakings contained in
this Agreement shall be binding on and shall inure to the benefit of the parties
hereto and their respective successors and assigns of the parties hereto
(including transferees of any of the Debentures, Warrants and Warrant Shares).
Notwithstanding the foregoing, (i) no transferee of Debentures, Warrants or
Warrant Shares, other than an affiliate of the Purchasers, shall have the right
to enforce the covenants contained in Section 4.4, and (ii) if a Debenture and
Warrant have been transferred to a Person other than an affiliate of a Purchaser
and all Debentures have been paid in full, then such unaffiliated transferee
shall not have the benefit of, and shall have no rights under, any of the
provisions of Articles III and IV hereof other than the provisions of Sections
3.1 and 3.5, each of which shall continue in full force and effect for the
benefit of such transferee.
31
<PAGE>
11.5 Debentures Owned by Affiliates. For the purposes of applying all
provisions of this Agreement the Debentures or shares owned of record by any
affiliate of a Purchaser shall be deemed to be owned by such Purchaser. For the
purpose of this Agreement, the term "affiliate" shall mean any Person
controlling, controlled by or under common control with, a Purchaser and any
general or limited partner of any Purchaser. Without limiting the foregoing,
each Purchaser shall be considered an affiliate of each other Purchaser.
11.6 Amendments and Waivers. This Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of not less than a majority in aggregate principal amount of the Senior
Debentures at the time outstanding; and each holder of any Debenture at the time
or thereafter outstanding shall be bound by any consent authorized by this
Section 11.6, whether or not such Debenture shall have been marked to indicate
such consent, but any Debenture issued thereafter shall contain a reference or
bear a notation referring to any such consent; provided that notwithstanding
anything in this Section 11.6 to the contrary, without the written consent of
(a) the holder or holders of all Senior Debentures at the time outstanding, no
consent, amendment or waiver to or under this Agreement shall extend or reduce
the maturity of any Senior Debenture, or reduce the rate or affect the time of
payment of interest with respect to any Senior Debenture, or affect the time,
amount or allocation of any required prepayments, or reduce the proportion of
the principal amount of the Senior Debentures required with respect to any
consent, amendment or waiver, (b) the holder or holders of all Junior Debentures
at the time outstanding, no consent, or waiver to or under this Agreement shall
extend or reduce the maturity of any Junior Debenture, or reduce the rate or
effect at the time of payment of interest with respect to any Junior Debenture,
or effect the time, amount or allocation of any required prepayments, or reduce
the portion of the principal amount of the Junior Debentures required with
respect to any consent, amendment or waiver, and (c) the holder or holders of
all Debentures at the time outstanding, no amendment to this Agreement shall
affect the provisions of Article VI. The Company shall promptly send copies of
any amendment, consent or waiver (and any requests for any such amendment,
consent or waiver) relating to this Agreement or the Debentures to each holder
of the Debentures and, to the extent practicable, shall consult with holder of
the Debentures, in connection with each such amendment, consent and waiver. No
course of dealing between the Company and the holder of any of the Debentures
nor any delay in exercise any rights hereunder or any of the Debentures shall
operate as a waiver of any rights of any holder of such Debentures. The Company
will reimburse the Purchasers for the reasonable fees and expenses of counsel
incurred in connection with any amendment or modification of this Agreement or
any of the Related Agreements or any waiver hereof or thereof.
11.7 Notices. All notices, requests, consents, reports and demands shall be
in writing and shall be hand delivered, sent by facsimile or other electronic
medium, or mailed, postage prepaid, to the Company or to the Purchasers at the
address set forth below or to such other address as may be furnished in writing
to the other parties hereto:
32
<PAGE>
The Company: Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Attention: President
Fax: (201) 971-0103
with copy to: Brown & Wood LLP
One World Trade Center
New York, New York
Attention: Joseph W. Armbrust, Esquire
Fax: (212) 839-5593
The Purchasers: The address set forth opposite the Purchaser's name on
Schedule 1.1 attached hereto.
with copy to: Hutchins, Wheeler & Dittmar,
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: James Westra, Esquire
Fax: (617) 951-1295
11.8 Expenses. Immediately upon consummation of the Closing, the Company
shall pay all reasonable costs and expenses of the Purchasers in connection with
the investigation, preparation, execution and delivery of this Agreement (and
due diligence related thereto) and the other instruments and documents to be
delivered hereunder and the transactions contemplated hereby and thereby,
including the reasonable fees and disbursements of Hutchins, Wheeler & Dittmar,
A Professional Corporation, special counsel to the Purchasers, provided that
such aggregate payment shall not exceed $45,000. If the purchase of the
Debentures is not consummated in accordance with the terms of this Agreement,
the Company shall not be required under this Agreement to pay any of the
Purchasers' costs or expenses.
11.9 Counterparts. This Agreement and any exhibit hereto may be executed in
multiple counterparts, each of which shall constitute an original but all of
which shall constitute but one and the same instrument. One or more counterparts
of this Agreement or any exhibit hereto may be delivered via telecopier, with
the intention that they shall have the same effect as an original counterpart
hereof.
11.10 Effect of Headings. The article and section headings herein are for
convenience only and shall not affect the construction hereof.
11.11 Transferability as Unit. Prior to payment of a Senior Debenture
included in an Investment Unit or exercise of a Warrant included in an
Investment Unit, no holder may separately transfer a Senior Debenture or Warrant
without transferring to the same transferee the other security comprising the
Investment Unit.
33
<PAGE>
11.12 Governing Law. This Agreement shall be deemed a contract made under
the laws of The Commonwealth of Massachusetts and together with the rights and
obligations of the parties hereunder, shall be construed under and governed by
the laws of such Commonwealth.
* * * * *
34
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Counterpart Signature Page
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon, this letter shall become a binding agreement among us.
Very truly yours,
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mary Kay Brooks
By: -------------------------------------
Name: Mary Kay Brooks
Title: President
PRINCIPAL SHAREHOLDERS:
----------------------
/s/ Mary Kay Brooks
-----------------------------------------
Mary Kay Brooks
/s/ Darren Bryden
-----------------------------------------
Darren Bryden
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Counterpart Signature Page
PURCHASERS:
----------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
Its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
/s/ Kevin Mohan
By: -------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
/s/ Kevin Mohan
By: -------------------------------------
Authorized Signatory
/s/ Paul F. Lozier
-----------------------------------------
Paul F. Lozier
SAMEDAN, INC.
/s/ Paul F. Lozier
By: -------------------------------------
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
Schedule 1.1
Senior Debentures
<TABLE>
<CAPTION>
Principal Amount of Total Purchase
Debentures to be Number of Shares Price of
Name and Address Purchased Covered by Warrants Investment Units
- ---------------- ------------------- ------------------- ----------------
<S> <C> <C> <C>
Summit Ventures IV, L.P. $5,032,521 194,770.50 $4,750,000
600 Atlantic Avenue
Boston, MA 022 10
Attention: Kevin P. Mohan
Summit Investors 111, L.P. $ 246,312.71 10,229.50 249,500
600 Atlantic Avenue
Boston, MA 02210
Attention: Kevin P. Mohan
Samedan, Inc. $ 243,902 10,000 243,902
40 Dellwood Drive
Madison, NJ 07940
------------------- ------------------- ----------------
Totals $5,540,735.71 215,000 $5,243,902
=================== =================== ================
</TABLE>
<PAGE>
Logical Design Solution, Inc.
Schedule 1.10
Junior Debentures
<TABLE>
<CAPTION>
Principal Amount of Junior Principal Amount of Junior
Subordinated Debentures for Subordinated Debentures for
Investment Logical Design Solutions, Logical Design Solutions
Name and Address Inc. International, Inc.
- ---------------------- ------------------------------ ------------------------------
<S> <C> <C>
Mary Kay Brooks $695,122.45 $378,777.33
222 Woodland Avenue
Madison, NJ 07940
Darren A. Bryden
18-24 Franklin Place
Suite 213
Morristown, NJ 07960 40,389.74
-------------- --------------
Total: $735.512.19 $378.777
============== ==============
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.4
Authorized and Outstanding Stock
<TABLE>
<CAPTION>
Logical Design Solutions, Inc. # Shares Authorized # Shares Outstanding
------------------------------ ------------------- --------------------
<S> <C>
at 12/31/1996 1,500,000 <C>
Mark Kay Brooks 706,500
Darren A. Bryden _________ 78,500
------
Total 1,500,000 785,000
Logical Design Solutions, Inc. 2,500
at 12/31/96
Mary Kay Brooks ______ 100
-----
Total 2,500 100
</TABLE>
* Employment Agreements for E. Bruce Lovenberg and Thomas J. Shea provide for
the issuance of Stock Options. Such Options are at the sole discretion of
the corporation. As of December 31, 1996, no such Options have been issued.
* A new Stock Option plan is being developed.
<PAGE>
Logical Design Solutions
Schedule 2.7
Subsequent Events
(i) None
(ii) None
(iii) None
(iv) None
Stockholders distributions representing accumulated Retained Earnings are as
follows:
LDS
Mary Kay Brooks $1,023,997
Darren A. Bryden $ 142,989
LDSI
Mary Kay Brooks $ 823,200
<PAGE>
Logical Design Solutions
Schedule 2.8
Divorce proceedings between Mr. and Mrs. Brooks. As of the date hereof, there
has been no claim relating to Logical Design Solutions, Inc. ("LDS") or to any
shares of LDS held by any shareholder of LDS.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.11
Real Property Environmental Matters
<TABLE>
<CAPTION>
Rental Address Lessor Term of the Lease Use of Property
- -------------- ------ ----------------- ---------------
<S> <C> <C> <C>
465 South Street Gale & Wentworth April 15, 1996 to July 15, 2001 Office
Suite 103 465 South Street $20,913.42 Monthly +
Morristown, NJ 07960 Morristown, NJ 07960 $111.60 for share of Cafe
465 South Street Gale & Wentworth March 1, 1997 to July 15, 2001 Office
Suite 105 465 South Street $9,100 Monthly + amortized
Morristown, NJ 07960 Morristown, NJ 07960 portion of build out costs
(estimated at $800 per month)
</TABLE>
No Environmental Issues Exist
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.12
Personal Property
- ------------------------------------------------------------------------------
Computer Equipment Financed through Sanwa Leasing Corporation
See Exhibit I Attached Hereto
Computer Equipment Financed through GE Capital
(Previously Tilden Financial Corp.)
See Exhibit 2 Attached Hereto
Computer Equipment Financed through Summit Bank (Previously United Jersey Bank)
See Exhibit 3 Attached Hereto
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.13
Patents. Trademarks, Etc.
LoQical Design Solutions, Inc.
Pending Trademark Application Mark: LDS WEBTRAC
<TABLE>
<S> <C> <C>
Class: International Class 9
Description: Computer software programs, and instruction
manuals and demo disks sold together, for
monitoring and reporting usage of various sites on
the Internet computer network, in International Class 9.
Date of first use: On or before October 30, 1995
Application Number: 75027878
Filing Date: December 5, 1995
Logical Design Solutions International, Inc.
Copyright Registration Title Of This Work: Tele-Trac
Registration Number: TX 3 704 768
Effective Date Of Registration: Jan 10, 1994
Nature Of Authorship: Computer Program
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.16
Contracts and Commitments
The following Project Commitments are expected to generate in excess of $100,000
during the coming year:
<TABLE>
<CAPTION>
Client Project ID Proiect Name Project Tvpe
- ------ ---------- ------------ ------------
<S> <C> <C> <C>
Advanta ADV2 Advanta Booster Project Time & Materials
Advanta ADV5 Avdanta Corporate Site Time & Materials
AT&T DPPG AT&T Personnel Guide - Print Time & Materials
AT&T CLSS AT&T BMD Local Service Site Time & Materials
AT&T DMHC AT&T Health Care Time & Materials
Lucent LHRW Lucent HR Website Time & Materials
NCR NCR2 NCR Phase 11 - Case Mgmt Time & Materials
AT&T DMEV AT&T HR Self Service Vision Time & Materials
J&J JJSS J&J Employee Self Service Fixed Fee ($505,000)
Vanguard VRRC Vanguard Retirement Center Fixed Fee ($230,000)
AT&T CICM AT&T Commercial Markets Time & Materials
Bell Atlantic BAV2 Bell Atlantic View @ Once 2.0 Fixed Fee ($620,000)
Time Telecom TMI I Time Telecom Malaysia Fixed Fee ($350,000)
New Zealand NIVS New Zealand Telecom Fixed Fee ($800,000)
Project Commitments are cancelable by LDS, or the Client Company with written
notice.
In addition to project commitments, LDS is obligated for $100,000 or more to the
following commitments:
Gale & Wentworth Lease for Offices - Suite 103 $1,145,864
Suite 105 $ 477,750 + Amortized Cost of Build Out
Employment Agreements over $ 100,000 for the following employees:
Mary K. Brooks
Darren A. Bryden
Thomas J. Shea
E. Bruce Lovenberg
Martin Bums
Agreement dated March 8, 1997 with Paul Lozier.
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.18
Insurance Coverage
Business Owners Policy
Agent: Traber & Vreeland Insurance
Insurance Co: LMI Insurance Company
4011 WestChase Blvd
Raleigh, NC 27607
Policy #: CB29-13004
Workers Compensation Ploicy
Agent: Traber & Vreeland Insurance
Insurance Co: LMI Insurance Company
4011 WestChase
Blvd Raleigh, NC 27607
Policy IM: WC2914429
Life Insurance - Mary K. Brooks
Insurance Co: The Midland Life Insurance Company
250 East Broad Street
Columbus, OH 43215
Policy #: 57313
Disability Insurance - Mary K. Brooks
Agent: Virginia R. Hendee
Insurance Co: Northwestern Mutual Life
720 E. Wisconsin Ave.
Milwaukee, WI 53202
Policy # D-790-864
DI-161-646
Company Health Insurance
Insurance Co: Aetna Life & Casualty
66 Sigourney Street
Hartford, CT 06160-0126
Policy#'s: 127335-010-00700
127335-010-00000
127335-010-00702
Company Dental Plan
Insurance Co: New England Insurance
Healthplan Services, Inc.
3501 Frontaae Road
Tampa, FL 33607
Policy TN792884-2
Group Life Insurance / Group Long Tenn Disability
Insurance Co: Unum Life Insurance of America
PO Box 7777-W3335
Philadelphia, PA 19175-3335
ID/ Policy#: 513104
There are no outstanding claims
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.19
Employee Matters
All employees have signed the EMPLOYEE CONFIDENTIALITY, NONDISCLOSURE AND
RESTRICTIVE COVENANT AGREEMENT. See attached schedule for listing of current LDS
employees.
Darren Bryden, E. Bruce Lovenberg, and Tom Shea have all signed individual
Employment Agreements.
All Independent Contractors have signed the INDEPENDANT CONTRACTORS AGREEMENT.
See attached schedule for listing of current LDS independent contractors.
All full-time employees are eligible to participate in the companies 401k
defined benefits program after six months of employment.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.21
Transactions with Affiliates
None.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.22
Assumptions. Guarantees. etc. of Indebtedness of Other Persons
None
<PAGE>
Logical Design Solutions, Inc.
Schedule 5.1
Representation and Warranties
Agreement dated March 8, 1997 with Paul Lozier.
<PAGE>
LOGICAL DESIGN SOLUTIONS
EMPLOYEE LISTING BY DEPARTMENT
EXECUTIVE:
Brooks, Mary K.
Bryden, Darren A.
Lovenberg, E. Bruce
Shea, Thomas J.
HUMAN RESOURCES:
- ----------------
Batista, Shirley
Gallic, Kerri
Links, Donald
Maurer, Debra
Sklareski, Leanne
ACCOUNTING/FINANCE:
Rankin, Maria E.
PRODUCTS & SERVICES:
Alvi, Hanif Knopf, Glenn
Bennett, Mark Koenig, John R.
Bissett, Lawrence Kushler, Jeanine
Boyer, Barbara Lanza, Lois
Bretherick, Steven Lee, Kelly
Burns, Martin Leno,Joseph
Cameron, Michelle Liao, Stephanie
Chidella, Aparna MacAvoy, Robert
Crowley, Jack Mauro, Edward
Cuorno, John Menk, James
Daidone, John Modell, Geri
Duane, Eileen Pinto, Jacqueline
Erdley, William Saint-Andre, Peter
Flesch, Joseph Salimbene, Michelle
Frassinelli, Michael Salvas, Thomas
Goebel, Daniel Shannon, Michael
Goldberg, Diane Sikorski, Gary
Harlos, Richard Smith, Samantha
Harris, Susan Snyder, Barbara
Jurista, James Thomas,Tammy
Kalas, Raymond Thomas, Jacqueline
Kermen, David TitQie, Charles
Khan, Arif Treiling, Steven
Kirchuk, Steven Tsai, Tony
Klingenburg, Anne Tunkel, Bruce
Zhana, Yan
<PAGE>
LOGICAL DESIGN SOLUTIONS
INDEPENDANT CONTRACTORS
Bergger, Joan
Eesley, Richard
Goldschmidt, Dee
Renda, Cathy
Tran, Polly
Tran, Tuyen
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Senior Subordinated Debenture
Due March 19, 2002
Morristown, New Jersey
No. S-1 March 19, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Summit Ventures IV,
L.P., or its registered assigns, the sum of Five Million, Thirty-Two Thousand,
Five Hundred Twenty-One Dollars ($5,032,521) on March 19, 2002, together with
interest, computed on the basis of the actual number of days elapsed over a 360-
day year, on the unpaid principal balance hereof until paid in full at the rate
of nine percent (9%) per annum from the date hereof. Interest shall accrue and
compound annually and shall be paid upon each payment or prepayment of
principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Debenture (as defined below) together with a late
charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Debenture may designate in writing to the Company before the scheduled payment
date.
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its "9% Senior Subordinated Debentures due March 19, 2002"
(herein called the "Debentures"), in the aggregate principal amount of
$5,296,833.71 and issued under a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement, dated as of March 19, 1997 (herein
53
<PAGE>
called the "Agreement"), among the Company, certain of its shareholders, Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.,
to which Agreement and all agreements supplemental thereto reference is hereby
made for a statement of the respective rights and duties thereunder of the
Company, and the holders of the Debentures, and the terms upon which the
Debentures are delivered.
The principal of this Debenture is subject to prepayment under certain
circumstances, together with accrued interest, all as more particularly set,
forth in the Agreement. The Company agrees to make such payments of principal
and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Debenture is issued subject
to such provisions, and each holder of Debentures, by accepting the same, agrees
to and shall be bound by such provisions and agrees to take such action as may
be necessary or appropriate to effectuate the subordination as provided in the
Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Debentures may be in certain circumstances declared, and upon such declaration
shall become, immediately due and payable, in the manner, with the effect and
subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Debenture or
of the Agreement shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this
Debenture at the times, places, and rates, and in the coin or currency, herein
prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Debenture is transferable by the registered owner hereof, in person or by duly
authorized attorney, on the books of the Company to be kept for that purpose,
upon surrender and cancellation of this Debenture, upon presentation of a duly
executed written instrument of transfer satisfactory to the Company and upon the
transferee's written agreement to be bound by the provisions of the Agreement,
and thereupon a new Debenture or Debentures, of the same aggregate principal
amount and in authorized denominations, will be issued to the transferee or
transferees in exchange therefor; and this Debenture, with or without other
Debentures may in like manner be exchanged for one or more new Debentures of
other authorized denominations but of the same aggregate principal amount, all
subject to the terms and conditions set forth in the Agreement. Any such
transfer or exchange shall be without charge by the Company. Transfer tax or the
like (if any) shall be paid by the holder hereof or the Transferee.
All terms used in this Debenture which are not defined herein and are
defined in the Agreement shall have the meanings assigned to them in the
Agreement.
This Debenture shall be deemed to be a contract made under the laws of the
Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
54
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161611-1
55
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Senior Subordinated Debenture
Due March 19, 2002
Morristown, New Jersey
No. S-2 March 19, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Summit Investors III,
L.P., or its registered assigns, the sum of Two Hundred Sixty-Four Thousand,
Three Hundred Twelve and 71/100 Dollars ($264,312.71) on March 19, 2002,
together with interest, computed on the basis of the actual number of days
elapsed over a 360-day year, on the unpaid principal balance hereof until paid
in full at the rate of nine percent (9%) per annum from the date hereof.
Interest shall accrue and compound annually and shall be paid upon each payment
or prepayment of principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Debenture (as defined below) together with a late
charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Debenture may designate in writing to the Company before the scheduled payment
date.
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its "9% Senior Subordinated Debentures due March 19, 2002"
(herein called the "Debentures"), in the aggregate principal amount of
$5,540,735.71 and issued under a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement, dated as of March 19, 1997 (herein
56
<PAGE>
called the "Agreement"), among the Company, certain of its shareholders, Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.,
to which Agreement and all agreements supplemental thereto reference is hereby
made for a statement of the respective rights and duties thereunder of the
Company, and the holders of the Debentures, and the terms upon which the
Debentures are delivered.
The principal of this Debenture is subject to prepayment under certain
circumstances, together with accrued interest, all as more particularly set
forth in the Agreement. The Company agrees to make such payments of principal
and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Debenture is issued subject
to such provisions, and each holder of Debentures, by accepting the same, agrees
to and shall be bound by such provisions and agrees to take such action as may
be necessary or appropriate to effectuate the subordination as provided in the
Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Debentures may be in certain circumstances declared, and upon such declaration
shall become, immediately due and payable, in the manner, with the effect and
subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Debenture or
of the Agreement shall alter or impair the obligation of the Company, which is
absolute And unconditional, to pay the principal of and interest on this
Debenture at the times, places, and rates, and in the coin or currency, herein
prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Debenture is transferable by the registered owner hereof, in person or by duly
authorized attorney, on the books of the Company to be kept for that purpose,
upon surrender and cancellation of this Debenture, upon presentation of a duly
executed written instrument of transfer satisfactory to the Company and upon the
transferee's written agreement to be bound by the provisions of the Agreement,
and thereupon a new Debenture or Debentures, of the same aggregate principal
amount and in authorized denominations, will be issued to the transferee or
transferees in exchange therefor; and this Debenture, with or without other
Debentures may in like manner be exchanged for one or more new Debentures of
other authorized denominations but of the same aggregate principal amount, all
subject to the terms and conditions set forth in the Agreement. Any such
transfer or exchange shall be without charge by the Company. Transfer tax or the
like (if any) shall be paid by the holder hereof or the Transferee.
All terms used in this Debenture which are not defined herein and are
defined in the Agreement shall have the meanings assigned to them in the
Agreement.
This Debenture shall be deemed to be a contract made under the laws of the
Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
57
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161612-1
58
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Senior Subordinated Debenture
Due March 19, 2002
Morristown, New Jersey
No. S-3 March 19, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Samedan, Inc., or its
registered assigns, the sum of Two Hundred Forty-Three Thousand, Nine Hundred
Two Dollars ($243,902) on March 19, 2002, together with interest, computed on
the basis of the actual number of days elapsed over a 360-day year, on the
unpaid principal balance hereof until paid in full at the rate of nine percent
(9%) per annum from the date hereof. Interest shall accrue and compound annually
and shall be paid upon each payment or prepayment of principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Debenture (as defined below) together with a late
charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Debenture may designate in writing to the Company before the scheduled payment
date.
This Debenture is one of a duly authorized issue of Debentures of the
Company designated as its "9% Senior Subordinated Debentures due March 19, 2002"
(herein called the "Debentures"), in the aggregate principal amount of
$5,540,735.71 and issued under a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement, dated as of March 19, 1997 (herein
59
<PAGE>
called the "Agreement"), among the Company, certain of its shareholders, Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.,
to which Agreement and all agreements supplemental thereto reference is hereby
made for a statement of the respective rights and duties thereunder of the
Company, and the holders of the Debentures, and the terms upon which the
Debentures are delivered.
The principal of this Debenture is subject to prepayment under certain
circumstances, together with accrued interest, all as more particularly set
forth in the Agreement. The Company agrees to make such payments of principal
and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Debenture is issued subject
to such provisions, and each holder of Debentures, by accepting the same, agrees
to and shall be bound by such provisions and agrees to take such action as may
be necessary or appropriate to effectuate the subordination as provided in the
Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Debentures may be in certain circumstances declared, and upon such declaration
shall become, immediately due and payable, in the manner, with the effect and
subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Debenture or
of the Agreement shall alter or impair the' obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this
Debenture at the times, places, and rates, and in the coin or currency, herein
prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Debenture is transferable by the registered owner hereof, in person or by duly
authorized attorney, on the books of the Company to be kept for that purpose,
upon surrender and cancellation of this Debenture, upon presentation of a duly
executed written instrument of transfer satisfactory to the Company and upon the
transferee's written agreement to be bound by the provisions of the Agreement,
and thereupon a new Debenture or Debentures, of the same aggregate principal
amount and in authorized denominations, will be issued to the transferee or
transferees in exchange therefor; and this Debenture, with or without other
Debentures may in like manner be exchanged for one or more new Debentures of
other authorized denominations but of the same aggregate principal amount, all
subject to the terms and conditions set forth in the Agreement. Any such
transfer or exchange shall be without charge by the Company. Transfer tax or the
like (if any) shall be paid by the holder hereof or the Transferee.
All terms used in this Debenture which are not defined herein and are
defined in the Agreement shall have the meanings assigned to them in the
Agreement.
This Debenture shall be deemed to be a contract made under the laws of the
Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
60
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161614-1
61
<PAGE>
EXECUTION COPY
WARRANT AGREEMENT
LOGICAL DESIGN SOLUTIONS, INC.
DATED AS OF March 19, 1997
62
<PAGE>
WARRANT AGREEMENT
Table of Contents
Page
----
1. ISSUE OF WARRANT TO PURCHASERS, FORM OF WARRANTS.......... 3
2. REGISTRATION.............................................. 3
3. TRANSFER OF WARRANTS...................................... 4
4. TERM; EXERCISE............................................ 4
5. SURRENDER OF WARRANT CERTIFICATES......................... 5
6. MUTILATED OR MISSING WARRANT CERTIFICATE.................. 5
7. RESERVATION OF COMMON STOCK, ETC.......................... 5
8. ANTI-DILUTION ADJUSTMENTS................................. 6
8.1 Extraordinary Distributions............................... 6
8.2 Equitable Adjustments..................................... 6
8.3 Notice of Adjustment...................................... 6
8.4 Reflection of Adjustments on Certificates................. 7
9. [INTENTIONALLY OMITTED]................................... 7
10. CERTAIN EVENTS........................................... 7
11. ABSENCE OF REGISTRATION.................................. 8
12. INFORMATION COVENANTS.................................... 8
12.1 Notice of Stockholder Meetings........................... 8
12.2 Notice of Distributions.................................. 9
12.3 Financial Statements, etc................................ 9
12.4 Proper Books and Records................................. 9
13. NOTICES.................................................. 9
14. WARRANT OBLIGATIONS INDEPENDENT OF DEBT OBLIGATIONS...... 9
15. FRACTIONAL INTERESTS..................................... 10
16. BINDING EFFECT; SURVIVAL................................. 10
17. COUNTERPARTS............................................. 10
18. GOVERNING LAW............................................ 10
63
<PAGE>
WARRANT AGREEMENT dated as of March 19, 1997, between Logical Design
Solutions, Inc., a New Jersey corporation (the "Company"), and the purchasers
set forth on Schedule I attached hereto (each individually a "Purchaser" and
----------
collectively the "Purchasers"). The Purchasers, so long as they are holders of
any warrants hereunder, together with any permitted transferees or assignees who
are registered holders of any warrant issued hereunder or a like warrant or
warrants issued upon the transfer of such warrant (each individually a "Warrant"
and collectively the "Warrants") are referred to collectively as the "Holders"
and individually as a "Holder."
WHEREAS, pursuant to the terms of a 9% Senior Subordinated Debenture and
Warrant Purchase Agreement dated as of March 19, 1997, among the Company,
certain shareholders of the Company and the Purchasers (the "Purchase
Agreement"), the Company has agreed to issue to each Purchaser a Warrant as
hereinafter described to purchase shares of the Company's Common Stock, no par
value per share (together with any other or additional classes of the Company's
capital stock for which the Warrants may become exercisable in accordance with
Section 8.4 of this Agreement, the "Common Stock"), upon the terms and subject
to the conditions set forth in the Purchase Agreement; and
WHEREAS, the Company wishes to set forth, among other things, the
provisions of such Warrants and the terms and conditions on which such Warrants
may be issued, exchanged, exercised and replaced;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
Section 1. Issue of Warrant to Purchasers, Form of Warrants. The Company
shall on the date hereof issue and deliver to the Purchasers Warrants to
purchase an aggregate of 215,000 shares of Common Stock, subject to adjustment
pursuant to Section 8 hereof, for the purchase price set forth in the Purchase
Agreement. Each Purchaser shall receive a Warrant to purchase the number of
shares of such Common Stock set forth opposite such Purchaser's name on Schedule
I attached hereto. Each Warrant, and any additional Warrants which may be issued
upon partial exercise, replacement or transfer of such Warrant or Warrants,
shall be evidenced by, and subject to the terms of, a Warrant Certificate
(including the Forms of Election to Purchase and Assignment attached thereto, a
"Warrant Certificate") in the form of Exhibit A attached hereto, in each case
executed on behalf of the Company by the manual or facsimile signature of the
President or Vice President of the Company, under its corporate seal affixed or
in facsimile, and attested to by the Secretary or an Assistant Secretary of the
Company. A Warrant Certificate evidencing the original Warrant issued to each
Purchaser shall be executed and delivered to such Purchaser simultaneously with
the execution of this Agreement. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Warrants and the issuance of
Common Stock upon the exercise of Warrants.
Section 2. Registration. All Warrant Certificates shall be numbered and
shall be registered in a warrant register (the "Warrant Register") as they are
issued. Subject to its compliance with the foregoing, the Company shall be
entitled to treat the registered Holder of any Warrant on the Warrant Register
as the owner in fact of such Warrant for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Warrant on the
64
<PAGE>
part of any other person or entity, and shall not be liable for any registration
of transfer of Warrants which are registered or to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration or transfer, or with the knowledge of such facts that its
participation therein amounts to bad faith.
Section 3. Transfer of Warrants. Any Warrant may be transferred or endorsed
to another party in whole or in part by (i) surrendering to the Company, or its
duly authorized agent, for cancellation the existing Warrant Certificate
evidencing the Warrant to be transferred, endorsed or accompanied by a written
instrument of transfer, in form satisfactory to the Company, duly executed by
the Holder thereof in person or by a duly authorized representative, agent or
attorney-in-fact appointed in writing, (ii) by supplying the Company with an
opinion of counsel, which opinion shall be reasonably satisfactory to the
Company, to the effect that registration under the Securities Act of 1933 has
been accomplished or is not necessary in connection with such transfer of
Warrants, and (iii) by having the transferee agree in writing to be bound by the
provisions of the Purchase Agreement, this Agreement, the Shareholders
Agreement, dated March 19, 1997, by and among the Company, certain of its
shareholders, and the Purchasers (the "Shareholders Agreement"), and the
Redemption Agreement, dated March 19, 1997, by and among the Company and the
Purchasers (the "Redemption Agreement"). Upon receipt thereof, the Company shall
issue and deliver, in the name of the transferee, a new Warrant Certificate
containing the same terms as the surrendered Warrant Certificate. In the case of
the transfer of fewer than all of the rights evidenced by the surrendered
Warrant Certificate, the Company shall issue a new Warrant Certificate to the
Holder thereof for the remaining number of shares specified in the Warrant
Certificate so surrendered.
Section 4. Term; Exercise. A Warrant entitles the Holder thereof to
purchase the number of shares of Common Stock specified in the Warrant
Certificate held by such Holder at a purchase price of $.01 per share (the
"Exercise Price") at any time after 12:01 p.m. on March 20, 1997 and on or
before 5:00 p.m. Boston Time on such date (the "Expiration Date") as is
specified in a written note (the "Termination Notice") given by the Company to
each registered holder of a Warrant Certificate; provided that such Termination
Notice may not be given prior to March 19, 2004, and provided further that the
Expiration Date shall be at least thirty (30) days after the date on which the
Termination Notice is given. The Exercise Price and the number of shares
issuable upon exercise of any Warrant are subject to adjustment upon the
occurrence of certain events, pursuant to the provisions of Section 8 of this
Agreement. Subject to the provisions of this Agreement, the Holder of a Warrant
shall have the right, which may be exercised in whole or in part, to purchase
from the Company, and the Company shall issue and sell to such Holder, the
number of fully paid and non-assessable shares of Common Stock (together with
any other shares of the Company's Common Stock issuable upon exercise of
Warrants, the "Shares") specified in the Warrant Certificate held by such
Holder. Such right shall be exercised by surrender to the Company, or its duly
authorized agent, of such Warrant Certificate, with the Form of Election to
Purchase attached thereto duly completed and signed, and upon payment to the
Company of the Exercise Price, as adjusted in accordance with the provisions of
Section 8, for the number of Shares in respect of which the Warrant is then
exercised. Payment of such Exercise Price may be made in cash, by certified
check or bank draft payable to the order of the Company, by wire transfer of
immediately available funds, or by cancellation of the Warrant with respect to
such number of Shares as have a fair market value
65
<PAGE>
(determined in good faith by the Board of Directors of the Company without
regard to minority or illiquidity discount) equal to the Exercise Price of the
Warrants which are being exercised. Upon such surrender of the Warrant
Certificate and payment of the Exercise Price as aforesaid, the Company shall
issue and cause to be delivered with all reasonable dispatch to or upon the
written order of the Holder of such Warrant, in such name or names as such
Holder may designate (assuming such designation is to a transferee as permitted
under Paragraph 3 hereof), a certificate or certificates for the number of full
Shares so purchased, together with cash, as provided in Section 15 of this
Agreement, in respect of any fraction of a Share otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued
and any person or entity so designated to be named therein shall be deemed to
have become a holder of record of such Shares as of the date of the surrender of
the Warrant Certificate and payment of the Exercise Price as aforesaid;
provided, however, that if, at the date of surrender of a Warrant Certificate
and payment of such Exercise Price, the transfer books for the Common Stock (or,
upon adjustment, such other class of stock as may be purchasable upon the
exercise of the Warrant) shall be closed, the certificates for the Shares in
respect of which such Warrant is then exercised shall be issued as of the date
on which such books shall next be opened (whether before, on or after the
Expiration Date) and until such date the Company shall be under no duty to
deliver any certificate for such Shares; provided further, however, that the
transfer books shall not be closed at any time for a period longer than forty-
eight (48) hours unless otherwise required by law. A Warrant shall be
exercisable, at the election of the Holder thereof, either for all or for part
only of the Shares specified in the Warrant Certificate and if any Warrant is
exercised in part prior to the Expiration Date, the Company shall issue a new
Warrant Certificate for the remaining number of Shares specified in the Warrant
Certificate so surrendered.
Section 5. Surrender of Warrant Certificates. Any surrender of a Warrant
Certificate for transfer pursuant to Section 3 above or upon exercise pursuant
to Section 4 above shall be made (a) to the Company at its principal office or
(b) to the Company at such other place or to such agent of the Company as the
Company shall hereafter notify the Holders.
Section 6. Mutilated or Missing Warrant Certificate. If a Warrant
Certificate is mutilated, lost, stolen or destroyed, the Company shall issue and
deliver (a) in exchange and substitution for and upon cancellation of any
mutilated Warrant Certificate or (b) in lieu of and in substitution for any
Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like
tenor representing an equivalent right or interest. Upon receipt by the Company
of an affidavit of the treasurer, assistant treasurer, or other responsible
official of any Purchaser (or, in the case of holders of Warrants other than a
Purchaser, evidence reasonably satisfactory to the Company) of the ownership of
and the loss, theft, destruction, or mutilation of a Warrant and (i) in case of
loss, theft, or destruction of a Warrant, of indemnity reasonably satisfactory
to it, or (ii) in the case of the mutilation of any Warrants, upon surrender and
cancellation thereof, the Company, at its expense, shall execute and deliver in
lieu thereof a new Warrant of like tenor. Transfer taxes or the like (if any)
shall be paid by the Purchaser or the transferee.
Section 7. Reservation of Common Stock, etc. The Company shall reserve for
so long as any Warrant remains outstanding a number of authorized and unissued
Shares sufficient to provide for the exercise of all such Warrants, and the
transfer agent for the Common Stock, which may be the Company (the "Transfer
Agent"), is hereby irrevocably authorized and directed at all times until the
Expiration Date to reserve such number of authorized and unissued
66
<PAGE>
Shares as necessary for such purpose. The Company shall keep copies of this
Agreement on file with the Transfer Agent and shall supply the Transfer Agent
with duly executed stock certificates for such purpose and will itself provide
or otherwise make available any cash payable as provided in Section 15 of this
Agreement. All Warrant Certificates surrendered upon the exercise of Warrants
shall be canceled, and such canceled Warrant Certificates shall constitute
sufficient evidence of the number of Shares which have been issued upon the
exercise of Warrants. The Company shall furnish to the Transfer Agent a copy of
all notices of adjustment, and certificates related thereto, required to be
transmitted to each Holder pursuant to Section 8.6 hereof.
Section 8. Anti-dilution Adjustments. The number and kind of Shares
purchasable upon exercise of the Warrants shall be subject to adjustments from
time to time upon the happening of the events hereinafter specified. No
adjustment shall be made for any cash dividends or any Shares issued or issuable
upon exercise of the Warrants. Notwithstanding any other provision hereof or of
any Warrant, the Exercise Price shall not in any event be less than the par
value (if any) of the Common Stock. The Company hereby covenants that, to the
extent permitted by law, the par value of each share of Common Stock shall not
be more than $.01 and the Company will not increase such par value so long as
any Warrant is outstanding.
a. Extraordinary Distributions. If the Company makes any distribution of
its assets upon or with respect to its Common Stock, as a liquidating or partial
liquidating dividend, or other than as a dividend payable out of earnings or any
surplus legally available for dividends under the laws of the jurisdiction of
incorporation of the Company, each Holder of a Warrant shall, upon the exercise
of such Warrant after the record date for such distribution or, in the absence
of a record date, after the date of such distribution, receive, in addition to
the shares subscribed for, the amount of such assets (or, at the option of the
Company, a sum equal to the value thereof at the time of distribution as
reasonably determined in good faith by the board of directors of the Company)
which would have been distributed to such Holder if such Holder had exercised
such Holder's Warrant immediately prior to the record date for such distribution
or, in the absence of a record date, immediately prior to the date of such
distribution.
b. Equitable Adjustments. If the Company (i) declares or pays a dividend
on its Common Stock in shares of its capital stock or makes a distribution in
shares of Common Stock, (ii) subdivides its outstanding Common Stock, (iii)
combines its outstanding Common Stock into a smaller number of shares of Common
Stock or (iv) issues any shares of its capital stock in a reclassification of
its Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing entity), the
number of Shares of Common Stock for which Warrants are exercisable in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that the Holder of any Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares which, if such Warrant had been
exercised immediately prior to such time, it would have owned upon such exercise
and been entitled to receive upon such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur, but no duplicative adjustment shall be made hereunder.
67
<PAGE>
c. Notice of Adjustment. Whenever an adjustment is made pursuant to this
Section 8, the Company shall promptly cause a notice setting forth the adjusted
number of Shares issuable upon exercise of each Warrant to be mailed to each
Holder at such Holder's last address appearing on the Warrant Register and shall
cause a certified copy thereof to be mailed to the Transfer Agent, if such
Transfer Agent is not the Company. The Company shall, upon the request in
writing of the Holders of a majority of the Warrants, retain a nationally
recognized firm of independent public accountants of recognized standing
selected by the board of directors of the Company to make any computation
required by this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment, which shall be
binding on the Holders and the Company.
d. Reflection of Adjustments on Certificates. Notwithstanding any
adjustments in the number or kind of Shares purchasable upon exercise of
Warrants, any Warrant Certificate theretofore or thereafter issued may continue
to express the same price and number and kind of Shares as are stated in the
Warrant Certificate initially issuable pursuant to this Agreement.
Section 9. [Intentionally Omitted].
Section 10. Certain Events. If any of the following occurs on or before the
Expiration Date:
i. a consolidation or merger of the Company with or into another
entity (other than any merger as to which the Company is the surviving
corporation and there is no change in the Common Stock in connection therewith),
ii. a liquidating dividend with respect to the Common Stock, or
iii. a tender offer or exchange offer with respect to the Common Stock
(other than a tender offer opposed by the Company's board of directors),
(each, an "Event"), then, in connection with any such Event, each Holder of a
Warrant shall have the right, in lieu of exercising such Warrant in advance of
such Event and receiving the consideration which a Holder of the Shares issuable
upon exercise of such Warrant would receive in connection with such
consolidation or merger, liquidating dividend or tender offer (the "Event
Consideration"), upon surrender of the Warrant Certificate evidencing such
Warrant to the Company or its duly authorized agent or to the depositary or
exchange agent, as the case may be, to receive the Event Consideration with
respect to the Shares for which such Warrant is exercisable reduced by the
Exercise Price. Such reduction in the Event Consideration shall first be applied
to any cash included in the Event Consideration and, to the extent that such
cash is less than the Exercise Price, the amount of the securities or other
property to be received by such Holder shall be reduced by an amount that,
together with any such cash, is (in the reasonable judgment of the Company's
board of directors) equal to the Exercise Price. The Company hereby covenants
(1) to give notice of any Event specified in (a) or (b) above to each
Holder of Warrants at least fifteen (15) business days in advance of the
record date for determining stockholders' rights with respect to such
Event, and
68
<PAGE>
(2) that any agreements, resolutions, offers or other documents with
respect to any Event shall contain terms consistent with the provisions of
this Section 10 and, in the case of any Event specified in (c) above, shall
be forwarded to each Holder of Warrants.
The provisions of this Section 10 shall also apply to successive Events.
Section 11. Absence of Registration. By acceptance of a Warrant Certificate
evidencing the Warrant, each Holder represents and agrees that such Holder is
acquiring the Warrant, and that upon exercise thereof it will acquire the
Shares, with its own funds for its own account for investment, and not with a
view to any sale, distribution or transfer thereof in violation of the
Securities Act of 1933 (the "Securities Act").
Each Holder acknowledges that such Holder has been informed by the Company
or by the previous Holder of the Warrant that the Warrant may not, under the
Securities Act and applicable regulations thereunder, be re-sold, transferred or
otherwise disposed of without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
Warrant Certificates and shares of Common Stock issuable upon exercise of
Warrants shall bear
the following legend:
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
Section 12. Information Covenants.
a. Notice of Stockholder Meetings. Except as otherwise expressly stated
herein, nothing contained in this Agreement shall be construed as conferring
upon any Holder the right to receive dividends, to vote or to consent to or
receive notice as a stockholder in respect of the meetings of stockholders or
the election of directors of the Company or any other matter, or any rights
whatsoever as a stockholder of the Company; provided, however, that if a meeting
of the stockholders of the Company is called or if consents of the Company's
stockholders are solicited to consider and take action on a proposal for (i) the
declaration of a dividend with respect to Shares, other than in cash and payable
out of its earned surplus, (ii) the redemption or repurchase of any Shares,
other than pursuant to the Purchase Agreement, the Shareholders Agreement, or
the Redemption Agreement or pursuant to repurchase agreements with employees,
(iii) the voluntary dissolution of the Company or (iv) any consolidation, merger
or sale of all or substantially all of its property, assets, business and good
will as an entirety, then the Company
69
<PAGE>
shall cause a notice thereof to be sent by first class mail, postage prepaid, at
least twenty (20) business days prior to the record date for determining
stockholders entitled to vote at such meeting or to take action with respect to
such consent, to each Holder of Warrants at such Holder's address appearing on
the Warrant Register; but failure to mail or to receive such notice or any
defect therein or in the mailing thereof shall not affect the validity of any
action taken at such meeting or by such consent.
b. Notice of Distributions. If the Company determines to make any
distribution on its Common Stock, then the Company shall deliver a notice of its
intention to make such distribution by first class mail, postage prepaid, at
least twenty (20) business days prior to the record date for such distribution
to each registered Holder of Warrants at such Holder's address appearing on the
Warrant Register, but failure to mail or to receive such notice or any defect
therein or in the mailing thereof shall not affect the validity of any action
taken in connection with such distribution.
c. Financial Statements, etc. Notwithstanding Section 12.1 above, the
Company shall promptly deliver to each Holder copies of all regular and periodic
financial information, proxy materials and other information and reports, if
any, which the Company or any of its subsidiaries shall file with the Securities
and Exchange Commission. In addition, the Company shall deliver to each Holder
all financial statements and other reports required to be delivered to holders
of Debentures pursuant to paragraph 3.1 of the Purchase Agreement.
d. Proper Books and Records. The Company covenants that it will keep
proper books and records in which full, true and correct entries in conformity
with generally accepted accounting principles shall be made of all dealings and
transactions in relation to its business and activities.
Section 13. Notices. Any notice pursuant to this Agreement to be given or
made by any Holder to or on the Company shall be made by hand delivery, prepaid
first-class mail (registered or certified, return receipt requested), telegraph,
facsimile transmission (receipt confirmed), or overnight air courier
guaranteeing next day delivery, addressed to the parties at their addresses set
forth in the Purchase Agreement.
Any notice or demand authorized by this Agreement to be given or made by the
Company to any Holder shall be sufficiently given or made (except as otherwise
provided in this Agreement) if sent as provided above, addressed to such
Holder's address appearing on the Warrant Register, with a copy, in the case of
a Purchaser, to James Westra, Hutchins, Wheeler & Dittmar, 101 Federal Street,
Boston, Massachusetts 02110 (facsimile transmission number: (617) 951-1295).
Section 14. Warrant Obligations Independent of Debt Obligations. Pursuant
to the Purchase Agreement, the Company has issued 9% Senior Subordinated
Debentures Due March 18, 2002, and 9% Junior Debentures Due March 19, 2003
(collectively, the "Subordinated Notes") to the Purchasers. The obligations of
the Company or its affiliates with respect to the Warrants, including, without
limitation, the obligations set forth in this Agreement, are independent of any
obligations of the Company under the Subordinated Notes, and such obligations
with respect to the Warrants shall remain valid and binding notwithstanding the
70
<PAGE>
performance of, or any breach by the Company or its affiliates with respect to,
their obligations under the Subordinated Notes.
Section 15. Fractional Interests. The Company shall not be required to
issue fractions of Shares on the exercise of Warrants. If the Company elects not
to issue fractions of Shares, then with respect to any fraction of a Share that
would otherwise have been issuable on the exercise of a Warrant, the Company
shall purchase such fraction for an amount in cash equal to the fraction of the
then current Exercise Price attributable to such fractional share.
Section 16. Binding Effect; Survival. This Agreement shall survive the
exercise of the Warrants and shall be binding upon the Company and its
successors and assigns and shall be binding upon and inure to the benefit of the
Holders of the Warrants and each holder of Shares issued upon exercise of the
Warrants.
Section 17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
Section 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the Commonwealth of
Massachusetts.
[The rest of this page intentionally left blank]
71
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.:
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.:
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
its General Partner
By: /s/ Kevin Mohan
------------------
General Partner
SUMMIT INVESTORS III, L.P.
By: /s/ Kevin Mohan
------------------
Authorized Signatory
/s/ Paul F. Lozier
---------------------
Paul F. Lozier
72
<PAGE>
EXHIBIT A
---------
WARRANT CERTIFICATE
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
NO. ___ March 19, 1997
TERMINABLE AFTER 5:00 P.M.
BOSTON TIME ON TERMINATION DATE,
AS DETERMINED IN ACCORDANCE WITH
WARRANT AGREEMENT DATED MARCH 19, 1997
LOGICAL DESIGN SOLUTIONS, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received, _______________, or its registered
assigns, is the owner of a Warrant which entitles it to purchase at any time
after 12:01 p.m. on March 20, 1997 and on or before 5:00 p.m. Boston Time on the
Expiration Date as provided in the Warrant Agreement (as hereinafter defined)
(the "Expiration Date"), ______________ fully paid and nonassessable Shares of
the Common Stock, no par value (the "Common Stock") of Logical Design Solutions,
Inc., a New Jersey corporation (the "Company"), at the purchase price of $.01
per share (the "Exercise Price") upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase attached hereto duly executed.
The number of Shares which may be purchased upon exercise of the Warrant
evidenced by this Warrant Certificate is the number as of the date of the
original issue of such Warrant, based on the Shares of Common Stock of the
Company as constituted at such date. As provided in the Warrant Agreement, the
number and kind of Shares which may be purchased upon the exercise of the
Warrant evidenced by this Warrant Certificate are, upon the happening of certain
events, subject to modification and adjustment.
This Warrant Certificate and the Warrant it represents are subject to, and
entitled to the benefits of, all of the terms, provisions and conditions of a
certain Warrant Agreement dated as of March 19, 1997 (the "Warrant Agreement")
between the Company and the original holder hereof, which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the rights,
limitation of rights, obligations, duties and immunities hereunder of the
Company and the
73
<PAGE>
holder of this Warrant Certificate. Copies of the Warrant Agreement are on file
at the principal office of the Company.
No fractional Shares of Common Stock need be issued upon the exercise of
any Warrant evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), to
receive notice of meetings (except as provided in the Warrant Agreement), or to
receive dividends or subscription rights or otherwise, until the Warrant
evidenced by this Warrant Certificate shall have been exercised and the Common
Stock purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for Shares purchasable upon such exercise until the date of the
reopening of said transfer books.
74
<PAGE>
IN WITNESS WHEREOF, Logical Design Solutions, Inc. has caused the signature
(or facsimile signature) of its President and Secretary to be printed herein and
its corporate seal (or facsimile) to be printed herein.
Attest: LOGICAL DESIGN SOLUTIONS, INC.
___________________________ By:______________________________
Secretary Mary Kay Brooks, President
75
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if the Holder desires to exercise the Warrant.
TO LOGICAL DESIGN SOLUTIONS, INC.:
The undersigned hereby irrevocably elects to exercise the Warrant evidenced
by this Warrant Certificate No. ____________ to purchase ____________ Shares of
Common Stock issuable upon the exercise of such Warrant and requests that
certificates for such Shares be issued in the name of:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
If such number of Shares shall not be all the Shares with respect to which
this Warrant is exercisable, a new Warrant for the balance remaining of such
Shares will be registered in the name of and delivered to:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
76
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificates)
For value received, ______________ hereby sells, assigns and transfers unto
______________ the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
______________ attorney, to transfer said Warrant Certificate on the books of
the within-named Company, with full power of substitution in the premises.
Dated:_________________________
______________________________________________
NOTE:
The above signature should correspond exactly
with the name on the face of this Warrant
Certificate.
77
<PAGE>
SCHEDULE I
Warrant Purchasers Number Purchased
- ------------------ ----------------
Summit Ventures IV, L.P. 194,770.50
Summit Investors III, L.P. 10,229.50
Paul F. Lozier 10,000
TOTAL: 215,000
=======
78
<PAGE>
WARRANT CERTIFICATE
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
NO. W-1 March 19, 1997
TERMINABLE AFTER 5:00 P.M.
BOSTON TIME ON TERMINATION DATE,
AS DETERMINED IN ACCORDANCE WITH
WARRANT AGREEMENT DATED MARCH 19, 1997
LOGICAL DESIGN SOLUTIONS, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received, Summit Ventures IV, L.P., or its
registered assigns, is the owner of a Warrant which entitles it to purchase at
any time after 12:01 p.m. on March 20, 1997 and on or before 5:00 p.m. Boston
Time on the Expiration Date as provided in the Warrant Agreement (as hereinafter
defined) (the "Expiration Date"), One Hundred Ninety Four Thousand Seven Hundred
Seventy and 50/100 (194,770.50) fully paid and nonassessable Shares of the
Common Stock, no par value (the "Common Stock") of Logical Design Solutions,
Inc., a New Jersey corporation (the "Company"), at the purchase price of $.01
per share (the "Exercise Price") upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase attached hereto duly executed.
The number of Shares which may be purchased upon exercise of the Warrant
evidenced by this Warrant Certificate is the number as of the date of the
original issue of such Warrant, based on the Shares of Common Stock of the
Company as constituted at such date. As provided in the Warrant Agreement, the
number and kind of Shares which may be purchased upon the exercise of the
Warrant evidenced by this Warrant Certificate are, upon the happening of certain
events, subject to modification and adjustment.
This Warrant Certificate and the Warrant it represents are subject to, and
entitled to the benefits of, all of the terms, provisions and conditions of a
certain Warrant Agreement dated as of March 19, 1997 (the "Warrant Agreement")
between the Company and the original holder hereof, which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the rights,
limitation of rights, obligations, duties and immunities hereunder of the
Company and the
79
<PAGE>
holder of this Warrant Certificate. Copies of the Warrant Agreement are on file
at the principal office of the Company.
No fractional Shares of Common Stock need be issued upon the exercise of
any Warrant evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), to
receive notice of meetings (except as provided in the Warrant Agreement), or to
receive dividends or subscription rights or otherwise, until the Warrant
evidenced by this Warrant Certificate shall have been exercised and the Common
Stock purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for Shares purchasable upon such exercise until the date of the
reopening of said transfer books.
80
<PAGE>
IN WITNESS WHEREOF, Logical Design Solutions, Inc. has caused the signature
(or facsimile signature) of its President and Secretary to be printed herein and
its corporate seal (or facsimile) to be printed herein.
Attest: LOGICAL DESIGN SOLUTIONS, INC.
/s/ E. Bruce Lovenberg By: /s/ Mary Kay Brooks
- --------------------------------- ----------------------------------
Secretary Mary Kay Brooks, President
81
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if the Holder desires to exercise the Warrant.
TO LOGICAL DESIGN SOLUTIONS, INC.:
The undersigned hereby irrevocably elects to exercise the Warrant evidenced
by this Warrant Certificate No. _________ to purchase _________ Shares of Common
Stock issuable upon the exercise of such Warrant and requests that certificates
for such Shares be issued in the name of:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
If such number of Shares shall not be all the Shares with respect to which
this Warrant is exercisable, a new Warrant for the balance remaining of such
Shares will be registered in the name of and delivered to:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
82
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificates)
For value received, ______________ hereby sells, assigns and transfers unto
______________ the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
______________ attorney, to transfer said Warrant Certificate on the books of
the within-named Company, with full power of substitution in the premises.
Dated:______________________
___________________________________________
NOTE:
The above signature should correspond exactly
with the name on the face of this Warrant
Certificate.
83
<PAGE>
WARRANT CERTIFICATE
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
NO. W-2 March 19, 1997
TERMINABLE AFTER 5:00 P.M.
BOSTON TIME ON TERMINATION DATE,
AS DETERMINED IN ACCORDANCE WITH
WARRANT AGREEMENT DATED MARCH 19, 1997
LOGICAL DESIGN SOLUTIONS, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received, Summit Investors III, L.P., or its
registered assigns, is the owner of a Warrant which entitles it to purchase at
any time after 12:01 p.m. on March 20, 1997 and on or before 5:00 p.m. Boston
Time on the Expiration Date as provided in the Warrant Agreement (as hereinafter
defined) (the "Expiration Date"), Ten Thousand Two Hundred Twenty Nine and
50/100 (10,229.50) fully paid and nonassessable Shares of the Common Stock, no
par value (the "Common Stock") of Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), at the purchase price of $.01 per share (the
"Exercise Price") upon presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase attached hereto duly executed. The number
of Shares which may be purchased upon exercise of the Warrant evidenced by this
Warrant Certificate is the number as of the date of the original issue of such
Warrant, based on the Shares of Common Stock of the Company as constituted at
such date. As provided in the Warrant Agreement, the number and kind of Shares
which may be purchased upon the exercise of the Warrant evidenced by this
Warrant Certificate are, upon the happening of certain events, subject to
modification and adjustment.
This Warrant Certificate and the Warrant it represents are subject to, and
entitled to the benefits of, all of the terms, provisions and conditions of a
certain Warrant Agreement dated as of March 19, 1997 (the "Warrant Agreement")
between the Company and the original holder hereof, which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the rights,
limitation of rights, obligations, duties and immunities hereunder of the
Company and the holder of this Warrant Certificate. Copies of the Warrant
Agreement are on file at the principal office of the Company.
84
<PAGE>
No fractional Shares of Common Stock need be issued upon the exercise of
any Warrant evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), to
receive notice of meetings (except as provided in the Warrant Agreement), or to
receive dividends or subscription rights or otherwise, until the Warrant
evidenced by this Warrant Certificate shall have been exercised and the Common
Stock purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for Shares purchasable upon such exercise until the date of the
reopening of said transfer books.
85
<PAGE>
IN WITNESS WHEREOF, Logical Design Solutions, Inc. has caused the signature
(or facsimile signature) of its President and Secretary to be printed herein and
its corporate seal (or facsimile) to be printed herein.
Attest: LOGICAL DESIGN SOLUTIONS, INC.
/s/ E. Bruce Lovenberg By: /s/ Mary Kay Brooks
- --------------------------- ---------------------------
Secretary Mary Kay Brooks, President
86
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if the Holder desires to exercise the Warrant.
TO LOGICAL DESIGN SOLUTIONS, INC.:
The undersigned hereby irrevocably elects to exercise the Warrant evidenced
by this Warrant Certificate No. _________ to purchase _________ Shares of Common
Stock issuable upon the exercise of such Warrant and requests that certificates
for such Shares be issued in the name of:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
If such number of Shares shall not be all the Shares with respect to which
this Warrant is exercisable, a new Warrant for the balance remaining of such
Shares will be registered in the name of and delivered to:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
87
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificates)
For value received, ______________ hereby sells, assigns and transfers unto
______________ the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
______________ attorney, to transfer said Warrant Certificate on the books of
the within-named Company, with full power of substitution in the premises.
Dated:_____________________
____________________________________________
NOTE:
The above signature should correspond exactly
with the name on the face of this Warrant
Certificate.
88
<PAGE>
WARRANT CERTIFICATE
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
NO. W-3 March 19, 1997
TERMINABLE AFTER 5:00 P.M.
BOSTON TIME ON TERMINATION DATE,
AS DETERMINED IN ACCORDANCE WITH
WARRANT AGREEMENT DATED MARCH 19, 1997
LOGICAL DESIGN SOLUTIONS, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received, Paul F. Lozier, or its registered
assigns, is the owner of a Warrant which entitles it to purchase at any time
after 12:01 p.m. on March 20, 1997 and on or before 5:00 p.m. Boston Time on the
Expiration Date as provided in the Warrant Agreement (as hereinafter defined)
(the "Expiration Date"), Ten Thousand and 00/100 (10,000.00) fully paid and
nonassessable Shares of the Common Stock, no par value (the "Common Stock") of
Logical Design Solutions, Inc., a New Jersey corporation (the "Company"), at the
purchase price of $.01 per share (the "Exercise Price") upon presentation and
surrender of this Warrant Certificate with the Form of Election to Purchase
attached hereto duly executed. The number of Shares which may be purchased upon
exercise of the Warrant evidenced by this Warrant Certificate is the number as
of the date of the original issue of such Warrant, based on the Shares of Common
Stock of the Company as constituted at such date. As provided in the Warrant
Agreement, the number and kind of Shares which may be purchased upon the
exercise of the Warrant evidenced by this Warrant Certificate are, upon the
happening of certain events, subject to modification and adjustment.
This Warrant Certificate and the Warrant it represents are subject to, and
entitled to the benefits of, all of the terms, provisions and conditions of a
certain Warrant Agreement dated as of March 19, 1997 (the "Warrant Agreement")
between the Company and the original holder hereof, which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the rights,
limitation of rights, obligations, duties and immunities hereunder of the
Company and the holder of this Warrant Certificate. Copies of the Warrant
Agreement are on file at the principal office of the Company.
89
<PAGE>
No fractional Shares of Common Stock need be issued upon the exercise of
any Warrant evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance or otherwise), to
receive notice of meetings (except as provided in the Warrant Agreement), or to
receive dividends or subscription rights or otherwise, until the Warrant
evidenced by this Warrant Certificate shall have been exercised and the Common
Stock purchasable upon the exercise thereof shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock are closed
for any purpose, the Company shall not be required to make delivery of
certificates for Shares purchasable upon such exercise until the date of the
reopening of said transfer books.
90
<PAGE>
IN WITNESS WHEREOF, Logical Design Solutions, Inc. has caused the signature
(or facsimile signature) of its President and Secretary to be printed herein and
its corporate seal (or facsimile) to be printed herein.
Attest: LOGICAL DESIGN SOLUTIONS, INC.
/s/ E. Bruce Lovenberg By: /s/ Mary Kay Brooks
- ------------------------------------------- ---------------------------
Secretary Mary Kay Brooks, President
91
<PAGE>
FORM OF ELECTION TO PURCHASE
To be executed if the Holder desires to exercise the Warrant.
TO LOGICAL DESIGN SOLUTIONS, INC.:
The undersigned hereby irrevocably elects to exercise the Warrant evidenced
by this Warrant Certificate No. _________ to purchase _________ Shares of Common
Stock issuable upon the exercise of such Warrant and requests that certificates
for such Shares be issued in the name of:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
If such number of Shares shall not be all the Shares with respect to which
this Warrant is exercisable, a new Warrant for the balance remaining of such
Shares will be registered in the name of and delivered to:
--------------------------------------
Name
--------------------------------------
Address
--------------------------------------
Social Security Number
--------------------------------------
Date:_____________________ Signature (Signature must conform in all respects
to name of holder as specified on the face of this
Warrant Certificate)
92
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificates)
For value received, ______________ hereby sells, assigns and transfers unto
______________ the within Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
______________ attorney, to transfer said Warrant Certificate on the books of
the within-named Company, with full power of substitution in the premises.
Dated:_________________________
____________________________________________
NOTE:
The above signature should correspond exactly
with the name on the face of this Warrant
Certificate.
93
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of ________ __, 1997, by and between
Logical Design Solutions, Inc., a New Jersey corporation (the "Company"), and
Logical Design Solutions international, Inc., a New Jersey corporation ("LDSI").
Section 19. The Merger.
a. The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the relevant provisions of Title 14A of the Business
Corporation Act of New Jersey (the "New Jersey Law"), LDSI shall be merged with
and into the Company (the "Merger") as soon as practicable following the
satisfaction or waiver, if permissible, of the terms and conditions set forth
herein and upon the filing of a Certificate of Merger with the office of the
Secretary of State of New Jersey pursuant to Section 1(b) below. Following the
Merger, the Company shall continue as the surviving corporation (the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of New jersey, and the separate corporate existence of LDSI shall cease.
b. Effective Time. The Merger shall be consummated .by filing, pursuant
to Section 14A:10-4.1 of the New Jersey Law, with the office of the Secretary of
State of the State of New Jersey, a Certificate of Merger that sets forth the
elements required by Section 14A:10-4.1 of the New Jersey Law (the time of such
filing being the "Effective Time").
c. Effects of the Merger. The Merger shall have the effects set forth in
Section 14A;10-6 of the New Jersey Law.
d. Certificate of Incorporation and By-Laws. The Certificate of
Incorporation of the Company at the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation (until modified in accordance with
applicable law). The By-Laws of the Company at the Effective Time shall be the
By-Laws of the Surviving Corporation until modified in accordance with
applicable law.
e. Directors and Officers. The directors of the Company at the Effective
Time shall be the directors of the Surviving Corporation until their successors
are duly elected and qualified and the officers of the Company at the Effective
Time shall be the officers of the Surviving Corporation until replaced in
accordance with the By-Laws of the Surviving Corporation.
f. Conversion of Shares.
i. All shares of common stock, no par value per share, of LDSI issued
and outstanding immediately prior to the Effective Time (other than shares held
in the treasury of the Company or by any subsidiary of the Company) (such issued
and outstanding shares are hereinafter referred to as the "Shares") shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive an aggregate of [100] shares
94
<PAGE>
of common stock, no par value per share, of the Surviving Corporation to be
distributed to holders of Shares on a pro rata basis.
ii. Each share of common stock held in the treasury of LDSI
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be cancelled without any
payment therefor.
g. Conversion of Company Common Stock. Each share of common stock, no
par value per share, of the Company issued and outstanding immediately prior to
the Effective Time shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into and exchangeable for one share of
common stock of the Surviving Corporation.
h. Closing. Upon the terms and subject to the conditions hereof, a
closing (the "Closing") shall take place at (i) the offices of Brown and Wood
llp, One World Trade Center, New York, New York 10048 at 10:00 a.m., New York
time, on ________ __, 1997, or (ii) such other place and/or time and/or on such
other date (but in no event later than __________, 1997) as the Company and LDSI
may agree (in case of either clause (i) or (ii), the "Closing Date").
Section 20. Conditions to Closing.
The respective obligations of each party hereto to effect the transactions
contemplated hereby are subject to the satisfaction or waiver as of the Closing
of the following conditions:
a. No statute, rule, regulation, executive order, decree, temporary
restraining order, preliminary or permanent injunction or other order shall have
been enacted, entered, promulgated, enforced or issued by any governmental
entity and no other legal restraint or prohibition preventing the Merger or any
of the other transactions contemplated by this Agreement shall be in effect.
b. No shareholder of LDSI shall have defaulted in its obligation to
deliver such holder's Shares pursuant to the Merger.
c. LDSI's Board of Directors shall have approved and authorized, at or
prior to the Closing, the distribution to the shareholder of record the right to
receive $1.7 million to be received from Bell Atlantic, relating to the
licensing of LDSI's "Teletrac" product, as a dividend.
d. Neither party hereto may rely on the failure of any condition set
forth in this Section 2 to be satisfied if such failure was caused by such
party's failure to act in good faith or to use its reasonable efforts to cause
the Closing to occur.
Section 21. Termination.
a. Anything contained herein to the contrary notwithstanding, this
Agreement may be terminated and the transactions contemplated hereby abandoned
at any time prior to the Closing Date:
i. by mutual written consent of either of the parties hereto;
95
<PAGE>
ii. by either of the parties hereto, if the Closing does not occur on
or prior to ________ __, 1997;
iii. by either of the parties hereto, if the conditions set forth in
Section 2(c) above is not fulfilled by __________, 1997; or
iv. by either of the parties hereto if any of the conditions set forth
in Section 2 have become incapable of fulfillment, and shall not have been
waived by the other party hereto; provided, however, that the right to terminate
this Agreement pursuant to this Section 3(a)(iii) shall not be available to a
party hereto if it has failed to perform any of its obligations under this
Agreement and such failure results in such conditions becoming incapable of
fulfillment;
b. In the event of termination by either of the parties hereto pursuant
to this Section, written notice thereof setting forth the reasons therefore
shall forthwith be given to the other party and the transactions contemplated by
this Agreement shall be terminated, without further action by any party.
Section 22. Amendments. No amendment, modification or waiver in respect of
this Agreement shall be effective unless it shall be in writing and signed by
both of the parties hereto.
Section 23. Entire Agreement. This Agreement contains the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter. The parties hereto shall not be liable or bound to any other
party in any manner by any representations, warranties or covenants relating to
such subject matter except as specifically set forth herein.
Section 24. Severability. If any provisions of this Agreement (or any
portion thereof) or the application of any such provision (or any portion
thereof) to any person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof (or the remaining portion thereof) or the application of such provision
to any other persons or circumstances.
Section 25. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New Jersey
applicable to agreements made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State.
96
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
Logical Design Solutions, Inc.
By:________________________
Mary K. Brooks
President
Logical Design Solutions International, Inc.
By:________________________
Mary K. Brooks
President
97
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATION OF INCORPORATION OF
Logical Design Solutions, Inc.
To: The Secretary of State of the
State of New Jersey
Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3),
Corporations, General, of the New Jersey Statutes, the undersigned corporation
executes the following Certificate of Amendment to its Certificate of
Incorporation:
1. The name of the corporation is Logical Design Solutions, Inc.
2. The following amendments to the Certificate of Incorporation were
approved by the directors and thereafter duly adopted by the shareholders of the
corporation on the 13th day of March, 1997:
Resolved, that Article FOURTH of the Certificate of Incorporation be
amended to read as follows:
"FOURTH: The aggregate number of shares which this corporation shall
have authority to issue is 1,500,000 shares without par value."
and
Resolved that an Article SEVENTH shall be added to the Certificate of
Incorporation to read in its entirety as follows:
"SEVENTH: No director or officer of the corporation shall be
personally liable to the corporation or its shareholders for damage
for breach of any duty owed to the corporation or its shareholders,
except that this provision shall not relieve a director from liability
for any breach of duty based upon an act or omission (a) in breach of
such director's duty of loyalty to the corporation or its
shareholders, (b) not in good faith or involving a knowing violation
of law or (c) resulting in receipt by such director of an improper
personal benefit."
3. The number of shares entitled to vote upon the amendment was 200.
98
<PAGE>
4. That in lieu of a meeting and vote of the shareholders and in
accordance with the provisions of Section 14A:5-6, the amendment was adopted by
the shareholders without a meeting pursuant to the written consents of the
shareholders and the number of shares represented by such consents is 200
shares.
Dated this 17th day of March, 1997.
Logical Design Solutions, Inc.
By: /s/ Mary K. Broosk
---------------------
Mary K. Brooks
President
99
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Junior Subordinated Debenture
Due March 19, 2003
Morristown, New Jersey
No. J-1 March 18, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Mary Kay Brooks, or its
registered assigns, the sum of Six Hundred Ninety Five Thousand One Hundred
Twenty Two and 45/100 ($695,122.45) Dollars on March 19, 2003, together with
interest, computed on the basis of the actual number of days elapsed over a 360-
day year, on the unpaid principal balance hereof until paid in full at the rate
of nine percent (9%) per annum from the date hereof. Interest shall accrue and
compound annually and shall be paid upon each payment or prepayment of
principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Junior Debenture (as defined below) together with a
late charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Junior Debenture may designate in writing to the Company before the scheduled
payment date.
This Junior Debenture is one of a duly authorized issue of Junior
Debentures designated as "9% Junior Subordinated Debentures due March 19, 2003"
(herein called the "Junior Debentures"), in the aggregate principal amount of
$1,114,289.50 and issued under a 9% Senior
100
<PAGE>
Subordinated Debenture and Warrant Purchase Agreement, dated as of March 19,
1997 (herein called the "Agreement"), among the Company, certain of its
shareholders, Summit Ventures IV, L.P., Summit Investors III, L.P., Paul F.
Lozier and Samedan, Inc., to which Agreement and all agreements supplemental
thereto reference is hereby made for a statement of the respective rights and
duties thereunder of the Company, and the holders of the Junior Debentures, and
the terms upon which the Debentures are, and are to be, delivered.
The principal of this Junior Debenture is subject to prepayment under
certain circumstances, together with accrued interest, all as more particularly
set forth in the Agreement. The Company agrees to make such payments of
principal and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Junior Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Junior Debenture is issued
subject to such provisions, and each holder of Junior Debentures, by accepting
the same, agrees to and shall be bound by such provisions and agrees to take
such action as may be necessary or appropriate to effectuate the subordination
as provided in the Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Junior Debentures may be in certain circumstances declared, and upon such
declaration shall become, immediately due and payable, in the manner, with the
effect and subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Junior
Debenture or of the Agreement shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
interest on this Junior Debenture at the times, places, and rates, and in the
coin or currency, herein prescribed.
Under certain circumstances as are more fully set forth in the Agreement,
this Junior Debenture is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose, upon surrender and cancellation of this Junior Debenture, upon
presentation of a duly executed written instrument of transfer satisfactory to
the Company and upon the transferee's written agreement to be bound by the
provisions of the Agreement, and thereupon a new Junior Debenture or Junior
Debentures, of the same aggregate principal amount and in authorized
denominations, will be issued to the transferee or transferees in exchange
therefor; and this Junior Debenture, with or without other Junior Debentures may
in like manner be exchanged for one or more new Junior Debentures of other
authorized denominations but of the same aggregate principal amount, all subject
to the terms and conditions set forth in the Agreement. Any such transfer or
exchange shall be without charge by the Company. Transfer tax or the like (if
any) shall be paid by the holder hereof or the transferee.
All terms used in this Junior Debenture which are not defined herein and
are defined in the Agreement shall have the meanings assigned to them in the
Agreement.
101
<PAGE>
This Junior Debenture shall be deemed to be a contract made under the laws
of the Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
IN WITNESS WHEREOF, the Company has caused this Junior Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary K. Brooks
--------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161623-1
102
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Junior Subordinated Debenture
Due March 19, 2003
Morristown, New Jersey
No. J-2 March 18, 1997
FOR VALUE RECEIVED, Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), hereby, promises to pay to Darren Bryden, or its
registered assigns, the sum of Forty Thousand Three Hundred Eighty Nine and
74/100 ($40,389.74) Dollars on March 19, 2003, together with interest, computed
on the basis of the actual number of days elapsed over a 360-day year, on the
unpaid principal balance hereof until paid in full at the rate of nine percent
(9%) per annum from the date hereof. Interest shall accrue and compound annually
and shall be paid upon each payment or prepayment of principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Junior Debenture (as defined below) together with a
late charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Junior Debenture may designate in writing to the Company before the scheduled
payment date.
This Junior Debenture is one of a duly authorized issue of Junior
Debentures of the Company designated as its "9% Junior Subordinated Debentures
due March 19, 2003" (herein called the "Junior Debentures"), in the aggregate
principal amount of $1,114,289.50 and issued
103
<PAGE>
under a 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997 (herein called the "Agreement"), among the Company, certain
of its shareholders, Summit Ventures IV, L.P., Summit Investors III, L.P., Paul
F. Lozier and Samedan, Inc., to which Agreement and all agreements supplemental
thereto reference is hereby made for a statement of the respective rights and
duties thereunder of the Company, and the holders of the Junior Debentures, and
the terms upon which the Debentures are delivered.
The principal of this Junior Debenture is subject to prepayment under
certain circumstances together with accrued interest, all as more particularly
set forth in the Agreement. The Company agrees to make such payments of
principal and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Junior Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Junior Debenture is issued
subject to such provisions, and each holder of Junior Debentures, by accepting
the same, agrees to and shall be bound by such provisions and agrees to take
such action as may be necessary or appropriate to effectuate the subordination
as provided in the Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Junior Debentures may be in certain circumstances declared, and upon such
declaration shall become, immediately due and payable, in the manner, with the
effect and subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Junior
Debenture or of the Agreement shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
interest on this Junior Debenture at the times, places, and rates, and in the
coin or currency, herein prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Junior Debenture is transferable by the registered owner hereof, in person or by
duly authorized attorney, on the books of the Company to be kept for that
purpose, upon surrender and cancellation of this Junior Debenture, upon
presentation of a duly executed written instrument of transfer satisfactory to
the Company and upon the transferee's written agreement to be bound by the
provisions of the Agreement, and thereupon a new Junior Debenture or Junior
Debentures, of the same aggregate principal amount and in authorized
denominations, will be issued to the transferee or transferees in exchange
therefor; and this Junior Debenture, with or without other Junior Debentures may
in like manner be exchanged for one or more new Junior Debentures of other
authorized denominations but of the same aggregate principal amount, all subject
to the terms and conditions set forth in the Agreement. Any such transfer or
exchange shall be without charge by the Company. Transfer taxes or the like (if
any) shall be paid by the holder hereof or the transferee.
All terms used in this Junior Debenture which are not defined herein and
are defined in the Agreement shall have the meanings assigned to them in the
Agreement.
104
<PAGE>
This Junior Debenture shall be deemed to be a contract made under the laws
of the Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
IN WITNESS WHEREOF, the Company has caused this Junior Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary K. Brooks
---------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
161627-1
105
<PAGE>
EXECUTION COPY
LOGICAL DESIGN SOLUTIONS INTERNATIONAL, INC.
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. THIS
SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS
(i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE ACT IS IN EFFECT OR
(ii) THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS
REASONABLY SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE ACT OR THE SECURITIES LAWS OF ANY STATE.
9% Junior Subordinated Debenture
Due March 19, 2003
Morristown, New Jersey
No. LDSI S-1 March 18, 1997
FOR VALUE RECEIVED, Logical Design Solutions International, Inc., a New
Jersey corporation (the "Company"), hereby, promises to pay to Mary Kay Brooks,
or its registered assigns, the sum of Three Hundred Seventy-Eight Thousand,
Seven Hundred Seventy-Seven and 33/100 Dollars ($378,777.33) on March 19, 2003,
together with interest, computed on the basis of the actual number of days
elapsed over a 360-day year, on the unpaid principal balance hereof until paid
in full at the rate of nine percent (9%) per annum from the date hereof.
Interest shall accrue and compound annually and shall be paid upon each payment
or prepayment of principal.
Any interest not paid when due and payable shall thereafter be paid on
demand by the holder of this Junior Debenture (as defined below) together with a
late charge of two percent (2%) of the amount of interest payment due.
All payments of principal (including any prepayments or redemptions) and
interest hereunder shall be made by the Company in lawful money of the United
States of America in immediately available federal funds (or, at the request of
the holder of this Debenture, by certified or bank check or wire transfer) not
later than 2:00 p.m., Boston, Massachusetts, time, on the date each such payment
is due, by crediting an account in the United States as the holder of this
Junior Debenture may designate in writing to the Company before the scheduled
payment date.
This Junior Debenture is one of a duly authorized issue of Junior
Debentures of the Company designated as its "9% Junior Subordinated Debentures
due March 19, 2003" (herein called the "Junior Debentures"), in the aggregate
principal amount of $1,114,289.50 and issued
106
<PAGE>
under a 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997 (herein called the "Agreement"), among the Company, certain
of its shareholders, Summit Ventures IV, L.P., Summit Investors III, L.P., Paul
F. Lozier and Samedan, Inc., to which Agreement and all agreements supplemental
thereto reference is hereby made for a statement of the respective rights and
duties thereunder of the Company, and the holders of the Junior Debentures, and
the terms upon which the Debentures are delivered.
The principal of this Junior Debenture is subject to prepayment under
certain circumstances together with accrued interest, all as more particularly
set forth in the Agreement. The Company agrees to make such payments of
principal and interest on the date and in the amount set forth in the Agreement.
Notwithstanding anything herein contained to the contrary, the indebtedness
evidenced by the Junior Debenture is, to the extent provided in the Agreement,
subordinate and subject in right of payment to the prior payment in full of all
Senior Debt (as defined in the Agreement), and this Junior Debenture is issued
subject to such provisions, and each holder of Junior Debentures, by accepting
the same, agrees to and shall be bound by such provisions and agrees to take
such action as may be necessary or appropriate to effectuate the subordination
as provided in the Agreement.
In case an Event of Default, as defined in the Agreement, shall have
occurred and be continuing uncured or unwaived, the principal of all of the
Junior Debentures may be in certain circumstances declared, and upon such
declaration shall become, immediately due and payable, in the manner, with the
effect and subject to the conditions provided in the Agreement.
No reference herein to the Agreement and no provisions of this Junior
Debenture or of the Agreement shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of and
interest on this Junior Debenture at the times, places, and rates, and in the
coin or currency, herein prescribed.
Under certain circumstances more fully set forth in the Agreement, this
Junior Debenture is transferable by the registered owner hereof, in person or by
duly authorized attorney, on the books of the Company to be kept for that
purpose, upon surrender and cancellation of this Junior Debenture, upon
presentation of a duly executed written instrument of transfer satisfactory to
the Company and upon the transferee's written agreement to be bound by the
provisions of the Agreement, and thereupon a new Junior Debenture or Junior
Debentures, of the same aggregate principal amount and in authorized
denominations, will be issued to the transferee or transferees in exchange
therefor; and this Junior Debenture, with or without other Junior Debentures may
in like manner be exchanged for one or more new Junior Debentures of other
authorized denominations but of the same aggregate principal amount, all subject
to the terms and conditions set forth in the Agreement. Any such transfer or
exchange shall be without charge by the Company. Transfer taxes or the like (if
any) shall be paid by the holder hereof or the transferee.
All terms used in this Junior Debenture which are not defined herein and
are defined in the Agreement shall have the meanings assigned to them in the
Agreement.
107
<PAGE>
This Junior Debenture shall be deemed to be a contract made under the laws
of the Commonwealth of Massachusetts and shall for all purposes be construed in
accordance with the laws of said Commonwealth.
IN WITNESS WHEREOF, the Company has caused this Junior Debenture to be duly
executed as a sealed instrument.
LOGICAL DESIGN SOLUTIONS
INTERNATIONAL, INC.
By: /s/ Mary Kay Brooks
----------------------
Attest: /s/ E. Bruce Lovenberg Name: Mary Kay Brooks
------------------------- Title: President
108
<PAGE>
Summit Ventures IV, L.P.
Subordinated Debt Fund, L.P.
600 Atlantic Avenue
Boston, MA 02210
Summit Investors III, L.P.
600 Atlantic Avenue
Boston, MA 02210
Paul F. Lozier
Samedan, Inc.
40 Dellwood Drive
Madison, NJ 07940
March 19, 1997
Ladies/Gentlemen:
We have acted as special counsel to Logical Design Solutions, Inc., a New
Jersey corporation ("LDS"), in connection with (i) the 9% Senior Subordinated
Debenture and Warrant Purchase Agreement, dated as of March 19, 1997 (the
"Agreement"), by and among LDS, Mary K. Brooks ("Brooks"), Darren Bryden
("Bryden", and collectively with Brooks, the "Principal Shareholders"), Summit
Ventures IV, L.P. ("Summit IV"), Summit Investors III, L.P. ("Summit III,),
Samedan, Inc. ("Samedan") and Paul F. Lozier ("Lozier", and collectively with
Samedan, Summit III and Summit IV, the "Purchasers"), (ii) the Warrant
Agreement, dated as of March 19, 1997, by and among LDS and the Purchasers (not
including Samedan) (the "Warrant Agreement"), (iii) the Redemption Agreement,
dated as of March 19, 1997, by and among LDS and the Purchasers (not including
Samedan), (iv) the Registration Rights Agreement, dated as of March 19, 1997, by
and among LDS and the Purchasers (not including Samedan) and (v) the
Shareholders Agreement, dated as of March 19, 1997, by and among LDS, the
Purchasers (not including Samedan) and the Principal Shareholders. The documents
set forth in clauses (ii) through (v) above are sometimes collectively referred
to herein as the "Related Agreements". Unless otherwise defined herein or unless
the context otherwise requires, the capitalized terms used herein have the
meanings ascribed to them in the Agreement.
This opinion is being furnished pursuant to Section 7.5 of the Agreement.
We have examined such documents and have reviewed such questions of law and
made such other inquiries as we have deemed necessary or appropriate for the
purpose of rendering this opinion.
109
<PAGE>
In rendering this opinion, we have relied, as to matters of fact, upon the
representations and warranties of the parties set forth in the Agreement and the
Related Agreements and upon certificates of such persons and governmental
authorities. Our opinion set forth in paragraph 1 in regard to the good standing
of LDS and Logical Design Solutions International, Inc. ("LDSI") is based solely
on certificates of good standing issued by the Secretary of State of the State
of New Jersey, dated March 11, 1997. Additionally, without any independent
investigation or verification, we have assumed (i) the genuineness of the
signatures of all persons signing any documents, (ii) the authority of all
persons signing any documents, other than officers of LDS signing in their
capacity as such, (iii) that each party to the Agreement and the Related
Agreements (other than LDS) which is not an individual, has been duly organized
and is validly existing under the laws of the jurisdiction of its organization
and has full power and authority, corporate and otherwise, to execute, deliver
and perform under the Agreement and the Related Agreements, (iv) that each party
to the Agreement and the Related Agreements that is an individual is fully
competent and has the requisite capacity to enter into the Agreement and the
Related Agreements and is generally subject to the jurisdiction of the courts of
the United States, (v) the execution, delivery and performance of the Agreement
and the Related Agreements by each of the parties thereto (other than LDS) has
been duly authorized by all requisite action on the part of such other parties
and such documents have been duly executed and delivered by such other parties
and each such document is the legal, valid and binding obligation of each such
other party thereto, (vi) the authority of all governmental entities, (vii) the
truth and accuracy of all matters of fact set forth in all certificates
furnished to us, and (viii) the authenticity of all documents submitted to us as
originals and the conformity to original documents of all documents submitted to
us as certified, conformed or photostatic copies, and the authenticity of all
such latter documents.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions set forth herein, we are of the opinion that:
1. Each of LDS and LDSI is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has all requisite corporate power and authority to own its properties and to
carry on its business as presently conducted. Each of LDS and LDSI is qualified
as a corporation in good standing in each jurisdiction in which it owns or
leases real property or maintains employees, the Company having advised us that
is does not own or lease real property nor maintain employees outside of New
Jersey.
2. LDS has all necessary corporate power and has taken all necessary
corporate action required for the due authorization, execution, delivery and
performance by LDS of the Agreement and the Related Agreements and the
consummation of the transactions as contemplated therein, and for the
authorization, issuance and delivery of the 9% Senior Subordinated Debentures
due March 20, 2002 (the "Debentures") and the Warrants. The issuance of the
Debentures, the Warrants and, upon exercise of the Warrants pursuant to the
terms of the Warrant Agreement and upon payment of the exercise price therefor,
the shares underlying the Warrants (the "Warrant Shares") does not require any
further corporate action and is not subject to any statutory preemptive rights
or, except as set forth in the Agreement and the Related Agreements, right of
first refusal or similar right. The Agreement and the Related Agreements will be
valid and binding obligations of LDS enforceable in accordance with their
respective
110
<PAGE>
terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws relating to or
affecting the enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
3. No consent, approval, license or authorization of, or designation,
declaration or filing with, any court or governmental authority is required on
the part of LDS in connection with the execution, delivery and performance by
LDS of the Agreement and the Related Agreements, or in connection with the
issuance of the Debentures, the Warrants and, upon exercise of the Warrants
pursuant to the terms of the Warrant Agreement and upon payment of the exercise
price therefor, the Warrant Shares except for (i) those which have already been
granted and (ii) those which may be required under state securities or "blue
sky" laws.
4. The authorized capital stock of LDS consists of 1,500,000 shares of
Common Stock, of which 785,000 shares are validly issued and outstanding and
held of record by the persons set forth on Schedule 2.4 attached to the
Agreement. All issued and outstanding shares of capital stock of LDS are, and,
when issued in accordance with the terms of the Agreement and upon proper
exercise and payment therefor, all Warrant Shares will be, duly and validly
authorized, validly issued and fully paid and nonassessable and free from any
restrictions on transfer, except for restrictions imposed by federal or state
securities or "blue sky" laws, and except for those imposed pursuant to the
Agreement or the Related Agreements.
5. Neither the execution, delivery or performance of the Agreement and the
Related Agreements, nor the consummation of the transactions contemplated
therein, nor the offer, issuance, sale or delivery of the Debentures and the
Warrants, with or without the giving of notice, the passage of time or both,
will violate, or result in any breach of, or constitute a default under, or
result in the imposition of any encumbrance upon any asset of LDS pursuant to
any provision of its charter or by-laws, or any statute, rule or regulation, or
any contract, lease or other agreement of which we have knowledge.
6. LDS and LDSI each has all requisite corporate power and authority to
enter into the agreement and plan of merger to be entered into by LDS and LDSI
in connection with the proposed merger ("Merger Agreement") of LDSI with and
into LDS (with LDS the surviving corporation). All corporate acts and other
proceedings required to be taken by LDS and LDSI to authorize the execution of
the Merger Agreement have been duly taken.
We are not expressing any opinion with respect to any laws other than the
laws of the State of New York and the federal laws of the United States of
America.
This opinion is being furnished solely for your benefit and may not be
relied on by any other party without the express written consent of this firm.
Very truly yours,
/s/ Brown & Wood LLP
-----------------------
Brown & Wood LLP
111
<PAGE>
REDEMPTION AGREEMENT
--------------------
This Redemption Agreement (this "Agreement") is dated as of the 19th day of
March, 1997 by and among Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), and the persons set forth on Schedule 1.1 (each an
"Investor" and collectively the "Investors").
Pursuant to the terms of a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement of even date (the "Purchase Agreement"), the Investors have
acquired warrants (the "Warrants") to purchase an aggregate of 215,000 shares of
the common stock, no par value per share, of the Company. Capitalized terms used
herein and not otherwise defined in this Agreement shall have the meanings
assigned to them in the Purchase Agreement.
In consideration of the execution and deliver, of the Purchase Agreement
and the agreements set forth below, the parties agree with each other as
follows:
Section 26. Option to Sell Warrants to Company.
Upon the first to occur of: (i) the liquidation, dissolution or
winding up of the Company; (ii) the sale of all or substantially all of the
Company's assets; (iii) the merger or consolidation of the Company with any
Person, or the transfer of ownership of any voting shares of the Company to any
Person as a consequence of which transaction described in this clause (iii)
those Persons who held all of the voting shares of the Company immediately prior
to such transfer do not hold a majority of the voting shares of the Company
after the consummation of such transfer (a "Control Sale") (the items described
in clauses (i) - (iii) referred to herein collectively as a "Liquidity Event"),
or (iv) March 19, 2003, the Investors may require the Company to redeem the
Warrants then held by them on the terms set forth herein; provided, however,
that if such request is made pursuant to clause (iv), then the Warrants as to
which redemption has been requested shall be redeemed one-half on March 19,
2003, and one-half on March 19, 2004. The Company shall use its best efforts to
give the Investors not less than 30 day's advance written notice of any proposed
Liquidity Event, and, in the event that a Liquidity Event shall not occur on or
before January 15, 2003, the Company shall give Investors notice on such date
that the Investors may elect to request redemption of Warrants on March 19,
2003. Following receipt of such notice, any Investor or Investors holding an
aggregate of not less than twenty percent (20%) of the total Shares held by the
Investors may notify the Company that it or they intend to offer to the Company
any or all of the Warrants then held by them for purchase by the Company. The
Company shall promptly give notice of such intention to all other Investors who
own Shares, and any Investor may, within ten (10) days of such notice, give the
Company notice that it intends to offer to the Company any or all of the
Warrants then held by it. The Company shall repurchase all Warrants so offered
under this Agreement as set forth below. The option to sell Warrants pursuant to
this Section 1 shall be referred to as the "Option."
Section 27. Price.
a. The price to be paid by the Company for the Warrants to be sold under
the Option shall be the fair market value of the Warrant Shares issuable upon
exercise thereof, as of
112
<PAGE>
the date of such proposed repurchase. In the case of redemption requested in
connection with a Liquidity Event, fair market value of Warrant Shares shall be
the price payable to holders of shares of Common Stock in connection with such
Liquidity Event. In the case of a redemption requested pursuant to clause (iv)
of Section 1, fair market value shall be as agreed upon in good faith by the
Company and the Representative (who shall be a Person selected by the Investors
owning a majority of the Warrants to be redeemed hereunder and who shall be
hereinafter referred to as the "Representative"), taking into account, in
valuing such Warrants, all relevant facts and circumstances; provided, however,
that there shall be no discount to reflect the fact that the Warrants are
illiquid or represent a minority interest in the Company. If no such agreement
is reached within thirty (30) days after notice is given to the Company of the
Investors' exercise of the Option under clause (iv), the fair market value shall
be determined by appraisal as set forth below.
b. All appraisals shall be undertaken by two appraisers, one selected by
the Board of Directors of the Company and one selected by the Representative. No
Director who is affiliated with an Investor shall vote on the selection of the
appraiser chosen by the Company. The fair market value shall be the fair market
value arrived at by those appraisers within thirty (30) days following the
appointment of the last appraiser to be appointed. In the event that the two
appraisers agree in good faith on such fair market value within such a period of
time, such agreed value shall be used for these purposes. If the appraisers
cannot agree but their valuations are within 10% of each other, the fair market
value shall be the mean of the two valuations. If the appraisers cannot agree
and the differences in the valuations are greater than 10%, the appraisers shall
select a third appraiser who will calculate fair market value independently,
and, except as provided in the next sentence, the fair market value of the
Warrants shall be the average of the two fair market values arrived at by the
appraisers who are closest in amount. If one appraiser's valuation is the mean
of the other two valuations, such mean valuation shall be the fair market value.
In the event that the two original appraisers cannot agree upon a third
appraiser within ten (10) days following the end of the thirty (30) day period
referred to above, then the third appraiser shall be appointed by the American
Arbitration Association in Boston, Massachusetts. The expenses of the appraiser
chosen by the Company will be borne by it, the expenses of the appraiser chosen
by the Investors will be borne by them, pro rata based on the number of Warrants
being redeemed, and the expenses of the third appraiser will be borne 50% by the
Company and 50% by the Investors, pro rata based on the number of Warrants being
redeemed; provided, however that in the event any Investor previously offering
his Warrants for repurchase shall notify the Company of its election not to sell
any or all of its Warrants, such Investor will be obligated to pay a portion of
the expenses of the third appraiser otherwise payable by the Company equal to a
fraction, the numerator of which is the number of Warrants such Investor
originally elected to be redeemed and the denominator of which is the total
number of Warrants the Investors requested to be redeemed.
Section 28. Payment.
a. Within fifteen (15) days following the determination of fair market
value, as provided above, the Company shall purchase the Warrants tendered to it
at the price established
113
<PAGE>
by this Agreement (the "Redemption Price"), and the Investors shall deliver to
the Company, upon receipt of payment therefor, the certificates for the Warrants
duly endorsed by them for transfer.
b. Payment shall be made by check or wire transfer of funds to such bank
account as each Investor shall direct.
Section 29. Termination of Option. The obligations of the Company to
purchase the Warrants as provided in this Agreement shall terminate immediately
prior to the consummation of a Liquidity Event.
Section 30. Notices. All notices or other communications required or
permitted to be delivered hereunder shall be in writing signed by the party
giving the notice and sent by telecopier, express delivery service, or regular
or certified mail to the address specified in the Purchase Agreement.
Section 31. Entire Agreement. This Agreement and the agreements referred to
herein constitute the entire agreement of the parties with respect to the
matters contemplated herein. This Agreement and such other agreements supersede
any and all prior understandings as to the subject matter of this Agreement.
Section 32. Amendments, Waivers and Consents. Any provision in this
Agreement to the contrary notwithstanding, changes in or additions to this
Agreement may be made, and compliance with any covenant or provision herein set
forth may be omitted or waived, if the Company shall obtain consent thereto in
writing from Persons holding an aggregate of at least a majority of the Warrants
owned by the Investors.
Section 33. Binding Effect; Assignment. This Agreement shall be binding
upon and inure to the benefit of the successors and assigns of the respective
parties hereto.
Section 34. General. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement. In this Agreement the singular includes the
plural, the plural the singular, the masculine gender includes the neuter,
masculine and feminine genders. This Agreement shall be governed by and
construed under the laws of The Commonwealth of Massachusetts.
Section 35. Severability. If any provision of this Agreement shall be found
by any court of competent jurisdiction to be invalid or unenforceable, the
parties hereby waive such provision to the extent that it is found to be invalid
or unenforceable. Such provision shall, to the maximum extent allowable by law,
be modified by such court so that it becomes enforceable, and, as modified,
shall be enforced as any other provision hereof, with all the other provisions
hereof continuing in full force and effect.
114
<PAGE>
Section 36. Counterparts. This Agreement may be executed in counterparts,
all of which together shall constitute one and the same instrument.
******
115
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
------------------------------------
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
its General Partner
By: /s/ Kevin Mohan
------------------------------------
General Partner
SUMMIT INVESTORS, L.P.
By: /s/ Kevin Mohan
------------------------------------
Authorized Signatory
/s/ Paul F. Lozier
---------------------
Paul F. Lozier
116
<PAGE>
SCHEDULE 1.1
------------
Investors
- ---------
Name and Address
- ----------------
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
117
<PAGE>
EXECUTION COPY
SHAREHOLDERS AGREEMENT
AGREEMENT, made as of the 19th day of March, 1997, by and among Logical
Design Solutions, Inc., a New Jersey corporation (the "Company"), Mary Kay
Brooks, Darren Bryden (individually, a "Management Shareholder" and
collectively, the "Management Shareholders"), and Summit Ventures IV, L.P.
"Summit Investors III, L.P. and Paul F. Lozier (individually an "Investor" and
collectively, the "Investors" and, together with the Management Shareholders,
the "Shareholders").
WHEREAS, the Investors are acquiring 9% Senior Subordinated Debentures and
Warrants (the "Warrants") to purchase an aggregate of 215,000 shares of common
stock, no par value per share, of the Company (the "Common Stock"), pursuant to
the terms of a 9% Senior Subordinated Debenture and Warrant Purchase Agreement
dated as of the date hereof among the Company, the Investors and certain
shareholders of the Company (the "Purchase Agreement");
WHEREAS, it is a condition to the obligations of the parties under the
Purchase Agreement that this Agreement be executed by the parties hereto, and
the parties are willing to execute this Agreement and to be bound by the
provisions hereof.
NOW, THEREFORE, in consideration of the foregoing, the agreements set forth
below, and the parties' desire to provide for continuity of ownership of the
Company to further the interests of the Company and its present and future
shareholders, the parties hereby agree with each other as follows:
Section 37. Definition of Shares. As used in this Agreement, "Shares" shall
mean and include all shares of the Common Stock and other equity securities of
the Company now owned or hereafter acquired by a Shareholder, including, without
limitation, the shares of Common Stock issuable upon exercise of the Warrants.
Other terms used as defined terms herein and not otherwise defined shall have
the meanings set forth in the Purchase Agreement.
Prohibited Transfers. No Management Shareholder shall sell, assign,
transfer, pledge, hypothecate, mortgage, encumber or dispose of all or any of
his or her Shares except in compliance with the terms of this Agreement.
Notwithstanding anything to the contrary contained in this Agreement, (a) a
Management Shareholder may transfer without the necessity of prior approval all
or any of his or her Shares by way of gift to his or her spouse, to any of his
or her lineal descendants or ancestors, or to any trust for the benefit of any
one or more of the Shareholder, his or her spouse, or his or her lineal
descendants or ancestors, and (b) a Shareholder may transfer all or any of his
or her Shares by will or the laws of descent and distribution; provided that any
such transferee under clause (a) or (b) of this Section 2 (referred to herein as
"Permitted Transferees") shall agree in writing with the Company and the other
Shareholders, as a condition to such transfer, to be bound by all of the
provisions of this Agreement to the same extent as if such transferee were the
Management Shareholder transferring such Shares.
118
<PAGE>
Right of First Refusal on Dispositions.
--------------------------------------
a. If at any time a Management Shareholder (a "Selling Management
Shareholder") desires to sell or otherwise transfer all or any part of his or
her Shares pursuant to a bona fide offer from a third party (the "Proposed
Transferee"), the Selling Management Shareholder shall submit a written offer
(the "Offer") by delivering the Offer to the Company and the non-selling
Shareholders (the "Other Shareholders") to sell such Shares (the "Offered
Shares") to the Company and the Other Shareholders on terms and conditions,
including price, not less favorable than those on which the Selling Management
Shareholder proposes to sell such Offered Shares to the Proposed Transferee. The
Offer shall disclose the identity of the Proposed Transferee, the number of
Offered Shares proposed to be sold, the total number of Shares owned by the
Selling Management Shareholder, the terms and conditions, including price, of
the proposed sale, and any other material facts relating to the proposed sale.
The Offer shall further state (i) that the Company and the Other Shareholders
may acquire, in accordance with the provisions of this Agreement, any of the
Offered Shares for the price and upon the other terms and conditions set forth
therein and (ii), if all such Offered Shares are not purchased by the Company
and the Other Shareholders, the Other Shareholders who have not purchased any
such Offered Shares pursuant to this Section 3 may exercise their rights
provided pursuant to Section 4 hereof.
b. The Company shall have the first right to purchase the Offered
Shares. If the Company desires to purchase all or any part of the Offered
Shares, it shall communicate in writing its election to purchase any of the
Offered Shares to the Selling Management Shareholder and the Other Shareholders,
which communication shall state the number of Offered Shares that the Company
desires to purchase and the number of Offered Shares, if any, remaining for
purchase by the Other Shareholders pursuant to Section (c) below, and shall be
given within 20 days of the date the Offer was made.
c. If the Company does not elect to purchase all of the Offered Shares
within the time period specified above, each Other Shareholder shall have the
right to purchase that number of remaining Offered Shares as shall be equal to
the number of such remaining Offered Shares multiplied by a percentage equal to
two times the percentage of Shares (calculated on a fully diluted basis) owned
by such Other Shareholder (or issuable to such Other Shareholder upon exercise
of Warrants owned by such Other Shareholder). The percentage of Shares owned on
a fully diluted basis by any Other Shareholder shall be calculated as if all
options and Warrants which are then exercisable have been exercised in full. The
amount of such Offered Shares that each Other Shareholder is entitled to
purchase under this Section 3(c) shall be referred to as its "Pro Rata
Fraction."
d. Those Other Shareholders who desire to purchase all or any part of
the remaining Offered Shares shall communicate in writing their election to
purchase to the Selling Management Shareholder, which communication shall state
the number of remaining Offered Shares said Other Shareholders desire to
purchase and shall be provided to the Selling Management Shareholder within 30
days of the date the Offer was made. Such communication, together with the
communication of the Company specified above, shall, when taken in conjunction
with the Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale and purchase of such Offered Shares. Sales of such
Offered Shares to be
119
<PAGE>
sold to the Company, the Other Shareholders pursuant to this Section 3 shall be
made at the offices of the Company within 60 days following the date the Offer
was made.
e. To the extent the Company and the Other Shareholders do not purchase
all the Offered Shares, then all, but not fewer than all, of the remaining
Offered Shares may be sold by the Selling Management Shareholder at any time
within 120 days after the date the Offer was made, subject to the provisions of
Section 4. Any such sale shall be to the Proposed Transferee, at not less than
the price and upon other terms and conditions, if any, not more favorable to the
Proposed Transferee than those specified in the Offer. If the Offered Shares are
not sold within such 120-day period, they shall continue to be subject to the
requirements of a prior offer pursuant to this Section 3, and may not be
transferred except in compliance with the provisions of this Section 3. If
Offered Shares are sold pursuant to this Section 3 to any purchaser who is not a
party to this Agreement, the purchaser of such Offered Shares shall execute a
counterpart of this Agreement as a precondition of the purchase of such Offered
Shares and any Offered Shares sold to such purchaser shall continue to be
subject to the provisions of this Agreement.
f. In the event a Management Shareholder is required to transfer Shares
pursuant to a court order, decree or judgment, or pursuant to a settlement of a
court proceeding such transfer shall be deemed to be a sale for purposes of this
Section 3, and shall entitle the Company and the Other Shareholders to exercise
their right of first refusal with respect to such transfer. In any event, the
Management Shareholder who is required to make such transfer shall provide an
Offer as herein provided. The price at which the Shares may be purchased
pursuant to such Offer shall be the price as set by the court which issued such
order, decree or judgment, or the price as set by the parties to such
settlement. If a price is not determined by such court, or by the parties to
such settlement, then the price shall be determined pursuant to an appraisal
conducted in accordance with the provisions of Section 2 of the Redemption
Agreement, with one appraiser chosen by the Management Shareholder who is making
such transfer, and the other appraiser chosen by the Company.
Right of Participation in Sales.
-------------------------------
g. If at any time following compliance with the provisions of Section 3
(if applicable), any Selling Management Shareholder desires to transfer all or
any part of the Shares owned by him or it to any third party (not including the
Company), then each Other Shareholder (other than those who have elected to
purchase Shares pursuant to Section 3) shall have the right to sell to the third
party, as a condition to such sale by the Selling Management Shareholder, at the
same price per share and on the same terms and conditions as involved in such
sale by the Selling Management Shareholder, a pro rata portion of the amount of
Shares proposed to be sold to the third party; provided, however, that such
right shall not apply to any sale or transfer by a Management Shareholder to the
Company. The "pro rata portion" of Shares which the Other Shareholder shall be
entitled to sell to the third party shall be that number of Shares as shall
equal the number of Shares proposed to be sold to the third party multiplied by
a fraction, the numerator of which is the aggregate of all shares of Common
Stock which are then held by the Other Shareholder wishing to participate in the
sale or issuable upon exercise of Warrants held by such Other Shareholder, and
the denominator of which is the aggregate of all shares of Common Stock which
are then held by all Other Shareholders wishing to participate in any sale
120
<PAGE>
under this Section 4 or issuable upon exercise of Warrants held by such Other
Shareholders, including the Selling Management Shareholder.
h. If the Selling Management Shareholder wishes to make a sale to a
third party which is subject to this Section 4, the Selling Management
Shareholder shall, after complying with the provisions of Section 3, give to
each Other Shareholder notice of such proposed sale, and stating that all Shares
were not purchased pursuant to the Offer as discussed in Section 3. Such notice
shall be given at least 20 days prior to the date of the proposed sale to the
third party. Each Other Shareholder wishing to so participate in any sale under
this Section 4 shall notify the selling Management Shareholder in writing of
such intention within 15 days after such Other Shareholder's receipt of the
notice described in the preceding sentence.
i. The Selling Management Shareholder and each participating Other
Shareholder shall sell to the third party all, or at the option of the third
party, any part of the Shares proposed to be sold by them at not less than the
price and upon other terms and conditions, if any, not more favorable to the
third party than those in the notice provided by the Selling Management
Shareholder under subparagraph (b) above; provided, however, that any purchase
of less than all of such Shares by the third party shall be made from the
Selling Management Shareholder and each participating Other Shareholder pro rata
based upon the relative number of the Shares that the Selling Management
Shareholder and each participating Other Shareholder is otherwise entitled to
sell pursuant to Section 4(a).
j. If any Shares are sold pursuant to this Section 4 to any purchaser
who is not a party to this Agreement, the purchaser of such Shares shall execute
a counterpart of this Agreement as a precondition to the purchase of such Shares
and such Shares shall continue to be subject to the provisions of this
Agreement.
Election of Directors.
---------------------
k. During the term of this Agreement, at each annual meeting of the
shareholders of the Company, and at each special meeting of the shareholders of
the Company called for the purpose of electing directors of the Company, and at
any time at which shareholders of the Company shall have the right to, or shall,
vote for directors of the Company, then, and in each event, the Shareholders
shall vote all Shares owned by them for the election of a Board of Directors
consisting of not more than seven directors, designated in the manner designated
below (subject to adjustment in accordance with the provisions of subparagraph
(b) of this Section 5):
i. two directors shall be designated by Summit Ventures IV, L.P. (so
long as it and its affiliates shall own or have the right to acquire at least
331/3% of the Shares which it owns or has the right to acquire on the date
hereof), one of which designees shall initially be Kevin P. Mohan, with the
second such designee to be named by Summit Ventures IV, L.P. at such time as it
deems appropriate;
ii. one director shall be Mary Kay Brooks, (so long as she and her
permitted transferees described in Section 2 shall continue to hold at least
331/3% of the shares of Common Stock owned by her on the date hereof), who shall
serve as chair; and
121
<PAGE>
iii. four directors shall be designated by holders of a majority of
the shares of Common Stock outstanding on a fully diluted basis.
l. Notwithstanding the provisions of subparagraph (a) of this Section 5,
if there shall occur an Event of Default under the Purchase Agreement, then upon
the date of occurrence of such Event of Default, and upon the first day of each
successive two fiscal quarter period following the occurrence of such Event of
Default (commencing with the first day of the second full fiscal quarter after
such Event of Default), the number of Directors designated by Summit Ventures
IV, L.P., designated pursuant to Section 5(a)(i) shall be increased by one
additional Director, and the total number of Directors set forth in Section 5(a)
shall be increased accordingly. Once the number of Directors designated pursuant
to Section 5(a)(i) and the size of the Board of Directors have been increased
pursuant to this Section 5(b), they shall not thereafter be reduced upon waiver
of such Event of Default; provided, however, that with respect to any Event of
Default resulting from a breach of Section 4.10 of the Purchase Agreement, if
subsequent to such Event of Default the Company achieves Consolidated Net Income
Before Taxes of at least $ 1.00 during any twelve (12 month) period commencing
with the last day of the second fiscal quarter ending subsequent to the
occurrence of such Event of Default, then on one occasion such Event of Default
shall be considered cured and the number of Directors which can be designated by
Summit Ventures IV, L.P. shall be reduced (and such additional designated
Director or Directors shall resign) to the original number set forth in Section
5(a) hereof.
Insurance. The Company shall at all times maintain for the benefit of its
officers and directors liability insurance in scope and amount, and from an
insurer, reasonably acceptable to the Investors; provided, however, that the
Company shall not be obligated to maintain such insurance if in the good faith
judgment of its Board of Directors such insurance is not available at a
reasonable cost.
Section 38. Compensation Committee. There shall be established at all times
during the term of this Agreement a Compensation Committee of the Board of
Directors (the "Compensation Committee"), one member of which shall be such one
of the directors designated pursuant to Section 5(a)(i) as shall be specified by
Summit Ventures IV, L.P. The Compensation Committee will determine the
compensation of all senior employees and consultants of the Company (including
salary, bonus, equity participation and benefits) consistent with compensation
of companies similar to the Company; provided that no member of the Compensation
Committee may vote on his or her own compensation. The compensation of senior
employees and consultants shall be reviewed by the Compensation Committee on an
annual basis, and the decision by a majority of the members of the Compensation
Committee will control the Committee's actions. Within thirty (30) days after
the date hereof the Compensation Committee shall adopt a statement of policy
concerning compensation of senior employees, which statement shall be reasonably
acceptable to a majority of the committee members, including the director
designated pursuant to Section 5(a)(i). Any decision of the Committee involving
the grant of options (including the pricing and other terms thereof, and prior
to the adoption of the statement of policy referenced in the preceding sentence,
any increase in compensation paid to a member of senior management, such
majority must include a director designated pursuant to Section 5(a)(i);
122
<PAGE>
Section 39. Term. This Agreement shall terminate on the earlier to occur of
(a) immediately prior to consummation of the first Qualified Public Offering,
(b) the tenth anniversary of the date of this Agreement or (c) all Warrants have
been redeemed by the Company pursuant to Paragraph 1 of the Redemption
Agreement.
Section 40. Preemptive Rights. a.The Company hereby grants to each Investor
so long as it shall own, of record or beneficially, or have the right to acquire
from the Company, any shares of Common Stock, the right to purchase all or part
of its pro rata share of New Securities (as defined in subparagraph (b)) which
the Company, from time to time, proposes to sell and issue. A Shareholder's pro
rata share, for purposes of this preemptive right, is the ratio of the number of
shares of Common Stock which such Shareholder owns or has the right to acquire
from the Company to the total number of shares of Common Stock then outstanding
(giving effect to the exercise of all Warrants then outstanding). The
Shareholders shall have a right of over-allotment pursuant to this Section 9
such that to the extent a Shareholder does not exercise its preemptive right in
full hereunder, such additional shares of New Securities which such Shareholder
did not purchase may be purchased by the other Shareholders in proportion to the
total number of shares of Common Stock which each such other Shareholder owns or
has the right to acquire from the Company compared to the total number of shares
of Common Stock which all such other Investors own or have the right to acquire
from the Company.
b. "New Securities" shall mean any capital stock of the Company, whether
now authorized or not, and rights, options or warrants to purchase capital
stock, and securities of any type whatsoever that are, or may become,
convertible into or exchangeable for capital stock, issued on or after the date
hereof; provided that the term "New Securities" does not include (i) Common
Stock issued as a stock dividend to holders of Common Stock or upon any stock
split, subdivision or combination of shares of Common Stock, (ii) the aggregate
number of shares of Common Stock issuable upon exercise of options permitted
under the Purchase Agreement, (iii) the Warrant Shares, (iv) Common Stock issued
in connection with a Qualified Public Offering, and (v) Common Stock issued in
connection with an acquisition, merger or other transaction which has been
approved by vote of the Board of Directors, including the affirmative vote of
any director designated pursuant to Section 5(a)(i) and (vi) capital stock and
rights, options or warrants to purchase and securities of any type whatsoever
which are convertible into or exchangeable for capital stock which are
outstanding on the date hereof.
c. In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Shareholder written notice of its intention,
describing the type of New Securities and the price and the terms upon which the
Company proposes to issue the same. Each Shareholder shall have 10 business days
from the date of receipt of any such notice to agree to purchase up to the
Shareholder's pro rata share of such New Securities (any over-allotment amount
pursuant to the operation of subparagraph (a) hereof) for the price and upon the
terms specified in the notice by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased.
d. In the event any Shareholder fails to exercise in full its preemptive
right (after giving effect to the over-allotment provision of subparagraph (a)
hereof), the Company shall have 90 days thereafter to sell the New Securities
with respect to which the Shareholder's option was not exercised, at a price and
upon terms no more favorable to the purchasers thereof than
123
<PAGE>
specified in the Company's notice. To the extent the Company does not sell all
the New Securities without first again offering such securities to the
Shareholders in the manner provided above.
e. The rights granted to the Shareholders under this Section 9 shall
expire immediately prior to, and shall not apply in connection with, the
consummation of the first Qualified Public Offering.
Section 41. Specific Enforcement. Each Shareholder expressly agrees that
the Other Shareholders and the Company may be irreparably damaged if this
Agreement is not specifically enforced. Upon a breach or threatened breach of
the terms, covenants and/or conditions of this Agreement by any Shareholder, the
Other Shareholders and the Company shall, in addition to all other remedies,
each be entitled to apply for a temporary or permanent injunction, and/or a
decree for specific performance, in accordance with the provisions hereof.
Section 42. Legend. Each certificate evidencing any of the Shares now owned
or hereafter acquired by the Shareholders shall bear in addition to any other
legends required by other agreements or by law a legend substantially as
follows:
"Any sale, assignment, transfer or other disposition of the shares
represented by this certificate is restricted by, and subject to, the terms
and provisions of a certain Shareholders' Agreement dated as of March 19,
1997. A copy of said Agreement is on file with the Secretary of the
Corporation."
Section 43. Notices. Notices given hereunder shall be deemed to have been
duly given on the date of personal delivery or on the date of postmark if mailed
by certified or registered mail, return receipt requested, to the party being
notified at his or its address specified on Schedule I hereto or such other
address as the addressee may subsequently notify the other parties of in
writing.
Section 44. Entire Agreement and Amendments. This Agreement constitutes the
entire agreement of the parties with respect to the subject matter hereof and
neither this Agreement nor any provision hereof may be waived, modified, amended
or terminated except by a written agreement signed by the parties hereto;
provided, however, that Investors owning at least a majority of the Shares owned
by all Investors may effect any such waiver, modification, amendment or
termination on behalf of all of the Investors and Management Shareholders owning
at least a majority of the Shares owned by all Management Shareholders may
effect any such waiver, modification, amendment or termination on behalf of all
of the Management Shareholders. Each of the Shareholders represents that he or
it is not a party to any other agreement which would prevent him or it from
performing his or its obligations hereunder. No waiver of any breach or default
hereunder shall be considered valid unless in writing, and no such waiver shall
be deemed a waiver of any subsequent breach or default of the same or similar
nature.
Section 45. Governing Law; Successors and Assigns. This Agreement shall be
governed by the internal laws of the State of New Jersey without giving effect
to the conflicts of laws
124
<PAGE>
principles thereof and, except as otherwise provided herein, shall be binding
upon the heirs, personal representatives, executors, administrators, successors
and assigns of the parties. Notwithstanding the foregoing, in the event an
Investor transfers Shares to an unaffiliated Person, such transferee shall have
no rights under this Agreement, other than those granted under Section 9 of this
Agreement, and shall not be bound by any of the provisions of this Agreement.
Section 46. Severability. If any provision of this Agreement shall be held
to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
Section 47. Captions. Captions are for convenience only and are not deemed
to be part of this Agreement.
Section 48. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
125
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as an instrument under
SEAL as of the date and year first above written.
MANAGEMENT SHAREHOLDERS: COMPANY:
/s/ Mary Kay Brooks LOGICAL DESIGN SOLUTIONS, INC.
- ---------------------------------- By: /s/ Mary Kay Brooks
Mary Kay Brooks ---------------------------
Name: Mary Kay Brooks
Title: President
/s/ Darren Bryden INVESTORS:
- ----------------------------------
Darren Bryden
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps Woodsum & Co. IV,
its General Partner
By: /s/ Kevin Mohan
---------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By: /s/ Kevin Mohan
---------------------------
Authorized Signatory
/s/ Paul F. Lozier
-------------------------------
Paul F. Lozier
126
<PAGE>
SCHEDULE 1
----------
Company
- -------
Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Attn: President
Management Shareholders
- -----------------------
Mary Kay Brooks
c/o Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Darren Bryden
c/o Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Investors
- ---------
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
127
<PAGE>
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, made as of the 19th day of March, 1997, by and among LOGICAL
DESIGN SOLUTIONS, INC., a New Jersey corporation (the "Company"), and those
persons set forth on Schedule I as Investors (each an "Investor" and
collectively the "Investors").
WHEREAS, the Investors are acquiring warrants ("Warrants") to acquire an
aggregate of 215,000 Shares of Common Stock, no par value per share, of the
Company (the "Common Stock"), pursuant to the terms of a 9% Senior Subordinated
Debenture and Warrant Purchase Agreement dated as of the date hereof among the
Company, the Investors and certain shareholders of the Company (the "Purchase
Agreement"); and
WHEREAS, it is a condition to the obligations of the Investors under the
Purchase Agreement that this Agreement be executed by the parties hereto in
order to provide the Investors with certain registration rights with respect to
the shares of Common Stock issuable upon exercise of the Warrants being acquired
by the Investors under the Purchase Agreement or otherwise acquired by the
Investors, and the parties are willing to execute this Agreement and to be bound
by the provisions hereof,
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
Section 49. Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Act" means the Securities Act of 1933, as amended, or any successor
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Commission" means the Securities and Exchange Commission, or any other
Federal agency at the time administering the Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Holder" means the person who is then the record owner of Registrable
Securities which have not been sold to the public.
"Initiating Holders" means any Investors and their assignees who in the
aggregate are holders of at least twenty-five percent (25%) of the outstanding
Registrable Securities held by the Investors and their assignees.
"Registrable Securities" means all shares of Common Stock now owned or
hereafter acquired by any Investor.
128
<PAGE>
EXECUTION COPY
The term "register" means to register under the Act and applicable state
securities laws for the purpose of effecting a public sale of securities.
"Registration Expenses" means all expenses incurred by the Company in
compliance with Sections 2, 3 or 5 hereof, including, without limitation, all
registration and filing fees, printing expenses, transfer taxes, fees and
disbursements of counsel for the Company, blue-sky fees and expenses, fees of
transfer agents and registrars, reasonable fees and disbursements of one counsel
for all the selling Holders, and the expense of any special audits incident to
or required by any such registration.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale of Registrable Securities.
Section 50. Requested Registrations
a. If at any time after December 31, 1997 the Company shall receive from
one or more Initiating Holders a written request that the Company effect the
registration of Registrable Securities representing at least twenty-five percent
(25%) of the Registrable Securities held by or issuable to all the Investors (or
any lesser percentage if the reasonably anticipated aggregate price to the
public of the Registrable Securities to be included in such registration would
exceed $ 10,000,000), in connection with a firm commitment underwriting, the
Company will:
i. promptly give written notice of the proposed registration to all
other Holders; and
ii. as soon as practicable, use all commercially reasonable efforts to
effect such registration as may be so requested and as would permit or
facilitate the sale and distribution of such portion of such Registrable
Securities as are specified in such request, together with such portion of the
Registrable Securities of any Holder or Holders joining in such request as are
specified in a written request given within thirty days after receipt of such
written notice from the Company. If the underwriter managing the offering
advises the Holders who have requested inclusion of their Registrable Securities
in such registration that marketing considerations require a limitation on the
number of shares offered, such limitation shall be imposed, subject to the
immediately following sentence, pro rata among such Holders who requested
inclusion of Registrable Securities in such registration according to the number
of Registrable Securities then held by such Holders. Neither the Company nor any
other shareholder may include shares in a registration effected under this
Section 2(a) without the consent of the Initiating Holders holding a majority of
the Registrable Securities sought to be included in such registration by the
Initiating Holders if the inclusion of shares by the Company or the other
shareholders would limit the number of Registrable Securities sought to be
included by the Initiating Holders or reduce the offering price thereof. The
Investors may initiate two registrations pursuant to this Section 2(a). No
registration initiated by the Initiating Holders hereunder shall count as a
registration under this Section 2(a) unless and until it shall have been
declared effective (an "Effective Registration") and the Initiating Holders
shall have sold all of the Registrable Securities included in such registration.
129
<PAGE>
EXECUTION COPY
b. The underwriter of any underwriting requested under this Section 2
shall be selected by the Company; provided that such underwriter must be
reasonably acceptable to the Holders of a majority of the Registrable Securities
included therein.
Section 51. "Piggy Back" Registrations.
a. If the Company shall determine to register any of its securities,
either for its own account or the account of a security holder or holders
exercising their registration rights (subject to the provisions of Section 2),
other than a registration relating solely to employee benefit plans or a
registration on any registration form which does not permit secondary sales or
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable Securities
or pursuant to Form S-4, the Company will:
i. Promptly give to each Holder of Registrable Securities written
notice thereof (which shall include the number of shares the Company or other
security holder proposes to register and, if known, the name of the proposed
underwriter); and
ii. Use its best efforts to include in such registration all the
Registrable Securities specified in a written request or requests, made by any
Holder within twenty (20) days after the date of delivery of the written notice
from the Company described in clause (i) above. If the underwriter advises the
Company that marketing considerations require a limitation on the number of
shares offered pursuant to any registration statement, then the Company may
offer all of the securities it proposes to register for its own account and such
limitation on any remaining securities that may, in the opinion of the
underwriter, be sold will be imposed: (a) first, so as to exclude all
Registrable Securities of Holders other than the Investors and their assignees;
and (b) thereafter, pro rata among the Holders who requested inclusion of
Registrable Securities in such registration according to the number of
Registrable Securities then held by such Holders.
b. The Company shall select the underwriter for an offering made
pursuant to this Section 3, but shall not be required to register under the
Exchange Act prior to such date.
Section 52. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 2, 3 or 5 shall be paid by the Company. All Selling Expenses incurred in
connection with any such registration, qualification or compliance shall be
borne by the holders of the securities registered, pro rata on the basis of the
number of their shares so registered.
Section 53. Registration on Form S-3. The Company shall use its best
efforts to qualify for registration on Form S-3 or any comparable or successor
form; and to that end the Company shall register (whether or not required by law
to do so) the Common Stock under the Exchange Act in accordance with the
provisions of the Exchange Act following the effective date of the first
registration of any securities of the Company on Form S- I or any comparable or
successor form, but shall not be required to register under the Exchange Act
prior to such date. After the Company has qualified for the use of Form S-3, in
addition to the rights contained in the
130
<PAGE>
EXECUTION COPY
foregoing provisions of this Agreement, the Holders of Registrable Securities
shall have the right to request registrations on Form S-3 (such requests shall
be in writing and shall state the number of shares of Registrable Securities to
be disposed of and the intended methods of disposition of such shares by such
Holder or Holders); provided that the Company shall not be obligated to effect
any such registration pursuant to this Section 5 more than once in any twelve
month period, and in no event shall the Company be required to register shares
with an aggregate market value of less than $5,000,000.
Section 54. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep each
Holder of Registrable Securities included in such registration advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will do the following for the benefit of
such Holders:
a. Keep such registration effective for a period of 120 days or until
the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs, and amend or
supplement such registration statement and the prospectus contained therein from
time to time to the extent necessary to comply with the Act and applicable state
securities laws;
b. Use its best efforts to register or qualify the Registrable
Securities covered by such registration under the applicable securities or "blue
sky" laws of such jurisdictions as the selling shareholders may reasonably
request; provided, that the Company shall not be obligated to qualify to do
business in any jurisdiction where it is not then so qualified or otherwise
required to be so qualified or to take any action which would subject it to the
service of process in suits other than those arising out of such registration;
c. Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
d. In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 2 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and is entered into by the Holder and provided
further that, if the underwriter so requests, the underwriting agreement will
contain customary contribution provisions on the part of the Company;
e. To the extent then permitted under applicable professional guidelines
and standards, use its best efforts to obtain a comfort letter from the
Company's independent public accountants in customary form and covering such
matters of the type customarily covered by comfort letters and an opinion from
the Company's counsel in customary form and covering such matters of the type
customarily covered in a public issuance of securities, in each case addressed
to the Holders, and provide copies thereof to the Holders; and
131
<PAGE>
EXECUTION COPY
f. Permit the counsel to the selling shareholders whose expenses are
being paid pursuant to Section 4 hereof to inspect and copy such corporate
documents as he may reasonably request.
Section 55. Indemnification.
a. The Company will, and hereby does, indemnify each Holder, each of its
officers, directors and partners, and each person controlling such Holder within
the meaning of the Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls such underwriter within the meaning of the
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any final prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any 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 any material violation by the Company of the Act or
the Exchange Act or securities act of any state or any rule or regulation
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification or
compliance, and will reimburse each such Holder, each of its officers, directors
and partners, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, whether or not resulting in any
liability, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) based upon written information furnished to the Company by
such Holder or underwriter and stated to be specifically for use therein.
b. Each Holder will, if Registrable Securities held by him are included
in the securities as to which such registration, qualification or compliance is
being effected, indemnify the Company, each of its directors and officers and
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of the Act and the rules and regulations thereunder, each
other such Holder and each of their officers, directors and partners, and each
person controlling such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, each person controlling the Company,
each underwriter and each person who controls any such underwriter, each Holder
and each person controlling such Holder, and their respective directors,
officers, partners, persons, underwriters and control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage,
132
<PAGE>
EXECUTION COPY
liability or action, whether or not resulting in liability, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and stated to be specifically for use therein; provided, however, that the
obligations of each Holder hereunder shall be limited to an amount equal to the
net proceeds received by such Holder upon sale of his securities.
c. Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Section 7 (except and to the
extent the Indemnifying Party has been prejudiced as a consequence thereof). The
Indemnifying Party will be entitled to participate in, and to the extent that it
may elect by written notice delivered to the Indemnified Party promptly after
receiving the aforesaid notice from such Indemnified Party, at its expense to
assume, the defense of any such claim or any litigation resulting therefrom,
with counsel reasonably satisfactory to such Indemnified Party, provided that
the Indemnified Party may participate in such defense at its expense,
notwithstanding the assumption of such defense by the Indemnifying Party, and
provided, further, that if the defendants in any such action shall include both
the Indemnified Party and the Indemnifying Party and the Indemnified Party shall
have reasonably concluded that there may be legal defenses available to it
and/or other Indemnified Parties which are different from or additional to those
available to the Indemnifying Party, the Indemnified Party or Parties shall have
the right to select separate counsel to assert such legal defenses and to
otherwise participate in the defense of such action on behalf of such
Indemnified Party or Parties and the fees and expenses of such counsel shall be
paid by the Indemnifying Party. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall (i) furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom and
(ii) shall reasonably assist the Indemnifying Party in any such defense,
provided that the Indemnified Party shall not be required to expend its funds in
connection with such assistance.
d. No Holder shall be required to participate in a registration pursuant
to which it would be required to execute an underwriting agreement in connection
with a registration effected under Section 2 or 3 which imposes indemnification
or contribution obligations on such Holder more onerous than those imposed
hereunder; provided, however, that the Company shall not be deemed to breach the
provisions of Section 2 or 3 if a Holder is not permitted to participate in a
registration on account of his refusal to execute an underwriting agreement on
the basis of this subsection (d).
133
<PAGE>
EXECUTION COPY
Section 56. Information by Holder Each Holder of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Agreement or otherwise required by applicable state or federal securities
laws.
Section 57. Limitations on Registration Rights. From and after the date of
this Agreement, the Company shall not, without the prior written consent of the
Investors, enter into any agreement with any holder or prospective holder of any
securities of the Company which would give any such holder or prospective holder
the right to require the Company, upon any registration of any of its
securities, to include, among the securities which the Company is then
registering, securities owned by such holder, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of its securities will
not limit the number of Registrable Securities sought to be included by the
Holders of Registrable Securities.
Section 58. Exception to Registration. The Company shall not be required to
effect a registration under this Agreement if (i) in the written opinion of
counsel for the Company, which counsel and the opinion so rendered shall be
reasonably acceptable to the Holders of Registrable Securities, such Holders may
sell without registration under the Act all Registrable Securities for which
they requested registration under the provisions of the Act and in the manner
and in the quantity in which the Registrable Securities were proposed to be
sold, or (ii) the Company shall have obtained from the Commission a "no-action"
letter to that effect; provided that this Section 10 shall not apply to sales
made under Rule 144(k) or any successor rule promulgated by the Commission until
after the effective date of the Company's initial registration of shares under
the Act or (iii) if the Company determines in its good faith judgment that the
use of any prospectus would require the disclosure of material information that
the Company has a bona fide business purpose for preserving as confidential or
the disclosure of which would impede the Company's ability to consummate a
transaction, and that the Company is not otherwise required by applicable
securities laws or regulations to disclose, upon written notice of such
determination by the Company, the rights of the Holders to offer, sell or
distribute any Registrable Securities or to require the Company to take action
with respect to the registration or sale of any Registrable Securities pursuant
to this Agreement shall be suspended until the date upon which the Company
notifies the Holders in writing (the "Suspension Termination Notice") that
suspension of such rights for the grounds set forth in this paragraph is no
longer necessary, and the Company agrees to give such notice as promptly as
practicable following the date that such suspension of rights is no longer
necessary (but in any event any such suspension shall be effective for a period
not in excess of 60 consecutive days and for no more than 180 days in any
calendar year). If the Company shall give any such notice, the time periods set
forth in Section 2 above shall be extended by the number of days during which
the period from and including the date of the giving of such notice of
suspension to and including the date the Company delivers the Suspension
Termination Notice. Notwithstanding the foregoing, in no event shall the
provisions of this Section 10 be construed to preclude a Holder of Registrable
Securities from exercising
134
<PAGE>
EXECUTION COPY
rights under Section 3 for a period of three years after the effective date of
the Company's initial registration of shares under the Act.
The Initiating Investors each agree not to offer, sell, contract to sell or
otherwise dispose of any Registrable Securities, or any securities convertible
into or exchangeable or excisable for such securities during any period when,
and to the same extent that, any officers of the Company are restricted in
connection with an offering of securities by the Company. The Company shall give
reasonable advance notice to each such Initiating Investor of such offering.
Section 59. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of restricted securities (as that term is used in Rule 144 under the Act)
to the public without registration, the Company agrees to:
a. make and keep public information available as those terms are
understood and defined in Rule 144 under the Act, at all times from and after
ninety days following the effective date of the first registration under the Act
filed by the Company for an offering of its securities to the general public;
b. use its best efforts to file with the Commission in a timely manner
all reports and other documents required of the Company under the Act and the
Exchange Act at any time after it has become subject to such reporting
requirements; and
c. so long as an Investor owns any restricted securities, furnish to the
Investor forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Act and Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as an Investor may reasonably request in availing itself of any
rule or regulation of the Commission allowing an Investor to sell any such
securities without registration.
Section 60. Listing Application. If shares of any class of stock of the
Company shall be listed on a national securities exchange, the Company shall, at
its expense, include in its listing application all of the shares of the listed
class then owned by any Investor.
Section 61. Damages. The Company recognizes and agrees that the Holder of
Registrable Securities shall not have an adequate remedy if the Company fails to
comply with the provisions of this Agreement, and that damages will not be
readily ascertainable, and the Company expressly agrees that in the event of
such failure any Holder of Registrable Securities shall be entitled to seek
specific performance of the Company's obligations hereunder and that the Company
will not oppose an application seeking such specific performance.
135
<PAGE>
EXECUTION COPY
Section 62. Representations and Warranties of the Company. The Company
represents and warrants to the Investors as follows:
a. The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government by which the Company or any of its properties or assets is bound, the
Articles of Incorporation or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which the Company or any or its
properties or assets is bound, conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.
b. This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
Section 63. Miscellaneous.
a. All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation transferees of any Registrable Securities), whether so expressed or
not.
b. All notices, requests, consents and other communications hereunder
shall be in writing and shall be mailed by certified or registered mail, return
receipt requested, postage prepaid, or telecopied or sent by other facsimile
method addressed as follows:
If to the Company or any Investor, at the address of such party set
forth on Schedule I hereto or the most recent address as is shown on the
stock records of the Company; and
If to any subsequent Holder of Registrable Securities, to it at such
address as may have been furnished to the Company in writing by such
Holder; or, in any case, at such other address or addresses as shall have
been furnished in writing to the Company (in the case of a Holder of
Registrable Securities) or to the Holders of Registrable Securities (in the
case of the Company) in accordance with the provisions of this paragraph.
c. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
d. This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company, the Investors
and the holders of at least a majority of the then outstanding Registrable
Securities.
136
<PAGE>
EXECUTION COPY
e. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
f. If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
* * * * * * * * *
137
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
excited as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
----------------------
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.,
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
By: /s/ Kevin Mohan
------------------
General Partner
SUMMIT INVESTORS, III, L.P.
By: /s/ Kevin Mohan
------------------
Authorized Signatory
/s/ Paul F. Lozier
---------------------
138
<PAGE>
SCHEDULE I
----------
Company
- -------
Logical Design Solutions, Inc.
465 South Street
Morristown, NJ 07960
Attn: President
Investors
- ---------
Name and Address
- ----------------
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
139
<PAGE>
EXHIBIT 10.10
AGREEMENT OF LEASE
between
MSGW MADISON, L.L.C.,
Landlord
and
LOGICAL DESIGN SOLUTIONS, INC.
Tenant
131 MADISON AVENUE
MORRISTOWN, NEW JERSEY
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
Preamble (Basic Provisions and Definitions)...........................1
1. Demised Premises, Term, and Purpose..........................3
2. Rent.........................................................4
3. Operating Expenses and Real Estate Taxes.....................5
4. Completion of Improvements and Commencement
of Rent...................................................11
5. Covenants as to Condition of Demised Premises and
Compliance with Laws........................................13
6. Tenant Improvements, Alterations, and Installations.........13
7. Various Negative Covenants by Tenant........................14
8. Various Affirmative Covenants by Tenant.....................15
9. Building Directory..........................................15
10. Casualty and Insurance......................................15
11. Indemnification.............................................18
12. Non-Liability of Landlord...................................19
13. Remedies and Termination Upon Tenant Default................19
14. Remedies Cumulative; Non-Waiver by Landlord.................20
15. Services; Electric Energy...................................21
16. Subordination...............................................23
17. Curing Tenant's and Landlord's Defaults.....................23
18. Notices.....................................................24
19. Quiet Enjoyment.............................................25
20. Security Deposit............................................25
21. Inspection and Entry by Landlord............................26
22. Brokerage...................................................26
23. Parking.....................................................26
24. Renewal Options.............................................26
25. Landlord's Inability to Perform.............................28
26. Condemnation................................................28
27. Assignment and Subletting...................................30
28. Environmental Laws..........................................33
29. Parties Bound...............................................34
30. Miscellaneous...............................................34
31. Hold Over Tenancy...........................................35
32. Financial Statements........................................36
33. Satellite Dish Antenna......................................36
<PAGE>
LIST OF EXHIBITS
----------------
Exhibits
- --------
A Floor Plan
A-1 Site Plan of Building
B Work Letter to Lease
C Rules and Regulations
D Cleaning Services
E Parking Plan
<PAGE>
INDEX OF DEFINED TERMS
----------------------
TERMS PARAGRAPH
- ----- ---------
Additional Insureds.................................................... 17
Additional Rent........................................................ 2,4
Building............................................................... 4
Building Common Areas.................................................. 3
business days.......................................................... 15
Business Days.......................................................... 3
- -------------
Business Hours......................................................... 3
- --------------
Commencement Date...................................................... 3
Common Areas........................................................... 3
Demised Premises....................................................... 1
- ----------------
Designated Broker...................................................... 2
Expiration Date........................................................ 1,3
- ---------------
Fair Market Renewal Rent............................................... 2,27
Fixed Rent............................................................. 1,2
- ----------
Improvements........................................................... 4
Land................................................................... 3,6
Landlord............................................................... 1
Late Charge............................................................ 2
Laws................................................................... 8
Lease Year............................................................. 5
- ----------
Permitted Use.......................................................... 1
- -------------
Prime Rate............................................................. 2
- ----------
Punch List............................................................. 12
Real Estate Taxes...................................................... 4
Renewal Term........................................................... 1
- ------------
Tenant Delay........................................................... 11
Tenant Improvements.................................................... 7
Term................................................................... 1
- -----
<PAGE>
LEASE AGREEMENT DATED FEBRUARY ____, 2000
BETWEEN MSGW MADISON, L.L.C., a Delaware limited liability company ("Landlord"),
having an office c/o GALE & WENTWORTH, LLC, 200 Campus Drive, Suite 200, Florham
Park, New Jersey 07932 and LOGICAL DESIGN SOLUTIONS, INC. a corporation of the
State of New Jersey, ("Tenant") having an address at 465 South Street,
Morristown, New Jersey 07960.
PREAMBLE
--------
BASIC LEASE PROVISIONS AND DEFINITIONS.
In addition to other terms elsewhere defined in this Lease, the
following terms whenever used in this Lease should have only the meanings set
forth in this Preamble, unless such meanings are expressly modified, limited, or
expanded elsewhere herein.
I. Demised Premises: The Demised Premises are as depicted on the floor
plans annexed hereto and made a part hereof as Exhibit A and consist of fifty
two thousand (52,000) square feet of Rentable Area (as defined in Building
Office and Managers Association ("BOMA") standard #ANSI Z65.1-1980 "Modified")
of office space located on the second (2d), third (3d) and fourth (4th) floors
in the building situated on the Land (as defined in Paragraph 1(a) of this
Lease) located at 131 Madison Avenue, Morristown, Morris County, New Jersey, as
shown on the site plan attached hereto and a part hereof as Exhibit A-1
("Building").
II. Term: Ten (10) years.
III. Expiration Date: Midnight on the last day of the calendar month
occurring ten (10) years after the Commencement Date.
IV. Renewal Term: Two (2) consecutive five (5) year renewal terms.
V. Permitted Use: General first-class office use and related ancillary
uses and for no other purpose.
VI. Fixed Rent: Twenty Eight Dollars ($28) per square foot of Rentable
Area of office space per annum, being a total of One Million Four Hundred Fifty
Six Thousand Dollars ($1,456,000) per annum from the Commencement Date through
the last day of the calendar month during which the third (3d) anniversary of
the Commencement Date occurs; Twenty Nine and 50/100 Dollars ($29.50) per square
foot of Rentable Area of office space per annum, being a total of One Million
Five Hundred Thirty Four Thousand Dollars ($1,534,000) per annum from the first
day of the calendar month commencing with (or, if such third (3d) anniversary is
not on the first day of a month, following) the third (3d) anniversary of the
Commencement Date through the last day of the calendar month during which the
sixth (6th) anniversary of the Commencement Date occurs; and Thirty One and
50/100 Dollars ($31.50) per square foot of Rentable Area of office space per
annum, being a total of One Million Six Hundred Thirty Eight Thousand Dollars
($1,638,000) per annum from the first day of the calendar month commencing with
(or, if such sixth (6th) anniversary is not on the first day of a
<PAGE>
month, following) the sixth (6th) anniversary of the Commencement Date through
the Expiration Date; and Fair Market Renewal Rent, as defined in Paragraph 24 of
this Lease, during the two (2) Renewal Terms.
VII. Monthly Fixed Rent: One-Twelfth (1/12th) of Fixed Rent, being One
Hundred Twenty One Thousand Three Hundred Thirty Three and 33/100 Dollars
($121,333.33) Dollars per month from the Commencement Date through the last day
of the calendar month during which the third (3d) anniversary of the
Commencement Date occurs; and One-Twelfth (1/12th) of Fixed Rent, being One
Hundred Twenty Seven Thousand Eight Hundred Thirty Three and 33/100 Dollars
($127,833.33) per month from the first day of the calendar month commencing with
(or, if such third (3d) anniversary is not on the first day of a month,
following) the third (3d) anniversary of the Commencement Date through the last
day of the calendar month during which the sixth (6th) anniversary of the
Commencement Date occurs; and One-Twelfth (1/12th) of the Fixed Rent, being One
Hundred Thirty Six Thousand Five Hundred Dollars ($136,500) per month from the
first day of the calendar month commencing with (or, if such sixth (6th)
anniversary is not on the first day of a month, following) the sixth (6th)
anniversary of the Commencement Date through the Expiration Date; and
One-Twelfth (1/12th) of the Fair Market Renewal Rent during the Renewal Term.
VIII. Late Charge: An amount equal to the sum of: (i) interest at
Prime Rate, as defined hereinafter, plus four (4%) percent per annum, which
interest shall accrue from the date any payment of Fixed Rent or Additional Rent
is due until the date of payment of the same; plus (ii) an administrative fee
equal to one (1%) percent of said late payment; provided, however, that, if
Tenant incurs more than two (2) Late Charges, in any calendar year, any
subsequent Late Charges incurred in that calendar year shall include an
administrative fee equal to four percent (4%) of said late payment.
IX. Security Deposit (subject to the provisions of Paragraph 2(c) and
20):
$970,667 for the 1st through the 3d years of the Term
$767,000 for the 4th through the 6th years of the Term
$546,000 for the remaining Term
X. Tenant's S.I.C. Code (as per most recent S.I.C Manual as published
by the United States Office of Management Budget): 7371.
XI. Designated Broker: JGT Company and Gale & Wentworth Real Estate
Advisors, LLC.
XII. Tenant's Construction Allowance: In accordance with Exhibit B
attached hereto and made a part hereof.
XIII. Prime Rate: The prime commercial lending rate on 90 day loans
announced by Citibank, N.A.
XIV. Building Holidays: Building Holidays shall be President's Day;
Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day and day
after; Christmas Day and New Year's Day; the Monday before or the Friday after
if Christmas Day,
2
<PAGE>
New Year's Day, or Independence Day falls on Tuesday or on Thursday; and the
Monday after or the Friday before if Christmas Day, New Year's Day, or
Independence Day falls on Saturday or on Sunday.
XV. Business Days: Weekdays excluding Building Holidays.
XVI. Business Hours: The generally customary daytime business hours of
Tenant (but not before 8:00 A.M. or after 6:00 P.M. on weekdays) and 8:00 A.M.
to 1:00 P.M. on Saturdays. Business Hours do not include Sundays or Building
Holidays.
XVII. Landlord's Work: That certain work described on Exhibit B
attached hereto. The parties hereby agree to the following terms and conditions:
1. Demised Premises, Term, and Purpose.
---------------------------------------
(a) Landlord does hereby lease to Tenant, and Tenant does hereby
lease from Landlord the Demised Premises located in the Building, together with
the non-exclusive right to use any pedestrian easements and/or vehicular
easements that may exist from time to time for the benefit of tenants of the
Building, together with all other Common Areas, as defined in Paragraph 1(d),
for the Term commencing on the Commencement Date, as defined in subparagraph (b)
of this Paragraph 1, and ending on the Expiration Date, or such earlier date
upon which the Term may expire or be terminated pursuant to the provisions of
this Lease or pursuant to law. The parcel of land on which the Building is
located ("Land") is known and designated as Lot 1, Block 4101 on the tax maps of
the Town of Morristown.
(b) For purposes of this Lease the "Commencement Date" shall be
the date on which the Commencement Date occurs with respect to the third (3rd)
and fourth (4th) floors of the Building, pursuant to the provisions of Paragraph
4(b).
(c) The Demised Premises shall be used by Tenant for the
Permitted Use and for no other use or purpose. Tenant shall be permitted to
conduct occasional client oriented training classes at the Demised Premises,
provided that the number of visitors attending such classes can be accommodated
in Tenant's parking area. The Permitted Use shall not be deemed to include the
following uses which are expressly prohibited: governmental offices; drive-up
facility; educational, training, or similar classes for members of the general
public; union offices; medical or similar treatments; barber or beauty parlor;
gaming or political activities; pornographic; employment, recruiting, or
placement activities (except executive search and similar activities in the
ordinary course of Tenant's business); retail or wholesale sale and delivery of
goods; repairing, servicing, or receiving for repair or service; and any other
use or uses that are of the same or similar nature or character. Tenant shall
not use or occupy the Demised Premises or any part thereof for any purpose
deemed unlawful, disreputable, or extra-hazardous on account of fire or other
casualty or for any purposes that shall impair the character of the Building as
reasonably determined by Landlord. Tenant, at its sole cost and expense, shall
obtain any consents, licenses, permits, or approvals required or obtainable in
normal course to conduct its business at the Demised Premises.
3
<PAGE>
(d) The "Common Areas" shall consist of the "Building Common
Areas," as defined hereinafter. The Common Areas shall be operated and
maintained by Landlord and/or such other owners or operators for the benefit of
all tenants in a manner similar to that of other office buildings in the Morris
County, New Jersey area that are reasonably similar to the Building with respect
to tenant mix, size, and age. The use of the Common Areas shall be in common
with Landlord, other tenants of the Building, and other persons entitled to use
the same. Landlord shall not diminish the Common Areas in any way that has a
materially negative impact on Tenant's ability to conduct its business for the
Permitted Use at the Demised Premises.
(i) The "Building Common Areas" shall be those parts of the
Building and other improvements designated by Landlord for the common use of all
tenants of the Building, including, but not limited to: utility lines,
pumpstations, drainage basins, swales, detention or retention ponds, and other
facilities on or serving the Land; halls; lobbies; delivery passages; drinking
fountains; public toilets; parking facilities; lobby plantings and interior
landscaped areas, exterior landscaped areas on the Land; and other facilities or
Improvements owned, operated, or maintained, in whole or in part, by Landlord
for use by all tenants of the Building.
(e) For purposes of this Lease the term "Improvements" shall mean
and include all, whether existing now or in the future, buildings, including the
Building, and/or appurtenant structures or improvements of any kind, whether
above, on, or below the Land surface (including, without limitation,
outbuildings; loading areas; canopies; walls; waterlines; sewer, electrical, and
gas distribution facilities; parking facilities; walkways; streets; curbs;
roads; rights of way; fences; hedges; exterior plantings; poles; and signs.
2. Rent.
-----
(a) The rent reserved under this Lease for the Term hereof shall
be and consist of: (i) the Fixed Rent payable in equal monthly installments in
advance on the first day of each and every calendar month during the Term
(except that Tenant shall pay one (1) monthly installment on the Commencement
Date, which installment shall be applied to the Monthly Fixed Rent due for the
first (1st) month of the Term); plus (ii) such additional rent ("Additional
Rent") in an amount equal to Tenant's Operating Expenses and of Real Estate
Taxes (as such terms are defined in Paragraph 3 of this Lease); all charges for
services and utilities pursuant to Paragraph 15 hereof; and any other charges or
amounts that shall become due and payable hereunder, including, without
limitation, the reasonable expenses incurred by Landlord in the enforcement of
any of the agreements, covenants, and obligations under this Lease and including
reasonable legal fees that may accrue in the event suit for rent or dispossess
proceedings are necessary to obtain the possession of the Demised Premises or to
collect the rent; all of which Additional Rent shall be payable as hereinafter
provided. All rent shall be paid to Landlord at its office stated above or such
other place Landlord may designate in writing. If the Commencement Date shall
occur on a date other than the first calendar day of a month, the rent for the
partial month commencing on the Commencement Date shall be appropriately
pro-rated on the basis of the monthly rent payable during the first year of the
Term.
(b) Tenant does hereby covenant and agree to pay promptly the
Fixed Rent and Additional Rent herein reserved as and when the same shall become
due and payable,
4
<PAGE>
without demand therefor and without any set-off, recoupment, or deduction
whatsoever. All Additional Rent payable hereunder that is not due and payable on
a monthly basis during the Term, unless otherwise specified herein, shall be due
and payable within thirty (30) days of delivery by Landlord to Tenant of notice
to pay the same.
(c) In the event that any payment of Fixed Rent or Additional
Rent shall not be paid within five (5) days after the due date for the same as
provided herein, Tenant shall pay, together with such payment, the Late Charge.
Furthermore, if Tenant fails to remit a full monthly installment of the Monthly
Fixed Rent or of the Additional Rent as provided herein for two (2) consecutive
months, then Landlord may require (i) all Fixed Rent and Additional Rent
payments to be paid in advance on a quarterly annual basis, rather than a
monthly basis, and (ii) an increase in an amount equal to one (1) installment of
Monthly Fixed Rent in the Security Deposit. In addition, if Tenant submits to
Landlord a check for which there are insufficient funds available, then Landlord
may charge Tenant as Additional Rent an administrative and handling fee in the
amount of One Hundred and 00/100 Dollars.
3. Operating Expenses and Real Estate Taxes.
----------------------------------------
(a) For purposes of this Paragraph, the following definitions
shall apply:
"Initial Year" shall mean calendar year 2000.
"Lease Year" shall mean each calendar year subsequent to the
Initial Year.
"Initial Year Operating Expenses" shall mean those
Operating Expenses, as defined hereinafter, paid or incurred by Landlord during
the Initial Year.
"Initial Year Real Estate Taxes" shall mean those Real
Estate Taxes, as defined hereinafter, determined by multiplying (i) the average
tax rate in effect during the calendar year 2000 by (ii) the highest assessment
in effect for the Building for the calendar year 2000.
"Real Estate Taxes" shall mean all real property taxes and
assessments now or hereafter imposed upon the Land, the Improvements, and other
real property now or hereafter included with or located upon the Land. If, due
to a change in the method of taxation or assessment, any franchise, income,
profit or other tax, however designated, shall be substituted by the applicable
taxing authority, in whole or in part, for the Real Estate Taxes now or
hereafter imposed on the Land, the Improvements, or other real property included
in the Land, such franchise, income, profit, or other tax shall be deemed to be
included in the term "Real Estate Taxes." Real Estate Taxes shall not include
any inheritance, estate, succession, transfer, gift, franchise, net income,
capital stock tax, corporate, capital levy, stamp, or transfer tax (except to
the extent that, as provided for above, such tax is substituted for and in lieu
of Real Estate Taxes now or hereafter imposed).
"Operating Expenses" shall mean: the total of all the
costs and expenses actually paid or incurred by Landlord (and/or others to the
extent such costs paid or incurred by others are chargeable to Landlord) with
respect to the management, operation,
5
<PAGE>
maintenance, and repair of the Land, the Building, and any of the other
Improvements and the services provided tenants therein [excepting electrical
energy expenses paid directly by tenants (including Tenant) to Landlord or the
applicable utility supplying said service pursuant to Paragraph 15 of this Lease
and equivalent provisions of other leases], including, but not limited to: (i)
all utilities, including without limitation, water, electricity, gas, lighting,
sewer and waste disposal; (ii) air conditioning, ventilation, and heating, to
the extent actually paid for by Landlord; (iii) lobby maintenance and cleaning;
maintenance of elevators; **[protection and security(tbd)]**; (iv) lobby
plantings and interior landscape maintenance; (v) exterior landscape
maintenance; (vi) snow removal; (vii) parking lot maintenance, striping, and
repairs; (viii) operation, maintenance, repair, or replacement of utility lines,
pumpstations, drainage basins, swales, detention or retention ponds, and other
facilities on or serving the Land; (ix) maintenance and painting of non-tenanted
areas; (x) fire, all-risk, boiler and machinery, sprinkler, apparatus, public
liability, property damage, rent, and plate glass insurance; (xi) supplies;
(xii) wages, salaries, disability benefits, pensions, hospitalization,
retirement plans, group insurance, worker's compensation insurance, payroll,
social security, unemployment, and other similar taxes with respect to employees
of Landlord employed at the Building (and whose functions are those customarily
performed by employees in comparable buildings) on a full-time basis (or such
portion of said expenses, as reasonably allocated by Landlord (the "Employment
Percentage") to reflect the percentage of time spent by Landlord's employees
performing work in, about or relating to the Building, the Land and any of the
Improvements, as opposed to the time a full- time employee of Landlord would
spend on his or her entire duties for Landlord); (xiii) the Employment
Percentage of the cost of uniforms and workers' clothes for such employees and
the cleaning thereof and the Employment Percentage of other similar employees
benefits and expenses imposed on Landlord pursuant to law or to any collective
bargaining agreement with respect to Landlord's employees; (xiv) the Employment
Percentage of the cost for a bookkeeper and/or for an accountant and/or any
other professional and consulting fees, including reasonable legal and auditing
fees; (xv) the expenses, including reasonable payments to attorneys and
appraisers, incurred by Landlord in connection with any application or
proceeding wherein Landlord obtains or seeks to obtain reduction or refund of
the Real Estate Taxes payable or paid; management fees of the Building; and
(xvi) any other expenses of any other kind whatsoever reasonably incurred in
managing, operating, maintaining, or repairing the Building, the Land, or any
other of the Improvements.
It is agreed, however, that the foregoing Operating Expenses shall
exclude or have deducted from them, as the case may be and as shall be
appropriate:
(i) leasing commissions;
(ii) salaries and benefits for executives above the grade of Building
manager;
(iii) Building start-up or opening expenses;
(iv) expenditures for capital improvements, except those which under
generally accepted accounting principles consistently applied ("GAAP") are
expensed or regarded as deferred expenses and except for capital expenses
required by any law enacted after the date of this Lease, in any of which cases
the costs thereof shall be included in Operating
6
<PAGE>
Expenses for the calendar year in which the costs are incurred and for
subsequent calendar years on a straight line basis amortized over the reasonably
expected useful life of the improvement with an interest factor equal to the
Prime Rate at the time of Landlord's having actually incurred said expenditure,
provided, however, that nothing herein shall relieve Tenant of the
responsibility for payments for capital improvements charged to Tenant pursuant
to Paragraph 5 hereof;
(v) advertising, marketing, space planning (including architectural
and engineering) and promotional expenditures;
(vi) legal fees for lease negotiations and disputes with tenants;
(vii) legal and auditing fees, other than legal and auditing fees
reasonably incurred in connection with (x) the maintenance and operation of the
Building or (y) the preparation of statements required pursuant to additional
rent or lease escalation provisions;
(viii) as a deduction, amounts received by Landlord through proceeds
of insurance to the extent the proceeds are compensation for expenses that were
previously included as Operating Expenses hereunder;
(ix) Landlord's contribution to Tenant Improvements (as defined below)
and any other costs incurred by Landlord to prepare the Building, the Land and
the Improvements to Tenant's occupancy in accordance with the terms of this
Lease;
(x) Taxes or any inheritance, estate, succession, transfer, gains,
mortgage recording, gift, franchise, corporation, income or profit tax or
capital levy that is imposed upon Landlord;
(xi) the cost of repairs and replacements incurred by reason of fire
or other casualty or condemnation;
(xii) payments of principal, interest and any other amounts under any
mortgages upon the Building, the Land and the Improvements or any cost incurred
by Landlord to finance or refinance the Building, the Land and the Improvements;
(xiii) payments of ground rent or other amounts pursuant to any ground
lease covering the Building, the Land and the Improvements;
(xiv) depreciation of the Building, the Improvements or any equipment
located therein;
(xv) costs incurred with respect to a sale or transfer of all or any
portion of the Building or any interest therein or in connection with the
purchase or sale of any air or development rights;
(xvi) payments made by Landlord to a company or other entity
affiliated with Landlord for goods and services to the extent that such payments
exceed the
7
<PAGE>
amounts that would have been paid to independent third parties for goods and
services of like kind;
(xvii) any general or administrative overhead of Landlord, other than
the items expressly described above;
(xviii) the cost of correcting latent defects in the construction of
the Building or the Building systems;
(xix) costs relating to withdrawal liability or unfunded pension
liability under the Multi-Employer Pension Plan Act or similar law;
(xx) any interest, fine, penalty or other late charges payable by
Landlord and incurred as a result of late payments; (xxi) the cost of acquiring
or installing objects of art;
(xxii) subject to the provisions of subparagraph (iv), above, costs
incurred to remedy violations of Laws (as defined below) that arise by reason of
Landlord's failure to construct, maintain or operate the Building, the
Improvements or any part of either in compliance with such Laws;
(xxiii) any and all costs (including testing, containing, removing or
abating costs, but excluding routine tests) arising from the presence of ACM or
any other Hazardous Substances (as defined below) in or about the Building or
the Land which were not placed in the Building or the Land by Tenant; excluding,
however, cleaning solvents and other Hazardous Substances customarily used for
the operation, repair and/or maintenance of comparable Buildings;
(xxiv) all charitable or political contributions; and
(xxv) any management fee in excess of those customarily charged in the
comparable buildings in the market area.
If Landlord and/or others shall purchase any item of capital equipment
or make any capital expenditures designed to result in savings or reductions in
Operating Expenses, then, to the extent such savings are realized, the costs for
same shall be included in Operating Expenses. The costs of such capital
equipment or capital expenditures are to be included in Operating Expenses for
the calendar year in which the costs are incurred and subsequent calendar years
on a straight line basis amortized over such period of time as reasonably can be
estimated as the time in which such savings or reductions in Operating Expenses
are expected to equal Landlord's costs for such capital equipment or capital
expenditure with an interest factor equal to the Prime Rate at the time of
Landlord's having actually incurred said costs. If Landlord and/or others shall
lease any such item of capital equipment designed to result in savings or
reductions in Operating Expenses, then, to the extent such savings are realized,
the rentals and other costs paid pursuant to such leasing shall be included in
Operating Expenses for the calendar year in which they were incurred.
8
<PAGE>
(b) In the event (i) that the Commencement Date shall occur on a day
other than the first day of a calendar year, or (ii) that the Expiration Date or
other termination date of this Lease shall occur on a day other than the last
day of a calendar year, or (iii) of any abatement of the Fixed Rent payable
hereunder pursuant to any provision of this Lease for any period of time not
equal to a full calendar year, or (iv) of any increase or decrease in the
Rentable Area of the Demised Premises or any increase or decrease in the
Rentable Area of the Building, then in each such event in applying the
provisions of this Paragraph 3 with respect to such calendar year in which such
events have occurred, appropriate adjustments shall be made to Tenant's
Proportionate Share of Operating Expenses and Real Estate Taxes payable pursuant
to Paragraph 3(c) so as to apportion such payment on the basis of (1) the pro
rata portion of the calendar year during which such payment is to be made and/or
(2) the increase or decrease in Tenant's Proportionate Share of Operating
Expenses and Real Estate Taxes by virtue of the changes in any such Rentable
Area.
(c) Tenant shall be responsible for and shall pay to Landlord in
accordance with Paragraph 3 (i) any increase in Operating Expenses in each Lease
Year during the Term over the Initial Year Operating Expenses and (ii) any
increase in Real Estate Taxes over the Initial Year Real Estate Taxes.
(1) During each Lease Year, Tenant shall pay to Landlord monthly,
on the first day of each calendar month, as Additional Rent, Landlord's
reasonable estimate of: (i) any increase in Operating Expenses in each Lease
Year over the Initial Year Operating Expenses, and (ii) any increase in Real
Estate Taxes in each Lease Year over the Initial Year Real Estate Taxes.
(2) Prior to the end of the Initial Year and thereafter for each
successive Lease Year, or part thereof, Landlord shall send to Tenant a
statement of the projected increase in Operating Expenses and Real Estate Taxes
for the applicable Lease Year, if any, (an "Operating Expense/Real Estate Tax
Projection") and shall indicate what the estimated amount of said increase in
Operating Expenses and in Real Estate Taxes shall be, said amount to be paid in
equal monthly installments (rounded to the nearest whole dollar) in advance on
the first day of each month by Tenant as Additional Rent, commencing January lst
of the applicable Lease Year.
(3) If during the course of any Lease Year, Landlord shall have
reason to believe that the increase in Operating Expenses and/or Real Estate
Taxes shall be higher than that upon which the aforesaid Operating Expense/Real
Estate Tax Projection was originally based, as set forth in subparagraph (c)(2)
above, then Landlord (upon delivering to Tenant, with respect to a material
increase in the Projection, evidence reasonably satisfactory to Tenant that such
adjustment is justified) shall be entitled to adjust the Operating Expense/Real
Estate Tax Projection by a lump sum invoice for the months of the Lease Year
which precede the revised Operating Expense/Real Estate Tax Projection and to
advise Tenant of an adjustment in future monthly projection amounts to the end
result that Landlord's Operating Expense/Real Estate Tax Projection shall be on
a reasonably current basis each Lease Year.
(4) Within ninety (90) days following the end of each Lease Year,
Landlord shall send to Tenant a statement of the actual Operating Expenses and
Real Estate Taxes incurred for the prior Lease Year showing the increase or
decrease in Operating Expenses
9
<PAGE>
and Real Estate Taxes. In the event that the amount prepaid by Tenant exceeds
the amount that was actually due based upon actual year-end cost, Landlord shall
pay to Tenant an amount equal to the overcharge. Landlord shall reimburse Tenant
for such overcharge by either, at Landlord's option, (i) paying such amount
together with the statement of the actual increase or (ii) crediting such amount
to the next installment of Fixed or Additional Rent due and payable by Tenant.
In the event that Landlord has undercharged Tenant, then Landlord shall provide
Tenant with an invoice stating the additional amount due, which amount shall be
paid in full by Tenant within thirty (30) days after receipt.
(d) Each and every of the aforesaid Operating Expense/Real Estate Tax
Projection amounts, whether requiring lump sum payment or constituting projected
monthly amounts added to the Fixed Rent, shall for all purposes be treated and
considered as Additional Rent, and the failure of Tenant to pay the same as and
when due in advance and without demand shall have the same effect as a failure
to pay any installment of the Fixed Rent and shall afford Landlord all the
remedies provided in this Lease therefor, including, without limitation, the
Late Charge as provided in Paragraph 2(c) of this Lease.
(e) Tenant acknowledges and agrees that Landlord shall have the right
to change the period of the Lease Year, either before or during the Term, to any
other fiscal year or twelve (12) month period. In the event that Landlord makes
such a change, then the same shall be effective upon written notice to Tenant
and, in such event, Tenant shall pay the amount of Operating Expenses and of
Real Estate Taxes over the Operating Expenses and Real Estate Taxes for the
period from the end of the initially designated Lease Year, as last billed, to
the beginning of the newly designated Lease Year, prorated for such period,
within thirty (30) days of the rendering by Landlord of the bill for such
interim period.
(f) Tenant acknowledges that Landlord shall have the exclusive right,
but not the obligation, to contest or appeal any assessment for Real Estate
Taxes. Landlord and Tenant agree that, in the event the amount of the Real
Estate Taxes for the Initial Year or for any Lease Year is reduced below the
then current amount of the Initial Year Real Estate Taxes due to a reduction in
the assessment of the Land and/or Building, the Initial Year Real Estate Taxes
shall be revised to be the product of (i) the lowest tax rate in effect at any
time between calendar year 2000 and the year in which the Building is assessed
as a fully completed Building, multiplied by (ii) such lower assessment for the
Building and/or the Land. Accordingly, any estimation of increases in Real
Estate Taxes set forth in any future Operating Expense/Real Estate Tax
Projection shall be based on the revised Initial Year Real Estate Taxes. In
addition, retroactive adjustments and future adjustments (as more particularly
set forth in Paragraph 3(c)(4) above) shall be made based upon the actual and
reduced amount of Real Estate Taxes for each Lease Year.
(g) Landlord shall maintain books of account which shall be open for
inspection to Tenant and his representatives at all reasonable times, upon
reasonable advance notice by Tenant within one hundred twenty (120) days of
Tenant's receipt of the year end statements referred to in subparagraph (c)(4)
hereof, so that Tenant can determine that such operating, utility and tax costs
have in fact been paid or incurred. Any disagreement with respect to any one or
more of said charges if not satisfactorily settled between Landlord and Tenant
may be referred by either party to any independent certified public accountant
to be mutually agreed
10
<PAGE>
upon, and if such accountant cannot be agreed upon, the American Arbitration
Association may be asked by either party to select an arbitrator, whose decision
on the dispute will be final and binding upon both parties. If the decision of
the arbitrator results in a decrease of the charge by more than five percent
(5%), the costs of the arbitration shall be paid by Landlord; otherwise the cost
of the arbitration shall be borne by Tenant. Pending resolution of the issue,
Tenant shall pay the amount established and billed by Landlord, all subject to
final adjustment once the issue is resolved as provided for herein.
(h) During any period when Tenant is not leasing all of the Rentable
Area of the Building, Tenant's liability for increases in Real Estate Taxes and
Operating Expenses over the Initial Year Real Estate Taxes and Initial Year
Operating Expenses shall be limited to Tenant's proportionate share of such
increases. Tenant's proportionate share shall be the Rentable Area of the
premises then leased by Tenant, divided by the total Rentable Area of the
Building.
4. Completion of Improvements and Commencement of Rent.
---------------------------------------------------
(a) Landlord agrees to perform Landlord's Work and to provide the
improvements and other work in and to the Demised Premises ("Tenant
Improvements") in accordance with the terms, conditions, and provisions of
Exhibit B attached hereto and made a part hereof.
(b) The Demised Premises shall be ready for occupancy and, subject to
the terms and conditions hereinafter set forth, the Commencement Date shall
occur on June 14, 2000 with respect to the third (3d) and fourth (4th) floors of
the Building, and on the earlier of Substantial Completion of the Landlord's
Work and Tenant Improvements for such space, and January 15, 2001 with respect
to the second (2nd) floor of the Building, or such later dates that: (i)
aforesaid portions of the Demised Premises shall be delivered to Tenant in
tenantable condition, free of violations of any health, safety, fire, and other
statutes and regulations governing the Demised Premises and its use, all of
which shall be established by the issuance by the appropriate governmental
authority of a certificate (temporary or final) permitting occupancy of the
Demised Premises for the purposes set forth herein; and (ii) Landlord has
Substantially Completed, as defined hereinafter, Landlord's Work and the Tenant
Improvements. If the occurrence of any of the conditions listed in the preceding
sentence, and thereby the making of the Demised Premises ready for occupancy,
shall be delayed due to Tenant Delay, as defined in Exhibit B; then the
Commencement Date shall be accelerated by a time period equal to the number of
days of delay so caused by Tenant, provided that the Commencement Date shall be
no earlier than the dates described in the preceding sentence. As used herein,
Landlord shall be deemed to have Substantially Completed the Tenant Improvements
notwithstanding that minor or insubstantial details of construction, mechanical
adjustment, or decoration remain to be performed in the Demised Premises or any
part thereof, the noncompletion of which does not materially interfere with
Tenant's use of the Demised Premises.
(c) Tenant shall occupy the portions of the Demised Premises as soon
as the same are ready for its occupancy and the Commencement Date shall have
occurred (but not prior to said date except to install Tenant's personal
property as provided in this Lease). If and when Tenant shall take actual
possession of all or any part of the Demised Premises, it shall be
11
<PAGE>
conclusively presumed that the same is in satisfactory condition, except as to
those items of work remaining to be performed by Landlord pursuant to this
Paragraph 4 or any items of work set forth in a punch list ("Punch List") to be
submitted to and acknowledged by Landlord in writing within thirty (30) days
after the Commencement Date as to each portion of the Demised Premises.
(d) Upon prior written notice from Landlord, Tenant shall be permitted
to enter the applicable portions of the Demised Premises prior to the
anticipated Commencement Date for each such portion for the purpose of moving
personal property into the Demised Premises, all without obligation to pay Fixed
Rent or Additional Rent therefor, provided all of such work shall be performed
for Tenant so as not to cause or create any labor dispute for Landlord or to
disrupt the performance of the Tenant Improvements, and further provided Tenant
complies with all of the other terms and provisions of this Lease, to include
but not be limited to the provisions of Paragraph 10 of this Lease.
(e) Upon the occurrence of the Commencement Date with respect to the
third (3d) and fourth (4th) floors of the Building, Tenant shall be obligated to
commence to pay sixty seven percent (67%) of the Fixed Rent specified in the
Preamble. Upon the occurrence of the Commencement Date with respect to the
second (2d) floor of the Building, Tenant shall be obligated to commence to pay
an additional thirty three percent (33%) of the Fixed Rent specified in the
Preamble. If Tenant occupies a portion of the second (2d) floor of the Building
for the conduct of its business prior to the Commencement Date with respect to
such floor of the Building, the Fixed Rent described above shall become payable
in a fraction, the numerator of which shall be the number of employees of Tenant
occupying the second (2d) floor of the Building and the denominator of which
shall be seventy (70). In such case, Tenant shall commence the payment of Fixed
Rent for the portion of the second (2d) floor of the Building in an amount
calculated as provided above.
(f) If Landlord shall not have delivered possession of the Demised
Premises to Tenant in the condition required by Paragraph 4(c) on or prior to
July 31, 2000 with respect to the third (3d) and fourth (4th) floors of the
Building, and March 1, 2001 with respect to the second (2nd) floor of the
Building, Tenant shall receive an abatement of Fixed Rent accruing after the
actual Commencement Date for such floors equal to 1 day of applicable Fixed Rent
for each day beyond such dates for the first forty-five (45) days that Landlord
shall not have delivered possession of such portion of the Demised Premises to
Tenant in the required condition, and 1 1/2 days of applicable Fixed Rent for
each of the next forty-five (45) days that such failure continues. If Landlord
has not delivered possession of the third (3d) and fourth (4th) floors of the
Building to Tenant on or prior to October 30, 2000, or if Landlord has not
delivered possession of the entire Demised Premises to Tenant on or prior to May
31, 2001, then Tenant shall have the option to cancel this Lease by giving
Landlord written notice thereof at any time within 30 days following such date,
whereupon this Lease shall terminate and Landlord and Tenant shall be released
from any further obligations hereunder. Landlord's obligations hereunder and
the deadlines provided herein are subject to the provisions of Paragraph 25 and
Exhibit B, including Tenant Delays.
12
<PAGE>
5. Covenants as to Condition of Demised Premises and Compliance with Laws.
----------------------------------------------------------------------
(a) In the event that the Building or any of the equipment affixed
thereto or stored therein should be damaged (other than by ordinary wear and
tear) as a result of any act of Tenant, its agents, servants, employees,
invitees, or contractors, Tenant shall, upon demand, pay to Landlord the cost of
all required repairs, including structural repairs.
(b) Tenant shall commit no act of waste and shall take good care of
the Demised Premises and the equipment affixed thereto and stored therein and,
at Tenant's sole cost and expense, shall maintain the Demised Premises in good
condition and state of repair. In addition, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all laws, rules, regulations, and ordinances
of all governmental authorities or agencies having jurisdiction over the Demised
Premises and of all insurance bodies (including, without limitation, the Board
of Fire Underwriters) at any time duly issued or in force, applicable to the
Demised Premises or any part thereof or to Tenant's manner of use thereof
(collectively "Laws" or, as the context requires, "laws"). Tenant agrees to
provide Landlord with immediate notice of the need for any of the foregoing
maintenance, repairs, or modifications, and Landlord shall perform, or cause to
be performed, all of the same with the costs incurred therefor to be paid by
Tenant within thirty (30) days after demand as Additional Rent.
(c) Landlord shall maintain and repair the Building Common Areas, the
costs of which shall be passed through as an Operating Expense to the extent
permitted in Paragraph 3 but subject to the obligations of Tenant to pay for the
same as a direct Additional Rent expense as specifically provided in this
Paragraph 5. Such maintenance and repair shall specifically include (i)
maintenance and repairs to the Building's HVAC, fire safety (including without
limitation, sprinklers), electrical, plumbing, or other systems to the extent
that such systems service the Demised Premises in common with other tenanted
areas (but specifically excluding the distribution portions of such Building
systems located within the Demised Premises and specifically excluding the
fixtures and systems that serve the Demised Premises exclusively, in which case
Landlord shall make such repair and/or modification, but Tenant shall pay to
Landlord the costs incurred therefor within thirty (30) days after demand as
Additional Rent) and (ii) any structural maintenance or repairs to the Building.
In addition, Landlord shall perform all maintenance and make all repairs to the
Common Areas of the Building and to the Land that are necessary to comply with
any applicable Laws, the costs of which shall be passed through to the Building
tenants as an Operating Expense, unless excluded therefrom under the provisions
of Paragraph 3.
(d) Upon the Expiration Date or sooner termination of this Lease,
Tenant shall deliver up the Demised Premises in good order and condition, wear
and tear from a reasonable use thereof excepted.
6. Tenant Improvements, Alterations, and Installations.
---------------------------------------------------
(a) All fixtures, equipment, improvements, alterations, installations
that are attached to the Demised Premises; any additions and appurtenances made
by Tenant to the Demised Premises; and any Tenant Improvements (excluding
Tenant's trade fixtures, business equipment, movable partitions, and personal
property) shall become the property of Landlord
13
<PAGE>
upon installation. Not later than the last day of the Term, Tenant shall, at its
expense, remove from the Demised Premises all of Tenant's trade fixtures,
business equipment, personal property, and any Alterations (as defined
hereinafter) designated in writing by Landlord for removal at the time that
Landlord approves Tenant's plans and specifications therefor. Tenant, at its
sole cost and expense, shall repair injury done by or in connection with the
installation or removal of the Alterations required to be removed. Any
equipment, fixtures, goods, or other property of Tenant not removed by Tenant
upon the termination of this Lease or upon any quitting, vacating, or
abandonment of the Demised Premises by Tenant shall be considered as abandoned,
and Landlord shall have the right, without any notice to Tenant, to sell or
otherwise dispose of the same, at the expense of Tenant, and shall not be
accountable to Tenant for any part of the proceeds of such sale, if any.
Landlord may have any such property stored at Tenant's risk and expense.
(b) Tenant, without Landlord's prior consent, shall have the right to
make non- structural Alterations in or to the Demised Premises that (i) involve
a total cost of not more than Thirty Five Thousand and 00/100 Dollars
($35,000.00); (ii) do not require a building permit to be issued by any
governmental authority to make same legally; (iii) do not affect any existing
building systems outside the Demised Premises and do not impair or adversely
affect any existing building systems within the Demised Premises; and (iv) do
not result in a violation of the Permitted Use of the Demised Premises. No other
Alterations (structural or non-structural) shall be made by Tenant without
Landlord's express prior written approval. Landlord agrees that approval of
Alterations of a non-structural nature that do not negatively affect any
building systems shall not be unreasonably withheld. Tenant shall give Landlord
prior written notice of any proposed alterations, installations, additions, or
improvements ("Alterations") with copies of proposed plans and as-built plans
upon completion of the Alterations. Landlord shall have the right to elect that
Tenant remove any Alteration made to the Demised Premises prior to the
expiration of the Lease and to restore the Demised Premises to the condition
existing prior to said Alteration. All such Alterations shall be done at
Tenant's sole expense and the making thereof shall not interfere with the use of
the Building by other tenants. Tenant agrees to indemnify, defend, and hold
harmless Landlord and any mortgagee of Landlord, if any, from any and all costs,
expenses, claims, causes of action, damages, and liabilities of any type or
nature whatsoever (including, but not limited to, reasonable attorneys' fees and
costs of litigation) arising out of or relating to the making of the Alterations
by Tenant. The foregoing indemnity shall survive the expiration or sooner
termination of this Lease. Nothing herein contained shall be construed as
constituting the permission of Landlord for a mechanic or subcontractor to file
a construction lien claim against the Demised Premises, and Tenant agrees to
secure the removal of any such construction lien that a contractor purports to
file against the Demised Premises by payment or otherwise pursuant to law. All
Alterations shall be effected in compliance with all applicable Laws.
7. Various Negative Covenants by Tenant. Tenant agrees that it shall not,
------------------------------------
without Landlord's prior written consent, which consent may be withheld in
Landlord's sole discretion:
(a) do anything in or near the Demised Premises that will increase the
rate of fire insurance on the Building;
14
<PAGE>
(b) permit the accumulation of waste or refuse matter in or near the
Demised Premises, except in containers provided therefor;
(c) except as expressly permitted herein, permit any signs, lettering,
or advertising matter to be erected or attached to the Demised Premises that is
visible from outside of the Demised Premises;
(d) mortgage, hypothecate, pledge, assign, transfer, or sublet all or
a portion of the Demised Premises or this Lease, as the case may be, except to
the extent specifically permitted in Paragraph 27; or
(e) encumber or obstruct the Common Areas surrounding the Demised
Premises, nor cause the same to be encumbered or obstructed, nor encumber or
obstruct any access ways to the Demised Premises, nor cause the same to be
encumbered or obstructed.
8. Various Affirmative Covenants of Tenant. Tenant covenants and agrees
---------------------------------------
that Tenant will:
(a) At any time and from time to time, execute, acknowledge, and
deliver to Landlord, or to anyone Landlord shall designate, within fifteen (15)
business days after receipt of request therefor, a tenant estoppel certificate
in form reasonably acceptable to Landlord or to the financial institutions
requesting the same relating to matters customarily included in tenant estoppel
certificates.
(b) Faithfully observe and comply with the rules and regulations
attached hereto and made a part hereof as Exhibit C and such reasonable
additional rules and regulations as Landlord may hereafter at any time or from
time to time communicate in writing to Tenant; provided, however, that in the
case of any conflict between the provisions of this Lease and any such rule or
regulation, the provisions of this Lease control. Nothing contained in this
Lease shall be construed to impose upon Landlord any duty or obligation to
enforce the rules and regulations or the terms, covenants, or conditions in any
other lease as against any other tenant, and Landlord shall not be liable to
Tenant for violation of any rule or regulation by any other tenant, its
employees, agents, visitors, invitees, subtenants, or licensees. Landlord shall
not discriminate against Tenant in enforcing the rules and regulations.
9. Building Directory. Landlord will maintain listings on the Building
------------------
directory and the elevator lobby directory of the name of Tenant, such internal
departments or locations as Tenant shall reasonably designate and any subtenant
permitted hereunder. Additionally, Tenant shall have the right, at Tenant's
sole cost and expense, to display its corporate name at the entrance to the
Demised Premises, on the exterior monument sign identifying the Building and on
the exterior of the Building itself, subject to compliance with applicable laws.
At the expiration of the Term, Tenant shall remove all such signs and repair any
damage to the monument or to the Building which results from such removal.
10. Casualty and Insurance.
----------------------
(a) In the event of partial or total destruction of the Building or of
the Demised Premises by reason of fire or any other cause (a "Casualty"), Tenant
shall immediately
15
<PAGE>
notify Landlord of the same, and Landlord shall promptly restore and rebuild the
Building and/or the Demised Premises (excluding the Tenant Improvement Work
performed by Landlord pursuant to Exhibit B and Tenant's trade fixtures,
equipment, and personal property) at Landlord's expense unless Landlord elects
by notice to Tenant within ninety (90) days of the Casualty not to restore and
rebuild the Building and/or Demised Premises, and, in such case, upon a date
specified in said notice by Landlord, this Lease shall terminate. If Landlord
elects to restore and rebuild the Demised Premises, then during the period of
restoration of any such area, if any portion of the Demised Premises is rendered
untenantable by said damage and Tenant is able to conduct its business in the
remaining portion of the Demised Premises, Tenant waives the benefit of N.J.S.A.
46:8-6 and 46:8-7 and agrees that Tenant will not be relieved of its obligation
to pay Fixed and Additional Rent in case of damage to or destruction of the
Demised Premises or the Building, except with respect to the portion of the
Fixed and Additional Rent herein reserved that relates to said untenantable
portion only. Tenant acknowledges that Landlord will not carry insurance on
Tenant's furniture, furnishings, fixtures, equipment, personal property, Tenant
Improvements, and other Alterations; therefore, Tenant agrees that Landlord
shall have no obligation to repair any damage to the same. Within 45 days after
the occurrence of any Casualty, Landlord shall deliver to Tenant an estimate
(the "Estimate") prepared by an independent reputable contractor selected by
Landlord, reasonably acceptable to Tenant, licensed to perform construction work
in the State of New Jersey and experienced with estimating the construction cost
of comparable Buildings, setting forth such contractor's good faith estimate as
to the time reasonably required to perform Landlord's restoration work. If the
estimated restoration period set forth in the applicable Estimate (the
"Estimated Restoration Period") exceeds 12 months from the date of the Casualty
(6 months in the event the Casualty occurs within the last 2 years of the Term,
including any exercised Renewal Term), Landlord or Tenant may elect to terminate
this Lease by notice ( a "Casualty Termination Notice") to the other party given
not later than 60 days following Tenant's receipt of the Estimate. If the
Estimated Restoration Period is less than 12 months from the date of the
Casualty (6 months in the event the Casualty occurs within the last 2 years of
the Term, including any exercised Renewal Term), and, subject to the provisions
of Paragraph 25, Landlord shall not substantially complete Landlord's
Restoration Work on or before the thirtieth (30th) day following the end of the
Estimated Restoration Period (such 30th day following the end of the Estimated
Restoration Period, the "Outside Restoration Completion Date"), then Tenant
shall have the right to terminate this Lease by giving a Casualty Termination
Notice to Landlord at any time after the Outside Restoration Completion Date but
prior to the later of thirty (30) days and the date on which Landlord's
Restoration Work has been substantially completed.
(b) Tenant shall, at Tenant's sole cost and expense, except to the
extent prohibited by law with respect to worker's compensation insurance, for
the benefit of Tenant, Landlord, and any Additional Insured (as hereinafter
defined) and/or any other additional insured as Landlord shall from time to time
reasonably determine, maintain or cause to be maintained (i) commercial general
liability insurance coverage with a limit of not less than Five Million and
00/100 Dollars ($5,000,000.00) per each occurrence ("CGL"), to include
commercial umbrella liability
16
<PAGE>
coverage, if necessary [If the CGL contains a general aggregate, it shall apply
separately to the Demised Premises. The CGL shall be written on ISO occurrence
form CG00011093 or a substitute providing equivalent coverage and shall cover
liability arising from the Demised Premises, operations, independent
contractors, products-completed operations, personal injury, advertising
liability, and liability under an insured contract. The commercial umbrella
liability coverage shall be consistent with the primary coverage.]; (ii)
worker's compensation insurance covering all persons employed in connection with
the construction of any improvements by Tenant and the operation of its business
upon the Demised Premises; and (iii) "all risk" coverage on all of Tenant's
personal property, including, but not limited to, standard fire and extended
coverage insurance with vandalism and malicious mischief endorsements on all of
the Tenant Improvements and Alterations in or about the Demised Premises, to the
extent of their full replacement value. If, in the reasonable opinion of any
mortgagees or ground lessors of the Land and/or the Building, the foregoing
coverages and/or limits shall become inadequate or less than that commonly
maintained by prudent tenants in similar buildings in the area by tenants making
similar uses, Landlord shall have the right to require Tenant to increase its
insurance coverage and/or limits. All such insurance shall, to the extent
permitted by law, name any mortgagees and ground lessors of the Land and the
Building and their successors and assigns ("Additional Insureds") and Landlord,
as additional insureds and shall be written by an insurance carrier authorized
to do business in the State of New Jersey and that is rated at least A+ XII by
A.M. Best Company, Oldwick, New Jersey.
(c) Prior to the Commencement Date, Tenant shall deliver to Landlord a
certificate of each policy required under this Lease, which certificate shall be
in a form reasonably satisfactory to Landlord and shall, at a minimum: (i)
specify the additional insured status of Landlord and of the Additional
Insureds, (ii) evidence the waiver of subrogation required pursuant to Paragraph
10(d), and (iii) provide that said policy shall not be reduced in amount (or
otherwise materially changed) or canceled or lapse without providing to Landlord
at the address specified in Paragraph 18 of this Lease at least thirty (30)
days' written notice of such reduction (or other material change), cancellation,
or lapse. Tenant agrees to provide to Landlord timely renewal certificates as
the coverage renews. Notwithstanding anything herein to the contrary, all
policies required to be effected by Tenant under this Lease shall be maintained
in force throughout the Term or any Renewal Term.
(d) Landlord and Tenant waive all rights of recovery against each
other and the Additional Insureds for any loss, damages, or injury of any nature
whatsoever to property for which the waiving party is required to be insured. In
addition, during the Term, Landlord and Tenant shall each maintain in effect in
each insurance policy required under this Lease that relates to property damage
a waiver of subrogation in favor of the other party and the Additional Insureds
from its then-current insurance carriers and shall upon written request of the
other party (made not more frequently than two (2) times each Lease Year)
furnish evidence of such currently effective waiver which shall be in customary
form.
(e) Each insurance policy required to be maintained under this Lease
shall state that, with respect to the interest of Landlord and of the Additional
Insureds, the insurance maintained pursuant to each such policy shall not be
invalidated by any action or inaction of Tenant and shall insure Landlord and
the Additional Insureds regardless of any breach or violation of any warranties,
declarations, conditions, or exclusions by Tenant.
(f) Each insurance policy required to be maintained under this Lease
shall state that all provisions of each such insurance policy, except for the
limits of liability, shall operate in the same manner as if a separate policy
had been issued to each person or entity insured thereunder.
17
<PAGE>
(g) Each insurance policy required to be maintained under this Lease
shall state that the insurance provided thereunder is primary insurance without
any right of contribution from any other insurance which may be carried by or
for the benefit of Landlord or the Additional Insureds.
(h) Each insurance policy required to be maintained under this Lease
shall recognize the indemnification set forth in Paragraph 11 of this Lease.
(i) The failure of Tenant or Landlord to maintain any of the insurance
required under this Lease, or to cause to be provided in any insurance policy
the requirements set forth in this Paragraph 10, shall constitute a default
under this Lease.
(j) Landlord shall maintain or cause to be maintained: (i) commercial
general public liability insurance in respect of the Building and the conduct
and operation of its business therein, with combined base and umbrella coverage
limits of not less than Ten Million and 00/100 Dollars ($10,000,000.00) for
bodily injury or death and property damage in any one occurrence, including
water damage and sprinkler leakage legal liability; and (ii) fire and extended
coverage insurance (including, without limitation, rent insurance) in respect of
the Building (including, without limitation, the Common Areas) (except for the
property Tenant is required to cover with insurance under Paragraph 10(b) and
similar property of other tenants and occupants in the Building) for the benefit
of the Additional Insureds, as their interests may appear. The fire and extended
coverage insurance with respect to the Building shall be in the amount of full
replacement value. Landlord shall have the right to provide any insurance
maintained or caused to be maintained by it under blanket policies provided that
such policies shall in all other respects comply with the requirements of this
Paragraph 10(j). The cost of maintaining the insurance required of Landlord
under this subparagraph (j) shall be an Operating Expense under Paragraph 3
hereof.
11. Indemnification.
---------------
(a) Tenant shall indemnify, defend, and hold harmless Landlord, the
Additional Insureds, any mortgagee, and any lessor under any underlying leases
or ground leases, from and against any expense (including, without limitation,
reasonable legal and collection fees), loss, liability, or damages (excluding
consequential damages) suffered or incurred as a result of or in connection with
(a) any breach of Tenant of its obligations contained in this Lease, or (b) its
acts or the acts of its agents, servants, invitees, contractors, or employees.
This provision shall survive the expiration or sooner termination of this Lease.
(b) Landlord shall defend, indemnify and hold harmless Tenant and any
partner, principal, director, officer, agent or employee of Tenant from and
against any and all claims, demands, liability, loss, damage, costs and expenses
(including reasonable attorneys' fees and disbursements) arising from or in
connection with any personal injury, death or property damage occurring in the
common areas of the Land and Building to the extent caused by the negligence or
willful misconduct of Landlord, or any contractor, agent, employee, partner,
principal, director or officer of Landlord. If any claim, action or proceeding
is brought against any of the persons indemnified under this section for a
matter covered by this indemnity,
18
<PAGE>
Landlord, upon notice from the indemnified person, shall defend such claim,
action or proceeding by counsel reasonably satisfactory to Tenant and the
indemnified person.
12. Non-Liability of Landlord. Landlord shall not be liable for
-------------------------
(and Tenant shall make no claim for) any property damage or personal injury that
may be sustained by Tenant or by any other person as a consequence of the
failure, breakage, leakage, inadequacy, defect, or obstruction of the water,
plumbing, steam, sewer, waste or soil pipes, roof drains, leaders, gutters,
valleys, downspouts, or the like or of the electrical, gas, power, conveyor,
refrigeration, sprinkler, air conditioning, or heating systems, elevators or
hoisting equipment; or by reason of the elements; or resulting from the
carelessness, negligence, or improper conduct on the part of any other tenant of
Landlord or on the part of Landlord's or Tenant's or any other tenant's agents,
employees, guests, licensees, invitees, subtenants, assignees, or successors; or
except as expressly set forth herein attributable to any interference with,
interruption, or failure of any services or utilities to be furnished or
supplied by Landlord. Tenant shall give Landlord prompt written notice of the
occurrence of any events set forth in this Paragraph 12.
13. Remedies and Termination Upon Tenant Default.
--------------------------------------------
(a) In the event that:
(i) Tenant shall default in the payment of any Fixed Rent, or any
Additional Rent, or other charge payable monthly hereunder by Tenant to
Landlord, on any date upon which the same becomes due, and such default shall
continue for seven (7) days after the notice thereof by Landlord to Tenant; or
(ii) Tenant shall default in the payment of any Additional Rent,
or any other charge payable hereunder which is not due and payable hereunder on
a monthly basis, on any date upon which the same becomes due, and such default
shall continue for ten (10) days after Landlord shall have given to Tenant a
written notice specifying such default; or
(iii) Tenant shall use the Demised Premises for an illegal
purpose and such shall continue and shall not be remedied by Tenant within five
(5) days after Landlord shall have given to Tenant a written notice specifying
the same; or
(iv) Tenant shall default in the due keeping, observing, or
performing of any covenant, agreement, term, provision, or condition of this
Lease on the part of Tenant to be kept, observed, or performed (other than a
default of the character referred to in clauses (i) or (ii) of this Paragraph
13(a), and if such default shall continue and shall not be remedied by Tenant
within thirty (30) days after Landlord shall have given to Tenant a written
notice specifying the same unless the nature of such failure is such that it
cannot reasonably be cured within such thirty (30) day period and (a) within the
aforesaid thirty (30) day period Tenant notifies Landlord that it intends to
cure such failure and actually commences to cure such failure, and (b) Tenant
thereafter diligently proceeds to complete such cure within a reasonable time;
then, Landlord may, in addition to any other remedies herein
contained, as may be permitted by law, without being liable for prosecution
therefor, or for damages, re-enter the Demised Premises and have and again
possess and enjoy the same; and as agent for Tenant or
19
<PAGE>
otherwise, re-let the Demised Premises and receive the rents therefor and apply
the same first to the payment of such expenses, reasonable attorneys' fees and
costs, as Landlord may have been put to in re-entering and repossessing the same
and in making such repairs and alterations as may be necessary and second to the
payment of the rents due hereunder. In addition to any post-judgment collection
fees, Tenant shall remain liable for such rents as may be in arrears and also
the rents as may accrue subsequent to the re-entry by Landlord to the extent of
the difference between the rents reserved hereunder and the rents, if any,
received by Landlord during the remainder of the unexpired Term hereof, after
deducting the aforementioned expenses, fees, and costs; the same to be paid as
such deficiencies arise and are ascertained each month. Landlord, at its option,
may require Tenant to pay in a single lump sum payment, at the time of such
termination or re-entry, as the case may be, a sum which represents the present
value (using a discount rate of four (4%) percent per annum) of the excess of
the aggregate of the Fixed Rent that would have been payable by Tenant for the
period commencing with such termination or re-entry, as the case may be, and
ending on the originally fixed Expiration Date of the Term, over the aggregate
rental value of the Demised Premises for the same period. Nothing contained in
this Lease shall be construed to impose upon Landlord the duty to mitigate
damages in the event of a default by Tenant.
(b) Upon the occurrence of any of the contingencies set forth in the
preceding subparagraph (a) of this Paragraph 13, or should Tenant be adjudicated
bankrupt or insolvent or placed in receivership, or should proceedings be
instituted by or against Tenant for bankruptcy, insolvency, receivership,
agreement of composition, or assignment for the benefit of creditors and such
proceedings, if instituted against Tenant, shall not be dismissed within sixty
(60) days after the commencement thereof, or if this Lease or the estate of
Tenant hereunder shall pass to another by virtue of any court proceedings, writ
of execution, levy, sale, or by operation of law, Landlord may, if Landlord so
elects, at any time thereafter, terminate this Lease and the Term hereof, upon
giving to Tenant or to any trustee, receiver, assignee, or other person in
charge of or acting as custodian of the assets or property of Tenant, five (5)
days' notice in writing of Landlord's intention so to do. Upon the giving of
such notice, this Lease and the Term hereof shall end on the date fixed in such
notice as if the same date were the Expiration Date; and Landlord shall have the
right to remove all persons, goods, fixtures, and chattels therefrom by force or
otherwise without liability for damages.
(c) Tenant hereby appoints Landlord attorney-in-fact, irrevocably, to
execute and deliver, on behalf of Tenant, any document reasonably needed by
Landlord during any period Tenant is in default of any terms and provisions of
this Lease beyond any applicable notice and cure period.
14. Remedies Cumulative; Non-Waiver By Landlord. The various rights,
-------------------------------------------
remedies, options, and elections of Landlord expressed herein are cumulative,
and the failure of Landlord to enforce strict performance by Tenant of the
conditions and covenants of this Lease, to exercise any election or option, or
to resort or have recourse to any remedy herein conferred, or the acceptance by
Landlord of any installment of rent after any breach by Tenant, in any one or
more instances, shall not be construed or deemed to be a waiver or a
relinquishment for the future by Landlord of any such conditions and covenants,
options, elections, or remedies, but the same shall continue in full force and
effect.
20
<PAGE>
15. Services; Repairs; Electric Energy
----------------------------------
(a) During Business Hours, Landlord shall (i) supply heating,
ventilation, and air conditioning to the Demised Premises in accordance with the
HVAC specifications attached hereto as Schedule I; (ii) provide snow and ice
removal for the parking area, sidewalks, and driveways in a reasonably
expeditious manner; and (iii) provide refuse removal from a dumpster to be
provided on site to be used for normal paper waste attendant to an office
building. Tenant agrees at all times to cooperate fully with Landlord and to
abide by all the regulations and requirements that Landlord may reasonably
prescribe for the proper functioning and protection of such air conditioning
system. Landlord shall clean the Demised Premises in accordance with the
cleaning schedule annexed hereto as Exhibit D. Except as hereafter provided, the
cost of the services and utilities provided pursuant to this Paragraph 15(a) is
included in Operating Expenses, as defined in Paragraph 3(a).
(b) Landlord reserves the right, without liability to Tenant and
without constituting any claim of constructive eviction, to stop or interrupt
any heating, lighting, ventilating, air conditioning, gas, steam, power,
electricity, water, or other service and to stop or interrupt the use of any
building or Building facilities at such times as may be necessary and for as
long as may reasonably be required by reason of accidents, strikes, or the
making of repairs, alterations, or improvements, or inability to secure a proper
supply of fuel, gas, steam, water, electricity, labor or supplies, or by reason
of any other similar or dissimilar cause beyond the reasonable control of
Landlord. No such stoppage or interruption shall entitle Tenant to any
diminution or abatement of rent or other compensation, nor shall this Lease or
any of the obligations of Tenant be affected or reduced by reason of any such
stoppage or interruption.
(c) Notwithstanding anything contained herein to the contrary, but
subject to the provisions of Paragraph 25, below, in the event that the Demised
Premises or any portion thereof (provided that such portion is more than a de
minimis portion which has no material adverse effect on the efficient conduct of
Tenant's business from the Demised Premises) becomes untenantable (which means
that a typical office tenant would be unable to conduct normal office operations
in the Demised Premises) and is not in fact used by Tenant, for 5 consecutive
business days (the "Eligibility Period") as a result of any failure to provide
water (for bathroom, but not drinking or other, purposes), electricity, life
safety (manual and automatic), HVAC or passenger elevator service to the Demised
Premises as and to the extent required to be provided pursuant to the terms of
this Lease and so long as the same is neither due to the actions or omissions of
Tenant, its partners, employees, agents, invitees, contractors or permitted
subtenants or permitted occupants, then Tenant's Fixed Rent and Additional Rent
shall be abated or reduced, as the case may be, during the period that Tenant is
so prevented from using, and does not use, the Demised Premises in the
proportion that the Rentable Area of the portion of the Demised Premises that
Tenant is prevented from using, and does not use, bears to the Total Rentable
Area of the Demised Premises. In addition, if Tenant is prevented from
conducting, and does not conduct, its business in any portion of the
21
<PAGE>
Premises for a period of time in excess of the Eligibility Period, and the
remaining portion of the Premises is not sufficient to allow Tenant to
effectively conduct its business therein, and if Tenant does not conduct its
business from such remaining portion, then during the period which Tenant is so
prevented from effectively conducting its business therein, such Rent for the
entire Premises shall be abated; provided, however, that if Tenant reoccupies
and conducts its business from any portion of the Premises during such period,
such Rent allocable to such reoccupied portion, based on the proportion that the
Rentable Area of such reoccupied portion of the Premises bears to the total
Rentable Area of the Premises, shall be payable by Tenant from the date such
business operations commence. Notwithstanding the foregoing, in the event that
Tenant is entitled to an abatement pursuant to this section and all or a portion
of the abatement period occurs prior to the rent Commencement Date, the rent
Commencement Date shall be extended one day for each day of abatement to which
Tenant shall be entitled.
(d) Landlord shall furnish to Tenant, through the transmission
facilities installed in the Building, electric energy at a minimum of ten (10)
watts (including mechanical load) per rentable square foot to be used by Tenant,
at Tenant's expense as provided for in this Paragraph 15.
(e) Landlord has installed an electrical meter so as to measure the
consumption of electricity in the Building and the common areas of the Land.
During the time that Tenant is leasing all of the Rentable Area in the Building,
Landlord and Tenant shall arrange with the electric utility to have all electric
bills sent directly to Tenant who shall pay same directly to the utility.
(f) In the event that Tenant shall require electric energy for use in
the Building in excess of the quantity to be initially furnished pursuant to
Exhibit B and if, in Landlord's reasonable judgment, such excess requirements
cannot be furnished unless additional risers, conduits, feeders, switchboards,
and/or appurtenances are installed in the Building, Landlord, upon written
request of Tenant, shall proceed with reasonable diligence to install such
additional risers, conduits, feeders, switchboards, and/or appurtenances,
provided the same and the use thereof shall not cause permanent damage or injury
to the Building or the Demised Premises, or cause or create a dangerous or
hazardous condition, or entail excessive or unreasonable alterations or repairs,
or interfere with or disrupt other tenants or occupants of the Building, and
Tenant agrees to pay all costs and expenses incurred by Landlord in connection
with such installation.
(g) Landlord, at Tenant's expense, shall purchase and install all
lamps (including, but not limited to, incandescent and fluorescent), starters,
and ballasts used in the Demised Premises.
(h) Tenant agrees that Tenant shall not make any material alteration
or material addition to the electrical equipment and/or appliances in the
Demised Premises without the prior written consent of Landlord in each instance,
which Landlord shall not unreasonably withhold, condition or delay.
(i) During the period when the second (2d) floor of the Building is
being temporarily occupied by another tenant (the "other tenant"), prior to the
Commencement Date hereunder for such space, the electric bill for the Building
shall be paid by Landlord who shall bill Tenant for the amount thereof, reduced
by (i) the cost of electricity consumed by the other tenant in its space, as
established by a check meter, and (ii) thirty three percent (33%) of the
electricity charges attributable to the common areas of the Land and Building,
excluding the tenanted portion thereof, as reasonably estimated by Landlord.
Landlord's bill for such
22
<PAGE>
electricity to Tenant shall be payable within thirty (30) days as Additional
Rent. If Tenant disagrees with any of the above estimations by Landlord, the
parties shall jointly select an electricity surveyor who shall conclusively
determine the appropriate deductions from Tenant's electricity charges. The fee
of the surveyor shall be shared equally by Landlord and Tenant.
(j) If, at any other time during the Term, Tenant ceases to lease all
of the Rentable Area of the Building, Landlord shall resume the payment of the
electric bill for the Building And shall bill Tenant for (i) the cost of
electricity consumed by Tenant in the Demised Premises and (ii) Tenant's
proportionate share (as defined in Paragraph 3(h)) of the cost of electricity
consumed in the common areas of the Land and Building. Tenant's electricity cost
shall be reasonably estimated by Landlord on the basis of check meters and/or
electric surveys. Any disputes between Landlord and Tenant with respect to such
electricity charges shall be determined by an electricity surveyor, as described
in subparagraph (i) above. All electricity charges shall be Additional Rent,
payable within thirty (30) days after billing.
16. Subordination. Landlord covenants that no mortgage or ground lease
-------------
will exist with respect to the Land and Building superior to Tenant's rights
hereunder, upon execution of this Lease. Upon Landlord's acquisition of title to
the Land and Building, Landlord shall deliver to Tenant a copy of Landlord's
title insurance policy, or marked-up binder, demonstrating the absence of a
mortgage on the Land and Building. Provided that Landlord shall deliver to
Tenant a subordination, nondisturbance and attornment agreement in form
reasonably satisfactory to Tenant and Landlord's mortgagee, this Lease is
subject and subordinate in all respects to any underlying leases, ground leases,
licenses, or agreements, and to all mortgages which may hereafter be placed on
or affect such leases, licenses, or agreements or the Land or the Demised
Premises, and also to all renewals, modifications, consolidations, and
extensions of such underlying leases, ground leases, licenses, agreements, and
mortgages. Although no instrument or action on the part of Tenant shall be
necessary to effectuate such subordination, Tenant shall, nevertheless, execute
and deliver such further instruments confirming such subordination as may
reasonably be desired by any holder of any such mortgage or by any lessor,
licensor, or party to an agreement under any such underlying lease, ground
lease, license, or agreement, respectively. If any underlying lease, ground
lease, license, or agreement to which this Lease is subject and subordinate
terminates, or if any mortgage to which this Lease is subordinate is foreclosed,
Tenant shall, on timely request, attorn to the holder of the reversionary
interest or to the mortgagee in possession, as the case may be. If Landlord
shall notify Tenant in writing that the Demised Premises or Building is
encumbered by a mortgage (which notice shall contain the name and address of the
mortgagee), then notwithstanding anything in this Lease to the contrary, no
notice intended for Landlord shall be deemed properly given unless a copy
thereof is simultaneously sent to such mortgagee in the manner provided for in
Paragraph 18.
17. Curing Tenant's and Landlord's Defaults.
---------------------------------------
(a) If Tenant shall fail or refuse to comply with and perform any
conditions and covenants of this Lease, Landlord may, if Landlord so elects,
carry out and perform such conditions and covenants, at the cost and expense of
Tenant, and said cost and expense shall be payable on demand, or, at the option
of Landlord, shall be added to the installment of Monthly Fixed Rent due
immediately thereafter but in no case later than one
23
<PAGE>
month after such demand, whichever occurs sooner, and shall be due and payable
as such. This remedy shall be in addition to such other remedies Landlord may
have hereunder by reason of the breach of Tenant of any of the covenants and
conditions in this Lease contained.
(b) Landlord shall be in default of this Lease if it fails to perform
any obligation of Landlord under this Lease and if such failure is not cured
within thirty (30) days after written notice thereof is given by Tenant to
Landlord and any first mortgagee(s); however, if said failure cannot reasonably
be cured within thirty (30) days, Landlord shall not be in default of this Lease
if Landlord commences to cure the failure within the thirty (30) day period and
diligently continues to cure the default. If Landlord does not cure a default in
accordance with the foregoing time periods, Tenant shall give to Landlord's
first mortgagee(s), if any, an additional notice of such default (in addition to
the notice required to be given pursuant to Paragraph 16) and an additional five
(5) day cure period. If such default remains uncured after the expiration of the
first mortgagee's cure period, Tenant may cure the default at Landlord's
expense. If Tenant pays any reasonable sum in order to cure Landlord's default,
such reasonable sum shall be reimbursed by Landlord to Tenant upon thirty (30)
days' written notice, which notice shall include supporting documentation. If
Landlord fails to so reimburse Tenant and if the existence of the default is not
being disputed by Landlord, Tenant may withhold from future Fixed Rent payments
due and owing the sum owed to Tenant. If the default is being disputed by
Landlord, Tenant may not offset its rent obligations until the existence of
Landlord's default and Tenant's entitlement to reimbursement hereunder has been
established by the judgment of a court of competent jurisdiction.
18. Notices. Any notice, demand, statement, or other communication which
-------
under the terms of this Lease or under any statute or law must or may be given
shall be given by hand delivery; or by registered or certified mail, return
receipt requested; or by reputable private overnight delivery service providing
a receipt of delivery or refusal, delivered, or addressed to the respective
parties at the following address:
To Landlord: c/o Gale & Wentworth, LLC
200 Campus Drive
Suite 200
Florham Park, New Jersey 07932
Attn: Kal Hazer
AND
c/o Gale & Wentworth, LLC
200 Campus Drive
Suite 200
Florham Park, New Jersey 07932
Attn: Kathleen Wielkopolski
24
<PAGE>
To Tenant: Prior to the Commencement Date, at its address stated in the opening
recital and, after the Commencement Date, at the Demised Premises, with a copy
to:
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Attn: Lee S. Saltzman, Esq.
Any such notice, demand, statement, or other communication shall be deemed to
have been given or made upon delivery or the date on which delivery was refused.
Legal counsel for the respective parties may provide the requisite notice(s)
hereunder on behalf of their respective client.
19. Quiet Enjoyment. Landlord covenants that Tenant, upon keeping and
performing each and every covenant, agreement, term, provision, and condition
herein contained on the part and on behalf of Tenant to be kept and performed,
shall quietly enjoy the Demised Premises without hindrance or molestation by
Landlord or by any other person lawfully claiming by, through, or under the
same, subject to the covenants, agreements, terms, provisions, and conditions of
this Lease and the effects of the application of same.
20. Security Deposit. Tenant has this day deposited with Landlord the
Security Deposit for the payment of the Fixed Rent, Additional Rent, and other
charges hereunder and the full and faithful performance by Tenant of the
covenants and conditions on the part of Tenant to be performed. Tenant, in lieu
of cash, may deliver to Landlord, as the Security Deposit, an irrevocable
negotiable letter of credit (the "Letter of Credit") by and drawn on a bank or
trust company reasonably approved by Landlord, in form and content acceptable to
Landlord for its account in the amount of the Security Deposit. The expiration
date of the Letter of Credit shall be the sixtieth (60th) day after the
Expiration Date. Upon Landlord's demand, Tenant, at its expense, shall revise
the Letter of Credit by changing the beneficiary thereunder to whomever Landlord
or its managing agent may designate from time to time. Tenant shall deliver the
revised Letter of Credit naming the new beneficiary within thirty (30) days
after Landlord requests delivery of same. Failure to deliver such revised Letter
of Credit within the aforementioned thirty (30) day period shall be a breach of
this Lease, and Landlord shall have the right, among other remedies provided
hereunder, to present the existing Letter of Credit for payment in full, draw
thereon, and either to apply or retain the proceeds thereof in accordance with
this Paragraph, or to assign such proceeds to any Building purchaser of
Landlord. The Security Deposit shall be returned to Tenant, with interest if
cash, after the expiration of the Term hereof, provided that Tenant has fully
and faithfully performed all such covenants and conditions and is not in arrears
in Fixed Rent, Additional Rent, and other charges. During the Term hereof,
Landlord may, if Landlord so elects, have recourse to such security, to make
good any default by Tenant, in which event Tenant shall, on demand, promptly
restore said security to its original amount. Liability to repay said security
to Tenant shall run with the reversion and title to the Demised Premises,
whether any change in ownership thereof be by voluntary alienation or as the
result of judicial sale, foreclosure, or other proceedings, or the exercise of a
right of taking or entry by any mortgagee. Landlord shall assign or transfer
said security, for the benefit of Tenant, to any subsequent owner or holder of
the reversion or title to Demised Premises, in which case the assignee shall
become liable for the repayment thereof as herein
25
<PAGE>
provided, and the assignor shall be deemed to be released by Tenant from all
liability to return such security. Subparagraph 1X of the Preamble provides for
reductions in the amount of the Security Deposit in certain stages throughout
the Term. These reductions shall only take place if, at the scheduled time for a
reduction, Tenant is not in default under this Lease beyond any applicable
notice and grace period pursuant to Paragraph 13. If Tenant fails to meet this
requirement, the amount of the Security Deposit shall not be reduced, but shall
remain at its existing level for an additional three (3) years, at which time
the foregoing requirement shall once again apply to a reduction to the
next-lower amount stipulated in the Preamble.
21. Inspection and Entry by Landlord.
--------------------------------
(a) During the Term, Tenant agrees to permit Landlord and Landlord's
agents, employees, or other representatives to show the Demised Premises to any
lessor under any underlying lease or ground lease or any mortgagee or any
persons wishing to rent or purchase the same or the Building. In addition,
Tenant agrees that, from and after the twelfth (12th) month preceding the
Expiration Date, Landlord or Landlord's agents, employees, or other
representatives shall have the right to show the Demised Premises to any
prospective tenants.
(b) Tenant agrees that Landlord and Landlord's agents, employees, or
other representatives, shall have the right to enter into and upon the Demised
Premises or any part thereof, at all reasonable hours, for the purpose of
inspecting the same, or reading meters, or performing maintenance, or, subject
to Article 15 hereof, making such repairs or alterations therein as may be
necessary for the safety and preservation thereof. This clause shall not be
deemed to be a covenant by Landlord nor be construed to create an obligation on
the part of Landlord to make such inspection or repairs.
22. Brokerage. Tenant and Landlord warrant and represent to each other
---------
that neither has dealt with any broker or brokers regarding the negotiation of
this Lease, other than the Designated Broker. Tenant and Landlord agree to be
responsible for and to indemnify and hold the other harmless from and against
any claim for a commission or other compensation by any broker other than the
Designated Broker claiming to have negotiated with the indemnifying party with
respect to the Demised Premises or to have called the said Demised Premises to
Tenant's attention or to have called Tenant to Landlord's attention. Landlord
agrees to pay the commission or other compensation of the Designated Broker in
accordance with a separate agreement between Landlord and the Designated Broker.
23. Parking. Tenant shall have the right under this Lease to the
-------
exclusive use of the parking spaces on the Land, as depicted on the parking plan
attached hereto as Exhibit E. Prior to Tenant's occupancy of the second (2d)
floor of the Building, the temporary occupant of such floor shall have the right
to use the parking spaces so designated for such occupant on Exhibit E. Tenant
shall comply with such reasonable Rules and Regulations as Landlord may
promulgate from time to time with respect to said parking.
24. Renewal Options.
---------------
(a) Tenant is hereby granted two (2) successive option(s) to renew
this Lease for a Renewal Term of five (5) years each, subject to the terms of
this Paragraph 24. In
26
<PAGE>
the event that Tenant desires to renew this Lease, it shall give notice in
writing to Landlord of its intention to renew the Lease at least twelve (12)
months prior to the Expiration Date and at least twelve (12) months prior to the
expiration of the (first) Renewal Term, as the case may be. During each of the
Renewal Terms, Tenant shall lease the Demised Premises in its "AS IS" condition
and all of the terms and conditions of this Lease shall otherwise remain in
effect during each of the Renewal Terms, except that the annual Fixed Rent
payable during each of the Renewal Terms shall be the annual fair market renewal
rental value of the Demised Premises based on a comparison of the rents and
accrued escalations then being paid by tenants renewing leases for comparable
space in the competitive market area of the Demised Premises, excluding from
consideration rent concessions made to tenants leasing space initially, but
taking into consideration the designation of the Initial Year for Operating
Expense and Real Estate Tax purposes, rent concessions made to tenants renewing
leases and the fact that Tenant is leasing the Demised Premises "As Is" ("Fair
Market Renewal Rent"); provided, however, that in no event shall the annual
Fixed Rent be less than the annual Fixed Rent payable during the year proceeding
the first year of each such Renewal Term. In the event the Fixed Rent to be paid
during either Renewal Term increases over the amount paid during the year
preceding the first year of each such Renewal Term, Landlord may, at its sole
option, require Tenant to pay, on or before the commencement of the applicable
Renewal Term, a proportionate increase in the Security Deposit, if any. During
any Renewal Term, the Initial Year Operating Expenses and Initial Year Real
Estate Taxes shall be the calendar year in which the renewal occurs.
(b) The Fair Market Renewal Rent of the Demised Premises for purposes
of subparagraph (a) of this Paragraph 24 shall take into account the provisions
of this Lease and shall be determined pursuant to the provisions of this
Paragraph 24(b). Within thirty (30) days after Landlord receives notice of
Tenant's intention to renew this Lease, Landlord shall notify Tenant of
Landlord's determination of the Fair Market Renewal Rent. Within thirty (30)
days after Tenant's receipt of Landlord's determination, Tenant shall notify
Landlord whether Tenant accepts or rejects said determination. If Tenant objects
to Landlord's determination and the parties are unable to resolve the dispute
within fifteen (15) days after Landlord's receipt of Tenant's objection, then
Tenant shall have the right, at its discretion, to either rescind its notice of
intention to renew this Lease or to implement the appraisal process hereinafter
described. If Tenant fails to give Landlord notice of its intention to rescind
its renewal notice by the first day of the ninth (9th) month preceding the then
Expiration Date (or by the first day of the ninth (9th) month preceding the
expiration date of the first Renewal Term, as the case may be), Tenant shall be
deemed to have waived its right to rescind pursuant to the terms of this
Paragraph 24; if Tenant elects to implement the appraisal process, Landlord and
Tenant each agree to be bound by the Fair Market Renewal Rent determined by said
process. In the event Tenant has elected to implement the appraisal process,
then each party, at their own expense, shall designate an MAI or SREA appraiser
in the Morris County area who shall then determine and promptly report to both
parties in writing the Fair Market Renewal Rent of the Demised Premises. If,
after receiving the appraisers' reports, the parties are unable to agree on the
Fair Market Renewal Rent, both parties shall jointly appoint a separate MAI or
SREA appraiser who shall determine the Fair Market Renewal Rent by selecting
either Landlord's appraiser's Fair Market Renewal Rent determination or Tenant's
appraiser's Fair Market Renewal Rent determination according to whichever of the
two valuations is closer to the actual Fair Market Renewal Rent in the opinion
of such third appraiser. The costs of such third appraiser shall be shared
equally by Landlord and Tenant.
27
<PAGE>
(c) Time shall be of the essence of this Lease with respect to the
time periods which Tenant must provide the notices to renew or rescind its
renewal as set forth in subparagraph (b) of this Paragraph 24.
(d) It shall be a condition of the exercise of the option set forth in
this Paragraph 24, that at the time of the exercise of said option, Tenant shall
not be in default under this Lease beyond applicable notice and cure periods.
(e) Tenant acknowledges and agrees that Tenant shall not have the
right to exercise the renewal option(s) set forth herein if it has sublet, or
has otherwise vacated, fifty (50%) percent or more of the amount of Rentable
Area leased by Tenant as of the Commencement Date.
25. Landlord's Inability to Perform. This Lease and the obligation of
-------------------------------
Tenant to pay the rent hereunder and to comply with the covenants and conditions
hereof shall not be affected, curtailed, impaired, or excused because of
Landlord's inability to supply any service or material called for herein, by
reason of any rule, order, regulation, or preemption by any governmental entity,
authority, department, agency, or subdivision, or for any other reason
constituting Force Majeure. Force Majeure shall mean acts of God, accidents,
such as fire or other casualty, and public emergencies, such as war or other
national disaster.
26. Condemnation.
------------
(a) In the event that the whole of the Demised Premises shall be
lawfully condemned or taken in any manner for any public or quasi-public use or
purpose or is transferred, under threat of condemnation, by Landlord to any
party having the right of condemnation (any of such acts are referred to herein
as "eminent domain"), this Lease and the Term and estate hereby granted shall
forthwith cease and terminate as to the date of vesting of title ("date of
taking"), and Tenant shall have no claim against Landlord for, or make any claim
for the value of, any unexpired term of this Lease, and the Fixed Rent and
Additional Rent shall be apportioned as of such date.
(b) In the event that any part of the Demised Premises shall be so
condemned or taken, this Lease shall be and remain unaffected by such
condemnation or taking, except that the Fixed Rent and Additional Rent allocable
to the part so taken shall be apportioned as of the date of taking, and Tenant
shall have no claim against Landlord for, or make any claim for the value of,
the portion of the unexpired Term of this Lease allocable to the part so taken,
provided, however, that either Landlord or Tenant may elect to cancel this Lease
in the event that more than twenty-five (25%) percent of the Demised Premises
should be so condemned or taken, provided such notice of election is given by
Landlord to Tenant not later than sixty (60) days after the date when title
shall vest in the condemning authority. Upon the giving of such notice, this
Lease shall terminate on the thirtieth (30th) day following the date of such
notice, and the Fixed Rent and Additional Rent shall be apportioned as of such
termination date, and Tenant shall have no claim against Landlord for, or make
any claim for the value of, the unexpired Term of this Lease. Upon such partial
taking and this Lease continuing in force as to any part of the Demised
Premises, the Fixed Rent and Additional Rent shall be diminished by an amount
representing the part of the Fixed Rent and Additional Rent properly applicable
to the portion or
28
<PAGE>
portions of the Demised Premises that may be so condemned and shall be reduced
proportionately. If, as a result of the partial taking (and this Lease
continuing in force as to the part of the Demised Premises not so taken), any
part of the Demised Premises not taken is damaged, Landlord agrees with
reasonable promptness to commence the work necessary to restore the damaged
portion to the condition existing immediately prior to the taking and to
prosecute the same with reasonable diligence to its completion. In the event
Landlord and Tenant are unable to agree as to the amount by which the Fixed Rent
and Additional Rent shall be diminished, the matter shall be determined by a
mutually acceptable third party. Pending such determination, Tenant shall pay to
Landlord the Fixed Rent and Additional Rent as fixed by Landlord, subject to
adjustment upon resolution of such dispute.
(c) Nothing herein provided shall preclude Tenant from appearing,
claiming, proving, and receiving in the condemnation proceeding Tenant's moving
expenses and the value of trade fixtures provided such claim shall be separate
from and shall not materially adversely affect Landlord's award.
(d) Subject to the provisions of Paragraph 26(c), the entire award for
any act of eminent domain shall be paid to Landlord, and, in the event of a
partial taking, if this Lease is not canceled by either party pursuant to the
provisions of this Paragraph 26, Landlord, at Landlord's own expense, shall
restore the unaffected part of the Demised Premises to substantially the same
condition and tenantability as existed prior to the taking. Until said
unaffected portion is restored, Tenant shall be entitled to a proportionate
abatement of Fixed Rent and Additional Rent of that portion of the Demised
Premises that is being restored and is not usable until the completion of the
restoration or until said portion of the Demised Premises is used by Tenant,
whichever occurs sooner. Said unaffected portion shall be restored within a
reasonable time, provided, however, if Landlord is delayed by Force Majeure, the
time for completion shall be extended for a period equivalent to the delay. If
such partial taking shall occur in the last year of the Term, either party,
irrespective of the area of the space remaining, may elect to cancel this Lease
and the Term hereby granted, provided such party shall, within sixty (60) days
after such taking, give notice to that effect, and upon the giving of such
notice, the Fixed Rent and Additional Rent shall be apportioned and paid to the
date of expiration of the term specified, which date shall be not more than
thirty (30) days after the date of such notice, and this Lease and the Term
hereby granted shall cease, expire and come to an end upon the expiration of the
period specified in said notice. If either party shall so elect to end this
Lease and the Term hereby granted, Landlord need not restore any part of the
Demised Premises and the entire award for partial condemnation shall be paid to
Landlord, and Tenant shall have no claim to any part thereof.
(e) If the temporary use or occupancy of all or any part of the
Demised Premises shall be so taken, (i) the Term shall not be reduced or
affected in any way except as provided in (iv) below, (ii) Tenant shall continue
to be responsible for all of its obligations hereunder and shall continue to pay
all Fixed Rent and Additional Rent when due, (iii) Tenant shall be entitled to
receive that portion of the award that represents reimbursement for the cost of
restoration of the Demised Premises, compensation for the use and occupancy of
the Demised Premises and for any taking of Tenant's property, except that, if
the temporary period of taking shall extend beyond the expiration of the Term,
the portion of the award representing compensation for the use and occupancy of
the Demised Premises shall be apportioned between
29
<PAGE>
Landlord and Tenant as of the Expiration Date, and Landlord shall receive that
portion of the award which represents reimbursements for the cost of restoration
of the Demised Premises, and (iv) if the date of taking shall occur during the
last year of the Term and the taking shall exceed twenty-five (25%) percent of
the Demised Premises, Tenant may elect to cancel this Lease by notice of
election given by Tenant to Landlord not later than sixty (60) days after the
date when title shall vest in the condemning authority. Upon the giving of such
notice, this Lease shall terminate on the thirtieth (30th) day following the
date of such notice, and the Fixed Rent and Additional Rent shall be apportioned
as of such termination date, with Landlord, and not Tenant, to receive the
portion of the award that represents reimbursement for the cost of restoration
of the Demised Premises and the portion of the award representing compensation
for the use and occupancy of the Demised Premises for the time subsequent to the
cancellation date.
27. Assignment and Subletting.
-------------------------
Tenant may not mortgage, hypothecate, pledge, assign, transfer, or
sublet all or a portion of the Demised Premises or this Lease, as the case may
be, except as specifically permitted in this Paragraph 27.
(a) In the event that Tenant desires to assign this Lease or sublease
all or any portion of the Demised Premises, Tenant shall provide to Landlord the
following information in writing: (i) the terms and conditions of such
assignment or sublease, and (ii) complete and accurate banking, financial, and
other credit information with respect to the proposed assignee or sublessee,
which information must be sufficient to enable Landlord to judge the fiscal
strength of said proposed assignee or sublessee. If Tenant intends to assign the
Lease or to sublet fifty percent (50%) or more of the Demised Premises, then
Landlord shall have the option, exercisable in writing to Tenant within thirty
(30) days after receiving Tenant's request for consent, to recapture the space
intended to be sublet, as the case may be, so that such prospective assignee or
sublessee shall then become the sole tenant of Landlord hereunder, and Tenant
shall be fully released from any and all obligations hereunder with respect to
the Demised Premises, in case of an assignment, or with respect to the space to
have been sublet, in the case of a sublease. Any sale or other transfer, whether
voluntary or involuntary, by operation of law or otherwise of a majority of the
voting stock of Tenant, if Tenant is a corporation, or a majority of the
partnership interests in Tenant, if Tenant is a partnership, shall be an
assignment for purposes of this Paragraph 27 whether such transfer is
accomplished in one (1) transaction or a series of transactions, except for
transactions with an entity into or with which Tenant is merged or consolidated
or to which substantially all its assets are transferred, provided that the
principal purpose of such merger is not the assignment of this Lease and that
the successor has a net worth (computed in accordance with GAAP) at least equal
to Tenant's net worth on the date of this Lease.
(b) In the event that Landlord elects not to (or does not have the
right to) recapture the Lease as hereinabove provided, Tenant may nevertheless
assign or sublet the whole of the Demised Premises, subject to Landlord's prior
written consent, which consent shall not be unreasonably withheld, conditioned
or delayed, and subject to the consent of any mortgagee or ground lessor if
required under the terms of any mortgage or ground lease, on the basis of the
following terms and conditions:
30
<PAGE>
(i) Tenant shall provide to Landlord the name and address of the
assignee or sublessee.
(ii) The assignee shall assume, by written instrument, all of the
obligations of this Lease and a copy of such assumption agreement shall be
furnished to Landlord within ten (10) days of its execution.
(iii) Tenant and each assignee shall be and remain liable for the
observance of all of the covenants and provisions of this Lease, including, but
not limited to, the payment of Fixed Rent, Additional Rent, and other charges
due hereunder through the entire Term of this Lease, as the same may be renewed,
extended, or otherwise modified.
(iv) Tenant shall pay to Landlord fifty percent (50%) of any
Assignment Proceeds (as defined below), in the case of and assignment of this
Lease, and fifty percent (50%) of any Sublease Profit, in the event of a
subletting of all or a portion of the Demised Premises; provided, however, that
any consideration paid to Tenant or the owners of Tenant in connection with the
sale of the assets or stock of Tenant shall not be subject to the foregoing
unless a portion of such consideration is specifically allocated to the
assignment of this Lease by the parties to the transaction. As used herein,
"Assignment Proceeds" shall mean all consideration payable to Tenant, directly
or indirectly, by any assignee, or any other amount received by Tenant from or
in connection with any assignment (including, but not limited to, sums paid for
the sale or rental, or consideration received on account of any contribution, of
Tenant's personal property) after deducting therefrom: (1) in the event of a
sale (or contribution) of Tenant's personal property, the then unamortized or
undepreciated cost thereof determined on the basis of Tenant's federal income
tax returns, (2) the reasonable out-of-pocket costs and expenses of Tenant in
making such assignment, such as brokers' fees, attorneys' fees, and advertising
fees paid to unrelated third parties, (3) any payments required to be made by
Tenant in connection with the assignment of its interest in this Lease pursuant
to Laws or any real property transfer tax of the United States or the State of
New Jersey (other than any income tax), (4) the commercially reasonable cost of
improvements or alterations made by Tenant expressly and solely for the purpose
of preparing the Demised Premises for such assignment, as determined by Tenant's
federal income tax returns, and (5) the unamortized or undepreciated cost of any
Tenant's personal property leased to and used by such assignee. For purposes
hereof (A) "Sublease Profit" shall mean the excess of (x) the Sublease Rent over
(y) the then Fixed Rent, (B) "Sublease Rent" shall mean any rent or other
consideration paid to Tenant directly or indirectly by any subtenant or any
other amount received by Tenant from or in connection with any subletting
(including, but not limited to, sums paid for the sale or rental, or
consideration received on account of any contribution, of Tenant's personal
property less the Sublease Expenses and (C) "Sublease Expenses" shall mean: (u)
in the event of a sale of Tenant's personal property, the then unamortized or
undepreciated cost thereof determined on the basis of Tenant's federal income
tax returns, (v) the reasonable out-of-pocket costs and expenses of Tenant in
making such sublease, such as brokers' fees, attorneys' fees, and advertising
fees paid to unrelated third parties, (w) the commercially reasonable cost of
improvements or alterations made by Tenant expressly and solely for the purpose
of preparing the Demised Premises for such subtenancy if not used by Tenant
subsequent to the expiration of the term of the sublease, and (x) the
unamortized or undepreciated cost of any Tenant's personal property leased to
and used by such subtenant. In determining Sublease Rent, the costs set forth in
clauses (v) and (w) shall be
31
<PAGE>
amortized on a straight-line basis over the term of such sublease and the costs
set forth in clause (x) shall be amortized on a straight line basis over the
greater of the longest useful life of such improvements, alterations or personal
property (as permitted pursuant to the Internal Revenue Code of 1986, as
amended) and the term of such sublease.
(v) In any event, the acceptance by Landlord of any rent from any
of the subtenants or the failure of Landlord to insist upon the strict
performance of any of the terms, conditions, and covenants herein from any
assignee or subtenant shall not release Tenant herein, from any and all of the
obligations herein during and for the entire Term of this Lease.
(vi) Tenant shall pay the actual reasonable legal costs incurred
by Landlord to cover its handling charges for each request for consent to any
assignment or sublet prior to its consideration of the same.
(vii) Landlord shall have the right to require from Tenant or any
assignee an increase in the Security Deposit prior to the effective date of any
permitted assignment or sublease. Landlord shall use its reasonable discretion
in determining the amount of the increase necessary to cover the potential costs
related to the wear and tear to the Demised Premises and to the Building caused
by the moving in and out of Tenant, the assignee, and/or the sublessee.
(viii) In no event may Tenant enter into more than five (5)
separate subleases with respect to the Demised Premises.
(ix) Pursuant to the provisions of Paragraph 6, Tenant shall,
upon expiration of the Term, at Landlord's request, remove any demising walls
which have been installed by Tenant in connection with any subleases.
(c) Any sublet or assignment to an Affiliate, as defined hereinafter,
shall not be subject to the recapture provisions set forth in Paragraph 27(a) or
to the provisions of Subparagraph 27(b)(iv) and shall not require Landlord's
prior written consent, but all other provisions of this Paragraph 27 shall
apply. As used herein, an Affiliate shall refer to an entity that is in common
control with Tenant, is controlled by Tenant, or controls Tenant.
(d) If Tenant believes that Landlord has unreasonably withheld its
consent with respect to a proposed subletting or assignment as to which Landlord
is required to be reasonable pursuant to paragraph (b), above, Tenant may,
within twenty (20) days after receiving notice that Landlord has withheld its
consent, give notice to Landlord of Tenant's intention to submit the question of
whether Landlord's consent was withheld unreasonably to expedited arbitration in
accordance with the expedited procedures of the American Arbitration Association
("AAA") Rules for the Real Estate Industry (the "Rules") except that: (i) the
list of arbitrators referred to in paragraph (b) of Rule 57 shall be returned to
the AAA within five (5) business days after submission of the list; (ii)
Landlord and Tenant shall notify the AAA within four (4) business days after an
arbitrator is appointed of any objections they may have thereto and shall have
no right to object to an arbitrator whose name was on the list submitted by the
AAA and as to whom no objection was made in connection with Rule 57; (iii) to
the extent acceptable to the arbitrator, the notice of hearing in Rule 58 shall
be four (4) business days in
32
<PAGE>
advance of the hearing; and (iv) the hearing shall be held within seven (7)
business days after the appointment of the arbitrator. In the event that Tenant
prevails against Landlord in an expedited arbitration brought pursuant to this
Section 10.02(c), Landlord's sole liability to Tenant for its refusal to consent
to an assignment proposed by Tenant shall be to consent thereto and Tenant
hereby waives and relinquishes any and all claims for damages or other
compensation by reason thereof. The foregoing reference to Rules 57 and 58
pertain to the Rules as amended and effective on April 1, 1997. In the event
that a subsequent amendment of the Rules becomes effective, the time frames set
forth herein shall pertain, as applicable, to the substantive equivalent of
those rules contained in such later version.
28. Environmental Laws.
------------------
(a) Tenant agrees to comply with all present or future federal, state,
or local laws, rules, or regulations dealing with environmental protection
("Environmental Laws"), including, but not limited to, the Industrial Site
Recovery Act (N.J.S.A. 13:lK-6, et seq.) ("ISRA") having jurisdiction over the
Demised Premises. Tenant agrees that such compliance shall be at Tenant's sole
cost and expense. Tenant shall immediately provide Landlord, as they are issued
or received by Tenant, with copies of all correspondence, reports, notices,
orders, findings, declarations, and other materials that are pertinent to
Tenant's compliance with Environmental Laws.
(b) Tenant represents to Landlord that Tenant's Standard Industrial
Classification (SIC) Number as used on Tenant's Federal Tax Return is as set
forth in the Preamble of this Lease. Tenant shall not conduct any operations at
the Demised Premises that shall cause the Building or the Demised Premises to be
deemed an "industrial establishment" as currently defined in ISRA or otherwise
trigger ISRA. If, due to an amendment to ISRA or otherwise Tenant's operations
become subject to ISRA during the Term of the Lease, Tenant shall comply with
all ISRA requirements at Tenant's sole cost and expense. Such expenses shall
include, but not limited to, any applicable state agency fees, engineering fees,
clean-up costs, filing fees, and suretyship expenses. In addition, in the event
any other Building tenant or Landlord triggers ISRA, Tenant agrees to cooperate
with Landlord and provide any information relating to Tenant and its operations
at the Demised Premises that is needed by Landlord to comply with ISRA. The
foregoing undertakings shall survive the termination or sooner expiration of the
Lease and surrender of the Demised Premises and shall also survive the sale,
lease, or assignment of the Demised Premises by Landlord for a period of one (1)
year.
(c) Tenant shall not generate, store, manufacture, refine, transport,
treat, dispose of, or otherwise permit to be present on or about the Demised
Premises any Hazardous Substances with the exception of de minimis quantities of
Hazardous Substances commonly used in the cleaning and maintenance of general
business offices in quantities appropriate to such use. As used herein,
"Hazardous Substance" shall be defined as any "hazardous chemical," "hazardous
substance," "hazardous waste," or similar term as defined in the Comprehensive
Environmental Response Compensation and Liability Act, as amended (42 U.S.C.
(S)(S)9601, et seq.), ISRA, the New Jersey Spill Compensation and Control Act,
as amended, (N.J.S.A. 58:10- 23.llb, et seq.), any rules or regulations
promulgated thereunder, or in any other present or future Environmental Laws.
33
<PAGE>
(d) Tenant agrees to indemnify, defend, and hold harmless Landlord and
each mortgagee of the Demised Premises from and against any and all liabilities,
damages, claims, losses, judgments, causes of action, costs, and expenses
(including the reasonable fees and expenses of counsel) that may be incurred by
Landlord or any such mortgagee or threatened against Landlord or such mortgagee,
relating to or arising out of any breach by Tenant of this Paragraph 28, which
indemnification shall survive the expiration or sooner termination of this
Lease.
29. Parties Bound.
-------------
(a) The covenants, agreements, terms, provisions, and conditions of
this Lease shall bind and benefit the respective successors, assigns, and legal
representatives of the parties hereto with the same effect as if mentioned in
each instance where a party hereto is named or referred to, except that no
violation of the provisions of Paragraph 7(c) or of Paragraph 27 hereof shall
operate to vest any rights in any successor, assignee, or legal representative
of Tenant and that the provisions of this Paragraph 29 shall not be construed as
modifying the conditions contained in Paragraph 13 hereof.
(b) Tenant acknowledges and agrees that neither Landlord, nor any
shareholder, officer, director, partner (general or limited), limited liability
company member, tenant-in-common, venturer, trustee, trust beneficiary, grantor,
trustee-grantor, or other individual or entity having an interest in Landlord
shall have any personal liability for the performance of any of the terms,
covenants, or conditions to be performed by Landlord under this Lease; rather,
Tenant agrees to look solely to Landlord's interest and estate in the Land and
the Building for the satisfaction of Tenant's remedies arising out of or related
to this Lease.
(c) The term "Landlord" as used in this Lease means only the owner, or
the mortgagee in possession, for the time being, of the Demised Premises (or the
owner of a lease of the Demised Premises) so that in the event of, and from and
after the date of, any sale or other transfer of the Land, the Building, or the
Demised Premises, or of this Lease, such Landlord shall be and hereby is
entirely freed and relieved of all covenants and obligations of Landlord under
this Lease, and it shall be deemed and construed without further agreement
between the parties or their successors-in-interest, or between the parties and
the purchaser at any such sale, or the said lessee of the Land, Building, or of
the Demised Premises, that the purchaser or other transferee of the same has
assumed and agreed to carry out any and all covenants and obligations of
Landlord hereunder.
30. Miscellaneous.
-------------
(a) This Lease contains the entire contract between the parties. No
representative, agent, or employee of Landlord has been authorized to make any
representations or promises with reference to the leasing of the Demised
Premises or to vary, alter, or modify the terms hereof. No additions, changes or
modifications, renewals, or extensions hereof shall be binding unless reduced to
writing and signed by Landlord and Tenant.
(b) The terms, conditions, covenants, and provisions of this Lease
shall be deemed to be severable. If any clause or provision herein contained be
adjudged to be invalid or
34
<PAGE>
unenforceable by a court of competent jurisdiction or by operation of any
applicable law, it shall not affect the validity of any other clause or
provision herein, but such other clauses or provisions shall remain in full
force and effect.
(c) The paragraph headings in this Lease are for convenience only and
are not to be considered in construing the same.
(d) If, in connection with obtaining financing for the Building, a
banking, insurance, or other recognized institutional lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay, or defer its consent thereto, provided
that such modifications do not in any significant manner increase the
obligations of Tenant hereunder or affect the leasehold interest created or the
conduct of Tenant's business operations at the Demised Premises.
(e) This Lease shall be governed by and construed in accordance with
the laws of the State of New Jersey.
(f) The parties agree that any litigation arising out of this Lease
shall be venued in the Superior Court of New Jersey. Each party waives trial by
jury in any action or proceeding arising out of this Lease. Furthermore, Tenant
expressly waives its right to make any claims against Landlord, unless Tenant
commences a legal action (if permitted under this Lease) against Landlord within
eighteen (18) months from the date of expiration or other termination of this
Lease; provided, however, that the foregoing limitation shall not apply to a
claim by Tenant for a share of the refund of Real Estate Taxes.
(g) Tenant shall not do or cause anything to be done whereby the
Demised Premises may be encumbered by a construction lien. If any construction
lien is filed against the Demised Premises, the Building, or the Land as a
result of any Alterations, repairs, or any other work or act of Tenant, Tenant
shall discharge or bond the same within fifteen (15) days from the date of the
filing of said lien. If Tenant shall fail to discharge or bond the lien,
Landlord may bond or pay lien or claim for the account of Tenant without
inquiring into the validity of the lien or claim, and Tenant shall reimburse
Landlord upon demand.
(h) Tenant represents that the undersigned officer(s) have been duly
authorized to enter into this Lease and that the execution and consummation of
this Lease by Tenant does not and shall not violate any provision of any by-
laws, certificate of incorporation, agreement, order, judgment, governmental
regulation, or any other obligations to which Tenant is a party or is subject.
Upon execution hereof, Tenant shall deliver a Secretary's certificate evidencing
its authority to execute this Lease.
(i) In any case where Landlord's consent, permission, or approval is
requested (or required to be requested) by Tenant in connection with this Lease,
Landlord shall have the right to charge Tenant all reasonable costs
(architectural, engineering and legal) as Additional Rent that Landlord incurs
in determining whether such consent, permission, or approval shall be granted.
31. Hold Over Tenancy. If Tenant shall remain in the Demised Premises
-----------------
after the expiration of the Term of this Lease without having executed and
delivered a new lease (or
35
<PAGE>
amendment to this Lease) with Landlord, such holding over shall not constitute a
renewal or extension of this Lease. Landlord may, at its option, (i) elect to
treat Tenant as one who has not removed at the end of its Term and thereupon be
entitled to all the remedies against Tenant provided by law in that situation,
or (ii) construe such holding over as a month-to-month tenancy subject to all
the terms and conditions of this Lease, except as to the duration thereof, in
which event Tenant shall pay to Landlord one hundred fifty (150%) percent of the
greater of: (x) the Fixed Monthly Rent in effect on the Expiration Date and (y)
the then fair market rent of the Demised Premises; plus all other sums due
hereunder, making such payment in accordance with this Lease. Tenant shall be
otherwise bound by all of the terms, covenants, and conditions contained in this
Lease.
32. Financial Statements. Tenant agrees, within (90) days after the
--------------------
end of Tenant's accounting year, to furnish to Landlord and to any mortgagee or
ground lessor of the Building and/or Land a certified balance sheet and profit
and loss statement for the last accounting year.
33. Satellite Dish Antenna. Provided Landlord shall have the continued
----------------------
ability to lawfully allow other parties or itself the right to install, operate
and maintain roof top antennas or other communications devices, Tenant shall
have the non-exclusive right to install, operate, and maintain, at its sole cost
and expense, one (1) or more communication devices on the roof of the Building,
the height and number of which are subject to Landlord's prior reasonable
approval in writing and to any applicable governmental regulation or ordinance.
Said device shall not display any name, logo, or other identity. Tenant shall be
solely responsible for obtaining, with Landlord's reasonable cooperation, if
necessary (but at no cost to Landlord), any and all governmental approvals and
permits, including, without limitation, any FCC permit, which may be required in
connection with the installation and use of the device. Tenant shall be
responsible for any and all damage to the Building in connection with said
device and agrees to indemnify and hold Landlord harmless from all direct and
indirect reasonable costs, expenses, and claims resulting therefrom. Landlord
shall designate a satisfactory Building location (taking into consideration
Tenant's device requirements), reasonable method of annexation (including the
location of any necessary wiring), and installer for said device. Tenant agrees
not to interfere with other radio transmission or reception equipment located at
the Building. If Tenant should cause such interference, Tenant shall cease its
operation of the communication device and, at its sole cost and expense,
immediately take the necessary and appropriate action to eliminate and correct
such interference before resuming operation. Such corrective action may include,
but not be limited to, Landlord's relocation of the device and any related
equipment, the cost of which Tenant shall pay as Additional Rent to Landlord
within ten (10) days of Tenant's receipt of a bill therefor. Upon the expiration
or sooner termination of this Lease, Tenant, at Landlord's option, shall remove
said communication device and repair all injury done by or in connection with
the installation or removal of said device. Any device installed by Tenant
pursuant to the provisions of this Paragraph shall be for the sole use of Tenant
itself, and Tenant may not assign, sublet or license the communication device or
the use thereof to any third party.
36
<PAGE>
IN WITNESS WHEREOF Landlord and Tenant have caused this Lease to be
executed as of the date first above written.
WITNESS: MSGW MADISON, L.L.C.
By: MSGW REAL ESTATE FUND II, LLC
Sole Member
By: /s/ Eugene Diaz
- --------------------- ------------------------------
Name: Eugene Diaz
----------------------------
Title: Vice President
---------------------------
DATED: February 9, 2000
ATTEST: LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ E. Bruce Lovenberg
------------------------------
Name: E. Bruce Lovenberg
----------------------------
Title: Chief Financial Officer
---------------------------
DATED: February 9, 2000
37
<PAGE>
EXHIBIT A
---------
FLOOR PLAN
A-1
1
<PAGE>
EXHIBIT B
---------
Work Letter to Lease
Between
MSGW MADISON, L.L.C.
and
LOGICAL DESIGN SOLUTIONS, INC.
Subject to and in consideration of the provisions of the lease between Landlord
and Tenant (the "Lease") to which this Exhibit B is attached, Tenant shall
design and Landlord's construction manager, Gale & Wentworth Construction
Services, LLC ("Construction Manager") shall construct certain improvements in
the Demised Premises as set forth in this Exhibit.
The provisions of this Exhibit shall have the same force and effect as if this
Exhibit were a numbered Paragraph of the Lease. In addition, the capitalized
terms herein shall have the same meanings as ascribed thereto in the Lease,
unless otherwise expressly provided herein to the contrary. The provisions of
this Work Letter are intended to supplement the Lease and are specifically
subject to the provisions thereof. In the event of any conflict between the
provisions of the Lease and the provisions of this Work Letter, the provisions
of the Lease shall control.
1. Plans and Schedules:
----------------------
1.1 Tenant has provided to Landlord at Tenant's expense design development
plans for the Demised Premises (the "Preliminary Plans"). Landlord has
approved the Preliminary Plans. Subject to the provisions of this Lease,
Landlord and Tenant have agreed to the following schedule for the
completion of the Tenant Improvements, as hereinafter defined:
<TABLE>
<S> <C>
* At Tenant's expense, Tenant shall provide to Landlord February 28, 2000 - 3d and 4th Floors
the Final Plans, as hereafter defined, which describe March 15, 2000 - 2d Floor
improvements to prepare the Demised Premises for Tenant's
occupancy (the "Tenant Improvements"), by the following
dates:
* Final subcontractor bidding shall be completed during February 29 to March 20, 2000
the following period:
* Based on the scope selected by Tenant, Construction March 21 to 27, 2000
Manager and Tenant shall agree upon a budget during the
following period:
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
* Construction Manager shall Substantially Complete the March 28 to June 13, 2000
Tenant Improvements and shall obtain a temporary
Certificate of Occupancy for the 3d and 4th Floors during
the following period:
* Tenant occupancy and rent commencement shall occur for June 14, 2000
the 3d and 4th Floors by the following date:
* Construction Manager shall Substantially Complete the January 15, 2001
Tenant Improvements and shall obtain a temporary
Certificate of Occupancy, and Tenant occupancy and rent
commencement shall occur for the 2d Floor by the
following date:
</TABLE>
Tenant and Construction Manager shall reasonably cooperate to integrate the
bidding and budgeting for the Tenant Improvements for the entire Demised
Premises into one project, despite the fact that the 2d Floor will be improved
at a later date.
1.2 As used herein, the "Final Plans" shall be defined as those drawings,
plans, and specifications submitted to and approved by Landlord, which
shall include any necessary working drawings, details, schedules, and
specifications for all architectural, electrical mechanical systems and
plumbing work within the Demised Premises in a form sufficient to enable
Construction Manager to obtain all construction permits and to perform
the Tenant Improvements without the need for additional details or
information. Within ten (10) Business Days after Landlord's receipt of
Tenant's proposed Final Plans, Landlord shall provide Tenant notice of
its approval or disapproval of the same. The scope of Landlord's review
during said time period shall be to determine whether the proposed Final
Plans conform to the Preliminary Plans and meet the requirements of
governmental authorities. In the event Landlord disapproves of the
proposed Final Plans, such notice shall contain Landlord's reasons for
such disapproval and the requested modifications and/or eliminations.
Tenant shall have three (3) Business Days after receipt of Landlord's
notice of disapproval to modify or eliminate those items that Landlord
has disapproved and to resubmit such proposed Final Plans for review.
Upon receipt of such resubmitted plans, Landlord shall have five (5)
Business Days to provide Tenant notice of its approval or disapproval of
the same. In the event Landlord disapproves of such resubmitted plans,
such notice shall again contain Landlord's reasons for such disapproval
and the requested modifications and/or eliminations. Tenant acknowledges
that subject to the provisions of Paragraph 7 hereof, any days from the
date of such disapproval until the date Construction Manager approves of
any further proposed Final Plans as the Final Plans shall constitute
Tenant Delays. Landlord agrees that any approvals required of it under
this Work Letter shall not be unreasonably withheld or delayed.
1.3 Construction Manager and Tenant shall work together to identify the
firms to be asked to bid. Construction Manager shall solicit a minimum
of three (3) bids for each trade
B-2
<PAGE>
estimated by Construction Manager to cost in excess of Twenty-five
Thousand and 00/100 Dollars ($25,000.00). All bids and subcontracts must
be at a fixed price. Upon a review of all bids, Construction Manager
shall forward to Tenant a summary of said bids, together with
Construction Manager's recommendation regarding the award of each
subcontract. Each such subcontract shall be subject to Tenant's prior
written approval. Construction Manager will award all subcontracts to
the lowest qualified bidder recommended by Construction Manager and
approved by Tenant. Construction Manager shall monitor and complete
construction of all Tenant Improvements as per the Final Plans.
1.4 In the event that any component of the schedule set forth above is
delayed due to Tenant's failure to provide plans and specifications on
the date or within the time period set forth above, or Tenant's failure
to provide its approval, consent or input on the date or within the time
period set forth above, such delay shall constitute a Tenant Delay, as
more particularly defined hereinafter.
1.5 As used herein, the term "Tenant Improvement Work" shall mean and refer
to the Tenant Improvements being performed to the Demised Premises
pursuant to the Final Plans. The term "Tenant Work" shall mean and refer
to all work that Tenant may perform through its own contractors with
respect to all work desired by Tenant that is not included in the Tenant
Improvement Work. Tenant Work shall be shown on the Final Plans. The
term "Base Building Work" shall be as defined and more particularly
described in Schedule I attached to this Exhibit.
1.6 Notwithstanding anything herein to the contrary, Tenant acknowledges
that the eleven (11) week construction period projected in Section 1.1
above is based upon the TI Cost being no greater than Sixty Dollars
($60.00) per square foot of Rentable Area ("Threshold Rate"), being
Three Million One Hundred Twenty Thousand Dollars ($3,120,000)
("Threshold Amount"). Therefore, if (i) Construction Manager's
reasonable estimate for the TI Cost per square foot of Rentable Area is
(or shall be) in excess of the Threshold Rate and (ii) Construction
Manager reasonably believes that Construction Manager shall be unable to
Substantially Complete the Tenant Improvements during said time period
due to the same, Tenant acknowledges that a Tenant Delay shall then
exist, the extent of which shall be determined in accordance with
Section 7.2 hereof
2. Construction Manager's Responsibilities
2.1 Construction Cost
The "Construction Cost" as defined herein shall be the actual verifiable
cost (as evidenced by paid invoices, copies of cancelled checks tendered
in payment thereof, final lien waivers and/or such evidence as shall be
reasonably requested by Tenant), including out-of-pocket soft costs, to
Landlord of the construction of the Demised Premises in accordance with
the Final Plans ("Cost of Work"), plus five (5%) percent of the first
$1,500,000 of Cost of Work, and four (4%) percent on the remaining Cost
of Work, as profit to the Construction Manager, and seven (7%) percent
of such Cost of Work as a payment to the Construction Manager to
compensate the Construction
B-3
<PAGE>
Manager for its overhead costs. The Cost of Work shall include all
construction related costs, such as subcontractor trade cost, materials,
labor for cleanup, permits, temporary protection, dumpsters, blueprint
reproduction, overnight deliveries, and other directly related project
costs of the Construction Manager.
2.2 Project Control
2.2.1 Work Supervision -- Construction Manager shall monitor the work of the
subcontractors and coordinate the same with the activities and
responsibilities of Landlord, Tenant, and the designers to complete the
Tenant Improvement Work, and allow Tenant to complete the Tenant Work,
in accordance with Tenant's objectives of cost, time, and quality. A
superintendent will be maintained at the site on a full-time basis by
Construction Manager to coordinate and direct the Tenant Improvement
Work and the progress of the trade contractors.
2.2.2 Work Procedures -- Construction Manager shall establish reasonable
procedures for coordination among Tenant, Tenant's designers and the
subcontractors with respect to all aspects of the Tenant Improvement
Work and the Tenant Work, and implement such procedures. Said procedures
shall be subject to Tenant's approval which approval shall not be
unreasonably withheld, conditioned or delayed.
2.2.3 Scheduling -- Construction Manager shall regularly schedule and conduct
progress meetings, or upon Tenant's reasonable request, at which trade
contractors, Tenant, Tenant's designers and Construction Manager can
discuss jointly such matters as procedures, progress, problems and
scheduling.
2.2.4 Monitoring Construction Progress -- Construction Manager shall provide
regular monitoring of the schedule as construction progresses and
identify potential variances between scheduled and probable completion
dates.
2.2.5 Supervision of Trade Contracts -- Construction Manager shall determine
the adequacy of the trade contractors' personnel and equipment and the
availability of materials and supplies to meet the schedule and
implement courses of action when the requirements of a trade contractor
are not being met.
2.2.6 Permits and Fees -- Construction Manager shall file applications for and
obtain all building permits, inspections and other governmental
approvals for the Tenant Improvement Work. The fees therefor shall be
included as a component of the Cost of Work.
2.2.7 Safety Programs -- Construction Manager shall review the safety programs
of each of the trade contractors and make appropriate recommendations.
2.2.8 Shop Drawings and Samples -- In collaboration with Tenant's architect,
Construction Manager shall establish and implement reasonable procedures
for expediting the processing and approval of shop drawings and samples.
B-4
<PAGE>
3. Substantial Completion
3.1 Construction Manager shall determine Substantial Completion and provide
seven (7) Business Days' prior written notice to Tenant and Tenant's
architect that the Tenant Improvement Work is ready for final
inspection. Construction Manager will secure and transmit to Tenant any
guaranties and warranties. Construction Manager will then turn over to
Tenant for its use all manuals, record drawings and maintenance
information pertaining to the Tenant Improvements. As used herein, the
term "Substantial Completion" or "Substantially Complete(d)" shall mean
the date when the Tenant Improvements shall have been completed in good
and workmanlike manner in accordance with the Final Plans (as modified
by any Change Orders, as defined hereinafter) except for Punch List
Items, as defined hereinafter. As used herein, the term "Punch List
Items" shall mean details of construction, decoration, and mechanical
adjustment which, in the aggregate, are minor in character and do not
substantially interfere with the tenantability of the Demised Premises.
4. Allowances
4.1 Landlord shall contribute the amount of Thirty One Dollars ($31.00) per
square foot of Rentable Area of the Demised Premises (the "TI
Allowance") towards the TI Cost. The TI Allowance shall also include an
additional $25,000 for use in renovating the elevator cabs, which
renovation shall be part of the Tenant Improvements. In the event that
any portion of the TI Allowance is remaining after the completion of the
Tenant Improvements, Tenant may use same to pay the cost of Tenant Work.
Tenant acknowledges that Tenant shall not have any right to any other
credit with respect to said portion.
4.2 In the event that the TI Cost exceeds the TI Allowance, the excess
amount shall constitute Additional Rent under the Lease and shall be
paid by Tenant to Landlord within twenty (20) days of receipt of an
invoice verifying the amount of the Tenant's Improvements completed
through the end of the prior month. Each invoice will include a ten
(10%) percent retainage to be withheld on all subcontractor costs until
Substantial Completion. There will be no retainage held on any general
condition items and fees.
5. Base Building Work
5.1 The Base Building Work, which is as defined in the Schedule I attached
to this Exhibit, will be furnished and installed by Construction Manager
at Landlord's expense and shall not be a component of the TI Cost.
Landlord agrees that Landlord shall complete those items of Base
Building Work which are necessary prerequisites to the performance of
Tenant Work and Tenant Improvement Work, as shown on the Final Plans, in
sufficient time to permit Tenant to complete the Tenant Work and
Landlord to complete the Tenant Improvement Work prior to the applicable
Commencement Date.
6. Change Orders
6.1 In the event that Tenant desires a Change Order, Tenant shall submit to
Construction Manager Construction Documents or other appropriate
documentation setting forth the
B-5
<PAGE>
proposed change and instructing Construction Manager in writing whether
to cease work or cease any segment of work while the Change Order is
being reviewed as such review is more particularly described below (in
which case the delay shall be a Tenant Delay) or whether Construction
Manager should continue constructing the Tenant Improvements in
accordance with the Final Plans notwithstanding the Change Order. In the
event that no such written instructions are given, Construction Manager
shall continue constructing the Tenant Improvements in accordance with
the Final Plans without regard to the Change Order. Within three (3)
Business Days after receipt of any request for a Change Order from
Tenant Construction Manager shall (a) review such request to determine
whether the proposed Change Order would be consistent with the style,
type, and quality of construction of the Building and (b) approve or
reject the proposed Change Order based upon such review for consistency.
If Construction Manager has stopped work, or some segment thereof at
Tenant's request. Construction Manager shall not resume work, or some
segment thereof, until it receives written instructions from Tenant
authorizing the recommencement of such work. Upon the granting of any
approval Construction Manager shall notify Tenant of the amount, if any,
of additional TI Cost arising from the request for the Change Order and
of Construction Manager's estimate of the delay in Substantial
Completion that will be caused by such proposed Change Order, if any. In
the event of a rejection by Construction Manager of the Change Order, or
any part thereof, Tenant may make changes to the proposed Change Order
and resubmit the same to Construction Manager pursuant hereto. Upon
receiving Construction Manager's approval to a Change Order and the cost
for the Change Order, Tenant shall, as soon thereafter as practicable,
but in no event in excess of three (3) Business Days, and understanding
that any failure to respond during said period may cause delays in
Substantial Completion substantially greater than the estimate given by
Construction Manager, authorize the performance of the Change Order work
that Tenant desires by approving in writing the commencement of the
Change Order work and the cost thereof and by submitting to Construction
Manager any necessary revisions to the Final Plans in a form sufficient
for Construction Manager to obtain all necessary permits and approvals
to construct the Tenant Improvements and to perform the Tenant
Improvements without the need for additional details or information in
accordance with such revised Final Plans. Upon the submission of such
revised Final Plans, such revised Final Plans shall become the Final
Plans hereunder. Any delay in Substantial Completion caused by the
Change Order, whether greater or less than Construction Manager's
estimate, shall be a Tenant Delay.
7. Tenant Delay
7.1 If (a) a delay shall occur in the Substantial Completion of the Tenant
Improvements in accordance with the Final Plans (or any revised Final
Plans) by Construction Manager as the result of (i) any written
direction by Tenant that Construction Manager delay proceeding with the
Tenant Improvement Work or any segment of the Tenant Improvement Work,
(ii) any Change Order authorized by Tenant in writing, (iii) any
interference in Construction Manager's performance of the Tenant
Improvement Work caused by Tenant or Tenant's agents, representatives,
or contractors performing the Tenant Work, (iv) any failure by Tenant to
comply with the requirements of Section 1 of this Exhibit, (v) any delay
caused by the per square foot cost of the TI Cost exceeding (or
estimated by Construction Manager to exceed) the Threshold Rate, as more
particularly
B-6
<PAGE>
described above, or (vi) any other act or omission of Tenant, its
agents, employees, or contractors (any of such events being a "Tenant
Delay"), then (b) the Commencement Date shall (even though no
Certificate of Occupancy (temporary or permanent) has been issued or the
Tenant Improvements have not been Substantially Completed) be
accelerated by a time period equal to the number of days that shall be
counted as Tenant Delays, but in no event to dates earlier than those
stated in Paragraph 4(b) of the Lease. Tenant Delay shall not include,
or shall be reduced by, any delay caused by Landlord and/or Construction
Manager, and/or any person acting by, through or under them,
respectively, in performing their obligations hereunder.
7.2 The extent of any Tenant Delay shall be determined in the following
manner: Landlord shall notify Tenant in writing of the estimated length
of the Tenant Delay involved as soon as practicable after the
information necessary to estimate such Tenant Delay is available (which
notice shall include the basis for the Landlord's estimate) and, as
Landlord obtains the information to calculate the actual Tenant Delay,
Landlord shall so notify Tenant providing it with the basis used in
calculating such Tenant Delay. In the event of a dispute concerning the
length of any Tenant Delay, the parties agree that such dispute shall be
resolved in accordance with the Expedited Procedures set forth by the
American Arbitration Association for expedited arbitration.
Notwithstanding the foregoing, Tenant shall pay all sums required to be
paid hereunder to Landlord, subject to a refund of the appropriate sums
upon the resolution of such dispute.
8. Observation by Tenant and Tenant Work Period
8.1 Landlord shall afford Tenant and its representatives access to the
Premises at reasonable times prior to the Commencement Date, at Tenant's
sole risk and expense, for the purpose of observing the performance of
the Tenant Improvement Work and of evaluating the workmanship. The
scheduling and coordination of Tenant's access hereunder shall be
subject to the reasonable control and regulation of Landlord to minimize
interference with the construction of the Tenant Improvement Work.
Access for such purpose shall not be deemed to constitute possession or
occupancy accelerating the Commencement Date. Landlord shall not be
liable in any way for any injury, loss, or damage to person or property
which may occur as a result of Tenant's observations herein. Tenant
agrees to indemnify, defend, and hold harmless Landlord from any and all
costs, expenses, claims, causes of action, damages, and liabilities of
any type or nature whatsoever (including, but not limited to, reasonable
attorneys' fees and costs of litigation) arising out of or relating to
(i) such entry and/or observations or (ii) the performance of the Tenant
Work described hereinafter by Tenant, its contractors, consultants, or
other invitees.
8.2 Tenant and its agents may, subject to the terms of this Paragraph 8.2,
enter the Demised Premises during the Tenant Work Period, as hereinafter
defined, in order that Tenant, at its sole cost, may have the Tenant
Work performed at the same time that Construction Manager is working in
the Demised Premises. Construction Manager shall have the right to
inspect all such Tenant Work. Tenant's workers and mechanics shall be
reasonably acceptable to Construction Manager and shall be properly
licensed and responsible. During the Tenant Work Period, Tenant shall
use all reasonable efforts to work harmoniously with Landlord (these
efforts shall include utilizing union labor forces
B-7
<PAGE>
for all work within the Building) and to coordinate the performance of
the Tenant Work in order to avoid interfering with or delaying the
Tenant Improvement Work. Landlord shall not be liable in any way for any
injury, loss, or damage that may occur to any Tenant Work made prior to
the Commencement Date (or such later date that Landlord delivers
possession of the Demised Premises to Tenant due to Tenant Delay), which
Tenant Work is being made solely at Tenant's risk. If Tenant desires
security for the Tenant Work Tenant shall be responsible for providing
its own security during such construction at Tenant's sole cost and
expense. Landlord and Construction Manager shall cooperate with Tenant's
contractors to ensure reasonably adequate power and utilities during the
Tenant Work Period. Landlord shall notify Tenant when it has completed
demolition of the particular floors of the Demised Premises. The period
commencing on the date Landlord so notifies Tenant and ending on the
Commencement Date (or such later date that Landlord delivers possession
of the Demised Premises to Tenant due to Tenant Delay) shall be the
Tenant Work Period. No early entry under this Paragraph 8.2 shall change
the Commencement Date or the Expiration Date of the Lease, except as
expressly provided for herein.
9. Certificate of Occupancy
9.1 Promptly upon Substantial Completion of the Tenant Improvement Work and
Tenant Work, Construction Manager shall obtain a temporary or permanent
certificate of occupancy or other such certificate permitting the lawful
occupancy of the Demised Premises from the appropriate governmental
authority (the "Certificate of Occupancy"). If a temporary Certificate
of Occupancy is obtained, Construction Manager shall proceed diligently
to satisfy all conditions thereof so as to obtain a permanent
Certificate of Occupancy prior to the expiration of the temporary
Certificate of Occupancy.
10. Notices
10.1 All notices required or permitted to be given pursuant to this Work
Letter shall be in writing and shall be deemed validly given if sent in
accordance with Paragraph 18 of the Lease, except that all notices to
Construction Manager shall be addressed as follows:
Gale & Wentworth Construction Services, LLC
200 Campus Drive, Suite 200
Florham Park, New Jersey 07932
Attention: Thomas J. Walsh
with a copy to:
Pitney, Hardin, Kipp & Szuch
P.O. Box 1945
Morristown, New Jersey 07962
Attention: Lawrence F. Reilly, Esq.
B-8
<PAGE>
SCHEDULE I
Base Building Work
131 Madison Ave
The work to be completed by the Landlord to establish the base building
conditions ("Base Building") shall be defined below in this Schedule I and shall
be completed by the Landlord with no cost to the Tenant.
A. Repairs to the concrete parking deck, including repair of spawled
areas of concrete, replace rusted portions of steel rebars, coat the
entire deck with waterproof membrane material and power wash the
inside walls of the deck.
B. Re-Stripping of parking areas C. Re-Lamp existing or add Parking Lot
Lighting to meet code. D. In addition to the TI Allowance, Landlord
will give to Tenant an $18,000 allowance towards the cost of
renovation of the bathrooms. E. Repair Elevators to assure good
working order. F. Complete Demolition of Tenant space, including
sheetrock, ceiling, lights, carpet, etc.
G. The Building Common Areas will be fully sprinklered as required in
accordance with all applicable codes and other Laws. Landlord will
supply the main loop system for the fire sprinklers as required in
accordance with all applicable codes and other Laws. All installation
of sprinkler branch piping and concealed heads within the Demised
Premises is to be included as part of the Tenant Improvement Work
under the Work Letter; provided, however, that, if the Construction
Cost for same shall exceed $36,400, Landlord shall be responsible for
such excess.
H. The existing fire alarm system for the Building shall be put into good
working order by Landlord in accordance with all current applicable
building codes and other Laws. Fire alarm devices outside of the
Common Areas and within the Demised Premises will be installed as part
of the Tenant Improvement Work.
I. The roof shall be rendered water tight and free of leaks as of the
Commencement Date.
J. The central HVAC system for the Building and the existing ducts and
VAV boxes shall be put in good working order. Any modifications and
additions to existing ducts and VAV boxes shall be part of the Tenant
Improvement Work.
<PAGE>
EXHIBIT C
---------
RULES AND REGULATIONS
1. Except as permitted by the terms of this Lease, no sign, placard, picture,
advertisement, name, or notice shall be installed or displayed on any part
of the exterior or interior Common Areas of the Building without the prior
written consent of Landlord. All approved signs or lettering on doors and
walls shall be printed, painted, affixed, or inscribed at the expense of
Tenant by a person reasonably approved by Landlord.
2. No awning shall be permitted on any part of the Demised Premises. Tenant
shall not place anything against or near glass partitions or doors or
windows which may appear unsightly from outside the Demised Premises.
3. Landlord shall retain the right to control and prevent access to the
Building of all persons whose presence in the judgment of Landlord would be
prejudicial to the safety, character, reputation, and interests of the
Building and its tenants; provided that nothing herein contained shall be
construed to prevent such access to persons with whom any tenant normally
deals in the ordinary course of its business, unless such persons are
engaged in illegal activities. No tenant and no employee or invitees of any
tenant shall go upon the roof of the Building.
4. All cleaning and janitorial services for the Building and for the Demised
Premises shall be provided exclusively through Landlord and, except with
the written consent of Landlord, no person or persons other than those
approved by Landlord shall be employed by Tenant or permitted to enter the
Building for the purpose of cleaning the same. Tenant shall not cause any
unnecessary labor by carelessness or indifference to the good order and
cleanliness of the Demised Premises.
5. Landlord will furnish Tenant, free of charge, a reasonable number of access
cards to the Building and the Demised Premises. Landlord may charge a
reasonable amount for any additional cards requested by Tenant. Tenant
shall not alter any lock or install a new additional lock or bolt on any
door of its Demised Premises. Tenant, upon the termination of its tenancy,
shall deliver to Landlord any cards that have been furnished to Tenant, and
in the event of loss of any cards so furnished, shall pay Landlord
therefor.
6. If Tenant requires telegraphic, telephonic, burglar alarm, or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
7. Any freight elevator shall be available for use by all tenants in the
Building, subject to such reasonable scheduling as Landlord, in its
discretion, shall deem appropriate. No equipment, materials, furniture,
packages, supplies, merchandise, or other property will be received in the
Building or carried in the elevators except between such hours and in such
elevators as may be designated by Landlord.
8. Tenant shall not place a load down upon any floor of the Demised Premises
that exceeds the load per square foot which such floor was designed to
carry and that is allowed by law. Landlord shall have the right to
prescribe the weight, size, and position of all
C-1
<PAGE>
equipment, materials, furniture, or other property brought into the
Building. Heavy objects shall, if considered necessary by Landlord, stand
on such platforms as determined by Landlord to be necessary to properly
distribute the weight. Any object belonging to Tenant that causes noise or
vibration that may be transmitted to the structure of the Building or to
any tenants in the Building shall be placed and maintained by Tenant, at
Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration. The persons employed to move such equipment
in or out of the Building must be reasonably acceptable to Landlord.
Landlord shall not be responsible for loss of, or damage to, any such
equipment or other property from any cause, and all damage done to the
Building by maintaining or moving such equipment or other property shall be
repaired at the expense of Tenant.
9. Tenant shall not use or keep in the Demised Premises any kerosene,
gasoline, or inflammable or combustible fluid, or material other than those
limited quantities necessary for the operation or maintenance of office
equipment. Tenant shall not use or permit to be used in the Demised
Premises any foul or noxious gas or substance, or permit or allow the
Demised Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of
noise, odors, or vibrations, nor shall Tenant bring into or keep in or
about the Demised Premises any birds or animals.
10. Tenant shall not use any method of heating or air-conditioning other than
that supplied by Landlord.
11. Tenant shall cooperate fully with Landlord to assure the most effective
operation of the Building's heating and air-conditioning and to comply with
any governmental energy- saving rules, laws, or regulations of which Tenant
has actual notice, and shall refrain from attempting to adjust controls
other than room thermostats installed for Tenant's use.
12. Landlord reserves the right to exclude from the Building, between the hours
of 6 p.m. and 8 a.m. the following day, or such other hours as may be
established from time to time by Landlord, and on Sundays and legal
holidays, any person, unless that person is known to the person or employee
in charge of the Building or has a pass and is properly identified. Tenant
shall be responsible for all persons for whom it requests passes and shall
be liable to Landlord for all acts of such persons. Landlord shall not be
liable for damages for any error in regard to the admission to or exclusion
from the Building of any person. Landlord reserves the right to prevent
access to the Building in case of invasion, mob riot, public excitement, or
other commotion by closing the doors or by other appropriate action.
13. Tenant shall not obtain for use on the Demised Premises ice, drinking
water, food, beverage, towel or other similar services, or accept barbering
or bootblacking services upon the Demised Premises, except at such hours
and under such regulations as may be reasonably fixed by Landlord.
14. The toilet rooms, urinals, wash bowls, and other apparatus shall not be
used for any purpose other than that for which they were constructed, and
no foreign substance of any
C-2
<PAGE>
kind whatsoever shall be thrown into same. The expense of any breakage,
stoppage, or damage resulting from the violation of this rule shall be
borne by the tenant who, or whose employees or invitees, shall have caused
it.
15. Tenant shall not sell, or permit the sale at retail, of newspapers,
magazines, periodicals, theater tickets, or any other goods or merchandise
to the general public in or on the Demised Premises. Tenant shall not make
any room-to-room solicitation of business from other tenants in the
Building.
16. Subject to the provisions of Paragraph 33 of the Lease, Tenant shall not
install any radio or television antenna, loudspeaker, or other device on
the roof or exterior walls of the Building. Tenant shall not interfere with
radio or television broadcasting or reception from or in the Building or
elsewhere.
17. Landlord reserves the right to direct electricians as to where and how
telephone and telegraph wires are to be introduced to the Demised Premises.
Tenant shall not cut or bore holes for wires. Tenant shall not affix any
floor covering to the floor of the Demised Premises in any manner except as
reasonably approved by Landlord. Tenant shall repair any damage resulting
from noncompliance with this rule.
18. Tenant shall not install, maintain, or operate upon the Demised Premises
any vending machine without the written consent of Landlord, not to be
unreasonably withheld.
19. Canvassing, soliciting, and distribution of handbills or any other written
material, and peddling in the Building are prohibited, and each tenant
shall cooperate to prevent same.
20. Landlord reserves the right to exclude or expel from the Building any
person who, in Landlord's reasonable judgment, is intoxicated or under the
influence of liquor or drugs or who is in violation of any of the Rules and
Regulations of the Building.
21. Tenant shall store all of its trash and garbage within the Demised
Premises. Tenant shall not place in any trash box or receptacle any
material that cannot be disposed of in the ordinary and customary manner of
trash and garbage disposal or that does not originate from materials
utilized by Tenant at the Demised Premises. All garbage and refuse disposal
shall be made in accordance with directions issued from time to time by
Landlord.
22. The Demised Premises shall not be used for the storage of merchandise held
for sale to the general public, or for lodging or for manufacturing of any
kind, nor shall the Demised Premises be used for any improper, immoral, or
objectionable purpose. No cooking shall be done or permitted by any tenant
on the Demised Premises, except that use by Tenant of Underwriters'
Laboratory- approved equipment for brewing coffee, tea, hot chocolate, and
similar beverages and for heating pre-prepared foods (such as a microwave
oven) shall be permitted, provided that such equipment and use is in
accordance with all applicable federal state, county, and city laws, codes,
ordinances, rules, and regulations.
23. Tenant shall not use in any space or in the public halls of the Building
any hand trucks, except those equipped with rubber tires and side guards or
such other material-handling
C-3
<PAGE>
equipment as Landlord may reasonably approve. Tenant shall not bring any
other vehicles of any kind into the Building.
24. Without the written consent of Landlord, Tenant shall not use the name of
the Building in connection with or in promoting or advertising the business
of Tenant, except as Tenant's address.
25. Tenant shall comply with all safety, fire protection, and evacuation
procedures and regulations established by Landlord or any governmental
agency. 26. **[Tenant assumes any and all responsibility for protecting the
Demised Premises from theft, robbery, and pilferage]**. 27. The
requirements of Tenant will be attended to only upon written application to
the office of the Building Manager by an authorized individual.
28. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors to the Building. Tenant shall not
leave vehicles in the Building parking areas overnight. Landlord reserves
the right, but shall not be obligated to, require that (i) Tenant's and
Tenant's employees' or visitors' vehicles be stickered with an
identification sticker and (ii) vehicles parked in violation of the Lease
(including the rules and regulations) be towed at Tenant's expense without
any liability of Landlord with respect to the same. Furthermore, Tenant
consents to the municipal enforcement of Title 39 of the New Jersey
Statutes regarding handicapped parking spaces.
29. Landlord may waive any one or more of these Rules and Regulations for the
benefit of Tenant or any other tenant, but no such waiver by Landlord shall
be construed as a waiver of such Rules and Regulations in favor of Tenant
or any other tenant, nor prevent Landlord from thereafter enforcing any
such Rules and Regulations against any or all of the tenants of the
Building.
30. These Rules and Regulations are in addition to and shall not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements, and conditions of any lease of premises in the Building. In the
event of conflict between the provisions contained in this Lease and these
Rules and Regulations, the provisions of this Lease shall prevail.
31. Landlord reserves the right to make such other and reasonable Rules and
Regulations as, in its judgment, may from time to time be needed for safety
and security, for care and cleanliness of the Building and the Complex and
for the preservation of good order therein. Tenant agrees to abide by all
such Rules and Regulations hereinabove stated and any additional rules and
regulations which are adopted.
32. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees, and
guests.
C-4
<PAGE>
EXHIBIT D
---------
CLEANING SERVICES
1. General Cleaning:
----------------
Nightly
-------
a. Empty and clean all waste receptacles, removing waste to a designated
central location for disposal. Landlord is to provide for disposal of
waste.
b. Empty and clean all ash trays and receptacles.
c. Remove all fingerprints, smudges, and other marks from metal
partitions, doors, and other surfaces.
d. With respect to a kitchen area (if applicable), rinse out coffee pots,
turn off burners to coffee pots, spot clean walls for coffee spillage,
clean sink, and clean tables and chairs in such area.
Weekly
------
e. Hand dust and clean all office furniture that has been cleared of
papers, boxes, and/or personal items, ledges, chair rails, baseboards,
and window sills.
2. Floors
------
Group A - Granite, ceramic tile, marble, terrazzo
Group B - Linotile, asphalt, koroseal, plastic vinyl, wood, rubber, or
other composition floors and base.
Nightly
-------
a. All floors in Group A to be swept, wet mopped and rinsed.
b. All floors in Group B to be dry mopped.
Weekly
------
c. All floors in Group B to be damp mopped.
Every six (6) months
--------------------
d. All floors to be scrubbed and buffed.
D-1
<PAGE>
3. Vacuuming
---------
Nightly
-------
a. Vacuum or carpet sweep all rugs and carpeted areas.
Monthly
-------
b. Brush or dust by hand carpet edges inaccessible to high pressure
vacuum attachments.
4. High Dusting
------------
Every six (6) months
--------------------
a. Dust all clothes closet shelving, pictures, charts, graphs, etc.
b. Dust clean all vertical surfaces such as walls, partitions, door
bucks, and other surfaces.
c. Dust all venetian blinds.
Special service
---------------
Records and General Storage Area
--------------------------------
Floors are to be broom cleaned weekly. Files and exposed open
shelves dusted once every three (3) months.
5. Other Services
--------------
a. Landlord shall supply all soap, towels, and toilet tissue in both
men's and women's rooms and sanitary napkins in coin dispensers
in the women's rooms.
b. Landlord shall supply all coin operated dispensers and shall be
responsible for the servicing of same and for the collection of
money from the machine.
c. During the Term of this Lease the dispenser price for sanitary
napkins shall not exceed a price equal to 150% of the wholesale
price paid by Landlord.
6. Carpeting
---------
In addition to the aforementioned nightly and weekly vacuuming,
Landlord shall do the following:
Weekly
------
All carpeting is to be spot cleaned, removing all stains, smudges, and
unsightly appearances.
D-2
<PAGE>
7. Glass
-----
Monthly
-------
a. Clean all partitions and furniture glass.
Annually
--------
b. Clean all perimeter windows, both inside and out.
8. Kitchen Areas
-------------
Nightly
-------
a. Clean all tables, chairs, counters, and sinks.
b. Spot cleaning of walls.
c. Cleaning of coffee pots.
9. General
-------
a. All lights are to be extinguished and the doors as specified by
Tenant are to be locked after cleaning is completed.
b. All personnel are to be uniformed and clean in appearance during
business hours.
c. Cleaning of all private bathrooms shall be subject to additional
charges shall be determined on a case-by-case basis.
D-3
<PAGE>
EXHIBIT E
---------
PARKING PLAN
E-1
<PAGE>
LEASE TERMINATION AGREEMENT
THIS LEASE TERMINATION AGREEMENT (the "Agreement") is made as of the
__ day of February, 2000 between MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY,
a Massachusetts corporation, through its agent, CORNERSTONE REAL ESTATE
ADVISORS, INC. ("Landlord"), having an office c/o Gale & Wentworth LLC, 200
Campus Drive, Florham Park, New Jersey 07932 and LOGICAL DESIGN SOLUTIONS, INC.,
a New Jersey corporation ("Tenant"), having an address of 465 South Street,
Morristown, New Jersey 07960.
INTRODUCTORY STATEMENTS:
A. By Agreement of Lease dated February 8, 1996, as amended by First
Amendment to Lease dated February 20, 1997 (collectively, the "Lease"), Tenant
leased from Landlord's predecessors in interest certain premises at 465 South
Street, Morris Township, New Jersey (the "Premises").
B. Tenant is about to sign a new lease for certain premises at 131
Madison Avenue, Morristown, New Jersey. As a result, Tenant desires to terminate
the Lease and vacate the Premises.
C. Landlord is willing to allow Tenant to terminate the Lease, and
conditions described herein.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
agree as follows:
1. All terms not defined herein shall have the meanings given to them
in the Lease.
<PAGE>
2. Provided that Tenant makes to Landlord the payment described
below, the Lease shall terminate on the date (the "Termination Date") on which
Tenant vacates the Premises and leaves the Premises in the condition in which
they were required to be left on the Expiration Date pursuant to the terms of
the Lease. Until such termination, Tenant shall continue to be responsible to
make the payments of Fixed Rent and Additional Rent required under the Lease.
3. In consideration of the early termination of the Lease, Tenant
shall pay to Landlord on or before the Termination Date the sum of $92,900,
representing Fixed Rent under the Lease for a period of three months.
4. Upon termination of the Lease, the parties shall execute a letter
agreement confirming the Termination Date. The rights and obligations of the
parties shall continue to be in accordance with the terms of the Lease, as if
the Termination Date were the Expiration Date under the Lease.
5. This Agreement shall be null and void if the Termination occurred
by October 30, 2000.
6. This Agreement may not be modified orally or by a course of
conduct, but only by a written document signed by both parties. This Agreement
shall be construed under the law of the State of New Jersey. This Agreement
shall bind and inure to the benefit of each of the parties hereto and their
respective successors and assigns. This Agreement may be executed in
counterparts which, when put together, shall constitute one document.
7. Except and as amended hereby, the Lease remains in full force and
effect.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease Termination
Agreement as of the day and year first above written.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
WITNESS: By: CORNERSTONE REALTY ADVISORS, INC.,
authorized agent
___________________________ By: /s/ Paul C. Bacon
--------------------
Name: Paul C. Bacon
---------------
Title: Vice President
----------------
DATED: March 6, 2000
WITNESS: LOGICAL DESIGN SOLUTIONS, INC.
Shirley Batista By: /s/ E. Bruce Lovenberg
- ----------------- -------------------------
Name: E. Bruce Lovenberg
--------------------
Title: Chief Financial Officer
-------------------------
DATED: February __, 20000
3
<PAGE>
EXHIBIT 10.11
______________________________
LEASE AGREEMENT
______________________________
BANK OF COMMUNICATIONS
as Landlord,
and
LOGICAL DESIGN SOLUTIONS, INC.
as Tenant
______________________________
PREMISES:
TWENTY-FIRST and TWENTY-SECOND FLOORS
ONE EXCHANGE PLAZA
NEW YORK, NEW YORK
______________________________
PREPARED BY:
PARKER DURYEE ROSOFF & HAFT, P.C.
529 Fifth Avenue
New York, New York 10017
Attn: Daniel B. Zanini, Esq.
<PAGE>
I N D E X
---------
Article Page
- ------- ----
Demised Premises......................................................1
Term..................................................................1
Rent..................................................................1
Tenant's Covenants....................................................4
Use and Occupancy.....................................................4
Compliance with Laws and Insurance Requirements.......................5
Alterations...........................................................5
Ownership of Improvements.............................................7
Repairs...............................................................7
Assignment, Mortgaging and Subletting.................................8
Electricity, Gas and Water...........................................10
Additional Rent......................................................14
Subordination and Attornment.........................................20
Liability of Landlord................................................21
Destruction, Fire or Other Casually..................................21
Eminent Domain.......................................................23
Defaults and Remedies and Waiver of Redemption.......................24
Landlord's Right to Perform Tenant's Obligations.....................26
Covenant of Quiet Enjoyment..........................................26
Indemnity............................................................26
Excavation...........................................................27
Hazardous Environmental Condition....................................27
Broker...............................................................28
Waiver of Jury Trial.................................................28
Surrender of Premises................................................28
Rent Limitation......................................................29
Fire Protection Requirements.........................................29
Insurance............................................................30
Access to Premises...................................................31
(i)
<PAGE>
Article Page
- ------- ----
Vaults...............................................................32
Bankruptcy...........................................................32
Rules and Regulations................................................33
Successors and Assigns...............................................34
Notice...............................................................34
No Waiver and Entire Agreement.......................................35
Captions.............................................................35
Inability to Perform.................................................35
No Representations by Landlord.......................................36
Failure to Give Possession...........................................36
Glass................................................................37
Floor Load...........................................................37
Services and Equipment...............................................37
Untenantability......................................................40
Moving...............................................................40
Negative Covenants...................................................41
Window Cleaning......................................................41
Landlord's Work......................................................42
Cancellation Option..................................................45
Right of First Offer.................................................45
Renewal Option.......................................................46
Schedule
- --------
Schedule A - Rent..............................................48
Exhibits
- --------
Exhibit I - Description of Demised Premises.................49
Exhibit II - Rules and Regulations...........................52
Exhibit III - Cleaning and Janitorial Services................55
(ii)
<PAGE>
LEASE dated as of the 25th day of March 1998, by and between BANK OF
COMMUNICATIONS, a banking corporation authorized to do business within the State
of New York, having its principal office at One Exchange Plaza, 32nd Floor, New
York, New York 10006, Borough of Manhattan, City, County and State of New York
(hereinafter referred to as "Landlord"), and LOGICAL DESIGN SOLUTIONS, INC., a
New Jersey corporation, having its principal place of business at 465 South
Street, Morristown, New Jersey 07960 (hereinafter referred to as "Tenant").
W I T NE S S E T H:
------------------
ARTICLE 1
Demised Premises
----------------
Section 1.01. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord space described in Exhibit I attached hereto and made a part hereof,
which space, together with all appurtenances, fixtures, improvements, additions
and other property attached thereto or installed therein during the term of this
lease (except as otherwise hereinafter expressly provided) is collectively
herein referred to as the "Demised Premises" in the building and on the site
commonly known as One Exchange Plaza, (a/k/a 55 Broadway), in the Borough of
Manhattan, City, County and State of New York (herein referred to as the
"Building", or the "Real Property") upon and subject to all of the terms,
covenants and conditions herein contained.
ARTICLE 2
Term
----
Section 2.01. The Demised Premises are leased for a term (hereinafter
referred to as the "Demised Term") commencing on the date of the mutual
execution and delivery of this agreement, as indicated above (hereinafter
referred to as the "Commencement Date"), and ending on the day which is the last
day of that certain month which is seven (7) years from the date on which
"Landlord's Work" (as defined in Article 47 hereof is substantially complete,
unless said Demised Term shall be sooner terminated pursuant to the provisions
hereof (hereinafter referred to as the "Expiration Date"). The parties agree
that rent, pursuant to Article 3, shall first become due as set forth in Article
3 and Schedule A below.
ARTICLE 3
Rent
----
Section 3.01. Tenant covenants and agrees during the Demised Term to pay
Landlord a fixed minimum rental in lawful money of the United States of America
in equal monthly installments in advance, as set forth on Schedule A attached
hereto and made a part hereof, on the first day of each month at the office of
Landlord or such other place as Landlord may designate, without setoff,
deduction or abatement (except as otherwise expressly herein provided), except
that if the first day of the Demised Term shall be a date other than the first
day of the calendar month Tenant shall pay on or before such first day to
Landlord an amount equal
<PAGE>
to such proportion of an equal monthly installment of rent as the number of days
from said first day to the end of calendar month in which such first day occurs
bears to the total number of days in said calendar month and said payment shall
represent the pro-rata monthly rent for such first calendar month, and the same
method shall be used in computing rent to be paid for the last partial calendar
month, if any, of the Demised Term. In the event a monthly installment of rent,
or any installment of additional rent, is not paid to Landlord by Tenant within
five (5) business days of the date on which the installment is due, Tenant shall
pay to Landlord, an additional rent, which shall be deemed part of the fixed
minimum rental, equal to six percent (6%) of the unpaid monthly, or other,
installment.
Section 3.02. Except as otherwise herein expressly provided, all costs,
charges and expenses of any kind which Tenant is required by the terms hereof to
pay to Landlord shall be deemed additional rental, and in the event said
additional rental shall not be paid, Landlord shall have all rights and remedies
with respect thereto as shall be herein provided in the case of nonpayment of
rent.
Section 3.03. A. Notwithstanding any provision contained in this Article
Three or in Article Two of this lease, Tenant, upon execution and delivery of
this lease, shall pay to Landlord the sum of $549,000.00 which will be held by
Landlord as security for the due performance by Tenant of the covenants and
obligations of Tenant under this lease, including the covenant to pay rent. This
amount shall be held by Landlord in a special account of Landlord's selection,
which account may or may not bear interest. In the event any interest is earned
on said deposit it shall be credited thereto when earned and shall be
distributed to Tenant once annually, less any administrative fee which Landlord
is permitted by law to retain. In the event that the amount deposited must be
used by Landlord for any reason resulting from the default by Tenant under any
covenant or obligation set forth in this lease, then Tenant shall promptly, upon
receipt of notice from Landlord, replenish the account by payment of the amount
set forth in Landlord's notice. Upon Tenant's surrender of the Demised Premises
at the expiration of this lease, assuming the Demised Premises are left in the
condition required hereunder, the amount deposited pursuant to this section,
together with interest thereon, if any, shall be returned to Tenant by Landlord.
B. In lieu of a cash deposit, Tenant may deliver to Landlord a clean,
irrevocable, non-documentary and unconditional Letter of Credit in the amount of
$549,000.00 issued by and drawn upon any commercial bank (hereinafter referred
to as the "Issuing Bank") with offices for banking purposes in the City of New
York and which shall mean a bank, trust company, national banking association or
savings and loan association which (or the-parent company of which) shall have
outstanding unsecured, uninsured and unguaranteed indebtedness, or shall have
issued a letter of credit or other credit facility that constitutes the primary
security for any outstanding indebtedness (which is otherwise uninsured and
unguaranteed), that is then rated, without regard to qualification of such
rating by symbols such as "+" or "-" or numerical notation, "Aa" or better by
Moody's Investors Service and "AA" or better by Standard & Poor's Corporation,
and has combined capital, surplus and undivided profits of not less than
$500,000,000, which Letter of Credit shall have a term of not less than one
year, be in form and content satisfactory to Landlord, be for the account of
Landlord, be in the amount of the Security Deposit and be fully transferable by
Landlord without the payment of any fees or charges, it being agreed that if any
such fees or charges shall be so imposed, then such fees or charges, shall be
paid by Tenant.
2
<PAGE>
Notwithstanding anything to the contrary contained herein, Landlord agrees to
accept a qualifying Letter of Credit issued by First Union Bank of New Jersey.
The Letter of Credit shall provide that it shall be deemed automatically
renewed, without amendment, for consecutive periods of one year each thereafter
during the term of this Lease, unless the Issuing Bank sends notice (the
"Non-Renewal Notice") to Landlord by certified mail, return receipt requested,
not less than thirty (30) days next preceding the then expiration date of the
Letter of Credit that it elects not to have such Letter of Credit renewed.
Additionally, the Letter of Credit shall provide that Landlord shall have the
right, exercisable within twenty (20) days of its receipt of the Non-Renewal
Notice, by sight draft on the Issuing Bank, to receive the monies represented by
the existing Letter of Credit and to hold such proceeds pursuant to the terms of
this Article 3 as a cash security pending the replacement of such Letter of
Credit. In the event that Tenant defaults in respect of any of the terms,
provisions, covenants or conditions of this Lease, including, but not limited
to, the payment of Rent and Additional Rent, Landlord may apply or retain the
whole or any part of the cash security so deposited or may notify the Issuing
Bank and thereupon receive all the monies represented by the Letter of Credit
and use, apply, or retain the whole or any part of such proceeds, as the case
may be, to the extent required for the payment of any Rent or Additional Rent or
any other sum as to which Tenant is in default or for any sum which Landlord may
expend or may be required to expend by reason of Tenant's default in respect of
any of the terms, provisions, covenants or conditions of this Lease, including,
but not limited to, any damages or deficiency in the reletting of the Premises,
whether such damages or deficiency accrue or accrues before or after summary
proceedings or other reentry by Landlord. If Landlord applies or retains any
part of the cash security or proceeds of the Letter of Credit, as the case may
be, Tenant, upon demand, shall deposit with Landlord the amount so applied or
retained so that Landlord shall have the full deposit on hand at all times
during the Term. If Tenant shall fully and faithfully comply with all of the
terms, provisions, covenants and conditions of this lease, the cash security or
Letter of Credit, as the case may be, shall be returned to Tenant after the
Expiration Date and after delivery of the entire possession of the Premises to
Landlord. Tenant expressly agrees that Tenant shall have no right to apply any
portion of the Security Deposit against any of Tenant's obligations to pay Rent
or Additional Rent hereunder and, if Tenant shall seek to so apply such Security
Deposit, Tenant shall pay liquidated damages to Landlord in a sum equal to one
and one-half (1-1/2) times the amount of any such unpaid Rent or Additional
Rent. In the event of a sale of the Real Property or the Building or leasing of
the Building, Landlord shall have the right to transfer the cash security to the
vendee or lessee and with respect to the Letter of Credit, within thirty (30)
days of notice of such sale or leasing, Tenant, at Tenant's sole cost and
expense, shall arrange for the transfer of the Letter of Credit to the new
landlord, as designated by Landlord in the foregoing notice or have the Letter
of Credit reissued in the name of the new landlord and Landlord shall thereupon
be released by Tenant from all liability for the return of such security. Tenant
shall look solely to the new landlord for the return of such cash security or
Letter of Credit and the provisions hereof shall apply to every transfer or
assignment made of the security to a new landlord. Tenant further covenants and
agrees that it shall not assign or encumber or attempt to assign or encumber the
monies or Letter of Credit deposited herein as security and that neither
Landlord nor its successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment or attempted encumbrance.
C. In the event Tenant is fully compliant with all of the terms and provisions
set forth in this agreement, then Landlord shall accept a reduction of the
security deposit pursuant to paragraphs "A" or "B" above, whichever is
applicable, in accordance with the following schedule:
3
<PAGE>
(i) for months 24 to 36 of the Demised Term, the security deposit shall be
no less than $320,250.00;
(ii) for months 37 to 48 of the Demised Term, the security deposit shall be
no less than $274,500.00; and
(iii) for months 49 to the Expiration Date, the security deposit shall be
no less than $137,250.00.
In the event the security deposit is in the form of cash, pursuant to
paragraph "A" of this section, each reduction shall be made by the Landlord
refunding the required amount to Tenant, in accordance with the schedule set
forth above. On the other hand, if the security deposit is in the form of a
Letter of Credit, pursuant to paragraph "B" of this section, then Tenant shall
provide Landlord with a new Letter of Credit, in the reduced amount, which shall
comply fully with the provisions of said paragraph, whereupon the previously
delivered Letter of Credit in the higher amount shall be returned to Tenant.
D. The security deposit shall be returned to Tenant, provided same has not been
utilized pursuant to the provisions contained herein, within thirty (30) days
after the Expiration Date and delivery of the entire possession of the premises
to Landlord.
ARTICLE 4
Tenant's Covenants
------------------
Section 4.01. Tenant covenants (i) to pay the fixed minimum rental set
forth in Article Three and Schedule A, as well as the additional rental provided
for herein; (ii) to observe and perform the terms, covenants and conditions of
this Lease on Tenant's part to be observed and performed; and (iii) to be liable
for all of the obligations, liabilities, duties, costs, expenses, burdens, and
requirements set forth in this Lease, inclusive of all Schedules and Exhibits
hereto.
ARTICLE 5
Use and Occupancy
-----------------
Section 5.01. Tenant shall use and occupy the Demised Premises solely in
connection with Tenant's business; to wit, general offices for a corporate
communications company, or other reasonable use in connection with Tenant's
business.
Section 5.02. Tenant will not use or occupy, or permit the use or occupancy
of, the Demised Premises for any unlawful purposes or for any purpose or in any
manner which would (i) violate the provisions of this lease, (ii) tend in any
way to impair the character, reputation or appearance of the Building as a first
class office building, (iii) unreasonably interfere with the use and enjoyment
of any part of the Building by any other tenant or occupant, including Landlord
or any person affiliated with or associated with Landlord, or (iv) be
inconsistent with the professional character and reputation of other tenants in
the Building. Tenant shall have the right of access to the Demised Premises on a
three hundred sixty-five day a year (seven days per week) basis, provided that
Tenant complies with all reasonable security or other requirements of the
4
<PAGE>
Landlord relating to access, use and occupancy of the Demised Premises on
weekends, holidays and before 8:00 A.M. and after 6:00 P.M. on Monday through
Friday.
ARTICLE 6
Compliance with Laws and Insurance Requirements
-----------------------------------------------
Section 6.01. Tenant, at Tenant's sole cost and expense, shall comply with
all laws, orders and regulations of Federal, State, County, and Municipal
authorities, and with all directions pursuant to law, of all public officers,
which shall impose any duty upon Landlord or Tenant arising out of Tenant's use
of the Demised Premises except that Tenant shall not be required to make any
structural alterations in order so to comply unless such alterations shall be
necessitated or occasioned by the acts, omissions, or negligence of Tenant or
any person claiming through or under Tenant, or any of Tenant's servants,
employees, contractors, agents, visitors or licensees, or by the use or
occupancy of the Demised Premises by Tenant or any such person.
Section 6.02. Tenant shall not do anything, or permit anything to be done,
in or about the Demised Premises which shall (i) invalidate or be in conflict
with the provisions of any fire or other insurance policies covering the
Building or any property located therein, or (ii) result in refusal by fire
insurance companies in good standing to insure the Building or any such property
in amounts reasonably satisfactory to Landlord, or (iii) subject Landlord to any
liability or responsibility for injury to any person or property by reason of
any business operation being conducted in the Demised Premises, or (iv) cause
any increase in the fire insurance rates applicable to the Building or property
located therein at the beginning of the Demised Term or at any time thereafter.
Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or
requirements of the New York Board of Fire Underwriters and the New York Fire
Insurance Rating Organization or any similar body relating to the Demised
Premises.
Section 6.03. In any action or proceeding wherein Landlord and Tenant are
parties, a schedule or "make up" of rates applicable to the Building or property
located therein issued by the New York Fire Insurance Rating Organization, or
other similar body fixing such fire insurance rates, shall be prima facie
evidence of the facts therein stated and of the several items and charges in the
fire insurance rates then applicable to the Building or property located
therein.
ARTICLE 7
Alterations
-----------
Section 7.01. Tenant shall not make or perform, or permit the making or
performance of, any alterations, installations, improvements, additions or other
physical changes in or about the Demised Premises costing in excess of Ten
Thousand Dollars ($10,000) in the aggregate over any twelve month period
(referred to collectively as "Alterations") without Landlord's prior written
consent. Notwithstanding the foregoing provisions of this Section 7.01, all
Alterations made by Tenant shall be made and performed in conformity with and
subject to the following provisions: (i) All Alterations shall be made and
performed at Tenant's sole cost and expense at reasonable times and in a
reasonable manner for the performance of such work; (ii) Alterations
5
<PAGE>
shall be made only by contractors or mechanics approved in writing by Landlord,
which approval shall not be unreasonably delayed or withheld; (iii) No
Alterations to be performed by Tenant shall adversely affect any service
required to be furnished by Landlord to Tenant or to any other tenant or
occupant of the Building; (iv) No Alteration shall be made if the value or
utility of the Building after completion of such Alteration will be materially
less than its value or utility immediately prior thereto; (v) No Alteration
shall affect the outside appearance of the Building; no air conditioners may be
installed through windows nor shall the color or style of any blinds or shades
be changed; (vi) All large business machines and mechanical equipment shall be
placed and maintained by Tenant in settings sufficient, in Landlord's reasonable
judgment, to absorb and prevent vibration, noise and annoyance to other tenants
or occupants of the Building; (vii) Tenant shall submit to Landlord detailed
plans and specifications (including layout, architectural, mechanical and
structural drawings) for each proposed Alteration and shall not commence any
such Alteration without first obtaining Landlord's written approval of plans and
specifications; (viii) Subject to Article 28 and prior to the commencement of
each proposed Alteration, Tenant shall furnish to Landlord duplicate original
policies of worker's compensation insurance covering all workers to be employed
in connection with such Alteration, including those to be employed by all
contractors and subcontractors, and of comprehensive public liability insurance,
in an amount not less than $3,000,000 (including property damage coverage) in
which Landlord, its agents and any mortgagee of the Building shall be named as
parties insured, which policies shall be issued by companies licensed to do
business in the State of New York and shall be maintained by Tenant or
contractors until the completion of such Alteration; (ix) All fireproof wood
test reports, electrical and air conditioning certificates, and all other
permits, approvals and certificates required by all governmental authorities
shall be timely obtained by Tenant and copies thereof submitted to Landlord; (x)
Notwithstanding Landlord's approval of plans and specifications for any
Alteration, all Alterations shall be made and performed in full compliance with
all applicable laws, orders and regulations of Federal, State, County and
Municipal authorities, and with all directions, pursuant to law, of all public
offices, and with all applicable rules, orders, regulations and requirements of
the New York Board of Fire Underwriters and the New York Fire Insurance Rating
Organization or any similar body; (xi) All Alterations shall be made and
performed in accordance with the Rules and Regulations attached hereto as
Exhibit II and made a part hereof; (xii) All materials and equipment to be
incorporated in the Demised Premises as a result of all Alterations shall be new
and first quality; and no such materials or equipment, shall be subject to any
lien, encumbrance, chattel mortgage or title retention or security agreement;
(xiii) Notwithstanding anything contained herein to the contrary, Tenant is
absolutely prohibited from performing any Alteration to the heating,
ventilation, air conditioning, electrical or plumbing systems in the Building.
Similarly, no Alteration of any nature shall be permitted if such Alteration
requires the issuance of an amended or updated Certificate of Occupancy. These
limitations shall apply even if the Tenant otherwise complies with all of the
requirements of this Article.
Section 7.02. Tenant shall not permit any mechanic's liens to be filed
against the Demised Premises, the Building or the real property on which the
Building is erected (hereinafter referred to as the "Real Property") for work
claimed to have been done for, or materials claimed to have been furnished to
Tenant, and Tenant shall discharge any such liens at Tenant's sole cost within
twenty-one (21) days after notice that they have been filed.
6
<PAGE>
Section 7.03. Tenant shall not, at any time prior to or during the Demised
Term, directly or indirectly employ, or permit the employment of, any
contractor, mechanic or laborer in the Demised Premises, whether in connection
with any Alteration or otherwise, if such employment will interfere with other
contractors, mechanics, or laborers engaged in the construction, maintenance or
operation of the Building by Landlord, Tenant or others. In the event of any
such interference or conflict, Tenant, upon demand of Landlord, shall cause all
contractors, mechanics or laborers causing such interference to leave the
Building immediately.
Section 7.04. Any such alterations, but not decorations, shall not be
removed by Tenant at the end of the Demised Term or any extension thereof,
except for Tenant's Personal Property, as defined in Article 8 below.
ARTICLE 8
Ownership of Improvements
-------------------------
Section 8.01. All appurtenances, fixtures, improvements, additions and
other property attached to or installed in the Demised Premises whether by
Landlord or Tenant or others, and whether at Landlord's or Tenant's expense, or
the expense of both, shall become the property of Landlord, at the expiration of
the Demised Term, except that any such property installed at the sole expense of
Tenant with respect to which Tenant has not been granted any credit or allowance
by Landlord, and which is removable without material damage to the Building or
is removable provided Tenant repairs any damage caused by such removal, shall be
and remain the property of Tenant and is referred to as "Tenant's Personal
Property". Any replacements of any property of Landlord, whether made at
Tenant's expense or otherwise, shall be and remain the property of Landlord.
ARTICLE 9
Repairs
-------
Section 9.01. Tenant shall take good care of the Demised Premises and, at
Tenant's sole cost and expense, shall make all repairs and replacements: (i) as
and when needed to the interior walls in the Demised Premises, floor coverings
of all type, ceilings and lighting fixtures unless such repairs and replacements
are necessitated by the acts, omissions or negligence of Landlord or any person
claiming through or under Landlord, or any of their servants, employees,
contractors, agents, visitors or licensees; and (ii) to the structural elements
of the Demised Premises but only when such structural repairs are necessitated
or occasioned by the material omissions or negligence of Tenant or any person
claiming through or under Tenant, or any of their servants, employees,
contractors, agents, visitors or licensees. Without affecting Tenant's
obligations set forth in the preceding sentence, Tenant, at Tenant's sole cost
and expense, shall make all repairs and replacements, as and when necessary, to
Tenant's Personal Property, and to any alterations made or performed by Tenant.
All repairs and replacements made by or on behalf of Tenant or any person
claiming through or under Tenant shall be at least equal in quality and
appearance to the original work or installation.
7
<PAGE>
Section 9.02. Landlord represents that all lighting fixtures, ballasts,
HVAC, mechanical, electrical, plumbing systems shall be in good working order at
the time the Demised Premises are delivered to Tenant for occupancy.
ARTICLE 10
Assignment, Mortgaging and Subletting
-------------------------------------
Section 10.01. Tenant covenants and agrees, for Tenant and its successors,
assigns and legal representatives, that neither this Lease nor the terms and
estate in or rights to Demised Premises hereby granted, nor any part hereof or
thereof, will be mortgaged, pledged, encumbered or otherwise transferred
(whether voluntarily, involuntarily, by operation of law, or otherwise), and
that neither the Demised Premises, nor any part thereof, will be encumbered in
any manner by reason of any act or omission on the part of the Tenant. If the
Tenant is a corporation, then any transfer of its shares of stock, or the
issuance of new shares of stock which, in either case, represents or amounts to
the conveyance of a controlling interest in Tenant, shall constitute a
prohibited mortgage, pledge or encumbrance hereunder.
Section 10.02. Tenant covenants and agrees that it will not assign this
lease nor its interest in the Demised Premises granted thereby without the
Landlord's prior written consent, in every case, which consent shall not be
unreasonably withheld or delayed, and further covenants that if Tenant is a
corporation, any transfer of its shares of stock, or the issuance of new shares
of stock which, in either case, represents or amounts to the conveyance of a
controlling interest in Tenant, shall constitute a prohibited assignment
hereunder. The word "assign" shall for the purposes of this Article 10 include
use or occupancy, or permitting the use or occupancy of the Demised Premises,
permitting the use or desk space in the Demised Premises, permitting the use of
the Demised Premises for mailing privileges or granting of a concession
involving the use of all or a portion of the Demised Premises, by any person
other than Tenant.
Section 10.03. Tenant covenants and agrees that it will not sublet the
Demised Premises or any part thereof, without the prior written consent of
Landlord in every case, which consent shall not be unreasonably withheld or
delayed. If Tenant is a corporation, any transfer of its shares of stock, or the
issuance of new shares of stock, either of which results in the grantee of such
stock claiming a sublease interest in the Demised Premises, without the prior
written consent of Landlord shall constitute a prohibited subletting hereunder.
The word "sublet" shall for the purposes of this Article 10 include use or
occupancy, or permitting the use or desk space in the Demised Premises,
permitting the use of the Demised Premises for mailing privileges or granting of
a concession involving the use of all or a portion of the Demised Premises, by
any person other than Tenant.
Section 10.04. Notwithstanding anything hereinbefore contained in this
Article 10, in the event Tenant desires Landlord's consent to a proposed
assignment or subletting, Tenant by notice in writing shall notify Landlord of
the name of the proposed assignee or sublessee, such information as to the
proposed assignee's or sublessee's financial responsibility and standing as
Landlord may request, and of the covenants, agreements, terms, provisions and
conditions contained in the proposed assignment or sublease (a signed copy of
which shall be delivered to the Landlord upon a request to Landlord for its
consent).
8
<PAGE>
Section 10.05. Landlord shall not be deemed to have unreasonably withheld
its consent to a proposed assignment or subletting if:
(i) such conveyance will result in there being a total of more than four
(4) tenancies or sub-tenancies in the Demised Premises or two (2) tenancies on
either floor thereof;
(ii) the space to be sublet shall be used for any purposes other than those
set forth in Article 5 hereof;
(iii) the proposed assignee or sublessee is a government or any subdivision
or agency thereof; a labor union; a messenger service; or an employment agency
(unless said agency is an executive search or recruiting firm); or
(iv) the Tenant fails to agree in writing that any rent paid by the
proposed assignee or sub-tenant, after actual and reasonable expenses paid by
Tenant in connection with such assignment or subletting, and which is in excess
of the rent and additional rent due the Landlord hereunder, will be divided
equally between Landlord and Tenant.
Section 10.06. Any conveyance pursuant to this Article 10 shall be subject
to all the covenants, agreements, provisions and conditions contained in this
lease. Tenant covenants and agrees that notwithstanding any such conveyance to
any transferee and/or acceptance of rent or additional rent by Landlord from any
transferee, Tenant shall be and shall remain fully liable for the payment of the
fixed rent and additional rent due and to become due hereunder and for the
performance of all the covenants, agreements, terms, provisions and conditions
contained in this lease on the part of Tenant to be performed. Tenant further
covenants and agrees that notwithstanding any such conveyance, no other,
additional, or further conveyance, including subletting of the Demised Premises
or any part thereof shall or will be made except upon compliance with and
subject to the provisions of this Article 10.
Section 10.07. If the Demised Premises or any part thereof be sublet or
occupied by anybody other than Tenant, Landlord may, after default by Tenant,
collect rent from the subtenant or occupant, and apply the net amount collected
to the rent herein reserved, but no such subletting, occupancy or collection
shall be deemed a waiver by Landlord of any of Tenant's covenants contained in
this lease, or the acceptance of the subtenant or occupant as Tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained.
Section 10.08. For the purposes of this Article 10, "conveyance of a
controlling interest in Tenant" shall mean the proposed conveyance of fifty
percent (50%) or more of the voting capital stock of the Tenant to a non-
affiliated, third party entity or entities, but shall not include the conveyance
of capital stock of the Tenant in an underwritten public offering of the
Tenant's capital stock.
9
<PAGE>
ARTICLE 11
Electricity, Gas and Water
--------------------------
Section 11.01. A. Definitions
-----------
For purposes of this Article 11, the following terms shall have the
following meanings:
1. The term "Landlord's Cost" shall mean, the average cost per kilowatt
hour and average cost per kilowatt demand, by time of day, if
applicable, to Landlord of purchasing electricity for the Building,
including, without limitation, fuel adjustment charges (as determined
for each month of the relevant period and not averaged) rate
adjustment charges, sales tax, and/or any other factors, used by the
public utility company (the "Utility") servicing the Building in
computing its charges to Landlord applied to the kilowatt hours of
energy and kilowatts of demand purchased by Landlord during a given
period, and further including transmission and transformer losses (to
be determined by Landlord if such losses are not measured by the
Submeter, as defined herein); and
2. The term "Landlord's Statement", shall mean an instrument containing a
computation (or estimate thereof), of Landlord's Cost (hereinabove
defined), or any other computation to be made by Landlord pursuant to
the provisions of this Article 11.
B. Method of Furnishing Electric Current to the Demised Premises
-------------------------------------------------------------
Subject to the provisions of subdivision 4 of paragraph C hereof, Tenant
agrees that Landlord may furnish electricity to Tenant on a "rent inclusion"
basis or on a "submetering" basis.
1. Submetering: Landlord shall, at Landlord's sole cost and expense (to the
-----------
extent not already in place, install a meter or meters (collectively, the
"Submeter")), at a location designated by Landlord, connections from the risers
and/or circuits servicing the Demised Premises to the Submeter and perform all
other work necessary for the furnishing of electric current by Landlord to the
Demised Premises in the manner provided for in this subdivision. If and so long
as electric current is supplied by Landlord to the Demised Premises to service
Tenant's office equipment and the machinery and mechanical equipment for the air
conditioning units utilized by Tenant, if any, Tenant will pay Landlord or
Landlord's designated agent, as additional rent for such service, the amounts,
as determined by the Submeter, for the purpose of measuring Tenant's consumption
and demand. In the event said air conditioning units are used by other tenants
of the building, the electric charges for such units shall be allocated by
Landlord proportionately, on the basis of the respective amount of rentable
square feet occupied by such tenants, including Tenant. Tenant shall not be
charged for electric charges for such units during times in which other tenants
have requested air-conditioning on weekends and outside regular business hours.
The additional rent payable by Tenant pursuant to this subdivision 1, shall be
computed in the same manner as that for computation of Landlord Cost, as applied
to the Demised Premises, plus a fee (the "Overhead Charge") equal to six percent
(6%) of such charge
10
<PAGE>
to Landlord, representing administrative/overhead costs to Landlord. The amounts
computed from the Submeter together with the Overhead Charge, are herein
collectively called the "Electricity Additional Rent", and such amounts computed
from the Submeter shall be binding and conclusive on Tenant. If the Submeter
should fail to properly register or operate at any time during the term of this
lease for any reason whatsoever, Landlord may estimate the Electricity
Additional Rent, and when the Submeter is again properly operative, an
appropriate reconciliation shall be made, by Tenant paying any deficiency to
Landlord within ten (10) days after demand therefor, or by Landlord crediting
Tenant with the amount of any overpayment, as the case may be. Landlord, at its
option, may from time to time, increase the Electricity Additional Rent based
upon, among other things, any increase in Landlord's Cost. The periods to be
used for the aforesaid computation shall be as Landlord, in its sole discretion,
may from time to time elect. Where more than one meter measures the electric
service to Tenant (including such electric energy as is consumed in connection
with the operation of the ventilation and air conditioning equipment servicing
the Demised Premises), the electric service rendered through each meter may be
computed and billed at Landlord's option, separately as above set forth, or
cumulatively. Bills for the Electricity Additional Rent (the "Bills") shall be
rendered to Tenant at such time as Landlord may elect.
Landlord and Tenant agree, that the Submeter might be installed subsequent
to the date (the "Initial Occupancy Date") that Tenant, or anyone (including,
without limitation, any contractors or other workmen) claiming under or through
Tenant first enters the Demised Premises. In such event, Landlord, at Landlord's
sole option, may either (x) estimate the Electricity Additional Rent payable by
Tenant for the period commencing on the Initial Occupancy Date and ending on the
Occupancy Reading Date (hereinafter defined), and Tenant shall pay to Landlord,
within ten (10) days after demand therefor, the amount set forth on Landlord's
estimate and, after rendition of a subsequent Landlord's Statement, an
appropriate reconciliation shall be made for any deficiency owed by Tenant, or
any overage paid by Tenant or (y) render a Landlord's Statement to Tenant, after
a reading of the installed Submeter is made (said date upon which the Submeter
is read, being herein called the "Occupancy Reading Date") on or about the date
upon which Tenant shall have commenced normal business operations in the Demised
Premises, and the amount calculated from the Submeter on the Occupancy Reading
Date shall be determined on a per them basis and then multiplied by the number
of days from the Initial Occupancy Date through the Occupancy Reading Date to
arrive at the amount due for said period, and Tenant shall pay the Electricity
Additional Rent on the basis of such Submeter reading within ten (10) days after
rendition of Landlord's Statement detailing such computation.
If any tax, exclusive of federal, state or city income tax payable by
Landlord, is imposed upon Landlord's receipts from the sale or resale of
electric current to Tenant by any federal, state or municipal authority, Tenant
agrees that, unless prohibited by law, Tenant's Proportionate Share (as said
term is defined in Article 12 hereof of such taxes shall be passed on to, and
included in the bill of, and paid by Tenant to Landlord as additional rent.
In the event the Submeter ceases to operate properly, Landlord shall cause
such Submeter to be repaired within a reasonable time after receiving written
notice from Tenant that such Submeter is inoperative.
11
<PAGE>
2. Direct Meter
------------
Tenant shall have the option, at any time during the Demised Term,
including any renewal period, if any, of contracting directly with the local
provider of electricity for the supply of electricity to the Demised Premises.
In such case, Tenant shall, on a timely basis, pay for all electrical
consumption within or pertaining to the Demised Premises based on the readings
of an electrical meter for such space either already existing or to be installed
by Landlord at its sole cost and expense. Landlord shall not be responsible for
any interruption or discontinuance of electrical service and shall have no
liability for any condition, claim, loss or damage experienced by Tenant
resulting from its agreement with the electricity supplier.
C. General Conditions
------------------
1. Landlord shall not be liable to Tenant for any loss or damage or expense
which Tenant may sustain or incur if either the quantity or character of
electric service is changed or is no longer available or suitable for Tenant's
requirements, but, if such condition results solely from Landlord's acts or
omissions or any other condition within Landlord's reasonable control, Landlord
shall use due diligence to restore electric service. In the event electrical
service is discontinued in the Demised Premises, solely and directly as a result
of Landlord's acts or omissions, and if such condition continues for a period in
excess of thirty (30) consecutive days, then, beginning on the thirty-first
(31st) day, Tenant shall be entitled to an abatement of the Annual Base Rent,
computed on a per day basis, for each day the Demised Premises are without
electricity, after such thirtieth consecutive day. Any good faith attempt by the
Landlord to restore electrical power to the Demised Premises shall result in a
waiver of the Tenant's right to an abatement of rent hereunder. Landlord hereby
represents that the electric service to the Demised Premises is suitable for
Tenant's intended use of the Demised Premises.
2. Tenant covenants and agrees that at all times its use of electric
current shall never exceed the capacity of existing feeders to Tenant's floor(s)
or space (if less than an entire floor) or the capacity of the risers or wiring
installation in the Building. Tenant agrees not to connect any additional
electrical equipment to the Building electric distribution system, other than
lamps, typewriters, word processing equipment, photocopy machines, personal
computers, telecommunications machines and other small office machines which
consume comparable amounts of electricity, without Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. Any riser
or risers to supply Tenant's electrical requirements shall, upon written request
of Tenant but subject to the prior written approval of Landlord in each
instance, be installed by Landlord, at Tenant's sole cost and expense, if, the
same are necessary and will not cause permanent damage or injury to the Building
or Demised Premises or cause or create a dangerous or hazardous condition or
entail excessive or unreasonable alterations, repairs or expense or interfere
with or disturb other tenants or occupants. If, in Landlord's sole judgment,
Landlord shall consent to the installation of such riser or risers, in addition
to such installation, Landlord will also, at Tenant's sole cost and expense,
install all other equipment proper and necessary in connection therewith subject
to the aforesaid terms and conditions.
3. The parties acknowledge that they understand that it is anticipated that
electric rates, charges, etc. may be changed by virtue of time-of-day rates or
other methods of billing, and that
12
<PAGE>
the references in the foregoing subdivisions to changes in methods of or rules
on billing are intended to include any such changes.
4. If required by applicable law or any other reason beyond Landlord's
reasonable control, Landlord shall have the right at any time, and from time to
time, during the term of this lease, upon ninety (90) days prior written notice
to Tenant, to change the furnishing of electricity to Tenant from a submetering
basis to a rent inclusion basis, or vice versa. In addition, if required by
applicable law or any other reason beyond Landlord's reasonable control, or if
Landlord shall terminate furnishing electricity to a majority of the tenants in
the Building then receiving electricity from Landlord, Landlord shall have the
right to terminate the furnishing of electricity to the Demised Premises on a
rent-inclusion, submetering, or any other basis at any time, upon ninety (90)
days' written notice to the Tenant in which event Tenant may make application
directly to the Utility for Tenant's entire separate supply of electric current
to the Demised Premises and Landlord shall permit its wires and conduits, to the
extent available and safely capable in Landlord's sole judgment, to be used for
such purpose. Any meters, risers or other equipment or connections necessary to
enable Tenant to obtain electric current directly from the Utility shall be
installed at Landlord's sole cost and expense, subject to the provisions of this
lease. Rigid conduit only will be allowed. Landlord, upon the expiration of the
aforesaid ninety (90) days' written notice to the Tenant may discontinue
furnishing the electric current but this lease shall otherwise remain in full
force and effect. Landlord will permit Tenant to continue to receive electricity
from Landlord on a redistribution basis for such period of time as is reasonably
required by Tenant to arrange to obtain electricity service directly from the
Utility. Commencing when Tenant receives such direct service and as long as
Tenant shall continue to receive such service, the fixed rent payable under this
lease shall be reduced where electricity rent inclusion is discontinued, by a
sum equal to what the ERIF portion of the fixed rent was at the time of such
discontinuance (the parties acknowledge that in the case of termination of
redistribution by submetering, the fixed rent payable under this lease would not
be affected thereby).
5. In the event that pursuant to any of the provisions of this Article, any
initial determinations, statements or estimates are made by or on behalf of
Landlord (whether such initial determinations, statements or estimates are
subject to dispute or not pursuant to the provisions of this Article), Tenant
shall pay to Landlord the amount(s) set forth on such initial determinations,
statements or estimates, as the case may be, until subsequent determinations,
statements or estimates are rendered, at which time, the parties shall make
adjustment for any deficiency owed by Tenant, or any overage paid by Tenant.
6. In addition to all other sums payable by Tenant for electricity pursuant
to this Article, Tenant acknowledges and agrees that the electric current
furnished to the building fan room(s) servicing the Demised Premises will be
measured, at Landlord's option, by either (i) a survey to be performed by an
electrical consultant selected by Landlord or (ii) a meter to be installed by
Landlord and the amount determined by such consultant or meter shall be billed
and payable by Tenant as additional rent hereunder, from time to time, within
ten (10) days after rendition of a Landlord's Statement therefor, which amount
shall be equitably pro-rated in the event that such fan room(s) services
portions of the Building other than the Demised Premises.
13
<PAGE>
Section 11.02. Tenant, at Tenant's expense, shall purchase and install all
new lamps and tubes (including, but not limited to, incandescent and
fluorescent) and new ballasts used in the Demised Premises, except that Landlord
shall furnish and install the lamps, tubes (including, but not limited to,
incandescent and fluorescent) and ballasts initially used in the Demised
Premises.
Section 11.03. If a separate water meter be installed for the Demised
Premises, or any part thereof, the Tenant will keep the same in repair and pay
the charges made by the municipality or water supply company for or in respect
to the consumption of water, as and when bills therefor are rendered. If the
Demised Premises, or any part thereof, be supplied with water through a meter
which supplies other premises, the Tenant will pay to the Landlord, as and when
bills are rendered therefor, the Tenant's proportionate part of all charges
which the municipality or water supply company shall make for all water consumed
through said meter, as indicated by said meter. Such proportionate part shall be
fixed by apportioning the respective charge according to floor area, against all
of the rentable floor area in the Building (exclusive of the basement) which
shall have been occupied during the period of the respective charges, taking
into account the period that each part of such area was occupied. Tenant agrees
to pay as additional rent the Tenant's proportionate part, determined as
aforesaid, of the sewer rent or charge imposed or assessed upon the Building of
which the premises are a part.
ARTICLE 12
Additional Rent
---------------
A. Taxes. Section 12.01. In addition to the fixed minimum rental and any
other sums, amounts or charges herein reserved, Tenant covenants and agrees to
pay to Landlord as additional rentals, sums computed in accordance with the
following provisions:
a) "Taxes" shall mean all taxes and assessments now or hereafter levied or
imposed upon the Building and the Land upon which same is situated (collectively
the "Real Property") and all new and additional taxes based on the ownership
thereof or the rents derived therefrom which might be substituted therefor, in
whole or in part, including, but without limiting the generality of the
foregoing, (i) any and all special assessments or levies which are imposed upon
the Real Property and (ii) by whatever name or designation they are called or
designated, any new or additional taxes levied or imposed upon the Landlord in
lieu of, or supplemental to, all or any part of the taxes or assessments now or
hereafter levied or imposed upon the Real Property, including, but not limited
to, any charge, fee or imposition resulting from the Property being located
within the Lower Manhattan Business Improvement District, or any similarly named
or described district. Anything herein to the contrary notwithstanding, it is
agreed that, in the event that the Taxes payable or imposed. for any Tax Year
(as hereinafter defined) are less than what they would have been because some
portion of the Real Property is exempt from Taxes, then and in each such Tax
Year for all purposes of this Article 12, "Taxes" shall be deemed to be what
they would have been if no such exemption applied, it being understood that in
such case the lesser amount of Taxes actually payable or imposed shall not be
used for purposes of any calculation provided in this Article.
14
<PAGE>
b) The term "Tax Year" shall mean the fiscal year commencing July 1 and
ending the next succeeding June 30 or such other twelve month period for which
taxes might hereafter be levied or imposed upon the Real Property during the
Demised Term.
Section 12.02. A. Tenant shall pay to Landlord, as additional rent for each
such Tax Year, Tenant's Proportionate Share, as defined below, of the Taxes in
each Tax Year in excess of the average amount of Taxes payable in Tax Years
1997/98 and 1998/99, except that if the last day of the Demised Term shall be a
date other than the last day of a Tax Year, Tenant shall pay, as additional rent
for the last Tax Year of the Demised Term an amount equal to such proportion of
the Taxes in the last Tax Year of the Demised Term, as the number of days from
the first day of last Tax Year of the Demised Term to the last day of the
Demised Term bears to the total number of days in the Tax Year, and said payment
shall represent the pro-rata additional rent for such final Tax Year of the
Demised Term.
At some time within three months after the determination by the
governmental authority having jurisdiction thereover, of the actual and
transitional assessed valuations (if applicable) and appropriate tax rate
affecting the Real Property for any Tax Year and the determination of any other
item that may be included in Taxes, Landlord shall submit to Tenant a statement
which shall indicate the amount required to be paid by Tenant as additional rent
as in this section provided.
Within twenty (20) days after the issuance of the statement, Tenant shall
pay such additional rent as is set forth on such statement.
B. If, following the delivery of any statement referred to above, Landlord shall
receive a refund of Taxes for any Tax Year for which Tenant has paid any
additional rent under the provisions of this Article, Tenant's pro-rata share of
the net proceeds of such refund, after deduction of actual legal fees,
appraisers' fees and other expenses paid in collecting the same shall be applied
and allocated to the periods for which the refund was obtained and, if Tenant is
not then in default hereunder, Landlord shall refund Tenant's pro-rata share of
such refund. In no event shall any refund for any tax year due Tenant hereunder
exceed the additional rent paid by Tenant pursuant to this Article for such
particular Tax Year.
C. Tenant shall pay, before delinquency, all occupancy taxes and all property
taxes and assessments on Tenant's furniture, Tenant's fixtures, Tenant's
equipment and other property of Tenant at any time situated on or installed in
the Demised Premises. If at any time during the term of this lease any of the
foregoing are assessed as a part of the Real Property of which the Demised
Premises are a part, Tenant shall pay to Landlord upon demand the amount of such
additional taxes as may be levied against said Real Property by reason thereof.
Section 12.03. A. For the purposes of this lease:
1. The term "Escalation Year" shall mean each calendar year which shall
include any part of the term of this lease.
2. The term "Tenant's Proportionate Share" shall be deemed to mean 6.12%.
15
<PAGE>
3. The term "Base Year" shall mean the twelve month period ending December
31, 1998.
4. The term "Operating Expenses" shall mean all costs and expenses (and
sales taxes thereon, if any) paid or incurred by Landlord or on behalf of
Landlord with respect to the operation, cleaning, repair, safety, management,
security and maintenance of the land and the Building, Building equipment,
sidewalks, curbs, and other areas adjacent to the Building, and with respect to
the services provided tenants, including: (i) salaries, wages and bonuses paid
to, and the cost of any hospitalization, medical, surgical, union and general
welfare benefits (including group life insurance), any pension, retirement or
life insurance plan and other benefit or similar expense (collectively "Wages")
relating to employees of Landlord or employees whose wages are chargeable to
Landlord engaged in the operation, cleaning, repair, safety, management,
security or maintenance of the Building and the Building equipment or in
providing Building maintenance services to tenants; (ii) social security,
unemployment and other payroll taxes, the cost of providing disability and
worker's compensation coverage imposed by any legal requirements, union contract
or otherwise with respect to said employees; (iii) the cost of electricity, gas,
steam, water, air conditioning and other fuel and utilities not otherwise paid
for by Tenant; (iv) the cost of casualty, rent, liability, fidelity, plate glass
and any other insurance; (v) the cost of repairs, maintenance and painting; (vi)
the cost or rental of all Building and cleaning supplies, tools, materials and
equipment; (vii) the cost of uniforms, work clothes and dry cleaning; (viii)
window cleaning, concierge, guard, watchman or other security personnel, service
or system, if any; (ix) management fees or, if no managing agent is employed by
Landlord, a sum in lieu thereof not in excess of then prevailing rates for
management fees payable in the Borough of Manhattan, City of New York for first-
class office buildings; (x) charges of independent contractors performing work
included within this definition of Operating Expenses; (xi) telephone and
stationery; (xii) legal, accounting and other professional fees and
disbursements incurred in connection with the routine, day-to-day operation and
management of the Building; (xiii) decorations; (xiv) depreciation of hand tools
and other movable equipment used in the operation, cleaning, repair, safety,
management, security or maintenance of the Building to the extent the cost of
such items are not already included in Operating Expenses; (xv) association fees
and dues; and (xvi) exterior and interior landscaping.
Provided, however, that the foregoing costs and expenses shall exclude or
have deducted from them, as the case may be:
(a) executives' salaries above the grade of building manager;
(b) expenditures for capital improvements, other than capital expenditures
made for the purpose of reducing energy consumption, in which case the cost
thereof shall be included in Operating Expenses for the Escalation Year in which
the costs are incurred and subsequent Escalation Years as hereinafter provided
in this Article. In addition, the cost of correcting defects in the original
design or construction of the Building or of the Building's systems shall be
excluded;
(c) amounts received by Landlord through proceeds of insurance to the
extent they are compensation for sums previously included in Operating Expenses
hereunder;
16
<PAGE>
(d) costs of repairs or replacements incurred by reason of fire or other
casualty or condemnation to the extent Landlord is compensated therefor;
(e) advertising and promotional expenditures;
(f) costs incurred in performing work or furnishing services for any tenant
(including Tenant), whether at such tenant's or Landlord's expense, to the
extent that such work or service is in excess of any work or service that
Landlord is obligated to furnish to Tenant at Landlord's expense;
(g) depreciation or amortization, except as provided above;
(h) brokerage commissions and other reletting expenses;
(i) Taxes;
(j) refinancing costs and mortgage interest and amortization payments;
(k) costs and expenses incurred in connection with disputes with other
tenants and/or the enforcement of leases in the Building;
(l) costs and expenses incurred in building-out or otherwise preparing
space for occupancy by tenants (including Tenant) and any free rent;
(m) any costs and expenses not attributable specifically to the land and
Building (except as expressly provided otherwise in this Article);
(n) rental under any ground or underlying lease;
(o) interest, penalties and late charges payable due to late payments by
Landlord;
(p) Landlord's overhead to the extent not related to the land and/or
Building;
(q) repairs and replacements necessitated by reason of the negligence of
Landlord;
(r) costs and expenses incurred as a result of the removal of asbestos and
Hazardous Materials, as defined below, from the common areas of the Building;
and
(s) costs and expenses incurred in connection with Landlord curing
Landlord's default hereunder and any violations of record.
If Landlord shall purchase any item of capital equipment or make any
capital expenditure which has the effect of reducing the expenses which would
otherwise be included in Operating Expenses, then the costs of such capital
equipment or capital expenditure are to be included in Operating Expenses for
the Escalation Year in which the costs are incurred and subsequent Escalation
Years, on a straight-line basis, to the extent that such items are amortized
over such period of time as Landlord reasonably estimates such savings or
reductions in Operating
17
<PAGE>
Expenses are expected to equal Landlord's costs for such capital equipment or
capital expenditure, with an interest factor equal to two (2) percentage points
above the prime commercial lending rate of Citibank, N.A., charged to its
customers of highest credit standing for ninety (90) day unsecured loans
("Expense Interest Rate") at the time of Landlord's having made said
expenditure. If Landlord shall lease any items of capital equipment designed to
result in savings or reductions in expenses which would otherwise be included in
Operating Expenses, then the rentals and other costs paid pursuant to such
leasing shall be included in Operating Expenses for the Escalation Year in which
they were incurred.
B. 1. For each Escalation Year commencing during the term of this lease, Tenant
shall pay ("Tenant's Operating Payment") to Landlord, as additional rent, a sum
equal to Tenant's Proportionate Share of the amount by which Operating Expenses
for such Escalation Year exceeds the Operating Expenses for the Base Year.
2. Landlord shall furnish to Tenant, prior to the commencement of each
Escalation Year, a written statement setting forth Landlord's estimate of
Tenant's Operating Payment for such Escalation Year including a gross-up of the
Base Year, and the method of calculation of Tenant's Operating Payment for such
Escalation Year. For purposes of calculating expenses in such written statement,
the Building shall be deemed to be occupied to a level of not less than ninety-
five percent (95%), but possibly higher based on the actual occupancy rate.
Tenant shall pay to Landlord on the first day of each month during such
Escalation Year an amount equal to one-twelfth (1/12th) of Landlord's estimate
of Tenant's Operating Payment for such Escalation Year. If, however, Landlord
shall furnish any such estimate for an Escalation Year subsequent to the
commencement thereof, then (a) until the first day of the month following the
month in which such estimate is furnished to Tenant, Tenant shall pay to
Landlord on the first day of each month an amount equal to the monthly sum
payable by Tenant to Landlord under this Paragraph B in respect of the last
month of the preceding Escalation Year; (b) promptly after such estimate is
furnished to Tenant or together therewith, Landlord shall give notice to Tenant
stating whether the installments of Tenant's Operating Payment previously made
for such Escalation Year were greater or less than the installments of the
Tenant's Operating Payment to be made for such Escalation Year in accordance
with such estimate, and (i) if there shall be a deficiency, Tenant shall pay the
amount thereof within thirty (30) days after demand therefor, or (ii) if there
shall have been an overpayment, Landlord shall either refund to Tenant the
amount thereof within thirty (30) days after Landlord becomes aware of such
overpayment or permit Tenant to credit the amount thereof against subsequent
payments under this Section; and (c) on the first day of the month following the
month in which such estimate is furnished to Tenant, and monthly thereafter
throughout the remainder of such Escalation Year, Tenant shall pay to Landlord
an amount equal to one-twelfth (1/12th) of Tenant's Operating Payment shown on
such estimate. Landlord may at any time or from time to time (but not more than
twice with respect to any Escalation Year) furnish to Tenant a revised statement
of Landlord's estimate of Tenant's Operating Payment for such Escalation Year,
and in such case, Tenant's Operating Payment for such Escalation Year shall be
adjusted and paid or refunded, as the case may be, substantially in the same
manner as provided in the preceding sentence.
3. After the end of each Escalation Year Landlord shall furnish to Tenant a
Landlord's Statement for such Escalation Year. Each such year-end Landlord's
Statement shall be accompanied by a computation of Operating Expenses for the
Building prepared by a certified
18
<PAGE>
public accountant or managing agent designated by Landlord from which Landlord
shall make the computation of Operating Expenses hereunder. If the Landlord's
Statement shall show that the sums paid by Tenant under this Section exceeded
Tenant's Operating Payment paid by Tenant for such Escalation Year, Landlord
shall either refund to Tenant the amount of such excess or permit Tenant to
credit the amount of such excess against subsequent payments under this Section;
and if the Landlord's Statement for such Escalation Year shall show that the
sums so paid by Tenant were less than Tenant's Operating Payment paid by Tenant
for such Escalation Year, Tenant shall pay the amount of such deficiency within
twenty (20) days after demand therefor.
4. If the Commencement Date or the Expiration Date shall occur on a date
other than January 1 or December 31, respectively, any additional rent under
this Article for the Escalation Year in which such Commencement Date or
Expiration Date shall occur shall be apportioned in that percentage which the
number of days in the period from the Commencement Date to December 31 or from
January 1 to the Expiration Date, as the case may be, both inclusive, shall bear
to the total number of days in such Escalation Year. In the event of a
termination of this Lease, any additional rent under this Article shall be paid
or adjusted within thirty (30) days after submission of a Landlord's Statement.
In no event shall fixed rent ever be reduced by operation of this Article and
the rights and obligations of Landlord and Tenant under the provisions of this
Article with respect to any additional rent shall survive the termination of
this lease.
C. 1. Landlord's failure to render Landlord's Statements with respect to any
Escalation Year shall not prejudice Landlord's right to thereafter render a
Landlord's Statement with respect thereto or with respect to any subsequent
Escalation Year. Nothing herein contained shall restrict Landlord from issuing
Landlord's Statements at any time there is an increase in Operating Expenses
during any Escalation Year or any time thereafter.
2. Each Landlord's Statement shall be conclusive and binding upon Tenant
unless within ninety (90) days after receipt of such Landlord's Statement,
Tenant shall notify Landlord that it disputes the correctness of Landlord's
Statement, specifying the particular respects in which Landlord's Statement is
claimed to be incorrect. If Tenant shall dispute the correctness of Landlord's
Statement as aforesaid, then Tenant shall have the right, during the sixty (60)
day period following the date of Tenant's dispute notice, to inspect Landlord's
books and records solely to the extent necessary to verify the accuracy of any
such disputed item(s) of Operating Expenses. Such inspection by Tenant shall
take place at Landlord's offices or at any other reasonable location designated
by Landlord, and shall be performed only during business hours, upon reasonable
prior notice to Landlord. If the parties shall not be able to resolve such
dispute within ninety (90) days after the giving of such Landlord's Statement,
then either party may refer the matter or matters in dispute to independent
reputable certified public accountants mutually agreed upon by Landlord and
Tenant, and the decision of such accountants shall be conclusive and binding
upon the parties. If the parties shall be unable to mutually agree upon the
accountants to be retained to settle such dispute, then either party, upon not
less than ten (10) days' prior written notice to the other, may request that the
American Arbitration Association in the City of New York appoint such
accountants. Pending settlement of such dispute, Tenant shall pay Tenant's
Operating Payment as determined by Landlord and, in the event such dispute is
resolved in favor of Tenant. Landlord shall promptly reimburse Tenant for any
overpayment(s). The fees and expenses of said accountants in determining such
matter or matters shall be borne
19
<PAGE>
by the unsuccessful party (and if both parties are partially unsuccessful, the
accountants shall apportion the fees and disbursements between the parties based
upon the degree of success of each party).
Section 12.04. The obligations of Landlord or Tenant pursuant to the
provisions of this Article, as the case may be, shall survive the expiration or
sooner termination of the term of this Lease.
Section 12.05. For purposes of this Article, the Building shall be deemed
to contain approximately 295,000 rentable square feet. An actual measurement of
the rentable space which yields a result within ten percent (10%) of this total
shall not be subject to dispute or contest by either party.
ARTICLE 13
Subordination and Attornment
----------------------------
Section 13.01. This Lease is subject and subordinate to all mortgages and
ground leases which may now or hereafter affect the Real Property and to all
renewals, modifications, consolidations, replacements and extensions of any such
mortgages and ground leases. This clause shall be self-operative and no further
instrument of subordination shall be required by any mortgagee, affecting the
Real Property. In confirmation of such subordination, Tenant shall execute
promptly any certificate or other instrument that Landlord may reasonably
request. Landlord hereby agrees to use reasonable efforts to obtain for Tenant a
subordination, non-disturbance and attornment agreement from all existing
mortgagees and lessors, in the standard form customarily employed by such
mortgagee and/or lessor.
Section 13.02. If, at any time prior to the expiration of the Demised Term,
Tenant agrees, upon demand of the holder of any mortgage in possession of the
Building, to attorn to any such holder, upon the then executory terms and
conditions of this Lease, for the remainder of the term originally demised in
this Lease, provided that such holder, shall then be entitled to possession of
the Demised Premises. The foregoing provisions of this Section shall inure to
the benefit of any such holder, shall be self-operative upon any such demand,
and no further instrument shall be required to give effect to said provisions.
Tenant, however, upon demand of any such holder, agrees to execute, from time to
time, instruments in confirmation of the foregoing provisions of this Section,
satisfactory to any such holder, acknowledging such attornment and setting forth
the terms and conditions of its tenancy. Nothing contained in this Section shall
be construed to impair any right otherwise exercisable by any such holder.
Section 13.03. From time to time, within five (5) business days next
following a request by either party, the party to which the request is directed
shall deliver to the requesting party a written statement executed and
acknowledged, (i) stating that this Lease is then in full force and effect and
has not been modified (or if modified, setting forth the specific nature of all
modifications), and (ii) setting forth the date to which the Fixed Rent has been
paid, and (iii) stating whether or not, the requesting party is in default under
this Lease, and, if so setting forth the specific nature of all such defaults.
Tenant acknowledges that any statement which it delivers pursuant to this
Section may be relied upon by a purchaser of the Building, or by any mortgagee,
20
<PAGE>
or by assignee of the mortgagee. Landlord acknowledges that any statement which
it delivers pursuant to this Section may be relied upon by a sub-tenant of any
portion of the Demised Premises, or any third party.
ARTICLE 14
Liability of Landlord
---------------------
Section 14.01. Neither (i) the making nor performances by Landlord, Tenant
or others of any decorations, repairs, alterations, additions or improvements in
or to the Building or the Demised Premises, nor (ii) the failure of Landlord or
others to make any such decorations, repairs, alterations, additions or
improvements, to the extent the same do not unreasonably interfere with Tenant's
use and occupancy of the Demised Premises, nor (iii) any damage to the Demised
Premises or to the property of Tenant, nor any injury to any persons, caused by
other tenants or persons in the Building, if any, or by operations in the
construction of any private, public or quasi-public work, to the extent the same
do not unreasonably interfere with Tenant's use and occupancy of the Demised
Premises, nor (iv) any closing or darkening of any windows of the Demised
Premises if required by law, order or regulation of Federal, County, State or
Municipal authorities or by any direction pursuant to law of any public officer,
nor (v) any inconvenience or annoyance to Tenant or injury to or temporary
interruption of Tenant's business by reason of any of the events or occurrences
referred to in the foregoing subdivisions (i) through (iv), shall constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent, or relieve Tenant from any of its obligations
under this Lease, or impose any liability upon Landlord, or its agents, other
than such liability as may be imposed upon Landlord by law for Landlord's
negligence or the negligence of Landlord's agents, servants or employees in the
operation or maintenance of the Building or for the breach by Landlord of any
express covenant of this Lease on Landlord's part to be performed.
ARTICLE 15
Destruction, Fire or Other Casually
-----------------------------------
Section 15.01. If the Demised Premises shall be damaged by fire or other
casualty, Landlord, at Landlord's expense, shall repair such damage within one
hundred eighty (180) days from receipt of notice of such damage from Tenant,
subject to delays beyond Landlord's control. However, Landlord shall have no
obligation to repair any damage to, or to replace, Tenant's Personal Property or
any other property or effects of Tenant. Except as otherwise provided in Section
15.03, if the entire Demised Premises shall be rendered untenantable by reason
of any such damage, the Fixed Rent and all other sums otherwise due Landlord
under this Lease shall abate for the period from the date of such damage to the
date when such damage shall have been repaired, and if only a part of the
Demised Premises shall be so rendered untenantable, the Fixed Rent and all other
sums otherwise due Landlord under this Lease shall abate for the period in the
proportion which the area of the part of the Demised Premises so rendered
untenantable bears to the total area of the Demised Premises. However, if, prior
to the date when all of such damage shall have been repaired, any part of the
Demised Premises so damaged shall be rendered tenantable and shall be used or
occupied by Tenant or any person or persons claiming through or
21
<PAGE>
under Tenant, then the amount by which the Fixed Rent and all other sums
otherwise due Landlord under this Lease shall abate shall be equitably
apportioned for the period from the date of any such use or occupancy to the
date when all such damage shall have been repaired. Tenant hereby expressly
waives the provisions of Section 227 of the New York Real Property Law, and of
any successor law of like import then in force, and Tenant agrees that the
provisions of this Article shall govern and control in lieu thereof.
Notwithstanding the foregoing provisions of this Section, if, prior to or during
the Demised Term, (i) the Demised Premises shall be totally damaged or rendered
wholly untenantable by fire or other casualty, and if Landlord shall decide not
to restore the Demised Premises, or (ii) the Building shall be so damaged by
fire or other casualty that, in Landlord's opinion, substantial alteration,
demolition, or total reconstruction of the Building shall be required then, in
either of such events, or (iii) if such casualty shall occur in the last two (2)
years of the Term, Landlord shall give to Tenant, within thirty (30) days after
such fire or other casualty, a thirty (30) days' notice of termination of this
Lease and, in the event such notice is given, this Lease and the Demised Term
shall come to an end and expire (whether or not said term shall have commenced)
upon the expiration of said thirty (30) days, the Fixed Rent and all other sums
otherwise due Landlord under this Lease shall be apportioned as of the date of
such fire or other casualty and any prepaid portion of Fixed Rent for any period
after such date shall be refunded by Landlord to Tenant. If the Demised Term has
not yet commenced at the time of such fire or casualty, all monies paid to
Landlord hereunder shall be refunded to Tenant.
Section 15.02. Landlord shall obtain and maintain, throughout the Demised
Term, in Landlord's fire insurance policies, provisions to the effect that such
policies shall not be invalidated should the insured waive, in writing, prior to
a loss, any or all right of recovery against any party for loss occurring to the
Building. In the event that at any time Landlord's fire insurance carriers shall
exact an additional premium for the inclusion of such or similar provisions,
Landlord shall give Tenant notice thereof. In such event, if Tenant agrees, in
writing, to reimburse Landlord for such additional premium, Landlord shall
require the inclusion of such or similar provisions by Landlord's fire insurance
policies then in force, Landlord hereby waives (i) any obligation on the part of
Tenant to make repairs to the Demised Premises necessitated or occasioned by
fire or other casualty that is an insured risk under such policies, and (ii) any
right of recovery against Tenant, any other permitted occupant of the Demised
Premises, and any of their servants, employees, agents or contractors, for any
loss occasioned by fire or other casualty that is an insured risk under such
policies. In the event that at any time Landlord's fire insurance carriers shall
not include such or similar provisions in Landlord's fire insurance policies,
the waivers set forth in the foregoing sentence shall, upon notice given by
Landlord to Tenant, be deemed of no further force or effect.
Section 15.03. Notwithstanding the provisions of Section 15.01, if any such
damage, occurring after any date when the waivers set forth in Section 15.02 are
no longer in force and effect, is due to the fault or neglect of Tenant, any
person claiming through or under Tenant, or any of its servants, employees,
agents, contractors, visitors or licensees, then there shall be no abatement of
Fixed Rent by reason of such damage.
Section 15.04. Tenant shall obtain and maintain, throughout the Demised
Term, in Tenant's fire insurance policies covering Tenant's property in the
Demised Premises (and shall cause any other permitted occupants of the Demised
Premises to obtain and maintain, in similar policies) provisions to the effect
that such policies shall not be invalidated should the insured
22
<PAGE>
waive, in writing, prior to a loss, any or all right to recovery against any
party for loss occasioned by fire or other casualty which is an insured risk
under such policies. In the event that at any time the fire insurance carriers
issuing such policies shall exact an additional premium for the inclusion of
such or similar provisions, Tenant shall give Landlord notice thereof. In such
event, if Landlord agrees, in writing, to reimburse Tenant or any person
claiming through or under Tenant, as the case may be, for such additional
premium for the remainder of the Demised Term, Tenant shall require the
inclusion of such or similar provisions by such fire insurance carriers. As long
as such or similar provisions are included in such fire insurance policies then
in force Tenant hereby waives (and agrees to cause any other permitted occupants
of the Demised Premises to execute and deliver to Landlord written instruments
waiving) any right of recovery against Landlord, and any servants, employees,
agents or contractors of Landlord, for any loss occasioned by fire or other
casualty which is an insured risk under such policies. In the event that at any
time such fire insurance carriers shall not include such or similar provisions
in any such fire insurance policy, the waiver set forth in the foregoing
sentence shall, upon notice given by Tenant to Landlord, be deemed of no further
force of effect with respect to any insured risks under such policy from and
after the giving of such notice. During any period while the foregoing waiver of
right of recovery is in effect, Tenant, or any other permitted occupant of the
Demised Premises, as the case may be, shall look solely to the proceeds of such
policies to compensate Tenant or such other permitted occupant for any loss
occasioned by fire or other casualty which is an insured risk under such
policies.
ARTICLE 16
Eminent Domain
--------------
Section 16.01. If the whole of the Demised Premises shall be acquired or
condemned for any public or quasi-public use or purpose, this Lease and the
Demised Term shall end as of the date of the vesting of title with the same
effect as if said date were the Expiration Date. If only a part of the Demised
Premises shall so be acquired or condemned then except as otherwise provided in
this Section, this Lease and the Demised Term shall continue in force and effect
but, from and after the date of the vesting of title, the Fixed Rent shall be
reduced in the proportion which the area of the Demised Premises so acquired or
condemned bears to the total area of the Demised Premises immediately prior to
such acquisition or condemnation. If only a part of the Real Property shall be
so acquired or condemned, then if the part of the Real Property so acquired or
condemned shall contain more than ten (10%) percent of the total area of the
Demised Premises immediately prior to such acquisition or condemnation or Tenant
no longer has reasonable means of access to the Demised Premises, Tenant, at
Tenant's option, may give to Landlord, within sixty (60) days next following the
date upon which Tenant shall have received notice of vesting of title, a thirty
(30) days' notice of termination of this Lease. In the event any such thirty
(30) days' notice of termination is given, by Tenant, this Lease and the Demised
Term shall come to an end and expire upon the expiration of said thirty (30)
days with the same effect as if the date of expiration of said thirty (30) days
were the Expiration Date. If a part of the Demised Premises shall be so acquired
or condemned and this Lease and the Demised Term shall not be terminated,
pursuant to the foregoing provisions of this Section, Landlord, at Landlord's
expense, shall restore that part of the Demised Premises not so acquired or
condemned to a self-contained rental unit. In the event of any termination of
this Lease and the Demised Term pursuant to the provisions of this Section, the
Fixed Rent and all other sums
23
<PAGE>
otherwise due Landlord under this Lease shall be apportioned as of the date of
sooner termination and any prepaid portion of rent for any period after such
date shall be refunded by Landlord to Tenant within fifteen (15) days. This
provision shall survive such termination of this Lease.
Section 16.02. In the event of any such acquisition or condemnation of all
or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Demised Term and Tenant hereby expressly assigns to
Landlord all of its right in and to any such award.
ARTICLE 17
Defaults and Remedies and Waiver of Redemption
----------------------------------------------
Section 17.01. (1) If Tenant defaults in fulfilling any of the covenants of
this Lease, including the covenants for the payment of fixed minimum rent or
additional rent, or if the Demised Premises become vacant for a period of thirty
(30) days or deserted, or, if the Demised Premises are damaged by reason of
negligence or carelessness of Tenant, its agents, employees or invitees, then,
in any one or more of such events, upon Landlord serving a written fifteen (15)
days' notice upon Tenant specifying the nature of said default and upon the
expiration of said fifteen (15) days, if Tenant shall have failed to comply with
or remedy such default, or if the said default or omission complained of is of
such a nature that the same cannot be completely cured or remedied within said
fifteen (15) day period, and if Tenant shall not have diligently commenced
curing such default within such fifteen (15) day period, and shall not
thereafter with diligence and in good faith remedy or cure such default, then
Landlord may serve a written five (5) days' notice of cancellation of this Lease
upon Tenant, and upon the expiration of said five (5) days, this Lease and the
term thereunder shall end and expire as fully and completely as if the date of
expiration of such five (5) day period were the day herein definitely fixed for
the end and expiration of this Lease and the term thereof and Tenant shall then
quit and surrender the Demised Premises to Landlord but Tenant shall remain
liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been given, and the
term shall expire as aforesaid; or (2a) if any execution or attachment shall be
issued against Tenant or any of Tenant's property whereupon the Demised Premises
shall be taken or occupied or attempted to be taken or occupied by someone other
than Tenant; or (2b) if Tenant fails to discharge any mechanics lien which it
permits to be filed against the Demised Premises or the Building within
twenty-one (21) days after notice that it has been filed, or (3) if Tenant shall
fail to move into, or take possession of, the premises within thirty (30) days
after the Commencement Date, then and in any of such events Landlord may without
notice, re-enter the Demised Premises either by force or otherwise, and
dispossess Tenant, the legal representative of Tenant or other occupant of the
Demised Premises by summary proceedings or otherwise, and remove their effects
and hold the Demised Premises as if this Lease had not been made, but Tenant
shall remain liable hereunder as hereinafter provided, and Tenant hereby waives
the service of notice of intention to re-enter or to institute legal proceedings
to that end. If Tenant shall make default hereunder prior to the date fixed as
the commencement of any renewal or extension of this Lease, Landlord may
24
<PAGE>
cancel and terminate such renewal or extension agreement by written notice, but
Tenant shall remain liable as hereinafter provided
Section 17.02. In case of any such default, re-entry, expiration and/or
dispossess by summary proceedings or otherwise, (a) the fixed minimum rent,
additional rent and any other charges payable hereunder shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, together with such reasonable expenses as Landlord may pay for legal
expenses, reasonable attorney's fees, brokerage commissions at the standard
rate, and/or putting the Demised Premises in good order, or for preparing the
same for re-rental; (b) Landlord may re-let the Demised Premises or any part or
parts thereof, either in the name of Landlord or otherwise, for a term or terms,
which may at Landlord's option be less than or exceed the period which would
otherwise have constituted the balance of the term of this Lease and may grant
concessions or free rent; and/or (c) at any time after the Demised Term shall
have expired and come to an end or Landlord shall have re-entered upon the
Demised Premises, as the case may be, whether or not Landlord shall have
collected any monthly deficiencies as aforesaid, Landlord shall be entitled to
recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for
liquidated and agreed final damages, a sum equal to the amount by which the
Fixed Rent reserved in this Lease (plus additional rent) for the period which
otherwise would have constituted the unexpired portion of the Demised Term
exceeds the then fair and reasonable rental value of the Demised Premises for
the same period, both discounted to present worth at the rate of eight (8%)
percent per annum, which sum shall be payable over the course of the unexpired
portion of the Demised Term, on a monthly basis. If, before presentation of
proof of such liquidated damages to any court, commission or tribunal, the
Demised Premises, or any part thereof, shall have been relet by Landlord for the
period which otherwise would have constituted the unexpired portion of the
Demised Term, or any part thereof, the amount of rent received upon such
reletting shall be deemed, prima facie, to be the fair and reasonable rental
value for the part of the whole of the Demised Premises so relet during the term
of the reletting. The failure of Landlord to relet the Demised Premises or any
part or parts thereof shall not release or affect Tenant's liability for
damages. In computing such damages there shall be added to the said deficiency
such expenses as Landlord may incur in connection with reletting as in (a) above
set forth. Any such damages shall be paid in monthly installments by Tenant on
the rent days specified in this Lease and any suit brought to collect the amount
of the deficiency for any month or months shall not prejudice in any way the
rights of Landlord to collect the deficiency for any subsequent month or months
by a similar proceeding. Landlord at Landlord's option may make such
alterations, repairs, replacements and/or decorations in the Demised Premises as
Landlord in Landlord's sole judgment considers advisable and necessary for the
purpose of reletting the Demised Premises; and the making of such alterations
and/or decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Landlord shall in no event be liable in any
way whatsoever for failure to relet the Demised Premises, or in the event that
the Demised Premises are relet, for failure to collect the rent thereof under
such reletting. In the event of a breach or threatened breach by either party of
any of the covenants or provisions hereof, the damaged party shall have the
right of injunction and the right to invoke any remedy allowed by law or in
equity as if re-entry, summary proceedings and other remedies were not herein
provided for. Mention in this lease of any particular remedy, shall not preclude
Landlord or Tenant from any other remedy, in law or in equity. The foregoing
remedies and rights of Landlord are cumulative. Tenant hereby expressly waives
any and all rights of redemption granted by or under any present or future laws
in the event of Tenant being evicted or
25
<PAGE>
dispossessed for any cause, or in the event of Landlord obtaining possession of
the Demised Premises, by reason of the violation by Tenant of any of the
covenants and conditions of this Lease.
ARTICLE 18
Landlord's Right to Perform Tenant's Obligations
------------------------------------------------
Section 18.01. If Tenant shall default in the observance or performance of
any term or covenant on its part to be observed or performed under or by virtue
of any of the terms or provisions in any Article of this Lease, as provided in
Article 17 of this Lease, Landlord, without being under any obligation to do so
and without thereby waiving such default, may after sending the notice of
default required by Section 17.01, remedy such default for the account and at
the expense of Tenant. If Landlord makes any expenditures or incurs any
obligations for the payment of money in connection with any such default on the
part of Tenant, including, but not limited to, reasonable attorneys' fees in
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligations incurred with interest and costs shall be deemed to be additional
rent hereunder and shall be paid to it by Tenant on demand.
ARTICLE 19
Covenant of Quiet Enjoyment
---------------------------
Section 19.01. Landlord covenants that upon Tenant paying the rent and
additional rent and observing and performing all the terms, covenants and
provisions of this Lease on Tenant's part to be observed and performed, Tenant
may quietly enjoy the Demised Premises, subject nevertheless to the terms and
conditions of this lease as well as any mortgage(s) now or hereafter affecting
the Real Property and provided, however, that no eviction of Tenant by reason of
paramount title or the foreclosure of any mortgage affecting the Demised
Premises shall be construed as a breach of this covenant nor shall any action by
reason thereof be brought against Landlord, subject to the terms hereof, only so
long as Landlord is in possession and is collecting rent from Tenant but not
thereafter.
ARTICLE 20
Indemnity
---------
Section 20.01. Tenant agrees to indemnify and save Landlord harmless of and
from all loss, cost, liability, damage and expense including, but not limited
to, reasonable counsel fees, penalties and fines, incurred in connection with or
arising from (i) any default by Tenant in the observance or performance of any
of the terms, covenants or conditions of this Lease on Tenant's part to be
observed or performed, or (ii) any violation of the use and occupancy provision
contained in Article 5, or (iii) any acts, omissions or negligence of Tenant or
the contractors, agents, servants, employees, visitors or licensees of Tenant in
or about the Demised Premises or the Building during, the Demised Term
including, but not limited to, any acts, omissions or negligence in the making
or performing of any Alterations.
26
<PAGE>
Section 20.02. Tenant shall pay to Landlord within ten (10) days next
following rendition by Landlord to Tenant of bills or statements therefor: (i)
sums equal to all reasonable counsel fees paid by Landlord, in connection with
the remedying by Landlord, for Tenant's account pursuant to the provisions of
Section 17.01, of any default of Tenant, and (ii) sums equal to all reasonable
expenditures made by Landlord including, but not limited to, expenditures made
for reasonable counsel fees, in collecting or attempting to collect the Fixed
Rent, any additional rent or any other sum of money accruing under this lease or
enforcing or attempting to enforce any rights of Landlord under this lease or
pursuant to law provided that Tenant shall only be liable after the expiration
of applicable grace periods and periods within which to cure, as provided for
herein, for such amounts paid in respect of defaults remaining uncured after
such periods, whether by the institution and prosecution of summary proceedings
or otherwise; and (iii) all other sums of money (other than Fixed Rent) accruing
from Tenant to Landlord under the provisions of this Lease. Any sum of money
(other than Fixed Rent) accruing from Tenant to Landlord pursuant to any
provision of this Lease, whether prior to or after the Commencement Date, may,
at Landlord's option, be deemed additional rent, and Landlord shall have the
same remedies for Tenant's failure to pay any installment of Fixed Rent when
due. Tenant's obligations under this Article shall survive the expiration or
sooner termination of the Demised Term.
ARTICLE 21
Excavation
----------
Section 21.01. In the event that an excavation or any construction shall be
made for building or other purposes upon land adjacent to the Building, or
should be authorized to be made, Tenant shall, if necessary, afford to the
person or persons causing or authorized to cause such excavation or construction
license to enter upon the Demised Premises upon reasonable notice and at
reasonable times causing as little interference as possible with Tenant's
enjoyment of the Demised Premises, for the purpose of doing such work as shall
reasonably be necessary to protect or preserve the wall or walls of the
Building, or the Building, from injury or damage and to support them by proper
foundations, pinning and/or underpinning, or otherwise.
ARTICLE 22
Hazardous Environmental Condition
---------------------------------
Section 22.01. Tenant shall not cause or permit any Hazardous Materials
(hereinafter defined) to be used, stored, transported, released, handled,
produced or installed in, on or from the demised premises or the Building.
"Hazardous Materials", as used herein, shall mean any flammables, explosives,
radioactive materials, hazardous wastes, hazardous and toxic substances or
related materials, asbestos or any material containing asbestos, or any other
substance or material included in the definition of "hazardous substances",
"hazardous wastes", "hazard materials", "toxic substances", "contaminants" or
any other pollutant, or otherwise regulated by any Federal, state or local
environmental law, ordinance, rule or regulation including, without limitation,
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended, the Hazardous Materials Transportation Act, as amended, the Resource
Conservation and Recovery Act, as amended, and in the regulations adopted and
publications
27
<PAGE>
promulgated pursuant to each of the foregoing. In the event of a violation of
any of the foregoing provisions of this Article 22 by Tenant, Landlord may, upon
reasonable prior notice (but without notice and without regard to any grace
period contained herein in the case of an emergency), take all remedial action
deemed necessary by Landlord to correct such condition and Tenant shall
reimburse Landlord for the cost thereof, upon demand, as additional rent.
Section 22.02. Tenant shall indemnify and hold harmless Landlord, its
officers, directors, principals, successors and assigns and the property from
and against any and all claims, obligations, liabilities, violations, penalties,
fines, governmental orders, suits, causes of action, judgments, damages (civil
or criminal) and all other costs and expenses of any nature whatsoever which may
result from Tenant's use or storage of Hazardous Materials in connection with
the Demised Premises or the Building within which same are located.
ARTICLE 23
Broker
------
Section 23.01. The parties hereto agree that the only brokers who brought
about this transaction were Cushman & Wakefield, Inc., 100 Wall Street, New
York, New York 10005 and GVA Williams Real Estate, 380 Madison Avenue, New York,
New York 10017, which worked with Jacobson, Goldfarb & Tanzman Company, LLC, 10
Woodbridge Center Drive, Woodbridge, New Jersey 07095 on Tenant's behalf.
Landlord and Tenant agree to indemnify each other and hold one another harmless
from any damages, costs, expenses suffered by Landlord or Tenant by reason of
any breach of the foregoing representation or by reason of any alleged dealings
with Tenant. Landlord shall be responsible for the payment of brokerage
commissions to Cushman & Wakefield and to GVA Williams Real Estate (but not to
Jacobson, Goldfarb & Tanzman Company, LLC) pursuant to separate agreements.
ARTICLE 24
Waiver of Jury Trial
--------------------
Section 24.01. Landlord and Tenant each waive the right to trial by jury in
any summary proceeding that may hereafter be instituted by one party against the
other in respect of the Demised Premises, or in any action that may be brought
hereunder, provided such waiver is not prohibited by law.
ARTICLE 25
Surrender of Premises
---------------------
Section 25.01. Upon the expiration or other termination of the term of this
Lease, Tenant shall quit and surrender the Demised Premises in good order and
condition, ordinary wear and tear and damage by fire or other casualty, the
elements and any cause beyond Tenant's control excepted, and shall remove all
its property therefrom, except as otherwise provided in this Lease. Tenant's
obligation to observe or perform this covenant shall survive the expiration or
other termination of the term of this Lease. In the event Tenant remains in
possession of the
28
<PAGE>
Demised Premises after the termination of this Lease, either at the stated
termination or otherwise, (i) Landlord shall be entitled to all of the rights
and remedies which are available to a Landlord against a Tenant holding over
after the expiration of a term and to such other rights and remedies as may be
provided for in this Lease, at law and/or in equity and (ii) Tenant, at the
option of Landlord, shall be deemed to be occupying the Demised Premises as a
tenant from month-to-month, at a monthly rental equal to one and one-half
(1-1/2) times the rent and additional rent payable during the last month of the
Demised Term, subject to all of the other terms of this Lease insofar as the
same are or may be applicable to a month-to-month tenancy. Such monthly rental
shall be pro rated on a per diem basis if Tenant occupies the Demised Premises
as a tenant from month-to-month for a portion of a month. Furthermore, Tenant
hereby indemnifies Landlord against any and all liability resulting from delay
by Tenant in so surrendering the Demised Premises including, but not limited to,
any claims made by any succeeding tenant or prospective tenant founded upon such
delay and agrees to be liable to Landlord for (i) any payment or rent concession
which Landlord may be required to make to any tenant obtained by Landlord for
all or any part of the Demised Premises in order to induce such tenant not to
terminate its lease by reason of the holding over by Tenant (ii) the loss of the
benefit of the bargain if any such tenant shall terminate its lease by reason of
the holding over by tenant. Tenant's obligations under this article shall
survive the expiration or termination of this Lease.
ARTICLE 26
Rent Limitation
---------------
Section 26.01. If any of the rent payable under the terms of this Lease
shall be or become uncollectible, reduced, offset, restricted or required to be
refunded because of any applicable law, ordinance, order, rule, requirement or
regulation, either currently in effect or enacted and made effective subsequent
to the date of this agreement, Tenant shall enter into such agreement(s) and
take such other actions as Landlord may request and as may be legally
permissible to permit Landlord to collect the maximum rents which, from time to
time during the continuance of such legal rent restriction, may be legally
permissible (and not in excess of the amounts reserved therefor under this
Lease). Upon the termination of such legal rent restriction, (a) the rents shall
become and thereafter be payable in accordance with the amounts reserved herein
for the periods following such termination and in addition (b) Tenant shall pay
to Landlord, in equal monthly installments paid over the unexpired portion of
the term of this Lease, and to the maximum extent legally permissible, an amount
equal to (i) the rents which would have been paid pursuant to this Lease but for
such legal rent restriction less (ii) the rents paid by Tenant during the period
such legal rent restriction was in effect.
ARTICLE 27
Fire Protection Requirements
----------------------------
Section 27.01. If there now is or shall be installed in said building a
"sprinkler system" Tenant agrees to keep the appliances thereto in the Demised
Premises in repair and good working condition, and if the New York Board of Fire
Underwriters or the New York Fire Insurance Exchange or any bureau, department
or official of the State or local government
29
<PAGE>
requires or recommend that any changes, modifications, alterations or additional
sprinkler heads or other equipment be made or supplied by reason of the Tenant's
business, or the location of partitions, trade fixtures, or other contents of
the Demised Premises, or if such changes, modifications, alterations, additional
sprinkler heads or other equipment in the Demised Premises are necessary to
prevent the imposition of a penalty or charge against the full allowance for a
sprinkler system in the fire insurance rate as fixed by said Exchange, or by any
Fire Insurance Company, then Tenant will at Tenant's own expense, promptly make
and supply such changes, modifications, alterations, additional sprinkler heads
or other equipment.
ARTICLE 28
Insurance
---------
Section 28.01. Tenant at Tenant's own cost and expense shall maintain
insurance naming Landlord as an insured and protecting Landlord against any and
all claims for injury or damage to persons or property or for the loss of life
or of property occurring upon, in or about the Demised Premises, and the public
portions of the Building arising solely from the acts of, Tenant, its employees,
agents, contractors, clients, licenses and invitees; such insurance to afford
minimum protection during the term of this lease, of not less than $3,000,000
combined single limit coverage.
Section 28.02. Tenant shall, and shall cause any person undertaking to do
any work of any kind on the Demised Premises to provide Worker's Compensation
Insurance as may be required by law and sufficient in amount and coverage to
protect Landlord against any and all claims or injury or damage to persons or
property wherever occurring as a result of such work.
Section 28.03. Tenant at Tenant's own cost and expense shall maintain
insurance in amounts reasonably satisfactory to Landlord covering Alterations
and Improvements which are Tenant's property for the Demised Premises against
loss or damage by fire or other casualty.
Section 28.04. All such insurance shall be written in form and substance
reasonably satisfactory to Landlord by an insurance company in a financial size
category of not less than XII and with general policy holders' ratings of not
less than A, as rated in the most current available "Best's" insurance reports,
or the then equivalent thereof, and licensed to do business in New York State
and authorized to issue such policies. All policies of insurance procured by
Tenant shall contain endorsements providing that (a) such policies may not be
reduced or canceled (including for non-payment of premium) or allowed to lapse
with respect to Landlord or materially changed or amended except after 30 days
prior notice from the insurance company to Landlord, sent by certified mail,
return receipt requested; and (b) Tenant shall be solely responsible for the
payment of premiums therefor notwithstanding that Landlord or any other party is
or may be named as an insured. Duly executed certificates of insurance or, if
required by Landlord, certified copies or duplicate originals of the original
policies, together with reasonably satisfactory evidence of payment of the
premiums therefor, shall be delivered to Landlord, on or before the Commencement
Date. Each renewal or replacement of a policy shall be so deposited at least 30
days prior to the expiration of such policy. Tenant shall not carry any separate
or additional insurance concurrent in form or contributing in the event of any
loss or damage with any insurance required to be maintained by Tenant under this
lease, and all policies of insurance
30
<PAGE>
procured by Tenant shall be written as primary policies not contributing with or
in excess of coverage that Landlord may carry.
Section 28.05. On or before Commencement Date, Tenant shall furnish
Landlord with an insurance policy or a certificate evidencing the aforesaid
insurance coverage, and renewal policies or certificates shall be furnished to
Landlord at least thirty (30) days prior to the expiration date of each policy
for which a certificate was theretofore furnished.
ARTICLE 29
Access to Premises
------------------
Section 29.01. Landlord or Landlord's agents shall have the right (but
shall not be obligated) to enter the Demised Premises in any emergency at any
time, and, at other reasonable times, upon prior notice, to examine the same and
to make such repairs, replacements and improvements as are necessary or which
Landlord may elect to perform following Tenant's default beyond all applicable
grace periods and periods within which to cure such default after notice of
same, to make repairs or perform any work which Tenant is obligated to perform
under this Lease, or for the purpose of complying with laws, regulations and
other directions of governmental authorities. Tenant shall permit Landlord to
use, and maintain and replace pipes and conduits in and through the Demised
Premises and to erect new pipes and conduits therein, Landlord may, during the
progress of any work in the Demised Premises, take all necessary materials and
equipment into said premises without the same constituting an eviction nor shall
the Tenant be entitled to any abatement of rent while such work is in progress
nor to any damages by reason of loss or interruption of business or otherwise.
Landlord shall, however, use diligence in making repairs, alterations, additions
or improvements so as to minimize any inconvenience to Tenant's business and
Landlord shall be responsible for restoring any damage caused to Tenant's
property. Throughout the term hereof Landlord shall have the right to enter the
Demised Premises at reasonable hours after prior notice for the purpose of
showing the same to prospective purchasers or mortgagees of the Building, and
during the last six months of the term for the purpose of showing the same to
prospective tenants. If Tenant is not present to open and permit any entry into
the Demised Premises during an emergency, Landlord or Landlord's agents may
enter the same whenever such entry may be necessary by master key or by force
provided reasonable care is exercised to safeguard Tenant's property and such
entry shall not render Landlord or its agents liable therefor, nor in any event
shall the obligations of Tenant hereunder be affected. Landlord shall have the
right at any time, without the same constituting an eviction and without
incurring liability to Tenant therefor to change the arrangement and/or location
of public entrances, passageways, doors, doorways, corridors, elevators, stairs,
toilets, or other public parts of the Building and to change the name, number or
designation by which the Building may be known. To effectuate the purposes of
this section, Tenant shall provide Landlord with a duplicate key(s) to allow
Landlord access to all portions of the Demised Premises. Failure to so provide
Landlord with such key(s) shall constitute a material breach of this Lease.
31
<PAGE>
ARTICLE 30
Vaults
------
Section 30.01. No vaults, vault space or area, whether or not enclosed or
covered, not within the property line of the building is leased hereunder,
anything contained in or indicated on any sketch, blue print or plan, or
anything contained elsewhere in this Lease to the contrary notwithstanding.
Landlord makes no representations as to the location of the property line of the
Building. All vaults and vault space and all such areas not within the property
line of the Building, which Tenant may be permitted to use and/or occupy, is to
be used and/or occupied under a revocable license, and if any such license be
revoked, or if the amount of such space or area be diminished or required by any
Federal, State or Municipal authority or public utility, Landlord shall not be
subject to any liability nor shall Tenant be entitled to any compensation or
diminution or abatement of rent, nor shall such revocation, diminution or
requisition be deemed constructive or actual eviction. Any tax, fee or charge of
Municipal authorities for such vault or area shall be paid by Tenant.
ARTICLE 31
Bankruptcy
----------
Section 31.01. If at the date fixed as the commencement of the term of this
Lease or if at any time during the Demised Term there shall be filed by or
against Tenant in any court pursuant to any statute either of the United States
or of any state, a petition in bankruptcy or insolvency or for reorganization or
for the appointment of a receiver or trustee of all or a portion of Tenant's
property, and within 90 days thereof, Tenant fails to secure a dismissal
thereof, or if Tenant makes an assignment for the benefit of creditors or
petition for, or enters into, an arrangement for the benefit of creditors, this
Lease, at the option of Landlord, exercised within 30 days after notice of the
happening of any one or more of such events, may be canceled and terminated
effective upon giving written notice to the Tenant at the Demised Premises (but
if any of such events occur prior to the Commencement Date, this lease shall be
ipso facto canceled and terminated) and whether such cancellation and
termination occur prior to or during the term, neither Tenant nor any person
claiming through or under Tenant by virtue of any statute or of any order of any
court, shall be entitled to possession or to remain in possession of the Demised
Premises but shall forthwith quit and surrender the Demised Premises, and
Landlord, in addition to the other rights and remedies Landlord has by virtue of
any other provision herein or elsewhere in this lease contained or by virtue of
any statute or rule of law, may retain as liquidated damages, any rent, security
deposit or moneys received by it from Tenant or others in behalf of Tenant. If
this lease shall be assigned in accordance with its terms, the provisions of
this Article 31 shall be applicable only to the party then owning the Tenant's
interest in this lease.
Section 31.02. It is stipulated and agreed that in the event of the
termination of this Lease pursuant to Section 31.01 hereof, Landlord shall
forthwith, notwithstanding any other provisions of this Lease to the contrary,
be entitled to recover from Tenant as and for liquidated damages an amount equal
to the amount by which the rent reserved hereunder for the unexpired portion of
the Demised Term is less than the fair and reasonable rental value of the
Demised
32
<PAGE>
Premises for the same period. In the computation of such damages the difference
between any installment of rent becoming due hereunder after the date of
termination and the fair and reasonable rental value of the Demised Premises for
the period for which such installment was payable shall be discounted to the
date of termination at the rate of eight (8%) percent per annum. If the Demised
Premises or any part thereof be relet by Landlord for the unexpired term of this
lease, or any part thereof, before presentation of proof of such liquidated
damages to any court, commission or tribunal, the amount of rent received upon
such reletting shall be deemed to be the fair and reasonable rental value for
the part or the whole of the premises so relet during the term of the reletting.
Nothing herein contained shall limit or prejudice the right of Landlord to prove
for and obtain as liquidated damages by reason of such termination, an amount
equal to the maximum allowed by any statute or rule of law in effect at the time
when, and governing the proceedings in which, such damages are to be proved,
whether or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
ARTICLE 32
Rules and Regulations
---------------------
Section 32.01. Tenant, its servants, employees, agents, visitors and
licensees shall observe faithfully and comply strictly with the rules and
regulations set forth in Exhibit 11 attached hereto and made a part hereof.
Landlord shall have the right from time to time during the term of this Lease to
make reasonable changes in and additions to the rules thus set forth.
Section 32.02. Any failure by Landlord to enforce any rules and regulations
now or hereafter in effect, either against Tenant or any other tenant in the
Building, shall not constitute a breach hereunder or waiver of any such rules
and regulations. Notwithstanding the foregoing, Landlord shall not discriminate
in the enforcement of any rules and regulations Landlord has by virtue of any
other provision herein or elsewhere in this lease contained or by virtue of any
statute or rule of law, may retain as liquidated damages, any rent, security
deposit or moneys received by it from Tenant or others in behalf of Tenant. If
this lease shall be assigned in accordance with its terms, the provisions of
this Article 31 shall be applicable only to the party then owning the Tenant's
interest in this lease.
Section 32.03. It is stipulated and agreed that in the event of the
termination of this Lease pursuant to Section 31.01 hereof, Landlord shall
forthwith, notwithstanding any other provisions of this Lease to the contrary,
be entitled to recover from Tenant as and for liquidated damages an amount equal
to the amount by which the rent reserved hereunder for the unexpired portion of
the Demised Term is less than the fair and reasonable rental value of the
Demised Premises for the same period. In the computation of such damages the
difference between any installment of rent becoming due hereunder after the date
of termination and the fair and reasonable rental value of the Demised Premises
for the period for which such installment was payable shall be discounted to the
date of termination at the rate of eight (8%) percent per annum. If the Demised
Premises or any part thereof be relet by Landlord for the unexpired term of this
lease, or any part thereof, before presentation of proof of such liquidated
damages to any court, commission or tribunal, the amount of rent received upon
such reletting shall be deemed to be the fair and reasonable rental value for
the part or the whole of the premises so relet during the term of the reletting.
Nothing herein contained shall limit or prejudice the right of Landlord
33
<PAGE>
to prove for and obtain as liquidated damages by reason of such termination, an
amount equal to the maximum allowed by any statute or rule of law in effect at
the time when, and governing the proceedings in which, such damages are to be
proved, whether or not such. amount be greater, equal to, or less than the
amount of the difference referred to above.
ARTICLE 33
Successors and Assigns
----------------------
Section 33.01. The covenants, conditions and agreements contained in this
Lease shall bind and enure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and, except as otherwise
provided herein, their assigns.
Section 33.02. The term "Landlord" wherever used in this Lease shall be
limited to mean and include only the owner or owners of the Real Property at the
time in question or a mortgagee in possession, so that in the event of any sale,
assignment or transfer of the Real Property, such owner, or mortgagee in
possession shall thereupon be released and discharged from all covenants,
conditions and agreements of Landlord hereunder; but such covenants, conditions
and agreements shall be binding upon each new owner, or mortgagee in possession
for the time being of the Real Property, until sold, assigned or transferred.
ARTICLE 34
Notice
------
Section 34.01. Any notice, request or demand permitted or required to be
given by the terms and provisions of this Lease, or by any law or governmental
regulation, either by Landlord of Tenant or by Tenant of Landlord, shall be in
writing. Unless otherwise required by such law or regulation such notice,
request or demand shall be given, and shall be deemed to have been served and
given by Landlord and received by Tenant, when Landlord (1) shall have caused
such notice, request or demand to be personally delivered or shall have
deposited such notice, request or demand by registered or certified mail, return
receipt requested mail enclosed in a securely closed postpaid wrapper, in a
United States Government general or branch post office, addressed to Tenant at
the Demised Premises, and (2) until Tenant has moved into the Demised Premises,
shall have caused such notice, request or demand to be personally delivered or
shall have deposited such notice, request or demand by registered mail enclosed
in a securely closed postpaid wrapper in such a post office addressed to Tenant
at its address as stated on the first page of this Lease. Such notice, request
or demand shall be given, and shall be deemed to have been served and given by
Tenant and received by Landlord, when Tenant shall have caused such notice
request or demand to be personally delivered or shall have deposited such
notice, request or demand by registered or certified mail, on a return receipt
requested basis, enclosed in a securely closed postpaid wrapper in such a post
office addressed to Landlord at 55 Broadway, 31st Floor, New York, New York
10006. Either party may, by notice as aforesaid designate a different address or
addresses for notices, requests or demands to it.
34
<PAGE>
ARTICLE 35
No Waiver and Entire Agreement
------------------------------
Section 35.01. The failure of Landlord to seek redress for violation of, or
to insist upon the strict performance of, any covenant or condition of this
lease, or any of the Rules and Regulations set forth or hereafter adopted by
Landlord, shall not prevent a subsequent act, which would have originally
constituted a violation, from having all the force and effect of an original
violation. The receipt by Landlord of rent with knowledge of the breach of any
covenant of this Lease shall not be deemed a waiver of such breach. No provision
of this Lease shall be deemed to have been waived by Landlord, unless such
waiver be in writing signed by Landlord. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement on any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in this lease provided.
Section 35.02. This Lease with the schedules and exhibits annexed hereto
contain the entire agreement between Landlord and Tenant and any executory
agreement hereafter made between Landlord and Tenant shall be ineffective to
change, modify, waive, release, discharge, terminate or effect an abandonment of
this Lease, in whole or in part, unless such executory agreement is in writing
and signed by the party against whom enforcement of the change, modification,
waiver, release, discharge, termination or the effecting of the abandonment is
sought.
Section 35.03. If any term or provision of this Lease shall, to any extent
be invalid or unenforceable, the remainder of this lease shall not be affected
thereby and the balance of the terms and provisions of this lease shall be valid
and enforceable to the fullest extent either hereunder or as permitted by law.
ARTICLE 36
Captions
--------
Section 36.01. The Table of Contents and Captions of Articles in this lease
are inserted only as a matter of convenience and for reference and they in no
way define, limit or describe the scope of this lease or the intent of any
provision thereof.
ARTICLE 37
Inability to Perform
--------------------
Section 37.01. This Lease and the obligation of Tenant to pay rent or
additional rent hereunder and perform and comply with all of the other covenants
and agreements hereunder on the part of Tenant to be performed and complied with
shall in no way be affected, impaired or excused (i) because of Landlord's delay
or failure to perform or comply with any of the
35
<PAGE>
covenants or provisions hereunder on the part of Landlord to be performed or
complied with, nor (ii) because Landlord is unable to fulfill any of its
obligations under this Lease nor (iii) because Landlord is unable to supply or
is delayed in supplying any service expressly or impliedly to be supplied nor
(iv) because Landlord is unable to make, or is delayed in making any repair,
additions, alterations or decorations nor (v) because Landlord is unable to
supply or is delayed in supplying any equipment or fixtures, if Landlord is
prevented or delayed from doing any of the foregoing by reason of strike or
labor troubles or any other cause whatsoever wholly or partially beyond
Landlord's control including, but not limited to, force majeure or governmental
pre-emption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
ARTICLE 38
No Representations by Landlord
------------------------------
Section 38.01. Landlord or Landlord's agents have made no representations
or promises with respect to the Building, the Land or the Demised Premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this Lease. The taking possession of the Demised Premises by
Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts the
Demised Premises and that same were in good and satisfactory condition at the
time such possession was so taken.
ARTICLE 39
Failure to Give Possession
--------------------------
Section 39.01. If Landlord is unable to give possession of the Demised
Premises to Tenant on the Commencement Date, Landlord shall not be subject to
any liability for failure to give possession on said date and the validity of
the lease shall not be impaired under such circumstances, but the rent payable
hereunder shall be abated, provided Tenant is not responsible for the inability
to obtain possession, until after Landlord shall have given Tenant written
notice that the premises are substantially ready for Tenant's occupancy. If
permission is given to Tenant to enter into the possession of the Demised
Premises or to occupy premises other than the Demised Premises prior to the
Commencement Date, Tenant covenants, and agrees that such occupancy shall be
deemed to be under all the terms, covenants, conditions and provisions of this
lease, except as to the covenant to pay rent. The provisions of this Article are
intended to constitute "an express provision to the contrary" within the meaning
of Section 223-a of the New York Real Property Law.
36
<PAGE>
ARTICLE 40
Glass
-----
Section 40.01. Landlord shall replace at the expense of the Tenant any and
all broken glass in the skylights, doors and walls in and about the Demised
Premises. Landlord may insure and keep insured all plate glass in the skylights,
doors and walls in the Demised Premises for and in the name of Landlord and
bills for the premiums therefor shall be rendered by Landlord to Tenant at such
times as Landlord may elect, and shall be due from and payable by Tenant when
rendered, and the amount thereof shall be deemed to be, and shall be paid as,
additional rent.
ARTICLE 41
Floor Load
----------
Section 41.01. Tenant shall not place a load upon any floor in the Demised
Premises heavier than the floor load per square foot which said floor was
designed to carry and as permitted by law. Landlord may prescribe the weight and
position of heavy equipment of any kind, including business machines and safes,
and Tenant shall pay for the cost of any installations necessary to permit the
safe installation of such equipment and to reduce vibration, noise and other
annoyances. Occupancy of the Demised Premises shall be limited to the number of
people per square foot of space permitted pursuant to the Zoning Resolution of
the City of New York as well as all other duly enacted laws, ordinances, orders
and regulations.
ARTICLE 42
Services and Equipment
----------------------
Section 42.01. Any service which Landlord is required to furnish pursuant
to the provisions of this Lease may, at Landlord's option, be furnished from
time to time in whole or in part by employees of Landlord or by one or more
third persons. Upon notice to Tenant, any such third person, and in particular
the managing agent of the Building from time to time, shall be deemed to be
agent of Landlord within the meaning of Section 14.01 hereof and entitled to be
indemnified and saved harmless as if it were Landlord within the meaning of
Section 20.01 hereof.
Section 42.02. So long as this Lease is in full force and effect Landlord
shall, at its cost and expense:
(a) Provide necessary elevator facilities on Business Days (defined as all
days except Saturdays, Sundays and all federal, state or local legal holidays,
as well as any other days recognized as holidays under applicable union
contracts) during "regular hours" (that is between the hours of 8:00 A.M. and
6:00 P.M.) and shall have at least one passenger elevator subject to call at all
other times thereby providing access to the Demised Premises, on a 24 hours a
day, 7 days a week basis. At Landlord's option, the elevators shall be operated
by automatic control or manual control, or by a combination of both of such
methods. In connection with Tenant's initial
37
<PAGE>
move-in to the Demised Premises, Tenant shall pay only Landlord's actual costs
including standard building service fees for providing freight elevator service
after hours.
(b) Maintain and operate the base building heating system and shall,
subject to the design specifications of the heating system and to energy
conservation requirements of, and voluntary energy conservation programs
sponsored by, governmental authorities, furnish heat (hereinafter called "Heat
Service") to the Demised Premises. Heat service shall be provided, as may be
required for comfortable occupancy of the Demised Premises during regular hours
of Business Days during the heating season. If Tenant shall require heat service
during hours other than regular hours or on days other than Business Days and
Saturdays as provided above (hereinafter called "After Hours"), Landlord shall
furnish such After Hours heat service upon advance notice given the day before
from Tenant, and Tenant shall pay the building standard charge for the
electricity consumed by the HVAC system during After Hours pursuant to Article
11 hereof.
(c) Supply base building air conditioning (hereinafter referred to as "A/C
service") to the Demised Premises, subject to the design specifications of the
systems and to energy conservation requirements of, and voluntary energy
conservation programs sponsored by, governmental authorities, during regular
hours of Business Days from May 15 to September 15. Landlord represents that the
base building air conditioning is not operated on Tenant's electrical submeter.
If Tenant shall require A/C service during After Hours, Landlord shall furnish
such After Hours HVAC service upon advance notice the day before from Tenant,
and Tenant shall pay the building standard charge for the electricity consumed
by the HVAC System during After Hours pursuant to Article 11 hereof. All extra
charges shall be separately designated and calculated.
(d) Provide cleaning and janitorial services on Business Days as set forth
on Exhibit 4. Tenant shall pay to Landlord on demand the costs incurred by
Landlord for (a) extra cleaning work in the demised premises required because of
(i) misuse or neglect on the part of Tenant or its employees or visitors, (ii)
use of portions of the demised premises for preparation, serving or consumption
of food or beverages, data processing, or reproducing operations, private
lavatories or toilets or other special purposes requiring greater or more
difficult cleaning work than office areas, (iii) unusual quantity of interior
glass surfaces, (iv) non-building standard materials or finishes installed by
Tenant or at its request and (b) removal from the Demised Premises and the
Building of so much of any refuse and rubbish of Tenant as shall exceed that
ordinarily accumulated daily in the routine of business office occupancy.
Landlord, its cleaning contractor and their employees shall have After Hours
access to the Demised Premises and the free use of light, power and water in the
` demised premises as reasonably required for the purpose of cleaning the
Demised Premises in accordance with Landlord's obligations hereunder.
(e) Furnish water for lavatory and drinking and office cleaning purposes.
If Tenant requires, uses or consumes water for any other purposes, Tenant agrees
to Landlord installing a meter or meters or other means to measure Tenant's
water consumption, and Tenant further agrees to reimburse Landlord for the cost
of the meter or meters and the installation thereof, and to pay for the
maintenance of said meter equipment and/or to pay Landlord's cost of other means
of measuring such water consumption by Tenant including standard building
service fees. Tenant
38
<PAGE>
shall reimburse Landlord for the cost of all water consumed, as measured by said
meter or meters or as otherwise measured, including sewer rents.
(f) Landlord shall maintain and clean all Common Building Facilities; shall
be responsible to remove snow and ice from the common building areas and
facilities and provide access to the building for the Tenant.
(g) Landlord shall provide vermin extermination and repair and replacement
of any item in the building damaged by vermin.
(h) Landlord shall maintain a concierge desk with a concierge present at
all times during Business Hours.
(i) (1) Except as otherwise specifically set forth herein, Landlord shall
maintain, repair and replace as necessary, keep in good order, safe and clean
condition, the plumbing, sprinkling, HVAC, electrical and mechanical lines and
equipment associated therewith, elevators and boilers, broken and damaged glass;
(2) utility and trunk lines, tanks and transformers and the interior and
exterior structure of the building, including the roof, exterior walls, bearing
walls, support beams, floor slabs, foundations support columns and window
frames; (3) common building facilities located within or outside the building
including, the common entrances, corridors, interior and exterior doors and
windows, stairways, lavatory facilities and access ways therefore.
Section 42.03. Any use of the Demised Premises, or any part thereof, or
rearrangement of partitioning in a manner that interferes with normal operation
of the heat and air-conditioning systems (hereinafter called the systems)
servicing the same, may require changes in such systems. Such changes, so
occasioned, shall be made by Tenant, at its expense, subject to Landlord's prior
written approval of such changes, which approval shall not be unreasonably
withheld. Tenant shall not make any change, alteration, addition or substitution
to the air-conditioning system without Landlord's prior written approval.
Section 42.04. Landlord reserves the right without any liability
whatsoever; or abatement of fixed annual rent, or additional rent, to stop the
heating, air- conditioning, elevator, plumbing, electric and other systems when
necessary by reason of accident or emergency or for repairs, alterations,
replacements or improvements. If possible, Tenant shall receive reasonable
advance notice.
Section 42.05. Landlord may fix in its reasonable discretion, at any time
and from time to time, the hours during which, and the regulations under which,
foods and beverages may be brought into the Building by persons other than the
regular employees of Tenant.
Section 42.06. If the Tenant elects to hire maintenance contractors for its
own use, then Tenant agrees to employ such office maintenance contractors as
Landlord may from time to time designate, for all waxing, polishing, lamp
replacement, cleaning and maintenance work in the Demised Premises, provided
that the quality thereof and the charges therefor are reasonably comparable to
that of other contractors. Tenant shall not employ any other contractor without
Landlord's prior written consent. Nothing herein is intended to reduce the
cleaning and maintenance services to be provided by Landlord.
39
<PAGE>
Section 42.07. (a) Tenant, at its sole cost and expense, shall comply with
all Legal Requirements pertaining to the collection, sorting, separation, and
recycling of waste products, garbage, refuse, and trash. Tenant shall sort and
separate such waste products, garbage, refuse, and trash to such categories as
provided by applicable legal and building standard requirements. Each separately
sorted category of waste products, garbage, refuse, and trash shall be placed in
separate receptacles approved by Landlord and shall be removed from the Demised
Space by Landlord as part of its services to be provided hereunder; except that
any medical or hazardous waste, if any, shall remain the responsibility of the
Tenant to remove from the Building, unless some exist due to the acts or
omissions of the Landlord. (b) Landlord reserves the right to refuse to collect
or accept from Tenant any waste products, garbage, refuse, or trash that is not
separated and sorted as required by applicable legal requirements and building
standards and to require Tenant to arrange for the collection thereof, at
Tenant's sole cost and expense, utilizing a contractor satisfactory to Landlord.
Tenant shall pay all costs, expenses, fines, penalties, or damages that may be
imposed on Landlord or Tenant by reason of Tenant's failure to comply with the
provisions of this Article 42.07.
Section 42.08. Landlord will not be required to furnish any other services,
except as otherwise provided in this Lease. Landlord agrees to provide services
as required and set forth herein, on a non-discriminatory basis.
ARTICLE 43
Untenantability
---------------
Section 43.01. Anything to the contrary contained herein notwithstanding,
if the Demised Premises are rendered untenantable by any event, except one due
to the actions of the Tenant, its employees or invitees, Tenant shall have the
right to terminate this Lease, pursuant to the terms of this Article. The term
untenantable is intended to mean that Tenant cannot for more than thirty (30)
consecutive days conduct its business in the Demised Premises. If Landlord and
Tenant shall disagree as to whether or not Tenant can conduct its business in
the Demised Premises, Tenant's right to terminate shall accrue only after the
matter shall have been submitted to arbitration and the arbitrator has
determined that the event or condition has in fact objectively and substantially
interfered with Tenant's conduct of its operations in the Demised Premises and
in the event of such a determination favorable to Tenant, Tenant's right to
terminate shall relate back to, and be effective as of, the date on which Tenant
has given Landlord notice of its exercise of such right to terminate.
ARTICLE 44
Moving
------
Section 44.01. Tenant shall notify Landlord of the date Tenant intends to
move into, or out of, the Demised Premises, by a writing received by Landlord at
least forty-eight (48) hours prior to such date.
40
<PAGE>
Section 44.02. Moving into or out of the Demised Premises shall be under
and pursuant to the reasonable and direct supervision of the Landlord, which
shall designate the reasonable and permissible times for same, including the
permissible use of elevators and hand trucks and dollies.
Section 44.03. Moving into or out of the Demised Premises shall be at
Tenant's sole cost and expense. Tenant agrees to use reasonable care required to
preserve and maintain all parts of the Demised Premises and the Building,
including elevators, if any, and to avoid interference with the use and
enjoyment of same by other Tenants of the Building. Tenant agrees to indemnify,
defend and hold harmless Landlord for any damage or destruction of the Building
or injury to persons resulting from Tenant moving into or out of the Demised
Premises; including any action or proceeding by any party claiming to have been
injured personally or otherwise as a result of Tenants conduct, whether or not
such action or proceeding is meritorious. This obligation shall come into effect
regardless of whether the conduct or act giving rise to the damage or injury
shall have been performed by the Tenant itself or by an agent, hired laborer or
independent contractor of Tenant.
ARTICLE 45
Negative Covenants
------------------
Section 45.01. Tenant will not disfigure or deface any part of the
building, or suffer the same to be done, except so far as may be necessary to
affix such trade fixtures as are herein consented to by Landlord; Tenant will
not obstruct, or permit the obstruction of the street or the sidewalk adjacent
thereto; will not permit the accumulation of waste or refuse matter. Tenant will
not obstruct or permit the obstruction of the light, halls, stairway or
entrances to the building, and will not erect or inscribe any sign, signals or
advertisements unless and until the style and location thereof have been
approved by Landlord; and if any be erected or inscribed without such approval,
Landlord may remove the same at the sole cost and expense of Tenant. No water
cooler, air conditioning unit or system or other apparatus shall be installed or
used without the prior written consent of Landlord.
ARTICLE 46
Window Cleaning
---------------
Section 46.01. Tenant agrees that it will not require, permit, suffer, nor
allow the cleaning of any window, or windows, in the Demised Premises from the
outside (within the meaning of Section 202 of the Labor Law) unless the
equipment and safety devices required by law, ordinance, regulation or rule,
including, without limitation, Section 202 of the New York Labor Law, are
provided and used, and unless the rules, or any supplemental rules of the
Industrial Board of the State of New York are fully complied with; and Tenant
hereby agrees to indemnify the Landlord, Owner, Agent, Manager and/or
Superintendent, as a result of Tenant's requiring, permitting, suffering, or
allowing any window, or windows in the Demised Premises to be cleaned from the
outside in violation of the requirements of the aforesaid laws, ordinances,
regulations and/or rules.
41
<PAGE>
ARTICLE 47
Landlord's Work
---------------
A. Tenant, at Tenant's expense, shall prepare such plans and specifications
(which plans, and specifications are hereinafter called the "Plans") which shall
contain complete information (including engineering required, if any) and
dimensions necessary and sufficient for the construction and finishing of the
Demised Premises by Landlord. The Plans shall be submitted by Tenant to Landlord
upon execution and delivery of this lease. Any revisions to the Plans required
by Landlord shall be performed by Tenant within five (5) business days after
demand by Landlord.
In accordance with Plans, Landlord, at Landlord's expense, subject to the
Cap, as described below, and except as otherwise expressly specified in this
lease, will cause its designated contractor to make and complete in and to the
Demised Premises the work and installations (hereinafter called "Landlord's
Work") specified in Exhibit III annexed hereto (which unless otherwise
specifically provided herein, shall include such removal as may be required of
existing installations, shall be of a material, design, capacity, quality,
finish and color of the standard adopted by Landlord for the building and, where
quantities are hereinafter specified, such quantities shall include any existing
installations to the extent usable and used in the performance of Landlord's
Work). Tenant shall utilize the services of Landlord's designated architect in
connection with the preparation of the Plans. The fees charged by said architect
shall be considered part of the Work Cost, as defined below, payable by
Landlord.
Notwithstanding any provision of this lease to the contrary, any requests
for revisions to the Plans or other notices to be given to Tenant by Landlord
pursuant to this Article may be given to Tenant's designated representative,
Shirley Batista, either (i) delivered personally or (ii) sent by certified mail,
return receipt requested, or overnight courier, with receipt acknowledged, to:
Tenant, 465 South Street, Morristown, New Jersey 07960.
B. The term "Work Cost" as used in this Article shall mean the actual cost
(including the cost of applicable insurance premiums and the cost of
architectural services and engineering) to Landlord of furnishing and installing
such part of Landlord's Work, subject to the Cap, as defined below.
C. In all instances where Tenant is required to supply information or
authorizations with regard to Landlord's Work, Tenant shall supply the same
within five (5) business days after written request therefor by Landlord.
D. Except as provided in this Article, Landlord shall not be required to
spend any money or to do any work to prepare the Demised Premises for Tenant's
occupancy. The specification of Landlord's Work represents the limit of
Landlord's responsibilities in connection with the preparation of the Demised
Premises and except as so provided, Tenant shall take the Demised Premises "AS-
IS". The Demised Premises shall be delivered free of asbestos containing
materials and Landlord's Work shall comply with applicable law. Any other
improvements, alterations or additions shall be performed by Tenant, but subject
to all of the terms, conditions and covenants of this lease.
42
<PAGE>
E. Landlord can make no representation of the date on which it will
substantially complete Landlord's Work and, Landlord shall be under no penalty
or liability to Tenant whatsoever by reason of any delay in such performance and
this lease shall not be affected thereby.
F. Tenant shall be permitted to enter into the Demised Premises for
installation of its machinery, equipment and fixtures and performance of its
work, all as permitted by this lease prior to the Commencement Date at its sole
risk, provided that such entry and work do not interfere in any way with
Landlord's performance of the Landlord's Work. At any time during such period of
prior entry, if Landlord notifies Tenant that Tenant's entry or work is
interfering with or delaying Landlord's performance of Landlord's Work, Tenant
shall forthwith discontinue any further work and shall remove from the Demised
Premises, and shall cause its workmen or contractors to remove therefrom, any
equipment, materials or installations which are the subject of Landlord's
notice.
G. All work performed by Landlord, shall, upon installation, become
Landlord's property and shall be surrendered at the expiration or sooner
termination of the term of this lease, in good condition, reasonable wear and
tear excepted.
H. 1. For the purposes of this Article, Landlord's Work shall be deemed to
be substantially completed when all major construction is completed, (or when
all major construction would have been completed but for delays caused by Tenant
as provided in Paragraph 2 below or otherwise) although (i) minor items of
construction or improvements which do not unreasonably interfere with Tenant's
ability to carry on its business in the Demised Premises and/or (ii) any
Additional Work is not completed. Tenant shall within thirty (30) days after the
Commencement Date of this lease submit to Landlord a "punch-list" of such minor
unfinished work which punch-list items, after approval by Landlord, will be
diligently completed. Tenant shall periodically inspect Landlord's Work and make
any objections thereto, if called for, without delay, so as to mitigate changes,
delays and costs.
2. Tenant specifically acknowledges and agrees that the Work Cost
will increase and there will be delay in completion of Landlord's Work by reason
of (i) Tenant's failure or unreasonable delay to consult with Landlord to enable
Landlord to prepare plans or specifications; (ii) unreasonable delay or failure
by Tenant in supplying information, approving estimates or giving authorization;
(iii) Tenant's making changes or additions in the plans or specifications or
materials originally requested; (iv) interference by Tenant or Tenant's
contractors with the performance of Landlord's Work; (v) delay or failure of any
special or additional new materials selected by Tenant; (vi) Additional Work
(without regard to any time periods granted to Tenant hereunder for the approval
of estimates and/or revisions of the Workletter); (vii) any resubmissions or
revisions of the Plans (without regard to any time periods granted to Tenant
hereunder for making such resubmissions or revisions); or (viii) work,
materials, components and other items specified by Tenant which are not building
standard, and/or are not readily available to Landlord or Landlords' designated
contractor, or require special manufacturing, fabrication or installation, or
require additional time to obtain or install thereby delaying the date that
Landlord's Work would otherwise be substantially completed, including but not
limited to, special wallcoverings, light fixtures, entrance doors, woodwork,
glass, stairways, door hardware, floor coverings and security and communications
devices.
43
<PAGE>
Landlord shall not be responsible for any of the delays set forth in this
Article, and, at Landlord's option, the term of this lease shall commence five
(5) business days after the date on which Landlord's Work would have been
substantially completed if not for the occurrence of any such delays. In
addition, Tenant shall reimburse Landlord, as additional rent, for any and all
losses, costs and damages suffered by Landlord caused by any such delays.
I. In the event Landlord has agreed to perform any work over and above
Landlord's Work (the "Additional Work") then, prior to commencing such
Additional Work, Landlord or Landlord's contractor shall advise Tenant (the
"Estimate") of the net increase, if any, in the Work Cost by reason of the
performance of such Additional Work. Landlord will not unreasonably withhold its
consent to any Additional Work which does not change the scope of Landlord's
Work as shown on the Plans and will not delay the performance of Landlord's
Work. Within five (5) days after Landlord's submission of the Estimate, Tenant
shall, in writing, either accept or reject the Estimate. Tenant's failure either
to accept or reject the Estimate within said five (5) day period shall be deemed
rejection thereof. Tenant may only accept the Estimate by countersigning a copy
thereof and returning same to Landlord together with a sum equal to twenty (20%)
percent of the Estimate. Thereafter, Tenant shall pay to Landlord, as additional
rent, the balance of the cost of the Additional Work at such time or times as
agreed to, but in no event shall the balance be paid later than the completion
of the Additional Work, upon rendition of a reasonably detailed invoice
therefor.
J. If Tenant shall fail to make timely payment of any sums payable to
Landlord pursuant to this Article, then, in addition to all other rights and
remedies afforded Landlord in the event of such non-payment, Landlord may,
without notice to Tenant, discontinue the performance of Landlord's Work and/or
Additional Work (or any items thereof) until such time as Tenant makes payment
to Landlord of all such past due sums and provides Landlord with adequate
assurance of the timely payment of all additional sums which may or shall be
payable by Tenant pursuant to this Article. Any delay resulting from the
discontinuance of Landlord's Work and/or Additional Work pursuant to this
Paragraph shall be deemed a delay caused by Tenant.
K. Notwithstanding anything contained to the contrary in this lease, the
total cost of Landlord's Work which Landlord shall provide Tenant without charge
and for building installations performed shall be SEVEN HUNDRED SIXTY-FIVE
THOUSAND DOLLARS ($765,000.00) (the "Cap"). Tenant hereby acknowledges that if
the building's engineer is required either for plumbing or sprinklers on
Saturdays, Sundays and holidays or before 7:30 a.m. or after 6:00 p.m. Monday
through Friday, Tenant still pay for same at the rate of $50.00 per hour.
Furthermore, if Tenant requires the use of the freight elevator on Saturdays,
Sundays or holidays, or before 7:30 a.m. or after 6:00 p.m. Monday through
Friday, Tenant shall pay for same at the rate of $50.00 per hour. If the cost of
Landlord's Work (including the cost of applicable insurance premiums and the
cost of engineering, if any) shall exceed the Cap, Tenant expressly acknowledges
and agrees that it shall be solely responsible for payment of all costs above
the Cap.
44
<PAGE>
ARTICLE 48
Cancellation Option
-------------------
Section 48.01. Provided Tenant is, and has been throughout the term of this
lease, (up to and including the Vacate Date, as defined below) fully compliant
with all of the terms, conditions and provisions herein imposed on Tenant, then
Tenant shall have a one-time, irrevocable opportunity to cancel this lease
agreement, subject to and conditioned upon satisfaction of the following
provisions and requirements:
(i) Tenant shall notify Landlord in writing of its election to cancel this
lease no later than the fourth anniversary of the date on which Tenant is first
obligated to pay rent hereunder, pursuant to Article 3 and Schedule A hereof; as
to which date time shall be of the essence (hereinafter the "Cancellation
Notice");
(ii) The effective date of the cancellation shall be exactly twelve (12)
full months following Landlord's receipt of the Cancellation Notice from Tenant;
(iii) Upon delivery of the Cancellation Notice by Tenant, and included
therewith, Tenant shall provide for Landlord a certified check, drawn on a New
York clearinghouse bank, in the amount of $330,450.00, which payment shall not
constitute rent but shall be deemed a cancellation fee and shall be paid in
addition to all rents and additional rent payments due from Tenant up to and
including the date Tenant actually vacates and surrenders possession of the
Demised Premises pursuant to this Article (the "Vacate Date");
(iv) Up to and including the Vacate Date, all of the terms, requirements,
obligations and impositions applicable against Landlord and Tenant pursuant to
this lease shall continue in full force and effect;
(v) On the Vacate Date, this lease agreement shall be deemed terminated as
if it shall have expired pursuant to its terms, whereupon neither party shall
have any continuing rights or liabilities to the other, except that Landlord
shall thereafter promptly refund Tenant's security deposit, paid pursuant to
Article 3 hereof.
ARTICLE 49
Right of First Offer
--------------------
Section 49.01. Provided Tenant is, and has been throughout the term of this
lease, fully compliant with all of the terms, conditions and provisions herein
imposed on Tenant, then Tenant shall have the first right, on a one-time-per-
space basis, to make an irrevocable offer to lease rentable spaces on the
twentieth (20th) floor in the Building, when, as and if rentable space(s) on
said floor become available for rental. This right, however, is expressly made
subject to any agreements, terms, rights or entitlements of any other tenants or
occupants of the Building as of the Commencement Date, as defined herein. Upon
Landlord becoming aware of the availability of rentable space(s) on said floor,
Landlord shall notify Tenant of same in writing. Tenant will then have fifteen
(15) days from receipt of Landlord's notice regarding the availability of a
rentable space to notify Landlord of its desire to lease such space and said
notice from Tenant
45
<PAGE>
shall set forth all of the material terms of Tenant's offer. Landlord may accept
or reject Tenant's offer, at its sole and absolute discretion; however, Landlord
shall not be permitted to reject Tenant's offer and then lease the subject space
to a third party on terms less favorable to Landlord than those offered by
Tenant. If Tenant does not respond to Landlord's notice regarding the impending
availability of an available space, Tenant shall be deemed to have waived any
rights it may have hereunder. Notwithstanding anything set forth herein,
Landlord shall have the right to retain any space on the 20th floor for its own
use, in which case the provisions of this Article shall not apply. Moreover,
Tenant's rights hereunder are not transferable and are deemed waived and
terminated in the event of an assignment of this lease or a subletting of the
Demised Premises.
ARTICLE 50
Renewal Option
--------------
Section 50.01. Provided Tenant has fully and faithfully complied with all
of the terms, provisions and covenants of this lease agreement, Tenant shall
have the right, on a one time, irrevocable basis to renew the Demised Term of
this lease for one additional five (5) year term. Such election to renew by
Tenant must be made in writing not later than twelve (12) months prior to the
expiration of the original Demised Term, as to which date time is of the
essence. In the event Tenant so elects to renew the term of this lease pursuant
hereto, the Annual Base Rental payable by Tenant in each year of the renewal
term shall be an amount equal to the annual fair market value ("FMV') at the
time of Tenant's notice of its election to renew. If Landlord and Tenant are
unable to agree as to the FMV, within thirty (30) days of the receipt of the
Tenant's notice to renew hereunder, then each party shall immediately thereafter
retain an independent appraiser who is a member of MAI who shall within thirty
(30) days of being retained prepare an appraisal report setting forth the FMV
rental of the property. Each party shall pay the fees and expenses of their
respective appraiser. In the event the reports of the two appraisers results in
a FMV rent difference of $27,450.00 per year or less, then the Annual Base
Rental shall be that amount which is the average of the two stated annual FMV's.
If, on the other hand, the reports yield a value difference of more than
$27,450.00 per year, then the two appraisers shall select a third appraiser,
whose fees shall be paid by the parties hereto on an equal (50/50) basis. In
such case such third appraiser shall prepare a report, also within thirty (30)
days of being retained, setting forth its analysis of the annual FMV rental of
the property, and the parties agree that the annual rental value determined by
said third appraiser shall be the Annual Base Rental amount to be paid by the
Tenant; provided, however, that said amount shall in no event be less than the
rental value determined by the appraiser selected by the Tenant nor more than
the rental amount arrived at by the appraiser selected by the Landlord.
46
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease
as of the day, month and year set forth on the first page hereof.
Witness for Landlord BANK OF COMMUNICATIONS
- --------------------------- ---------------------------
By:
Witness for Tenant LOGICAL DESIGN SOLUTIONS, INC.
/s/ Shirley Batista /s/ E. Bruce Lovenberg
- --------------------------- ---------------------------
By:
47
<PAGE>
SCHEDULE "A"
------------
RENT
----
For the period from the Commencement Date to the Expiration Date, the
Annual Base Rental payable by Tenant is FIVE HUNDRED FORTY-NINE THOUSAND DOLLARS
($549,000.00) per annum, payable in equal monthly installments of FORTY-FIVE
THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($45,750.00) per month on the first day of
each month.
Notwithstanding anything to the contrary set forth herein, Tenant shall be
entitled to a credit against the monthly base rental amount due and payable for
the period during which Landlord's Work, pursuant to Article 47 hereof, is being
performed as well as for the first five (5) full months following the
substantial completion of Landlord's Work, provided that and conditioned upon
Tenant's full compliance with all of the covenants and terms of this lease.
48
<PAGE>
EXHIBIT I
DESCRIPTION OF DEMISED PREMISES
-------------------------------
[TO BE INSERTED]
49
<PAGE>
[FLOOR PLAN]
50
<PAGE>
[FLOOR PLAN]
51
<PAGE>
EXHIBIT II
RULES AND REGULATIONS
---------------------
1. The rights of tenants in the entrances, corridors, and elevators of the
Building are limited to ingress to and egress from the tenants' premises for the
tenants and their employees, licensees and invitees, and no tenant shall use, or
permit the use of, the entrances, corridors, or elevators for any other purpose.
No tenant shall invite to the tenant's premises, or permit the visit of, persons
in such numbers or under such conditions as to interfere with the use and
enjoyment of any of the plazas, entrances, corridors, elevators and other
facilities of the Building by other tenants. Fire exits and stairways are for
emergency use only, and they shall not be used for any other purposes by the
tenants, their employees, licensees or invitees. No tenant shall encumber or
obstruct, or permit the encumbrances or obstruction of any of the sidewalks,
plazas, entrances, corridors, elevators, fire exits or stairways of the
Building. The Landlord reserves the right to control, supervise and/or operate
the public portions of the Building and the public facilities, as well as
facilities, furnished for the common use of the tenants, including elevators, in
such manner as it deems best for the benefit of the tenants generally.
2. The cost of repairing any damage to the public portions of the Building
or the public facilities or to any facilities used in common with other tenants,
caused by a tenant or the employees, licensees or invitees of the tenant, shall
be paid by such tenant.
3. Landlord may refuse admission to the Building outside of ordinary
business hours to any person not known to the watchman in charge, if any, or not
having a pass issued by the Landlord or not properly identified, and may require
all persons admitted to or leaving the Building outside of ordinary business
hours to register. Tenant's employees, agents and visitors shall be permitted to
enter and leave the Building whenever appropriate arrangements have been
previously made between the Landlord and the Tenant with respect thereto. Each
Tenant shall be responsible for all persons for whom he requests such permission
and shall be liable to the Landlord for all acts of such persons. Any persons
whose presence in the Building at any time shall, in the judgment of the
Landlord, be prejudicial to the safety, character, reputation and interests of
the Building or its tenants may be denied access to the Building or may be
rejected therefrom. In case of invasion, riot, public excitement or other
commotion the Landlord may prevent all access to the Building during the
continuance of the same, by closing the doors or otherwise, for the safety of
the tenants and protection of property in the Building. The Landlord may require
any person leaving the Building with any package or other object to exhibit a
pass from the tenant from whose premises the package or object is being removed,
but the establishment and enforcement of such requirement shall not impose any
responsibility on the Landlord for the protection of any tenant against the
removal of property from the premises of the tenant. The Landlord shall, in no
way, be liable to any tenant for damages or loss arising from the admission,
exclusion or ejection of any person to or from the tenant's premises or the
Building under the provisions of this rule.
4. No tenant shall obtain or accept for use in its premises ice, drinking
water, food and beverage, (other than an employee's repast), towel, barbering,
boot blacking, floor polishing, lighting, maintenance, cleaning or other similar
services from any persons not authorized by the Landlord in writing to furnish
such services, provided always that the charges for such services
52
<PAGE>
by persons authorized by the Landlord are not excessive. Such services shall be
furnished only at such hours, in such places within the tenant's premises and
under such regulations as may be fixed by the Landlord.
5. No signs, awnings or other projections on, over or around the windows
shall be installed by any tenant, and only such signage as is permitted in
writing by the Landlord, shall be used in a tenant's premises.
6. There shall not be used in any space, or in the public halls of the
Building, either by the Tenant or by jobbers or others, in the delivery or
receipt of merchandise, any hand trucks or dollies except those approved or
supplied by the Landlord.
7. All entrance doors in each tenant's premises shall be left locked when
the tenant's premises are not in use. Entrance doors shall not be left open at
any time. All windows in each tenant's premises shall be kept closed at all
times when the premises are not in use.
8. No noise, including the playing of any musical instruments, radio or
television, which, in the judgment of the Landlord, might disturb other tenants
in the Building shall be made or permitted by any tenant, and no cooking shall
be done in the Tenant's premises, except as expressly approved by the Landlord.
Nothing shall be done or permitted in any tenant's premises, and nothing shall
be brought into or kept in any tenant's premises, which would impair or
interfere with any of the Building services or the proper and economic heating,
cleaning or other servicing of the Building or the premises, or the use or
enjoyment by any other tenant of any other premises, nor shall there be
installed by any tenant any ventilating `air conditioning, electrical or other
equipment of any kind which, in the judgment of the Landlord, might cause any
such impairment or interference. No dangerous, inflammable, combustible or
explosive object or material shall be brought into the Building by any tenant or
with the permission of any tenant.
9. Tenant shall not permit any cooking within the Demised Premises.
10. No acids, vapors or other materials shall be discharged or permitted to
be discharged into the waste lines, vents or flues of the Building which may
damage them. The water and wash closets and other plumbing fixtures in or
serving any tenant's premises shall not be used for any purpose other than the
purpose for which they were designed or constructed.
11. No signs, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any tenant on any part of the outside or inside
the premises, including windows, or the Building without the prior written
consent of Landlord. In the event of the violation of the foregoing by any
tenant, Landlord may remove the same without any liability, and may charge the
expense incurred by such removal to the tenant or tenants violating this rule.
Interior signs and lettering on doors and elevators as and if permitted by
Landlord shall be inscribed, painted, or affixed for each tenant by Landlord at
the expense of such tenant, and shall be of a size, color and style prescribed
by Landlord. Landlord shall have the right to prohibit any advertising by any
tenant which impairs the reputation of the Building or its desirability as a
building for professional offices, and upon written notice from Landlord, Tenant
shall refrain from or discontinue such advertising.
53
<PAGE>
12. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows in any tenant's premises and no lock on any door therein
shall be changed or altered in any respect. Duplicate keys for a tenant's
premises shall be procured only from the Landlord, which may impose a reasonable
charge therefor. Upon the termination of a tenant's lease, all keys to the
tenant's premises shall be delivered to the Landlord.
13. No tenant shall mark, paint, nail, tack or drill into, or in any other
way deface any part of the Building or the premises demised to such tenant. No
boring, cuffing or stringing of wire shall be permitted, except with the prior
written consent of Landlord, and as Landlord may direct. No tenant shall install
any resilient tile or similar floor covering in the premises demised to such
tenant except in a manner approved by Landlord. However, ordinary activities
required to decorate and furnish the Demised Premises, such as hanging pictures,
drapes and so forth shall be permitted without the Landlord's prior written
consent.
14. Smoking and the carrying of lighted cigars, cigarettes and pipes is
specifically prohibited in all elevators of the building at all times.
15. The tenants' employees shall not loiter around the hallways, stairways,
elevators, front, roof or any other part of the building used in common by the
occupants thereof.
16. Tenant shall not allow any accumulation of refuse or debris of any kind
to remain in or about the Premises or the Building.
54
<PAGE>
EXHIBIT III
CLEANING AND JANITORIAL SERVICES
--------------------------------
The Landlord shall provide the following night services excluding strikes
or union and/or building holidays on a five day weekly schedule:
I. Service Areas/Elevator Lobby
----------------------------
A. Daily
-----
1. Vacuum carpet at elevator lobby, including freight area (if
applicable), nightly and spot clean as necessary.
2. Damp wipe and dry elevator call plaques and multi-directional
signage at multi tenant floors.
3. Remove finger and smudge marks from elevator hatch doors, frames,
adjacent walls, and entrance doors.
4. Sweep and damp mop VCT floor at freight area.
5. Police fire stairways daily. Sweep as needed on a daily basis.
6. Clean and dust fire hoses, extinguishers and other Life/Safety
equipment as often as needed.
7. Keep slop sink rooms in clean and orderly condition.
B. Weekly
------
1. Spray buff VCT floor at freight areas.
2. Clean and vacuum elevator saddles.
C. Monthly (or as needed)
----------------------
Fire Stairs - Mop at least once per month. Damp wipe and clean walls,
metal railings, standpipes and hose racks as required, but no less
than once per month.
D. Quarterly
---------
High dusting at light fixtures, elevator hall lanterns and diffusers,
grills, etc.
II. Tenant Office Space
-------------------
A. Daily
-----
1. Carpet sweep nightly. Spot clean as necessary.
55
<PAGE>
2. Hand dust and wipe clean all horizontal surfaces with a
chemically treated cloth including all furniture and window unit
covers, moldings, door louvers, radiators, chair rails and trim
nightly.
3. Remove all finger marks and smudges from all vertical surfaces,
including doors, door frames, around light switches and private
entrance glass and elevator doors and lambs (at full floor
tenants) nightly.
4. Empty and clean all waste receptacles and recyclable paper
receptacles and remove to designated areas nightly. Plastic
liners should be provided for waste receptacles only. Replace old
plastic liners as needed, but not less than one (1) time per
week.
5. Wash clean all water fountains and coolers nightly.
6. Dust all telephones with treated cloth nightly.
7. Clean all glass furniture tops. For textile or similar desk top
surfaces, wipe clean with a damp cloth nightly.
8. Sweep all private stairways.
9. Dry mop all VCT flooring and/or raised flooring.
B. Weekly
------
1. Vacuum-clean carpet.
2. Damp wipe all waste baskets.
C. Monthly
-------
Mop all private stairway structures.
D. Quarterly
---------
Do all High Dusting (that which is above eye level) quarterly, unless
otherwise specified, including, but not limited to, the following:
1. Vacuum and dust all pictures, frames, charts, graphs and similar
wall hangings not reached in nightly cleaning.
2. Vacuum and dust all vertical surfaces such as walls, partitions,
door bucks and ventilating louvers, grilles, high moldings and
other surfaces not reached in nightly cleaning.
3. Dust all overhead pipes, sprinklers, ventilating and air
conditioning louvers, ducts, high moldings and other high areas
not reached in nightly cleaning.
56
<PAGE>
4. Dust all vertical and horizontal mini blinds. Dust all window
frames.
5. Dust exterior of lighting fixtures.
6. Vacuum and dust ceiling tiles around ventilators and clean air
conditional diffusers as required.
7. Dust and spot clean all fire extinguishers as required.
III. Common Area Lavatories
----------------------
A. Daily
-----
Note: It is the intention to keep lavatories thoroughly clean and not to
use a disinfectant to mask odors. If disinfectants are necessary, an
odorless disinfectant shall be used.
1. Scour, wash and disinfect all basins, bowls and urinals with an
approved germicidal detergent solution, making sure to clean the
inner lip of bowls and urinals. Leave cleaner in bowl and do not
flush. Similarly, pour one ounce of bowl cleaner into urinal
after cleaning and do not flush.
2. Wash and disinfect both sides of all toilet seats with an
approved germicidal detergent solution. Leave toilet seat in
upright position when completed.
3. Damp wipe all ledges, toilet partitions and doors. Remove
fingertips, streaks, smudges and foreign matter from all
surfaces.
4. Spot clean light switches, doors and walls.
5. Sweep and wet mop all floor areas, including tile edges and
baseboards, with an approved germicide. Rinse with clear water.
6. Clean and polish all mirrors, soap dispensers, flushometers,
shelves, piping, toilet hinges, disposal containers and any other
bright work and enameled surfaces using a detergent/disinfectant
and water.
7. Furnish and refill all toilet tissue, paper towel and sanitary
napkin dispensers. Furnish and refill soap in dispensers, check
operation of all dispensers.
8. Report any and all mechanical deficiencies, dripping faucets,
lighting problems, etc. to Property Management Office.
9. Empty and clean paper towel and sanitary napkin disposal
receptacles, transport waste to designated location and replace
plastic liners. Contractor to maintain any and all dispensers.
57
<PAGE>
B. Monthly
-------
1. Wash any and all diffusers, grilles, toilet partitions and doors,
and tile walls with disinfectant/detergent.
2. Machine scrub floors.
3. Scrub stone saddles.
C. Semi-Annually
-------------
Polish stone saddles.
58
<PAGE>
EXHIBIT 10.12
SUN MICROSYSTEMS, INC.
SOFTWARE CHANNEL PROGRAM AGREEMENT
(United States and Canada)
This Sun Software Channel Program Agreement ("Agreement") and the Sun Channel
Program Guide ("Guide") contain the terms applicable to participants in the Sun
Software Channel Program. The terms of Section A and B below apply to
participants which resell Sun software products. For other participants which do
not resell Sun Software products, such as consultants and systems integrators,
only the terms of Section B apply.
Upon Sun Microsystems, Inc. ("Sun") issuing to the undersigned applicant
("Applicant") an authorization number ("Authorization"), Sun appoints Applicant
as a nonexclusive "Authorized Software Partner" or "Authorized Software
Enterprise Partner" as indicated by the Authorization.
Section A
1.0) Obligations. Applicant agrees to:
1.1) Sell only Sun software products which Applicant is authorized to sell as
indicated in the Guide ("Licensed Products"). Licensed Products may be acquired
by Applicant only from Sun Authorized Software Distributors and Master Resellers
("Authorized Distributors");
1.2) Pass along to End Users the Binary Code License ("BCL") contained in
Licensed Products;
1.3) Provide End Users with a warranty for Licensed Products at least
equivalent to the warranty provided by the Authorized Distributor from which
Applicant acquired the Licensed Product and indemnify Sun for any liability or
damages caused by Applicant's provision of any other warranty;
1.4) P rovide to Sun (or its designee) a written point-of-sale report as
described in the Guide (Authorized Software Enterprise Partners only);
1.5) Sell Licensed Products only to End Users located in United States and
Canada ("Territory"). "End User" means a person or entity who acquires Licensed
Products for its own internal use and does not include an entity which resells,
licenses or leases Licensed Products; and
1.6) Use its best efforts to promote the sale of Licensed Products.
2.0) Support. During the Term of this Agreement, Applicant will provide
prospective End Users with complete pre-sale support, and End Users with
post-sale support as provided in the Guide.
3.0) Subscription Kits.
3.1) Sun grants to Applicant a non-transferable, nonexclusive, limited license
to distribute Subscription Kits within the Territory. "Subscription Kit" means
tangible or electronically
<PAGE>
downloadable materials for Licensed Products designated in the applicable Sun
price list as a Sun Software Subscription product and delivered in a kit form.
Subscription Kits contain (i) a certificate for the Sun Software Subscription
services entitling an End User to receive drop-shipments of upgrades for
Licensed Products directly from Sun; (ii) Sun Software Subscription services
program terms; (iii) End User registration and acceptance forms to be completed
and returned to Sun; and (iv) marketing collateral.
3.2) Applicant may not open any Subscription Kit prior to delivery to End
Users. Applicant may not sell or distribute Subscription Kits unless the End
User has first provided satisfactory proof of its license for the most current
version of the Licensed Products. Proof of End User's current license will be
satisfied by the End User showing Applicant copies of its license or install
disk, cover page of the install disk manual or other form of proof satisfactory
to Sun that End User is licensed to the current version level.
3.3) Subscription Kits may be purchased only from Authorized Distributors.
3.4) In the event an End User does not accept the terms provided in the
Subscription Kits and elects within fifteen (15) days of purchase to return the
Subscription Kit to Applicant, Applicant must accept return of the Subscription
Kit and refund the fees paid by End User. Applicant may return, shipping
prepaid, to the Authorized Distributor from which the Subscription Kit was
purchased, the Subscription Kit returned by the End User for a refund of the
fees paid by Applicant, provided, however, that: (i) the Subscription Kit was
properly returned to Applicant by the End User within fifteen (15) days of its
purchase; and (ii) Applicant requests and has received a Return Material
Authorization ("RMA") number from the Authorized Distributor within five (5)
business days of the Subscription Kit's return by the End User to Applicant.
3.5) Any additional subscription offerings and requirements are set forth in
the Guide.
Section B
1.0) Obligations. Applicant agrees to:
1.1) Report promptly to Sun all suspected and actual problems with any Licensed
Product;
1.2) Display, demonstrate and represent Licensed Products fairly and make no
representations concerning Sun or Licensed Products which are false, misleading
or inconsistent with those representations set forth in literature distributed
by Sun;
1.3) Adhere to Sun's applicable requirements for training, including for
authorized sales representatives and authorized systems engineers as set forth
in the Guide; and
1.4) Provide Sun on a quarterly basis with a relationship planning document as
described in the Guide.
2.0) Access to Sun Software Channel Program Web Site. Subject to the following,
Sun will provide Applicant with an account login, password and the site URL for
Sun's proprietary channel information system ("Channel Web").
2.1) Title to and ownership in all products, including software products,
documents and other program information contained in the Channel Web ("Web
Contents") will solely and exclusively be and remain in Sun and/or its
licensors.
2
<PAGE>
2.2) Applicant is not authorized to make any modifications or revisions to the
Web Contents nor distribute the Web Contents to any third party. Applicant will
indemnify Sun form all liability, expense, and damage of any type arising form
Applicant's violation of this Section B.2.0.
2.3) Applicant acknowledges that Sun is not obligated to make any of the Web
Contents available as a final Sun product. Sun retains the right to make any
modifications or changes to the Web Contents at any time without prior notice to
Applicant. The Web Contents are provided strictly on as "AS IS" basis. Applicant
acknowledges that no support will be provided by Sun for the software product(s)
contained in the Web Contents.
2.4) Applicant may use software products contained in the Web Contents only
for: (i) its internal evaluation purposes and (ii) at its primary business
facility. If the software products contain third party code, Applicant's use of
the products may be subject to additional terms.
3.0) Sun Channel Program Guide. Applicant understands that the Guide sets forth
additional terms and authorization requirements and that Applicant's appointment
is conditioned on its compliance with this Agreement and the Guide. Changes to
the Guide will be provided via the Channel Web and Applicant agrees to be bound
by these changes. For those Applicants who do not have regular access to the
internet and Channel Web, printed copies of changes to the Guide will be
provided by Sun upon written request.
4.0) Not For Resale Software.
4.1) As part of the Sun Software Channel Program, Applicant may obtain
not-for-resale copies of Licensed Products ("NFR Software"). Licensed Products
available as NFR Software are designated on Channel Web and may be ordered only
from Authorized Distributors. Applicant may use no more than one (1) copy of
each NFR Software at each Applicant business location. Each location at which
NFR Software is used must be staffed with Applicant employees who have met all
applicable training, testing and authorization requirements set forth in the
Guide.
4.2) NFR Software must at all times be clearly labeled "Not For Resale
Software" and may be used only for purposes of internal staff training,
pre-sales support, customer demonstrations and Sun approved marketing.
4.3) Applicant must destroy all NFR Software: (i) upon notice that the NFR
Software has been discontinued or is available as a new revision release or (ii)
if it is no longer being used on a regular basis by Applicant for the purposes
described in Section B.4.2. To obtain new revision releases of NFR Software,
Applicant must provide Authorized Distributor with written certification that
the NFR Software has been destroyed.
4.4) In addition to this Section B.4.0, Applicant's use of NFR Software is
further subject to the terms of the BCL which accompanies the software.
4.5) Applicant may not use the NFR Software for development of software
programs; nor copy, resell or distribute the NFR Software to any third party.
3
<PAGE>
5.0) Disclaimer of Warranties.
5.1) Unless specified in this Agreement, all express or implied conditions,
representations and warranties, including any implied warranty of
merchantability, fitness for a particular purpose, or non-infringement, are
disclaimed, except to the extent that such disclaimers are held to be legally
invalid.
5.2) Licensed Product is not designed or intended for use in the design,
construction, operation or maintenance of any nuclear facility. Sun disclaims
any express or implied warranty of fitness for such uses.
6.0) Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER FOR THE OTHER'S INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE
DAMAGES, NO MATTER WHAT THEORY OF LIABILITY, AND EVEN IF ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. THE FOREGOING LIMITATION OF LIABILITY WILL NOT
APPLY: (i) IN THE EVENT THAT THE ACTION OR INACTION OF A PARTY RESULTS IN THE
UNAUTHORIZED DISCLOSURE, DISTRIBUTION OR USE OF THE OTHER PARTY'S CONFIDENTIAL
INFORMATION; (ii) WITH RESPECT TO ANY INDEMNIFICATION REQUIRED UNDER THIS
AGREEMENT OR (iii) FOR CLAIMS ARISING OUT OF SECTION B.5.2. IN NO EVENT WILL AN
ENTITY WORKING WITH SUN ON THE DEVELOPMENT AND SUPPLY OF ANY LICENSED PRODUCT OR
PART THEREOF BE LIABLE UNDER THIS AGREEMENT.
7.0) Trademarks and Special Program Logos.
7.1) "Sun Trademarks" means all names, marks, logos, designs, trade dress and
other brand designations used by Sun in connection with Licensed Product.
Applicant may refer to Licensed Product by the associated Sun Trademarks,
provided that such reference is not misleading and complies with the then
current Sun Trademark and Logo Policies. Applicant may not remove, alter, or add
to any Sun Trademarks, nor may it co-logo Licensed Products. Applicant is
granted no right, title or license to, or interest in, any Sun Trademarks.
Applicant acknowledges Sun's and its licensors' rights in Sun Trademarks and
agrees that any use of Sun Trademarks by Applicant will inure to the sole
benefit of Sun and its licensors. Applicant agrees not to (i) challenge Sun
Microsystems, Inc.'s or its licensors' ownership or use of, (ii) register, or
(iii) infringe any Sun Trademarks, nor will Applicant incorporate any Sun
Trademarks into Applicant's trademarks, service marks, Applicant names, internet
addresses, domain names, or any other similar designations. If Applicant
acquires any rights in any Sun Trademarks by operation of law or otherwise, it
will immediately at no expense to Sun assign such rights to Sun or its licensors
as applicable along with any associated goodwill, applications, and/or
registrations.
7.2) Applicant may use the special program logo, if any, applicable to
Applicant's channel (e.g. Authorized Applicant Logo) only: (i) as shown in the
art work provided by Sun; (ii) in pre-sale marketing materials and advertising,
but not on goods, packaging, product labels, documentation or other materials
distributed with Sun products; (iii) in a manner no more prominent than
Applicant's corporate name and logo; and (iv) otherwise in accordance with the
then current Sun Trademark and Logo Policies.
4
<PAGE>
7.3) Sun has the right to disclose and publish Applicant's name, address and
profile information in connection with the Sun Software Channel Program.
8.0) Confidential Information. If Sun desires that information provided to
Applicant under this Agreement be held in confidence, Sun will identify the
information as confidential or proprietary. Applicant may not disclose Sun's
confidential or proprietary information and may use it only for purposes
specifically contemplated in this Agreement. Sun will treat tangible business
and financial information of Applicant that has been previously identified as
confidential, with the same degree of care as it does its own similar
information. The foregoing obligations do not apply to information which: (i) is
or becomes known by recipient without an obligation to maintain its
confidentiality; (ii) is or becomes generally known to the public through no act
or omission of recipient, or (iii) is independently developed by recipient
without use of confidential or proprietary information. This Section B.8 will
not affect any other confidential disclosure agreement between the parties.
9.0) Records and Audit Rights. During the term of this Agreement, and for a
period of three (3) years thereafter, Applicant will maintain records and
accounts sufficient to determine Applicant's compliance with the terms of this
Agreement. These records and accounts will be kept in the English language. Sun
has the right to audit Applicant's records and accounts after reasonable notice,
no more frequently than once per calendar quarter. The right to audit may be
exercised through an independent auditor of Sun's choice ("Auditor"). Auditor
will be bound to keep confidential the details of the business affairs of
Applicant and to limit disclosure of the results of any audit to only the
sufficiency of the records and accounts, including, but not limited to, whether
Applicant is in compliance with the terms of this Agreement.
10.0) Term and Termination.
10.1) This Agreement will commence upon the date Sun issues the Authorization
to Applicant ("Effective Date"). Unless earlier terminated as provided, below,
this Agreement will remain in effect until the date established in the following
schedule:
Effective Date Expiration Date (of the following year)
-------------- ---------------------------------------
July 1 - September 30 September 30
October 1 - December 31 December 31
January 1 - March 31 March 31
April 1 - June 30 June 30
10.2) Either party may terminate this Agreement at any time upon thirty (30)
days written notice to the other party.
10.3) Upon termination of this Agreement: (i) Applicant's rights under this
Agreement will immediately terminate; (ii) Applicant must discontinue use of and
destroy any confidential information provided by Sun and NFR Software in its
control or possession; and (iii) Applicant must cease use of any Sun special
program logos. Rights and obligations which by their nature should survive, will
remain in effect after termination or expiration of this Agreement.
5
<PAGE>
11.0) General Terms.
11.1) Neither party may assign or otherwise transfer any of its rights or
obligations under this Agreement, without the prior written consent of the other
party, except that Sun may assign this Agreement to an affiliated company.
11.2) All written notices required by this Agreement must be delivered in
person or by means evidenced by a delivery receipt and will be effective upon
receipt.
11.3) All Licensed Products under this Agreement is subject to U.S. Export
control laws and may be subject to export or import regulations in other
countries. Applicant agrees to comply strictly with all such laws and
regulations and acknowledges that it has the responsibility to obtain such
licenses to export, re-export or import as may be required after delivery to
Applicant.
11.4) Any express waiver or failure to exercise promptly any right under this
Agreement will not create a continuing waiver or any expectation of
non-enforcement.
11.5) Any action related to this Agreement will be governed by California law
and controlling U.S. federal law. The United Nations' Convention on Contracts
for the International Sale of Goods and the choice of law rules of any
jurisdiction will not apply.
11.6) This Agreement is not intended to create a relationship such as a
partnership, franchise, joint venture, agency, or employment relationship.
Neither party may act in a manner which expresses or implies a relationship
other than that of independent contractor, nor bind the other party.
11.7) This Agreement (including the Guide) is the parties' entire agreement
relating to its subject matter. It supersedes all prior or contemporaneous oral
or written communications, proposals, conditions, representations and warranties
and prevails over any conflicting or additional terms of any quote, order,
acknowledgment, or other communication between the parties relating to its
subject matter during the term of this Agreement. Except for the Guide, which
may be modified by Sun at any time without notice to Applicant, no modification
to this Agreement will be binding, unless in writing and signed by an authorized
representative of each party.
6
<PAGE>
I have read and agree to the terms of this Agreement and the Guide.
(Initial one) Sections A and B (reseller) _____
Section B (non-reseller) X
-------
Applicant: Logical Design Solutions Inc.
-----------------------------
(printed or typed)
By:
Name: E. Bruce Lovenberg
-----------------------------
(printed or typed)
Tile: Chief Financial Officer
-----------------------------
(printed or typed)
Date: August 23, 1999
-----------------------------
<PAGE>
EXHIBIT 10.13
Sun Professional Services
Subcontractor Master Consulting Agreement SPS: 7787
----
This Subcontractor Master Consulting Agreement ("Agreement") is entered into on
1-18-2000, 19__ (the "Effective Date"), by and between Sun Microsystems, Inc.,
- ---------
with its principal place of business at 901 San Antonio Road, Palo Alto, CA
94303 (hereinafter referred to as "Sun") and Logical Design Solutions with its
------------------------
principal place of business at 55 Broadway 21st Floor, NY, NY 10006 (hereinafter
------------------------------------
referred to as "Subcontractor"). This Agreement contains the full agreement of
the parties and supersedes any prior agreements, written or oral, between the
parties relating to this subject matter.
RECITALS
WHEREAS, Sun Microsystems, Inc. by and through its business unit, Sun
Professional Services, is in the business of providing integration services to
its various Customers; and
WHEREAS, Subcontractor is in the business of providing technical consulting
services; and
WHEREAS, the parties desire to enter into a contractual relationship for the
provision of Services to Sun Customers as described herein; and
WHEREAS, the parties acknowledge that Sun shall act as the prime contractor for
the delivery of Services to its Customers, and that _______________ shall act as
a Subcontractor under said prime contract(s) for the delivery of the Services
described herein.
1. Definitions
1.1. "Services" shall include, but not be limited to, programming, software
analysis, project analysis, project management, facilities management,
document development, testing and technical support.
1.2. "Customer" shall mean Sun's customer to whom the Services under this
Agreement shall be provided.
1.3. "Prime Contract" shall mean Sun's contract with the Customer for which
purchase orders under this Agreement will be issued.
1.4. "Prime Contractor" - Sun is the Prime Contractor with the primary
responsibility for the provision of Services to the Customer.
1.5. "Subcontractor" shall mean the person or firm contracting to perform
the Services defined herein.
2. Terms and Conditions
2.1. This Agreement contains the terms and conditions which apply to all
purchases of Services made pursuant to this Agreement, notwithstanding
any terms or
Page 1 of 14
<PAGE>
conditions contained in any acknowledgment or other business forms
transmitted by Subcontractor. All Subcontractor acknowledgments and
transmittals must reference this Agreement and Sun's applicable
purchase order.
2.2. This Agreement does not constitute a purchase order or other
commitment. Purchases of Services shall be evidenced by purchase
orders issued by Sun's purchasing department. Sun shall be liable
under this Agreement only for those purchases of Services covered by
such a purchase order.
2.3. Upon request of Sun, Subcontractor shall furnish to Sun written
evidence of Subcontractor's compliance with its obligations of this
Agreement. Subcontractor further agrees to provide in a format
acceptable to Sun any and all reports and cooperate with any audits
which Sun may request.
3. Term of the Agreement
The term of this Agreement shall commence upon the Effective Date as
defined herein and shall continue until one (1) year after the Effective
Date ("Initial Term"). Thereafter, this Agreement shall be automatically
renewed for additional one (1) year periods unless either party gives
written notice of termination at least sixty (60) days before any
anniversary of the Effective Date, unless sooner terminated in accordance
with the provisions hereof (the "Term").
4. Services
4.1. Subcontractor, as an independent contractor and not as an agent, shall
provide the Services described herein on a case-by-case basis in
support of Sun Prime Contracts.
4.2. Sun, by issuance of a purchase order, shall request that Subcontractor
provide the services defined in the Statement of Work (SOW), which
will be made a part of this Agreement as Exhibit A. The Services shall
conform to the scope of work described in the SOW(s) and corresponding
purchase order(s) issued by Sun.
4.3. In the event Subcontractor anticipates at any time that it will not
reach one or more milestones or complete one or more assignments
within the prescribed timetable, Subcontractor shall immediately so
inform Sun by written notice.
4.4. Sun may at any time, and for any reason, terminate the Services of any
person or persons provided by Subcontractor to Sun. Subcontractor
shall act promptly to remove such individual(s) from either Sun's or
the Customer's premises. Sun's sole liability in such event shall be
to pay Subcontractor, in accordance with the applicable purchase
order, for the Services actually performed by such individual(s) prior
to the termination.
Page 2 of 14
<PAGE>
5. Changes
Subcontractor agrees that it will, upon the request of Sun, negotiate
in good faith to amend this Agreement to incorporate additional provisions
herein and to change the provisions hereof, as Sun may reasonably deem necessary
in order to comply with the provisions of the Prime Contract or with the
provisions of amendments to the Prime Contract. If any such amendment to this
Agreement causes an increase in the cost of, or the time required for,
performance under this Subcontract, an equitable adjustment shall be made in the
Agreement price or delivery schedule, or both. No claim by the Subcontractor for
such an adjustment will be valid unless asserted within fifteen (15) calendar
days from the date of the Subcontractor's receipt of the change request.
6. Additional Terms and Conditions
Both parties agree that from time to time it will be necessary to negotiate
additional terms and conditions which shall be attached hereto and
incorporated herein by reference as Exhibit B. In the event that any
inconsistency exists between this Agreement and the additional terms and
conditions, the additional terms and conditions will take precedent.
7. Interim Review
7.1. At each milestone Sun will review the progress of the project, provide
written direction for any revisions that may be desired by Sun, or its
Customer, to the Agreement, and authorize Subcontractor, in writing.
If changes in the work are required due to the errors or omissions of
Subcontractor, Subcontractor shall, at its expense, make any revisions
requested by Sun to make the Services conform to the SOW.
7.2. Sun reserves the right to reject the Services anytime, if the Services
were not delivered in a timely manner in accordance with the SOW. If
Sun determines that the Services do not conform to the SOW, Sun shall
notify Subcontractor in writing, and Subcontractor shall have ten (10)
working days to submit new Deliverables and/or perform new Services
conforming to the SOW.
8. Payment
8.1. As full compensation and consideration for the Services and other
obligations of Subcontractor set forth herein, Sun will pay
Subcontractor in accordance with the applicable purchase order. Sun's
payment terms are 2%15 Net 45. Payment check will be issued according
to terms of payment upon receipt of invoice in Sun's Accounts Payable
Department. Payments are considered made by Sun on date of mailing as
evidenced by postmark. Any out-of-pocket expenses (e.g. travel)
incurred by Subcontractor in connection with providing the Services
will be the sole responsibility of Subcontractor, unless otherwise
approved in writing by Sun prior to Subcontractor incurring such
expense. Sun shall only pay for
Page 3 of 14
<PAGE>
actual expenses incurred by Subcontractor's employees at fair and
reasonable rates.
8.2. For time and material efforts, timecards are to be submitted, by
Subcontractor personnel, to the applicable Sun Project Manager each
Friday via FAX for the respective week's work. An example of the
Consultant Timecard is set forth as Exhibit C.
8.3. Subcontractor shall each month submit duplicate invoices to Sun for
the Services performed and any approved expenses incurred in the
immediately preceding month. Subcontractor shall include with each
invoice: (1) Time Cards for each employee of Subcontractor performing
Services hereunder, showing the amounts of billable time expended, and
a description of the work performed; (2) Receipts or other
documentation supporting reimbursable expenses previously approved by
Sun.
8.4. Subcontractor shall promptly pay its employees for all work performed.
If Subcontractor does not pay its employees on a current basis for
work performed on behalf of Sun, such nonpayment shall be deemed a
material breach of this Agreement and shall entitle Sun, in addition
to all other remedies, to withhold all further payments to
Subcontractor under the applicable purchase order and contract
directly with such employee(s) to complete the Services.
9. Ownership
9.1. With the exception of modifications to Subcontractor specific
products, all right, title and interest in and to any code developed
by Subcontractor and all right, title and interest in and to all
patents, copyrights, mask work rights, trade secrets, trademarks and
other intellectual property developed hereunder are hereby, upon
Subcontractor's creation thereof, transferred and assigned to Sun or
otherwise vested therein. Subcontractor shall obligate its employees
and/or agents to provide and shall supply Sun at no additional cost,
all such assignments, rights and covenants as Sun deems appropriate to
assure and perfect such transfer, assignment or other vesting. All
code or information developed under this Agreement shall be deemed to
be a "work made for hire" to the extent allowed by law. Subcontractor
agrees, and shall obligate Subcontractor's employees to agree, that
all code or information developed hereunder shall be kept in
confidence by Subcontractor and Subcontractor's employees and shall be
used only in the performance of this Agreement, and may not be used
for other purposes except upon such terms as agreed to under this
Agreement. Sun shall have all right, title and interest to such
modifications. Sun shall acquire title, upon its delivery, to all
software media and other information, communication, and copies of the
code developed hereunder.
9.2. Notwithstanding the above, Sun grants Subcontractor a perpetual,
royalty-free, non-exclusive, non-transferable, worldwide license to
use and reproduce the code
Page 4 of 14
<PAGE>
developed under this Agreement in object code form only and solely
for use on Sun hardware platforms.
10. Warranty
10.1. Subcontractor warrants that the Services provided hereunder will
substantially conform to the SOW. In the event that the Services
provided hereunder fail to conform to the SOW, Subcontractor's
obligation hereunder at Sun's option will be to promptly (a) bring
work performed hereunder into compliance with the SOW, or (b) grant
Sun a refund of the compensation paid by Sun relating to the
nonconforming work.
10.2. Subcontractor represents and warrants that Subcontractor is the sole
developer of any work products produced hereunder, that such work
product is original, does not infringe upon or violate any patent,
mask work rights, copyright, trade secret, trademark or other
proprietary right of any third party and that Subcontractor has the
right to make disclosure and use of all such information used by
Subcontractor in the performance of the Services.
10.3. Subcontractor warrants that: a) all versions of its products and
services which are sold and licensed to Sun ("Products") and
comprising the Deliverables (in whole or in part) have been or will
be tested for, and will be documented for Sun and its customers as
meeting the Year 2000 Compliant definition set out below; and b) if
Products incorporate inferencing rules, Subcontractor will notify Sun
of the specific rules applied and ensure that they are unambiguous.
Sun's remedies for Subcontractor's breach of the warranty in this Section 10.3,
will be for Sun at its option to require Subcontractor, free of charge to Sun:
(a) to use all reasonable efforts to make Products Year 2000 Compliant; or (b)
to supply functionally equivalent Products which are Year 2000 Compliant; or (c)
to refund to Sun the full purchase price or license fees paid by Sun for
non-complaint Products.
In addition to the above remedies, Sun may also require Subcontractor, free of
charge to Sun: (a) to provide Sun with the source code to software Products; (b)
to permit Sun or its contractors to access and modify such source code, to the
extent required for Sun or its contractors to create Year 2000 Compliant
products and services; and (c) to distribute modified source code and license it
to Sun's customers, to the extent required for them to have Year 2000 Compliant
products and services.
Subcontractor further represents and warrants to Sun that the data processing
and business systems on which Subcontractor relies to operate its business and
to supply Products to Sun are Year 2000 Compliant and that the date change from
December 31, 1999 to January 1, 2000 and the occurrence of any leap year will
not materially affect Subcontractor's ability to provide Sun with Products.
Page 5 of 14
<PAGE>
For the purposes of this Agreement "Year 2000 Compliant" means that
Products will not produce errors in the calculation or processing of date
data related to the year change from December 31, 1999 to January 1, 2000.
Date calculation or representation, including leap years, will be accurate
when products are used in accordance with their accompanying documentation,
provided that all hardware and software products used in combination with
Year 2000 Compliant Products properly exchange date data with them.
11. Personnel
Subcontractor shall secure all personnel required to perform Services
pursuant to this Agreement. Subcontractor's employees and agents shall
observe the working hours, working rules and holiday schedule of the
Customer while working on the Customer's premises. Sun reserves the right
to direct the replacement of any personnel assigned by Subcontractor to
perform the services. If Sun determines that the presence of such person is
detrimental to the progress of the work, Subcontractor shall replace such
personnel with properly qualified personnel as soon as is reasonably
practical. The parties agree that Subcontractor is an independent
contractor and in no event shall any temporary personnel hired by
Subcontractor and provided to Sun hereunder be considered an employee or
agent of Sun. Subcontractor agrees and understands that it assumes all
responsibility for, and liability arising form, any employment or payroll
tax withholding obligations for personnel provided to Sun, indulging,
without limitation, federal and state income tax withholding, FICA, FUTA,
SDI and state payroll taxes. Nothing herein shall be construed to grant to
Subcontractor any right or authority to create any obligation, expressed or
implied, on behalf of Sun, or to bind Sun or its Customers in any manner
whatsoever.
12. Employment Taxes and Benefits
12.1. Subcontractor shall be responsible for the payment of any and all
taxes due as a result of the performance of the Services or the
payment, thereof, Subcontractor acknowledges and agrees that it is
solely the responsibility of Subcontractor to report as income all
compensation received hereunder and Subcontractor shall indemnify and
hold harmless Sun and its Customers from any obligation to pay any
sales or withholding taxes, social security, unemployment or
disability insurance or similar charges or impounds, including any
interest or penalties thereof, in connection with any payments made
to Subcontractor hereunder.
12.2. Subcontractor shall comply with all applicable state, federal and
local laws including, but not limited to, laws and regulations
covering wages, hours of work and payroll withholding.
13. Employee Conversion
During the period commencing on the date Subcontractor employee or
contractor commences to provide Services to Sun under this Agreement and
continuing for twelve (12) months, Sun may not convert Subcontractor
employee or contractor to Sun's payroll.
Page 6 of 14
<PAGE>
After twelve (12) months Sun will have the right to convert said
Subcontractor employee or contractor to Sun's payroll. After twelve (12)
months Sun will have the right to convert said Subcontractor employee or
contractor at no further cost.
14. Direct Contracting Fee
Both parties acknowledge that Sun has made a major sales investment in
those contractual relationships where Subcontractor has worked under this
Agreement and the parties further acknowledge that there may be occasions
when the Customer may desired to contract directory with the Subcontractor.
In those situations where the Subcontractor has worked previously under
subcontract with Sun and is requested by the Customer during the
subcontract effort or the twelve (12) month period following the
termination by the Customer during the subcontract effort or the twelve
(12) month period following the termination of its contractual relationship
with Sun, the Subcontractor shall pay Sun an amount equal to and not to
exceed twenty percent (20%) of the contract amount between the
Subcontractor and Customer. The Direct Contracting Fee does not apply in
instances where a previous relationship exists, or where the
Subcontractor's sales force has been working Sun Customer on an un-related
effort.
15. Discrimination
Subcontractor shall not discriminate in any manner against any individual
because of race, color, religion, national origin, age, sex or handicap.
Subcontractor, in performing Services under this Agreements, shall comply
with all applicable laws, rules and regulations concerning the prohibition
of discrimination in employment.
16. Confidentiality
16.1. The parties acknowledge and agree that, in the course of performing
under this Agreement, each party may be provided with or given access
to information, in verbal or written form, that is proprietary and
confidential to the other party ("Information") including by way of
illustration only and without limitation, the management and business
of the other party, the organizational structure, policies and
procedures of the other party, information concerning the business
relationships of the other party and information relating to and/or
proprietary to the clients of the other party. For the purposes of
this provision each party will be deemed to be (i) the "Recipient"
with regard to the information that it receives from the other party
(ii) the "Disclosure" with regard to the Information that it provides
to the other party. Recipient shall employ the same degree of care in
preventing the disclosure of the Information to any third party(ies)
as it uses with regard to its own information of similar importance,
provided, however, that in no event shall Recipient employ less than
a reasonable degree of care. Recipient shall only disclose
Information to those of its employees who have a need to know the
Information for the purposes of performing under this Agreement. The
term "Information" as used herein shall not include, and neither
party shall have any obligation of confidentiality with respect to,
information that; (a) is in or
Page 7 of 14
<PAGE>
comes into the public domain (except as a result of a breach of this
provision); (b) is received by Recipient from a third party not under
an obligation of confidentiality with respect thereto; (c) is
independently developed by the Recipient's personnel who have not had
access to the Information of the Discloser; (d) is required to be
disclosed by Recipient under operation of law or (e) is approved for
disclosure by Recipient in writing executed by the Discloser.
16.2. It is understood and agreed that in the event of a breach of this
Section, damages may not be an adequate remedy that the Discloser
shall be entitled to injunctive relief to restrain any such breach,
threatened or actual.
17. SunScreen Requirement
Subcontractor agrees and warrants that for each Subcontractor employee whom
it identifies for a Sun project, Subcontractor will provide the Sun
security department a SunScreen form as attached as Exhibit D. Only after
Sun's approval of the SunScreen form can Subcontractor assign said employee
to any Sun project.
18. Indemnification
18.1. Subcontractor shall defend Sun and/or the Customer against any claim
that Services furnished hereunder infringe any U.S. Patent, trade
secret or copyright and will indemnify Sun and/or the Customer
against any loss, damage or liability arising from final award
against Sun and/or the Customer, provided that Sun notifies the
Subcontractor promptly in writing of the claim and provides
Subcontractor with reasonable assistance and sole authority to defend
or settle such claims, at Subcontractor's sole expense. Subcontractor
shall not be liable for any claim of infringement arising from
Subcontractor's conformance with specifications provided by Sun
and/or the Customer. THIS PARAGRAPH STATES THE ENTIRE LIABILITY OF
SUBCONTRACTOR WITH RESPECT TO INFRINGEMENT OF PATENTS, TRADE SECRETS
OR COPYRIGHTS AND SUBCONTRACTOR SHALL HAVE NO ADDITIONAL LIABILITY
WITH RESPECT TO ANY ALLEGED OR PROVEN INFRINGEMENT.
18.2. Subcontractor shall indemnify and hold harmless Sun, its officers,
directors, employees, agents and attorneys from and against any
claims or actions brought by third parties and from any and all
damages, losses, expenses, including reasonable attorneys' fees and
costs of litigation, arising out of or resulting from acts, errors or
omissions by Subcontractor or any of its agents, employees, or
subcontractors.
19. Limitation of Liability
Except for express undertakings to indemnify under this Agreement, and/or
breach of the Confidential Information obligations:
Page 8 of 14
<PAGE>
a. Each party's liability to the other for claims relating to this
Agreement, whether for breach or in tort, shall be limited to ONE
HUNDRED THOUSAND DOLLARS ($100,000.00) or the value of the applicable
purchase order, whichever is greater.
b. In no event will either party be liable for any indirect, punitive,
special, incidental or consequential damage in connection with or
arising out of this Agreement (including loss of profits, use, data, or
other economic advantage), however it arises, whether for breach of this
Agreement, including breach of warranty, or in tort, even if that party
has been previously advised of the possibility of such damage. Further,
liability for such damage shall be excluded, even if the exclusive
remedies provided for in this Agreement fail of their essential purpose.
20. Insurance
20.1. Subcontractor agrees to maintain insurance in accordance with the
following:
Workers Compensation & Employer's Liability:
-------------------------------------------
As required under the laws of the states in which the work is
performed with Employer's liability limit not less than $500,000 per
occurrence/annual aggregate.
Commercial General Liability:
----------------------------
Covering all operations of the Subcontractor including product and
completed operations and contractual liability against claims for
personal bodily injury and property damage with a liability limit not
less than $2,000,000 per occurrence/annual aggregate.
Automobile Liability Insurance:
------------------------------
Covering bodily injury and property damage liability arising out of
the use by or on behalf of the Subcontractor, its agents and
employees of any owned, non-owned or hired automobile with combined
limits not less than $100,000.
Errors & Omission Insurance:
---------------------------
Covering loss or damage arising out of negligent acts or errors or
omissions which arise from professional Services provided by
Subcontractor under this Agreement with limits no less than
$1,000,000 per occurrence.
20.2. Such insurance coverage as is required under this Agreement shall be
in form and with insurance carriers satisfactory to Sun and without
additional cost to Sun, unless otherwise provided herein. As evidence
of said coverage, Subcontractor shall forward Certificates of
Insurance, or copies of insurance policies, to Sun, which shall
contain a provision to notify Sun in writing of a cancellation or
non-renewal of said coverages not less than thirty (30) days before
its effective dates.
Page 9 of 14
<PAGE>
20.3. The foregoing statements as to the types and limits of insurance
coverage to be maintained by Subcontractor, and any approval or
waiver of said insurance by Sun, is not intended to and shall not in
any manner limit or qualify the liabilities and obligations otherwise
assumed by Subcontractor pursuant to this Agreement, including but
not limited to the provisions concerning indemnification.
21. Termination
This Agreement, or any Purchase Orders issued hereunder, may be
terminated upon the occurrence of any of the following:
a. The liquidation or dissolution of Sun or the Subcontractor;
b. Termination by Sun for Subcontractor's material breach of this
Agreement where such breach continues for a period of thirty (30)
business days following Sun's written notice thereof;
c. Termination by Sun for Subcontractor's failure to remedy any
defect in the Services provided under this Agreement, where such
defect is not cured within thirty (30) business days following
Sun's written Notice of such defect;
d. Termination by Subcontractor for Sun's material breach where such
breach continues for thirty (30) business days following Sun's
receipt of Subcontractor's written notice;
e. The termination of Sun's Customer Contract;
f. Amendment of Sun's Customer Contract such that the specific
Services are no longer required.
22. Assignment
Subcontractor may not assign or delegate obligations under this Agreement,
either in whole or in part, without the prior written consent of Sun. Any
unauthorized assignment or delegation by Subcontractor shall be null and
void, and shall give Sun the right immediately to terminate this Agreement
without liability for Services performed after such terminations. The
rights and liabilities of the parties hereto shall be binding upon and
inure to the benefit of their respective successors, permitted assigns,
executors, and administrators.
23. Permits
Subcontractor shall acquire and maintain in good standing, and at its sole
expense, all permits, licenses and other entitlements required of it in the
performance of Services under this Agreement.
Page 10 of 14
<PAGE>
24. No Use of Sun's Name
Subcontractor shall not use Sun's name in any form of publicity or release
without Sun's prior written approval.
25. Dispute Resolution
Any action related to this Subcontract will be governed by California law,
excluding choice of law rules.
26. Attorneys' Fees
In the event that any dispute arises between the parties hereto with regard
to any of the provisions of this Agreement or the performance of any of the
terms and conditions hereof, the prevailing party in any such dispute shall
be entitled to recover costs and expenses associated with resolving such
dispute, including reasonable attorneys' fees.
27. Waiver
The failure of Sun to enforce at any time the provisions of this
Subcontract, to exercise any election or option provided herein, or to
require at any time the performance by Subcontractor of any provisions
herein will not in any way be construed to be a waiver of such provisions.
28. Notices
Any notice required under this Agreement shall be in writing and shall be
sent to the individuals listed below. Notices shall be effective when
received and shall be sent via FAX, certified or registered mail, return
receipt requested, or via overnight carrier.
Sun:
Sun Professional Services
901 San Antonio Road
Mail Stop: MTV19-220
Palo Alto, CA 94303
Attn:
Phone:
FAX: 650-336-6451
CUSTOMER:
Attn:
Phone:
FAX:
Email:
Page 11 of 14
<PAGE>
29. Severability
If any provision of this Agreement shall be held illegal, unenforceable, or
in conflict with any law of a federal, state, or local government having
jurisdiction over this Agreement, the validity of the remaining portions or
provisions hereof shall not be affected thereby.
30. Entire Agreement
This Agreement and the Exhibits hereto constitutes the entire agreement of
the parties and supersedes all prior or contemporaneous oral or written
communications, proposals and representations with respect to its subject
matter and prevails over any conflicting or additional terms of any quote,
order, acknowledgment, or similar communication between the parties during
the term of this Agreement.
Page 12 of 14
<PAGE>
Signature Page
IN WITNESS WHEREOF, the parties hereto have executed this Subcontract as of the
day and year first above written.
SUN MICROSYSTEMS, INC. [SUBCONTRACTOR]
By: By:
------------------------------- -------------------------------
(Signature) (Signature)
------------------------------- -------------------------------
(Typed Name) (Typed Name)
------------------------------- -------------------------------
Sun Professional Services
(Title) (Title)
EXHIBIT A - STATEMENT OF WORK
EXHIBIT B - ADDITIONAL TERMS & CONDITIONS
EXHIBIT C - TIMECARD
EXHIBIT D - SUNSCREEN FORM
Page 13 of 14
<PAGE>
Exhibit A-(#) -- STATEMENT OF WORK
SUN CUSTOMER NAME: ------------------------------------------------------
SUBCONTRACTOR STATE DATE: ------------------------------------------------------
Page 14 of 14
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated February 17,
2000 (except Note 17, as to which the date is March 1, 2000) with respect to
the financial statements of Logical Design Solutions, Inc., and February 4,
2000 with respect to the financial statements of Jump! Information
Technologies, Inc., included in Amendment No. 1 of the Registration Statement
(Form S-1 No. 333-31674) and related Prospectus of Logical Design Solutions,
Inc. for the registration of 3,500,000 shares of its common stock.
Hackensack, New Jersey /s/ Ernst & Young LLP
April 5, 2000
